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In Tough Markets, Foreign Investors Find a Way

26 06 2007  Investment is arriving in southeast Europe's toughest economies, too, but market entry can be complicated.

By Besiana Xharra in Pristina and Saida Mustajbegovic in Sarajevo

When Ferronikeli restarts production in July, the massive metals processing factory in Kosovo will reawaken after an extraordinarily difficult hiatus.

Variously mismanaged, plundered and bombed through a decade of conflict in Serbia's breakaway province, the smelter and attached mines were finally privatised in 2006.

The buyer was IMR/Alferon, a Zurich-based management firm for Eurasian Natural Resources Corporation, a London holding company for a Kazakh mining group that is the world's third largest producer of ferroalloys.

Ferronikeli will be ready to work again “within a month”, after IMR/Alferon’s initial investment of 22 million euros, employing 820 workers so far, a company spokesman says.

Privatization officials in Pristina, the provincial capital, say they view the Ferronikeli sale as a particular success in a sales drive that, despite occasional halts, has ultimately injected vitality into Kosovo’s struggling economy.

“The economy has been unleashed, and the privatisation process played a big role in that,” says Kirk Adams, director of privatisation at the Kosovo Trust Agency (KTA), an institution set up after the 1999 Kosovo war as an administrator and sometimes seller of socially-owned enterprises, including some whose ownership remains in dispute.

Yet even a story such as Ferronikeli's – generally as clear a success as can be expected in Kosovo and other of the western Balkan region's toughest economies – comes with complications.

Nowhere in post-communist Europe is foreign direct investment (FDI) growing faster than in southeast Europe. While post-communist Europe in 2006 posted its highest-ever annual figure for FDI inflows – 55 billion euros, 18 per cent greater than FDI in 2005 – inflows to southeast Europe grew furiously, doubling year on year.

Figures from across eastern Europe tabulated by the Vienna Institute for International Economic Studies show that southeast Europe's magnetism for FDI was powered mostly by Serbia and Croatia while tiny Montenegro posted the region's highest level of per capita FDI.

Analysts at the Vienna Institute called southeast Europe's rapid inflows “a result of increasing economic growth and progress of transformation, as well as a support to both of these processes”.

However, the growth trend was not spread evenly across southeast Europe. Far behind in the FDI stakes were southeast European economies such as Kosovo, Bosnia-Herzegovina and Albania. Especially in the cases of Kosovo and Bosnia-Herzegovina, a key limiting factor cited by potential investors was perceived political risk.

However, case by case, the hindrances to successful investment in these difficult Balkan economies rarely relate directly to political instability. Instead, major investments have often been troubled by the opposition of small but determined stakeholders.

In the Ferronikeli case, for example, local officials in Drenas, the munipality where the smelter is based, now say they refuse to accept the factory's sale. Their opposition comes despite enthusiastic support for the sale from much of Ferronikeli's remaining workforce, much of which is local, and which stands to benefit from reactivation of jobs.

“I will always say that the contract between the Kosovo Trust Agency and Alferon is illegitimate,” says Xheme Binaku, chief executive of Drenas municipality.

Thus, while Ferronikeli's new managers speak already of “warming the pipes”, preparing the smelting complex for first processing in August, Drenas has declined to transfer to the company 30 hectares of land as stipulated by the privatisation contract.

KTA officials describe the transfer as nothing controversial. Ekrem Tahiri, the agency's spokesman, said there is “no doubt” the sale – backed by the United Nations, European Union and Kosovo’s provisional institutions of self-government – was legitimate.

But the conflict has nonetheless caused a delay which Ferronikeli’s new managers must handle sensitively.

Similarly, a dispute involving small stakeholders has emerged in regard to Bosnia-Herzegovina’s single largest foreign direct investment, a 1.4 billion euro joint venture between the Czech power utility CEZ and its counterpart in Bosnia’s Republika Srpska, Elektroprivreda RS.

Minority shareholders in Gacko RiTE, whose power generation facilities are due to be upgraded and supplemented by the joint venture, have threatened lawsuits over the arrangement both domestically and in the European Union.

In a letter sent to CEZ and to government offices in the Republika Srpska, shareholders including the London-based investment firm Monte Cristo Capital wrote that minority shareholder rights had been “violated” by the joint venture deal. The deal makes Gacko RiTE a minority shareholder next to CEZ’s majority stake in a new power plant operator, allegedly diluting their stake.

The letter threatens to cast a pall over an investment which government officials in the Republika Srpksa had trumpeted as a victory for future “energy independence” in the post-war statelet. At the same time, for the complainants, the arrangement itself with CEZ is seen as a threat to predictability in the investment environment.

Analyses differ in regard to such cases. Arguably, the emergence of such disputes in high profile cases harms the image of these economies as stable, predictable destinations for FDI. Yet commercial disputes and resulting litigation are plentiful in most dynamic markets.

What continues to distinguish the markets of Bosnia-Herzegovina and Kosovo is the reluctance of leading multinationals to buy in. Meanwhile as new FDI continues to flow in, but without the entry of global leaders, some of the new entrants are surprising.

Perhaps none is more surprising than E&I Group, a global group of companies noted for its work in mine-clearance in Iran and in industrial projects elsewhere. E&I has signed a memorandum of understanding with officials in the Bosnian district of Brcko, regarding a large-scale project to generate leading-edge industrial potential through the clearance of mines remaining from the 1992-1995 Bosnian war.

If E&I succeeds in moving forward, a large swathe of mine-polluted land in northeast Bosnia will be cleared to make way for agricultural prodcution, which in turn will feed a new 150 million dollar ethanol refinery, to be built by 2011.

The result would be both an FDI triumph for local officials, in the shape of 400 new jobs created directly and some 4,000 created indirectly. It would also be an industrial anomaly, a real-life instance of turning not swords but killing fields into ploughshares – and then fuel.


Besiana Xharra is a journalist with the daily newspaper Express in Pristina. Saida Mustajbegovic is a freelance journalist and BIRN contributor. Balkan Insight is BIRN’s online publication.

This article was published as part of the project: "Bosnia and Herzegovina and Neighbours: Training and Reporting on Economic Dialogue" supported by the British Embassy in Sarajevo.