Peripheral vision in south-east Europe

GCC countries are starting to explore opportunities in Europe’s southern extremities. Published in The Gulf, October 2013

Walking around the Macedonian capital of Skopje in the early autumn sunshine, it can at times feel like you are in a previously unknown Gulf city rather than a little-visited corner of southeast Europe. Large parts of the town centre are being renovated or rebuilt as the country pursues a bold scheme to recast itself as a dynamic, thrusting centre for trade and tourism.Grandiose buildings for government ministries and museums are popping up allover the place, more often than not decorated with neoclassical columns,statues and fountains.

To the south of the city centre on a street corner opposite the old railway station yet another construction site is hidden behind a corrugated iron fence.Some machinery is in place although work has yet to really get going. The site will eventually become home to the new headquarters of Elektrani na Makedonija(ELEM), the country’s power generation company. By the time the building is complete, the company itself may have some new Gulf shareholders.

The Macedonian government says that at a meeting in Doha in January, Qatari officials expressed an interest in investing in the electricity company as well as in some tourism projects such as the Popova Sapka ski resort and a spa centre. Discussions on the topic were held between the Macedonian economy minister Valjon Saraqini and Ahmad Mohamed al Sayed, managing director of Qatar Holding. Although no formal deal has yet been announced, the potential is certainly there. During the same visit, Macedonian president Gjorge Ivanov and Qatar’s then Amir Shaikh Hamad bin Khalifa al Thani agreed to form a joint economic co-operation committee.

Like all the countries in the Balkans region, Macedonia is keen to bring in new investors to boost its economy and reduce the unemployment rate which currently stands at more than 30 per cent. But with so many of the European Union (EU) economies to the west still in the doldrums, they are having to look further afield for partners. Many of them appear to have identified the oil-rich Gulf states as offering a lot of potential.

Serbia’s deputy prime minister Aleksandar Vucic said in an interview with local media in Belgrade on 13 September that he had asked Shaikh Mohammed bin Zayed al Nahyan,Abu Dhabi’s crown prince, for a low interest rate loan of $2-$3 billion to be repaid over 20 or 30 years.

“That would practically be a present to this country,” Vucic said. “We would use apart of that loan to pay back our most difficult debts. At the same time, we would lower the public debt and we would inject the rest of the money into the economy in various ways. It would allow us to ... improve the image of Serbia’s economy in the world ... and I think we would have a better economic environment as soon as next spring.”

In terms of population size the countries of the Balkans and the Gulf are not too dissimilar, with most having less than four million citizens. Overall there are 37 million people living in the eight countries that make up the core of the Balkans, from Bulgaria in the east to the former Yugoslav states in the west and Greece in the south. In comparison there are some 46 million people in the six GCC states. But their economies are on very different trajectories. While the Gulf economies are enjoying rapid growth from their oil windfalls, the Balkan countries have seen their economies stagnate in recent years. Average gross domestic product (GDP) per capita in the Balkans is $10,389, around a third of the $29,459 figure for the Gulf countries.

The economic links between the two regions are not as yet very extensive but things are moving apace. Inter-government talks aimed at boosting trade and investment have involved almost all the Gulf and Balkan countries over the past few years.These discussions have tended to revolve around Gulf countries making investments in transport infrastructure, technology and agriculture around the region, as well as in the defence and tourism sectors.

The most notable deal to date has been Etihad’s purchase of a large stake in JatAirways, the Serbian national carrier. The deal was announced in August this year and will see the Gulf carrier acquire 49 per cent of the airline, the maximum allowed by EU regulators. The airline will be rebranded as Air Serbia and Etihad will also provide up to $100 million in further funding as well as management expertise for at least the next five years.

According to Etihad, the deal is not just about expanding its route network. It should also enhance trade and investment relations between the UAE and Serbia and boost tourism flows in both directions.

Onthe surface it is a strange deal, given the Serbian airline’s limited list of destinations and its difficult financial position, but there is a sizeable Serbian expatriate community around the world and it could provide a useful way to connect traffic from the wider Balkans region into Etihad’s route network.Other airlines have also been expanding their services into the Balkans,including flydubai and Qatar Airways, which both serve Belgrade and Skopje, as well as nearby Bucharest in Romania.

“Jat has an established network and you could go in and expand that network and funnel off the people who need long-haul flights through Abu Dhabi,” says Carter Stewart, managing director of TWC Aviation Consulting. “Etihad could probably pick up a lot of Mediterranean traffic with that. It could also be well positioned to do more Europe to North Africa traffic when the political situation stabilises there, which it will. You have to think in the long-term. Etihad is playing a long game here, they’re not worried about short-term issues.”

Such deals are typical of the way Gulf states often expand their diplomatic and economic relations, using a large state-owned business such as an airline or a bank to act as the agent to break into a new market, allowing others to follow in its wake. Trade ties between the UAE and Serbia were valued at around $30 million in 2012, but that was three times more than the figure for 2011. The Jat Airways deal could well be the precursor to far more growth in the coming years, particularly if the Abu Dhabi government also pushes ahead with the soft loan that deputy prime minister Vucic asked for.

Already some private sector companies are getting involved, often in conjunction with longer-term government policy agendas. The UAE’s Al Dahra Agricultural Company is investing €300 million ($406 million) in eight Serbian farms which will fit in with Abu Dhabi’s long-term food security programme. Al Dahra says it also plans to invest in storage and shipping facilities in Serbia, in what will be a welcome boost to the Balkan country’s transport infrastructure.

The UAE and Qatar are between them at the forefront of the diplomatic and investment push into the Balkans. Among the other recent deals that have been concluded, Qatar Petroleum signed a $58 million deal in July to acquire a 25 per cent stake in the Heron II gas-fired power plant in Greece that is run by the local Gek Terna Group.

The flow of business and investment is not entirely one-way however. In the other direction, Gek Terna is building the SR404 million ($107 million) Aldara Hospital & Medical Centre in Riyadh, Saudi Arabia in a joint venture with the UAE’s Arabtec Construction. And Slovenian steel products firm Trimo has facilities in Dubai and Fujairah.

For the Balkan countries the attraction of Gulf money is obvious and probably outweighs the potential for exports into the GCC. For the GCC states themselves, there are also some obvious motivations to become more closely involved in this part of Europe. The region is experiencing tough economic conditions at the moment which means investment valuations are often attractive, but its prospects could brighten in the longer run. The EU will emerge from its downturn at some point and, when it does, the countries of southeast Europe should benefit, particularly as more of them become EU members in their own right. They also offer the GCC countries a new set of potential allies in the corridors of power in Brussels.

The ones that have done most to try to attract Gulf money to date are the former Yugoslav republics such as Serbia, Macedonia and Kosovo. Others such as Albania lag behind but there are some aspects of that country that should prove comfortingly familiar for Arab investors. Albania has one of the largest onshore oilfields anywhere in Europe at Patos Marinza and is one of the few countries in Europe to have a Muslim majority population, along with Kosovo and Bosnia & Herzegovina (there are substantial Muslim minorities in Macedonia and Montenegro).

Some private Gulf investors have dipped their toes into the waters here too. Outside the Butrint Hotel, the smartest in the Albanian seaside resort town of Saranda,a Kuwaiti flag flaps in the warm breeze coming off the Ionian Sea in deference to an investor in the hotel. Governments in Tirana and other regional capitals will be hoping that more follow in the future.