Russia Is Losing Ground in the Balkans
Summary
As Russia's economic troubles lower remittance volumes and cause currency fluctuations and abnormal trade patterns throughout the former Soviet Union, the country's economic struggles threaten to undermine its position further afield. The shift will be particularly evident in the Balkans, where Russia and the European Union are competing for influence.
Serbia and Bulgaria have long been the main focus of Russia's strategy in the Balkans because of their geographic location, relationship with the European Union and historic ties to Russia. Over the past few years, Moscow has used loans, strategic acquisitions, proposed energy projects, trade and other investments to deepen its relationship with Bulgaria and Serbia. However, negative growth in 2015 and a weakened currency in Russia will inhibit its ability to compete with the European Union for influence in the two countries.
Analysis
Russia's interest in the Balkans dates from the 19th century, when the Russian Empire competed with the Austro-Hungarian and Ottoman Empires for influence in the region. Bulgaria is a strategic country for Russia because of its geographic position between Romania and Turkey on the Black Sea coast. Neighboring Serbia is a particularly important partner for Russia given its historic role as the dominant power in the Balkans and its pursuit of EU and NATO membership. Russia also shares centuries-long cultural ties and a history of political cooperation with both countries. By building stronger ties with Bulgaria, Russia has shaped decision-making in the European Union on issues such as sanctions and energy projects. In Serbia, Russia has worked to hamper the country's integration with Western institutions by increasing its influence in the country.
Though Bulgaria is a member of the European Union and Serbia is pursuing integration with the bloc, Russia also has significant economic ties with both countries. According to the Bulgarian National Bank, net inflow of foreign investment in Bulgaria between January and October 2014 was around 805 million euros ($974 million). Of that, some 177 million euros, or about 22 percent, came from Russia. The major Russian firms with assets in Bulgaria are LUKoil, Gazprom and Promet Steel. LUKoil's operations, including its oil refinery in Burgas, have reportedly contributed about 25 percent of Bulgaria's tax revenues. Export volumes, however, are modest, and only about 2.6 percent of Bulgarian exports in 2013 went to Russia. Nevertheless, more than 18 percent of Bulgaria's imports came from Russia that year.
Similarly, Russian businesses contribute a substantial portion of investment in Serbia. In 2013, according to the National Bank of Serbia, net foreign direct investment in Serbia totaled around 769 million euros. Of that, 45 million euros came from Russia, or around 5.8 percent. Since 2009, Russian energy giant Gazprom has been the majority shareholder in Petroleum Industry Serbia, an oil and natural gas company better known as NIS, with assets reportedly totaling over $3 billion. Moreover, since mid-2013, Russia has pledged over $1.3 billion in loans to Serbia to finance its budget deficit and to modernize infrastructure. Unlike Bulgaria, Serbia has a free trade agreement with Russia, with about 7 percent of its exports going to Russia in 2013. Around 9 percent of its imports came from Russia that same year. Furthermore, Russian bank Sberbank operates a subsidiary in Serbia with assets worth 839 million euros.
Plans for the South Stream natural gas pipeline constituted Russia's largest effort in recent years to boost its role in the Balkans. The proposed pipeline would have brought jobs and investment to the countries. Nevertheless, on Dec. 1, when pipes had already been delivered to the Bulgarian coast and work on the onshore construction of South Stream was soon to begin, Russian President Vladimir Putin announced that South Stream would not be built. Russia would pursue the construction of a major pipeline to Turkey instead. Serbian Prime Minister Aleksandar Vucic said the Kremlin's decision was the "price of a clash between the great powers," while Bulgaria's leadership has insisted on continuing to issue permits for South Stream to demonstrate that Bulgaria cannot be blamed for the project's failure. Though Russia may ultimately back plans for new energy projects in the Balkans or even revive a form of South Stream, ceasing work on South Stream is a major setback for Russia in the Balkans. The Kremlin will no longer be able to use the promise of jobs or investment for Bulgaria and Serbia to help influence decisions over the countries.
Russia's economic troubles come at a time when the Kremlin is experiencing major political setbacks. Low oil prices and Western sanctions have restricted Russia's economy and have contributed to the fall of its currency, which has lost more than 40 percent of its value since the beginning of 2014. GDP is now expected to shrink next year. In an effort to stem the crisis, Russia's Central Bank has increased its benchmark interest rate from 10.5 percent to 17 percent and has spent billions of dollars to support the ruble. Moreover, the Russian government has ordered some of the country's top exporters, including Rosneft and Gazprom, to sell parts of their foreign currency reserves to prop up the ruble. These new demands on exporters, coupled with a weak currency and high interest rates, will hurt Russian investments abroad, including the operations of subsidiaries of large Russian firms. Countries such as Serbia and Bulgaria can expect lower demand for their goods, a decrease in Russian investment and fewer loans from the Russian government.
Though Russia's economic crisis is not expected to be as grave as the one in 1998, the country's economic troubles will limit its ability to rival the European Union for influence in the Balkans. The European Union has promised Bulgaria billions of dollars for projects, including infrastructure and development initiatives. It will be difficult for Russia to compete with such investment. For Serbia, though actual membership in the European Union remains elusive, further movement toward integration with the bloc could bring more funding and investment to the country. Russia will retain some influence in the Balkans through its investments in Serbia and Bulgaria and because of the region's dependence on Russian natural gas imports, but Russia's economic troubles are a setback in its competition with the European Union — at least for now.
Natural Gas Europe is pleased to provide this article in cooperation with Stratfor, a Natural Gas Europe Knowledge Partner. For more visit http://www.stratfor.com/ Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook