02 June 2007

Doing business in Serbia's unpredictable climate

By Eric Jansson
Published by Financial Times, 30 May 2007

For one nervous moment earlier this month, Vuk Hamovic, one of Serbia’s most successful private businessmen, thought political risk might force his company out of the country. Energy Finance Team (EFT), his electricity trading and investment group, chose at the end of 2000 to locate its trading floor and largest office in Belgrade. The move marked a moment of personal triumph for Mr Hamovic.

Based in London through the 1990s, he had helped bankroll Serbia’s democratic opposition under the regime of Slobodan Milosevic, the former Yugoslav president. The democratic bloc’s sudden ascent to power in October 2000 signalled Mr Hamovic’s moment to invest in his native country.

EFT has since grown quickly. Now operating in 17 central and east European countries, it posted turnover of almost €600m in 2006.

But when power-sharing negotiations within Serbia’s “democratic bloc” faltered and ultra-nationalists appeared poised to re-enter government, Mr Hamovic and his colleagues drew up emergency plans that would have moved EFT’s trading floor from Serbia to Hungary. If ultra-nationalists had taken control, “we would have packed our bags and gone,” he says.

Risks to EFT’s operations would have been acute, since it is feared that an ultra-nationalist resurgence would raise the threat of international sanctions. “Even a 48-hour blockage could have triggered defaults on key contract obligations, with huge implications,” says a company spokesman.

It never happened. Risks vanished when Serbia’s democratic reform parties cut an 11th-hour deal blocking the ultra-nationalists from power, under intense diplomatic pressure from the US and the European Union.

Yet EFT’s flash crisis of confidence provided a stark reminder of how unpredictable Serbia’s investment climate remains, despite the country’s surging economy. Serbia’s reformers have clung to power since 2000, but they have been divided throughout by competing visions and bitter partisan rivalries. Amid the infighting, economic reforms have sometimes raced forward and sometimes stalled.

Few companies have felt compelled to consider leaving altogether, as EFT did. On the contrary, investors’ interest is growing quickly as Serbia consistently registers brisk economic growth while showing plenty of capacity for more, even by east European standards.

The ultra-nationalists’ brief chance at power was anomalous – many big investors ignored it – and the market’s confidence rose again when it passed.

However, many companies find themselves stymied by failures of state officials to adhere to timelines for the conception and introduction of reforms. Political wrangling frequently stands in the way of faster economic growth.

A prime example is the restructuring and privatisation of large, inefficient public enterprises, none bigger than the state-owned oil company Nafta Industrija Srbije (NIS) and electricity utility Elektroprivreda Srbije (EPS). Action on both was held up for years under the last government of Vojislav Kostunica, which focused more intently on Kosovo’s status and constitutional reform before calling inconclusive early elections that extended the delay.

With Kosovo’s status up for grabs this year, the government’s primary focus is likely to remain elsewhere. But investors still regard restructuring and privatisation as an important opportunity and an important test for the new government.

Mr Kostunica is promising to act. The prime minister has announced plans to attract new investments worth €3bn to the energy sector by 2010. A large portion of this sum is anticipated in the form of privatisation revenue from NIS, while one-third will cover construction of a new gas pipeline. Restructuring of EPS is likewise to go ahead, as should privatisation of big state-owned insurers.

Branko Pavlovic, a former privatisation chief under Mr Kostunica who now advises trade unions on privatisation issues, predicts the government will bide its time. NIS and EPS together employ about 80,000 workers. Although their unions officially profess support for privatisation, as Mr Pavlovic says he urges them to do, he also claims that union officials are poised to resist “realities of privatisation” such as slow wage growth.

A clash with these big unions will give government officials an excuse to avoid effective restructuring and privatisation of the big state-owned companies, Mr Pavlovic says.

“They will spend as much time as possible not doing it, and they will try to maintain as much control as possible.” This is because NIS and EPS are not only companies but patronage machines, each providing offices for “more than 1,000” appointees, typically selected along party lines.

Investors hope more pertinent market criteria will determine the fates of NIS, EPS and other big state-owned companies. But some acknowledge that the government must proceed with care. For example, Mr Hamovic, who insists that EFT has no interest in buying EPS despite persistent rumours, argues that the electricity utility cannot be effectively restructured until electricity prices are allowed to rise closer to international market levels. “There are no overnight answers,” he says.

1 comment:

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