Reshaping the Balkans: soft power after “ruble diplomacy”

By Admin Aspenia On Jan 27, 2015

Over the last decade, Russia has been committed to increasing its political and economic leverage in Southeast Europe. Indeed, as is stated in the 2013 Foreign Policy Concept of the Russian Federation, the Balkan region has a great geostrategic importance for Moscow, due to historical and cultural ties, as well as its role as a potential economic hub linked to Western Europe.

The pursuit of the European integration process remains the main goal for all the countries of the region, even if Jean-Claude Juncker, the President of European Commission, recently stated that no new member will join the EU in the next five years. In the meantime, the Kremlin has expanded its “soft power” in an attempt to take advantage of the Eurozone crisis and EU “enlargement fatigue” by using its main economic tools, such as investments in key strategic sectors, particularly energy. But this scenario could quickly change due to recent events.

First, in April 2013 Russia gave Serbia a $500 million loan based on a request of $1 billion and it is currently negotiating a €270 million loan with the Republika Srpska – one of the two entities in Bosnia-Herzegovina – that would cover the budget deficit replacing the International Monetary Fund’s (IMF) intervention. Moscow also owns more than 30% of the foreign companies in Montenegro and more than 40% of its real estate industry belongs to Russians businessmen.

Nevertheless with the landmark acquisition of Volksbank International (VBI) in 2011 (the first outside the Commonwealth of Independent State), Sberbank, Russia’s biggest lender, became the major financial group in the area. For example it has funded several regional firms like Agrokor, the biggest Croatian food producer, in the acquisition (April 2014) of Slovenia’s Mercator – a deal expected to create the top food retailer in the Balkans – while in July it announced a $1.2 billion credit line to Slovenské elektrárne, the second-largest power company in Central and Eastern Europe controlled by the Italian company Enel.

Russian investments in the infrastructure and energy sectors – especially the strategic acquisitions in the field of oil and gas, the modernization of refineries in Serbia [1] and the construction of pipelines such as South Stream – are deeply linked to each other with the twin aims of protecting Moscow’s economic and political interests and promoting interdependence among countries in a hub-and-spoke mode that puts Russia itself at the core. A secondary objective is probably political stability, but again only to the extent that this suits Moscow’s key interests.

It is clear that with the actual currency crisis, Russia could cut off loans and other investments. The ruble has lost about 40% of its value against the US dollar and Sberbank has seen a 12% decrease in its market value, erasing $2.1 billion. Moreover, the decision to stop the South Stream project risks marking a point of no return for Russian economic strategies in Southern Europe.

That is basically due to four international events: the collapse of crude oil prices (Russia depends on energy exports for 65% of its GDP); the Western economic sanctions as a consequence of the Ukraine crisis; the partially linked dispute with the European Commission about the Third Energy Package and the related suspension of the works by Bulgaria (the EU executive has indeed threatened the opening of an infringement procedure against Sofia because of irregularities in awarding processes as well as in the compliance with rules that prohibit gas suppliers from also controlling access); finally the weakness of the European market. According to local governments, Bulgaria is expected to lose 6,000 new jobs and €3-4 billion in investments; equally Serbia and Hungary may lose respectively about €600-700 million. Hence all of these countries may find it more convenient to strengthen economic ties with other foreign investors.

China has indeed been interested in the region since the 2000s, creating bi- and multilateral business forums. At the third Summit of Central and Eastern Europe – the so-called “16+1 Group” – held in Belgrade on December 16-17, Chinese Prime Minister Li Keqiang announced an investment fund worth $3 billion aimed at supporting bilateral cooperation and infrastructure projects. Moreover the Chinese Southeast European Business Association (CSEBA), an organization with the aim of attracting and managing Chinese investments to the Balkans, opened its first branch in Croatia last February.

Beijing is actually involved in several investment plans with low interest credits (an average of 2,5% with a repayment period of 10-15 years): the construction of the bridge over the Danube in Belgrade funded by Exim Bank of China; the modernization of the Budapest-Belgrade railroad (it will be extended to Skopje and Athens in the future for an estimated value of €1.5 billion); the building of the highway from the Black Sea to Adriatic ports thanks to loans from the China Road and Bridge Corporation.

Chinese strategy is paradoxically focused on completing investment plans insufficiently funded by Brussels (such as the Pan European Corridors). More specifically, there is strong interest in supporting regional development and faster distribution of goods and products, notably from the Piraeus port in Greece, which is home to the world’s largest merchant marine fleet and has already been upgraded by the China Ocean Shipping Company (COSCO), to Central and Western Europe in alternative to the northern routes. On the contrary, the energy sector is still relatively unexplored by the Chinese government, although it is in talks with local authorities for loans related to the construction and modernization of several thermal power plants (in Croatia, Romania and Serbia), hydroelectric stations (in Bulgaria) with special attention to clean energy projects, for example in Macedonia.

Also Turkey and the United Arab Emirates are seen as emerging powers for those Balkan countries seeking economic diversification. After the Istanbul Declaration of 2010 between Turkey, Serbia and Bosnia-Herzegovina, Ankara is expanding its economic presence into the region through a Free Trade Area with Serbia, it owns the second largest bank in Albania (Banka Kombëtare Tregtare – BKT) and its companies are involved in many construction projects and privatization processes. On the other side, Serbia has announced a $1 billion UAE loan with a low-interest rate – an alternative to those from the IMF and defined as “game-changer” for Belgrade – to repay some of its foreign borrowing and to pump investments in several industrial sectors.

In conclusion, Central and Eastern Europe, especially the Balkan countries, will represent in the medium- to long-term perspective a crossroads for direct investments and foreign strategic interests that will be partially overlapped. Russian competitors may take advantage of the “ruble diplomacy” crisis to pursue their priorities – for example Turkey could finally open the Southern Gas Corridor through the Trans Adriatic Pipeline – but they will not be able to rapidly increase their competitive soft power vis-à-vis that of Moscow. Only China seems to be able to safeguard its European market penetration through the new Silk Road strategy, which is partly compatible with further progress of the European integration process.