Jadarite, Kosovo’s Threat, and Political Instability: Foreign Direct Investment in Serbia

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In 2004, reports surfaced of a new mineral in Serbia. Analysis from the Museum of Natural History in London confirmed that the mineral was previously unknown to geologists. The discovery of this new mineral, jadarite, in Serbia’s Jadar region has garnered the attention of a variety of foreign industrial and mining firms, like Rio Tinto Mining, a leading investor in Serbia.

The discovery of jadarite also sparked further interest from investors around the world, leading to a rapid increase in foreign direct investment (FDI) in Serbia. This past year, Serbia rose to the top of IBM’s Global Locations Trends Report because of the large number of jobs created by FDI relative to the country’s population.  FDI inflows have expanded beyond the mining and processing of jadarite to a variety of other industries throughout the Serbian economy. The report states that Serbia “continues to receive significant inward investment in key sectors such as textiles, transport equipment, chemicals and electronics,” noting that manufacturing jobs in particular accounted for “almost 80% of all jobs created from FDI.”

According to the National Bank of Serbia, the gross inflow of foreign money has been consistently increasing since 2014, reaching €2.1 billion in 2016 and peaking at €2.5 billion euros in 2017. Goran Knežević, Serbia’s Ministry of Economy, attributes these influxes to the government’s persistent effort to make the region more attractive to foreign investors, particularly through corporate reforms and job training policies.

If Serbia hopes to continue reaping the gains from foreign investment, however, it must continue working to provide a stable investing environment through improvements in both its domestic policies and its interactions with neighboring nations. Continual tension with Kosovo not only threatens the tepid peace in the region, but also investors’ faith in the country as political conflict is both risky and costly. Further, investors question Serbia’s ties with Russia given Russia’s oil investment in the region. As such, many Western investors feel uneasy investing in a state with such close ties to an adverse country.

Political questions aside, Serbia has been working toward more corporate-friendly policies since 2010. This effort has included the creation of a specialized office for company registration, eliminating minimum capital investment requirements, and expediting corporate registration processes by reducing paperwork requirements. Serbia’s government has seemingly recognized the importance of FDI in the rebuilding of the economy and has consistently worked toward making it more appealing. To date, it takes on average less than 12 days to register and begin operating a corporation in Serbia. Any reductions in bureaucratic red tape significantly improve the region’s attractiveness to corporate interests.

To further appeal to investors, the Serbian government has allocated greater resources to its vocational training programs. Such policies are appealing to investors looking to minimize labor and training costs and as well, providing a vast labor force that accommodates the growing manufacturing and industrial operations from foreign companies. However, brain drain continues to plague the country, as many highly skilled workers left during the 1991 wars in Yugoslavia, and many young people continue to leave the country to pursue professional opportunities or attend university in the EU.

Though Serbia’s economy has been growing consistently over the past couple of years, such growth has done little to retain Serbia’s young professionals, leading investors to question whether projects in the region are sustainable for the long-term.

Serbia still struggles with government corruption and political instability, particularly regarding Kosovo. The two countries have been at odds since the 1990s, and especially since Kosovo’s independence in 2008. Peace processes have continually failed between the two countries, and most recently, a potential land deal between the two countries has gone sour after a nationalist speech from Serbian president Aleksandar Vučić. Though his speech was well-received by Western leaders, Kosovo President Hashim Thaçi claims Vučić has no intention of compromise with Kosovo after his comments about a “long road of thorns and problems” where he sees no opportunity to “implement [Vučić’s] ideas.”

On top of political tensions, it is extremely costly and difficult to import into the country. It costs more than $1600 and requires seven documents for each transaction, a policy that is designed to minimize capital outflows. Last year, more than half of Serbia’s output was in exports, indicating a trade surplus, but companies remain frustrated in their manufacturing efforts.

Serbia’s economy has also struggled since the breakup of Yugoslavia, largely due to the destruction of agricultural resources and political corruption. However, the country seems to be getting back on its feet. The European Commission expects Serbia’s economy will grow by around 3.5% by 2019 and for unemployment to drop to around or below 10% in the same time. Such improvements are likely due to FDI and the stability it has brought to the region.

Further, most of the wealth in Serbia comes from outside sources. Serbia’s GDP per capita peaked in 2017 at $5,899, roughly 47% of the world’s average. Fiscal instability and low levels of local wealth put local, grass-roots type projects at a significant disadvantage given that few individuals have the ability or capital to run a business at the scale that other investors are able to.

FDI is absolutely central to Serbia’s long-term economic development. Should FDI to Serbia recede, it is unlikely they would be able to sustain their current levels of growth.  As such, the Serbian government should perhaps be more willing to cooperate with Kosovo and in resolving their ongoing disputes, if only for the optics—appearing to be more diplomatic only eases investor apprehension.  

Though there are significant profits to be made, its political condition makes investing in Serbia high-risk. Given other investment opportunities in countries with less political tension and similar economic status, in Central Asia, for example, diplomatic efforts would be a powerful signal from Serbia to investors who may be uncertain. For a country that has struggled economically and politically since the early 90s, ameliorating relations with Kosovo is more necessary now than ever as Serbia hopes to appear less-risky and retain investor interest and capital.