Executive Summary
In the Western Balkans, slow EU accession perspectives and investments are colliding with Russia’s historic influence and China’s new-found business pragmatism.
Although Russia cannot offer tangible benefits to the region, it maintains a strong grip on local leaders that exploit anti-Western and Eurosceptic public attitudes.
The war in Ukraine intensifies competition between the EU-led Three Seas Initiative and China’s Belt and Road Initiative.
Implications for
International Businesses
The EU’s Economic and Investment Plan (EIP) enables sustained development of the region, but effective investment management is needed to keep China from dominating the green energy sector and to minimize engrained corruption.
Serbia and Bosnia and Herzegovina are the only two states to not have adopted EU sanctions against Ukraine, allowing for Russian-Chinese coordination in the region.
Over time, the repercussions of the war in Ukraine will negatively impact the business climate in the region unless the activities of China and Russia are kept in check.
State of Play Russia still has soft power and economic clout in Western Balkans
The Western Balkans stand at the crossroads of rivalling powers. The EU has focused on post-conflict reconstruction and stabilization since the mid-1990s, whereas NATO solidified its presence through the membership of Albania (2009), Montenegro (2017) and North Macedonia (2020). However, the region’s slow progress towards EU accession has undermined the EU’s influence. Not only has this allowed Russia to boast its cultural, religious and political ties, but also to remain a dominant provider of energy to some countries, such as Serbia. China, in turn, has taken advantage by adopting a pragmatic, trade-driven approach. Meanwhile, Turkey is bolstering its economic and financial presence, building on its historical legacy as much as on its companies’ presence.
The war in Ukraine has raised the stakes for the above-mentioned players and negatively impacted the region’s economy, security and political stability. This mostly concerns the four heartland states – Bosnia and Herzegovina, Kosovo, North Macedonia, and Serbia. The growing insecurity in the Black Sea region elevated the significance of the Western Balkans as alternative pan-European transport corridor for two competing strategic initiatives: The Three Seas Initiative and Land-Sea Express Route (part of the Chinese Belt and Road Initiative). This geopolitical dynamic has provided local elites with more maneuvering space in the context of the rising inflation and energy prices. Thus, Bosnia and Herzegovina and Serbia, unlike the other states in the region, have not adopted the EU’s sanctions against Russia. Instead, they remain open to both EU pre-accession funds and continued Chinese investments, especially in the energy sector and transport infrastructure.
Key Issues As disillusionment with Europe grows in the region, the clash of systems is intensifying
The Ukraine war and its repercussions have turned the Western Balkans into a political and economic frontline between Russia and the EU, and with it the United States. This confrontation also benefits China and Turkey respectively, thus giving them a geopolitical edge. On the one hand, Russia’s setbacks in Ukraine have also taken a toll on Moscow’s economic perspectives in the region. Even among the Christian Orthodox population of Serbia and Bosnia and Herzegovina, the perception of dwindling Russian influence has taken hold. On the other hand, and precisely due to the lack of more tangible benefits on offer, Moscow relies heavily on operationalizing the idea of a Serbian World as a conduit for the Russian World concept of unity among Christian Orthodox people. At the end of February 2022, Russia dispatched a special envoy to Belgrade to coordinate the Russo-Serbian activities in the region. The latest threat of Serbian President Aleksandar Vučić on December 14 to dispatch Serbian army units to Northern Kosovo amidst rising tensions between Belgrade and Pristina exemplifies the military component of promoting these concepts. Pivotal for the realization of the latter is the exploitation of the nexus between strategic corruption and the malign interplay of the security services of both states.
China, in turn, has taken advantage of Russia’s shrinking economic presence in the region. It is bent on continuing its infrastructure projects along the Skopje-Belgrade-Budapest axis. Chinese investments in renewable energy projects are at odds with Russian vested interests in gas and oil supplies to the region. While such investments do not create enough jobs, they guarantee profits for the local elites through the mandatory buy-back of electricity from renewable energy sources by the state.
Lack of EU investment risks leaving the region to Russian and Chinese influence
The EU’s substantial €3.2 billion investment package for the Western Balkans as part of the 2022-2027 €30 billion EIP is an expression of the EU’s continued commitment to the region. Together with other EU investment initiatives, it offers opportunities for infrastructure development and the digital economy, despite high emigration rates from the region. The EU program for Competitiveness of Enterprises and SMEs through the Western Balkans Enterprise Development and Innovation Facility and EU-led regional integration also provide medium and long-term incentives for businesses and an improvement in the business climate. Importantly, these financial pledges are now underpinned by granting EU candidate status to Bosnia and Herzegovina, which allows for the protection of EU funds, provided Chinese and Russian firms’ access to these funds is limited.
Adjusting to the ripple effects of the war in Ukraine, China has shifted the focus of its Belt and Road Initiative from Central and Eastern Europe to the Western Balkans, prioritizing the Land-Sea Express Route, a transport corridor connecting Europe and Asia. Chinese infrastructure projects are in direct competition with the Trans-EU Transport Routes No.10 (Thessaloniki-Skopje-Belgrade-Budapest), which is still in the planning and development stages, and No.8, which connects the Black Sea with the Adriatic Sea and is funded through the Connecting Europe Facility funding mechanism. Although Serbia became a partner in the Three Seas Initiative in 2021, other countries in the region were left out. Local elites in Serbia seem inclined to prioritize cooperation with China at the expense of the EU initiative.
Serbia, for one, is on the verge of signing a free trade agreement with China around the end of 2022, consolidating its position as Serbia’s second largest trading partner after the EU. In Bosnia and Herzegovina, Serbian and Croatian leaders have increased their cooperation to facilitate Chinese investments. In the energy sector, for example, China’s shift towards green energy projects is evident in the growing number of companies such as Clenergy and Geminox trying to enter the regional market. In the long run, this could enable China to remotely control the renewable energy production via the 5G network it also runs. The above-mentioned projects would preposition China for future reconstruction efforts in Ukraine, e.g. by providing the necessary link to infrastructure projects in the Central European and Baltic States. China is actively involved in the development of the Land-Sea Express Route that connects ports of the Baltic Sea, the Adriatic Sea, and the Black Sea.
The interaction of Russia and China negatively impacts the business climate in the region. Without financial support, Moscow’s strategy aims to exploit public disillusionment with the slow EU accession process, especially in Slavic-majority countries like Serbia, North Macedonia, and the Republika Srpska in Bosnia-Herzegovina, where local elites heavily depend on Russia. The endemic corruption that accompanies these ties raises concerns about the management of expenditure on any EU-funded project.