Serbia & Montenegro Russia’s Trojan horse into the EU?

Dimitar Bechev (D.Phil, Oxford) teaches international politics at Sofia University and is affiliated with the Centre for Liberal Strategies in Sofia. His former posts include the directorship of the European Council on Foreign Relations’ office in Bulgaria and lectureships at Oxford and Hitotsubashi University (Tokyo). Dr Bechev has published extensively on EU foreign policy, the Balkans, Central Eastern Europe and Turkey.

The EU and the United States have implemented a series of incremental sanctions against Russia over the on-going conflict in Ukraine. Dimitar Bechev writes on the effect of the crisis in Serbia and Montenegro, noting that the two countries’ strong economic ties with Russia sit at odds with their respective bids to join Western institutions.

Russia has often played the role of a spoiler but rarely a full-fledged competitor when it comes to the EU’s endeavour to integrate the Balkans. The contrast between its hostile reaction to the Eastern Partnership and benign neglect of the Union’s embrace of the likes of Montenegro and Serbia is quite telling.

The underlying reasons are easy to grasp. The Kremlin could only welcome the inclusion of more friends into the Union, and the opportunity to reap fresh benefits via privileged bilateral ties of the sort cultivated with Italy, Austria, Cyprus or Bulgaria. It would not be far-fetched to say that Russia has been free-riding on the West’s efforts to stabilise the region. In a similar vein, a number of Balkan governments see no contradiction between the bid to join Western institutions and doing business with Russia, e.g. in the energy sector. After all, they have the example of their EU counterparts.

But the war in Ukraine is changing all that. EU and NATO hopefuls are left with no other option but to take sides in the growing spat between Russia and the West. How, then, are Balkan states such as Serbia and Montenegro reacting to the situation?

Montenegro: act of defiance

Following Crimea’s annexation March, Montenegro sided with the visa bans and the freezing of assets targeted at individuals close to the Kremlin. For the small Adriatic republic, where up to 40 per cent of the real estate is thought to be in Russian ownership and the tourist sector reigns supreme, this is hardly a trivial matter. The move was in no small part motivated by Montenegro’s bid to obtain a membership invitation at NATO’s forthcoming summit in Wales. But the country’s authorities seem to take a softer line domestically, trying to play down the significance of the decision while addressing an overall sceptical public.

Serbia: business as usual?

By contrast, Serbia sought to avoid the question and proceed with business as usual. Yet, with the latest escalation of tensions in the wake of the downing of Malaysia Airlines flight MH17, it can no longer sit on the fence. Belgrade media report that Prime Minister Aleksandar Vučić faces pressure from the EU and the US to join the sanctions by early September.

It has stirred public opinion. Politika’s editor in chief Ljiljana Smajlović wrote recently that Serbia should not turn into “blood-soaked petty change” as great powers are wrangling. Now that we are entering into the so-called ‘Phase 3’ of sanctions (measures targeting entire economic sectors rather than individuals), the stakes are getting higher.

However, the costs are not as prohibitive as it seems at first glance. The latest round of sanctions imposed by the EU, for instance, exclude the subsidiaries of Russian banksoperating in member states. In other words, the branches of Sberbank and Vneshtorgbank (VTB) operating in Serbia will not sustain direct damage if Vučić ultimately strikes a political deal with Western leaders. The prospect of Russian investors acquiring the Balkan network of Austrian lender Hypo Alpe Adria remains real. It is also worth noting that Vučić visited Moscow earlier this month, with the Srbijagas debt of more than USD 180 million as the main agenda item. Belgrade expects Putin in November.

The South Stream saga

One thing to watch is how the South Stream gas pipeline develops. In early July, state-owned Srbijagas signed a deal with Gazprom’s subsidiary Centrgas for the section passing through its territory. But that is certainly not the end of the story. First, the work on South Stream in next-door Bulgaria is essentiallysuspended following the European Commission’s intervention over a botched public tender. The project, which has caused a huge domestic controversy over the misuse of public funds and the role played by local oligarchs, could be restarted only after the early parliamentary elections on 5 October usher in a new cabinet.

Second, the intergovernmental agreement (IGA) signed by Russia and Serbia back in 2008 is now being renegotiated by Brussels. The same is true for the IGAs with EU members Slovenia, Croatia, Hungary, Austria and Bulgaria. The issue at stake is Gazprom’s insistence that it is eligible for an exception from EU rules on third-party access to gas grids – a key part of the famed Third Energy Package. The rising tensions over Ukraine make it unlikely that the European Commission, or member states like Germany for that matter, will seek to accommodate Russia on South Stream.

If Gazprom is to complete the pipeline running from Bulgaria to Austria via Serbia, Hungary and Slovenia (with offshoots to Croatia and Republika Srpska and possibly Macedonia) it has to allow competitor suppliers to use part of the volume (63bn m3 per annum). Inevitably, that will push up costs for the Russian behemoth and jeopardise the whole project. That in turn will hit a number of Balkan governments who have repeatedly promised to the public that the pipeline would restart sluggish growth, while assuring friends in business that billions are coming on-stream in lucrative contracts.

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This article was originally published at the London School of Economics’ EUROPP blog.

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