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Jan 15, 2013 | 11:00 GMT

Russia's Involvement in the Former Yugoslavia

Russia's Involvement in the Former Yugoslavia
MIKHAIL MORDASOV/AFP/Getty Images
Summary

The former country of Yugoslavia is part of the European borderland contested by Western Europe, Turkey and Russia. Moscow is using energy projects and opportunities created by the European economic crisis to build and solidify its influence in the region. For instance, the Russian-backed South Stream natural gas pipeline is expected to receive national project status from Serbia soon. Moreover, Russia and Serbia recently signed an agreement for an $800 million loan to finance an upgrade to Serbia's railway system and discussed a prospective $1 billion loan to support Belgrade's budget.

Although Russia's presence in the former Yugoslavia is growing, Moscow's involvement in the region will remain constrained. The countries that once constituted Yugoslavia will maintain ties to Europe and Western institutions that provide them with financial assistance.

Since Yugoslavia's gradual and conflict-laden disintegration, which began in the early 1990s, Yugoslavia's former constituent territories — Slovenia, Croatia, Serbia, Kosovo, Bosnia-Herzegovina, Montenegro and the Republic of Macedonia — have diverged economically and in their attitudes toward Europe and Russia. Serbia has a particularly strong relationship with Russia; the two countries have cultural and religious ties, and Moscow supports Belgrade in its claims on Kosovo. Other countries in the former Yugoslavia are not as close to Russia. For example, Slovenia is a member of the European Union and eurozone, and Moscow does not even recognize Kosovo. The region's mountainous geography and cultural differences make it difficult for outsiders to deal with the seven countries of the former Yugoslavia uniformly.

All of the former Yugoslav states have developed strong commercial ties to Europe and either have been or aspire to be integrated into the European Union. However, this integration has been complicated by the current European crisis as well as the numerous unresolved ethnic and territorial disputes in the region and the countries' relative lack of Western institutional standards. Russia, which always had relatively strong cultural ties with the region's Slavic and Orthodox countries, can benefit from the slowdown in Europe's integration efforts and the funding slump that the European economic crisis has created in the region. The former Yugoslav republics' need to upgrade their industrial bases and transportation infrastructures opens more avenues for Russian involvement. Moreover, Russia can use its energy wealth and ambition to gain greater relevance in the region.

South Stream

Map - Former Yugoslavia and South Stream

Map - Former Yugoslavia and South Stream Pipeline

Russia is already the Balkans' main energy provider, and South Stream will allow it to fortify that position. Natural gas currently makes up about 10 to 15 percent of energy consumption in the former Yugoslav states, but with the construction of the South Stream pipeline, increasing natural gas exploration in the region and the expansion of the area's natural gas infrastructure, natural gas usage is expected to rise.

Russian state-owned energy company Gazprom heads the South Stream project. The main pipeline will run through the Black Sea, then through Bulgaria, Serbia, Hungary and Slovenia and will end in Italy. Serbia and Slovenia will benefit from increased natural gas supplies as well as transit fees. Other countries in the region eventually will gain access to natural gas from the South Stream line after lateral pipelines are built. In 2012, Montenegro, Croatia, Macedonia and Bosnia-Herzegovina were in talks to gain access to South Stream supplies through lateral pipelines, but the latest plans include only additional links to Croatia and Bosnia-Herzegovina.

Russia's Interests Beyond South Stream

Numerous Russian energy companies are involved in the former Yugoslavia outside the scope of South Stream. Macedonia is collaborating with Russian company Stroytransgaz to modernize and expand the national natural gas grid. In March 2012, Russia's Sintez Group completed a natural gas power plant in Macedonia.

Gazprom Neft purchased Serbian energy company NIS, which operates in Serbia, Montenegro, Macedonia and Bosnia-Herzegovina, in 2009. NIS announced in July 2012 that it intends to invest nearly $2 billion over three years to expand its retail network and its oil exploration and refining operations in the region.

In 2012, Russian state-controlled oil company Zarubezhneft announced plans to invest around $1.3 billion in the oil infrastructures of Croatia and Bosnia-Herzegovina in order to transport refined products from its refineries in Bosnia-Herzegovina to Croatia. Moreover, Zarubezhneft and Gazprom Neft are bidding for approximately 63 petrol stations in Croatia that Austrian company OMV is planning to sell. 

Even outside the energy sector, most countries in the former Yugoslavia largely depend on outside capital to modernize and develop infrastructure and energy. Most of the money comes from Europe, but Russian companies are taking advantage of Europe's current economic weakness and are picking up numerous strategic assets.

Russia's largest bank, Sberbank, which is majority-owned by the Russian central bank, acquired Volksbank International from a group led by Austria's Volksbanken in 2012. Volksbank International has subsidiaries in Serbia, Bosnia-Herzegovina, Croatia and Slovenia. Moreover, Russian company Uralvagonzavod is negotiating the takeover of a Serbian steel plant that a U.S. company gave up in 2012, and NIS involvement in Serbia's petrochemical sector is being discussed.

Russian involvement in the former Yugoslavia is not limited to asset acquisition. In November 2012, Serbia and Russia agreed to jointly produce military vehicles in Serbia for export. In December, Russian bank VTB announced it was considering financing infrastructure projects in Serbia and showed interest in the privatization of certain companies. Montenegro, meanwhile, is known for attracting Russian real estate investors and tourists.

Russia's interest in the region is not one-sided. In June 2012, former Macedonian Prime Minister Nikola Gruevski traveled through Russia to attract Russian business and announced the relaxation of visa requirements for Russians visiting Macedonia. Croatian officials made a similar trip to seek Russian investment in Croatia's energy and shipbuilding sectors.

Limits of Russian Involvement

Although the former Yugoslav republics welcome Russian capital, they will remain tightly linked economically to Europe, which is the closer and larger market and investor. Also, institutions like the International Monetary Fund, World Bank, European Bank for Reconstruction and Development and the European Union overall provide more funding to these countries than Russia does. Moreover, the former Yugoslav republics' aspirations to deepen relations with the European Union limit Russia's leverage in the region.

Croatia exemplifies the strategy of welcoming some Russian involvement but maintaining wariness of becoming too dependent on Russia. The Croatian government has courted Russian investors and shown interest in a connection to the South Stream pipeline. However, Croatia — the second former Yugoslav republic expected to join the European Union in 2013 — has pursued plans to construct a liquefied natural gas terminal (for which the European Union is expected to provide 25 percent of funding) and has showed an unwillingness to enter into a long-term natural gas supply contract with Gazprom. Initially, South Stream's main pipeline was supposed to traverse Croatia, but this plan was abandoned in part because of Zagreb's energy efforts.

Russian involvement in the former Yugoslavia will differ from country to country. Instead of trying to create blanket relationships across the region, Moscow is pinpointing specific projects, particularly those that use energy (Russia's most powerful tool) to increase its influence. Moscow will continue to target Serbia more than any other country in the region, since Russia has ties to Serbia that it does not have to other former Yugoslav republics.

Although the region's ongoing relationship with Europe will hamper Russia's efforts, Moscow will continue making inroads in the former Yugoslavia, recognizing its importance as a region with access to Central Europe and the greater Mediterranean. 

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