Global Economics

Investing In the Balkans Has Its Perils


Low-cost terms in mining and energy are enticing investors to the region, but dodgy politics and infrastructure may mean risk

Here's an idea of just how desperate the Western Balkans are for investment: If you have a solid business plan and the moxie to match, a mine in Albania can be yours for one euro per year.

Introduced in 2006 to offer foreign businesses excellent terms on investments in strategic sectors like mining and energy, the "Albania One Euro" program is an example of how the Western Balkans are trying to woo investment. Serbia's Free Zone Law, which eliminates the value-added tax on income from business activity in four areas of the country, is another.

The nascent courtship is attracting foreign money, which largely ignored the economically undeveloped, politically unstable region for years in favor of safer markets in Central European countries. Foreign direct investment more than doubled in Serbia last year to around $4.5 billion, reached some $3.6 billion in European Union hopeful Croatia, and exceeded 10 percent of the GDP in the Balkans as a whole.

The Austrians are leading the charge with acquisitions in the banking and telecom sectors, drawing oblique comparisons to their ultimately lucrative, initially risky investments in Poland, Hungary, Slovakia and the Czech Republic in the 1990s. The risk is arguably higher in the Western Balkans, but the reward could prove handsome, as these economies are some of the least developed in Eastern Europe.

"There are entire markets to be conquered, if you're willing to take the risk," said Claudio Viezzoli, director for the Western Balkans at the European Bank for Reconstruction and Development. For instance, returns can exceed 20 percent in the banking sector.

But investors would be wise to pause to consider that risk, Viezzoli added.

Though countries such as Albania, Serbia, and Croatia are pursuing investment vigorously -- and having some success -- political instability and immature business environments are impediments to maintaining momentum. Namely, Kosovo's push for independence from Serbia is fuelling regional tensions that aren't investor friendly.

Investors can tolerate risk, but only in the shadow of perceived stability. This is one reason businesses in Russia aren't concerned about President Vladimir Putin's evident intention to retain the reins over the government after he steps down next year. Putin's regime may rule with a heavy, sometimes capricious hand, but it's largely viewed as leading Russia from economic chaos in the late 1990s to a period of sustained stability and economic growth. As a result, investors are reaching into their pockets, with the country posting a record $60.3 billion in foreign direct investment in the first half of 2007.

LOW MARKS FOR STABILITY

Yet the current situation in Serbia only supports long-held concerns that the Western Balkans are unstable, and therefore dubious investment sites. The World Economic Forum noted this weakness in its recently released Global Competitiveness Report 2007-2008. It listed political instability as the second most problematic factor for doing business in both Serbia and Bosnia. Bosnia was cited for being prone to government shake-ups as well.

The report noted other investor turnoffs, most notably corruption, inefficient government bureaucracy, and poor infrastructure. The latter is a significant problem in Albania, where roads are in disrepair and electricity supplies are unreliable.

With the exception of Croatia, all the countries of the Western Balkans ranked near the bottom of the 131 economies studied in the WEF's report. (Croatia was 57th, and is without a doubt the most economically developed country in the region.)

One thing the Western Balkans have going for them is cost. According to the European Investor Outreach Program, an arm of the World Bank Group, operating costs in the automotive sector in the Western Balkans are as low as 40 percent of the levels in the Czech Republic and Hungary.

The World Bank's European investment program is pitching the Western Balkans as Europe's next hot spot for manufacturing investment and using the countrys' relative cheapness as a key selling point. But cost isn't sacrosanct to investors. Quality infrastructure, political and governmental stability, and skilled labor forces are often more important, and the Western Balkans come up short in at least the first two criteria.

As a result, Viezzoli said, the countries' strong investment numbers last year are more likely a one-off occurrence than an emerging trend. It's important to note that 2006 was a particularly strong year for foreign direct investment throughout the world, according to the U.N. Conference on Trade and Development's World Investment Report 2007.

The EBRD is nevertheless optimistic about the future of the Western Balkans. The bank will increase its investment there around 60 percent over the next few years. It also believes the process of EU accession will begin lifting the countries' economies toward Western European levels and act as an impetus to reform.

NOW WE'RE LEGITIMATE

Albania, Bosnia, Montenegro, and Serbia recently signed the Stabilization and Association Agreement with Brussels, the initial step toward accession, and Croatia and Macedonia are EU candidates. Though Croatia is the only country with a prayer of joining the union any time soon, the EU will start to pump money next year into improving infrastructure throughout Southeastern Europe, and this could catch the eye of investors looking for lucrative tenders.

But the real benefit that starting on the road to EU accession will bring the Western Balkans is legitimacy. It will show foreign businesses that these countries are serious about supporting stable governments and economies with lucrative and safe investment opportunities.

Considering the current concerns over Kosovo, legitimacy is something the Western Balkans could use right now. To investors at least, it's a lot more attractive than Albania's one-euro rent.

Provided by Transitions Online—Intelligent Eastern Europe

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