Belgrade Pristina dialogue

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George Anjaparidze

Restarting Belgrade-Pristina talks could unlock funds for COVID recovery

Policy Pulse - George Anjaparidze - 24 June 2020

On 27 June 2020 the leaders from Belgrade and Pristina plan to meet in Washington, DC with the goal of restarting formal dialogue. The meeting has potential to be a turning point on the road to normalization of relations.

Political analysts have suggested that the timing looks promising. Both sides are at the start of their political mandates. Furthermore, key roadblocks that derailed previous efforts at dialogue have, at least in part, been addressed. Perhaps of most significance, the 100% tariffs imposed by Kosovo in November 2018 on imports from Serbia and Bosnia have been removed in April 2020. Earlier in June 2020, the new Kosovo leadership also removed the recently imposed non-tariff measures.

Both sides need international support to sustain a post-COVID recovery. Restarting Belgrade – Pristina talks on normalization can unlock additional funds to support the economic recovery following the COVID-19 shock.

Removing trade barriers is good for Kosovo and will ease recovery from COVID

The decisions taken earlier in the year to lift the mentioned tariffs and other non-tariff barriers are good for consumers and businesses in Kosovo. Reduced trade restrictions make it easier for Kosovo to bounce back from the COVID-19 shock as it becomes less costly to source inputs for the recovery.

As our previous analysis examined, these tariffs were harmful to Kosovo. A year ago, experts also warned that import taxes would lead to higher prices in Kosovo.

Estimated consumer prices inflation for 2019 shows that despite using the Euro, inflation in Kosovo was more than two times higher than the Eurozone average. The process used by the Kosovo Agency of Statistics (KAS) for estimating inflation could benefit from greater transparency, nevertheless, taking the published figures at face value indicates that inflation in Kosovo was 2.7% compared to the Eurozone average of 1.2%.

The higher rate of inflation captures only part of the impacts. A retrospective assessment of the tariff impacts would likely show that the tariffs led to a combination of higher prices, consumption of lower quality products and potentially lower profit margins in the distribution chain within Kosovo.

Restarting talks can help unlock new resources to accelerate post-COVID recovery

The IMF expects the outbreak of COVID-19 will severely curtain Kosovo’s economic performance through depressing tourism receipts, remittances, exports and FDI. Even at the beginning of April, IMF forecasted the economy to shrink by 5% in 2020, with external financing inflows cut by half. In 2018, personal remittances received were equal to 15.6% of GDP or €1.1 bn and expectation for 2020 point to a sharp contraction. Since these forecasts, the response to the epidemiological situation has led to an even weaker economic backdrop and implies an even worse outlook.

Across Serbia, COVID-19 is expected to have a significant adverse impact on the economy. The travel and tourism sector contributed to nearly 6% of GDP in 2019 and grew nearly two percentage points faster than the overall economy. In 2018, personal remittances received were equal to 8.8% of GDP or €3.9 bn. A major contraction in remittances and the travel and tourism sector combined with a challenging external environment pose serious difficulties to the post-COVID recovery.

Formally restarting the normalization discussions can help unlock additional international support for the recovery. Immediate opportunities for leveraging additional funds, beyond those already announced in the EU post-pandemic recovery plan, could come from EU instruments such as the Stabilization and Association Process (SAP) and investment initiatives targeting the Western Balkan region.

In the medium term, a particularly promising source of additional funds could come from the new EU methodology for enlargement, which promises to front load some of the benefits associated with the EU accession process. Historically, there was a big difference in the support provided through the instrument for pre-accession and the scale of funds that would be available upon EU membership through the EU cohesion program (see chart).

As illustrated in the chart, economic transfers from the EU under the instrument for pre-accession were significantly lower than the potential funds that would be available through the EU Cohesion program if Kosovo and Serbia were EU members. One of the aims of the new methodology for enlargement is to front load the benefits of EU membership and make them available throughout the accession process. While operational aspects of the new methodology are still being finalized, this new approach could serve as a major opportunity for accessing additional resources and lead to a scale-up in EU assistance during the accession process.

Combining economics and international support improves prospect of normalization

Imbedding economic issues as part of the dialogue on normalization has potential to improve the negotiation dynamics. A greater focus on the economic dimension could change the negotiation from a “slicing the pie” to a “growing the pie” dynamic.

Focusing on economic benefits in combination with targeted international support has potential to greatly improve the prospects of normalization.

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George Anjaparidze

Conflict Economics: Eastern Europe 2020

Policy pulse - George Anjaparidze - 28 January 2020

Belgrade – Pristina: cautious optimism for 2020

Economic costs continued to mount in 2019

Kosovo’s consumers continued to be harmed by the 100% tariffs imposed by Pristina on Serbian imports. The indecision of the EU on enlargement, especially with respect to North Macedonia, was perhaps the most discouraging development of 2019. By making EU enlargement in the Balkans more elusive the EU diminished prospects for normalization of relations between Pristina and Belgrade. The prospect of EU membership, in particular the eventual access to EU structural funds, is a major economic incentive for normalizing relations between Pristina and Belgrade. Access to EU structural funds would result in about a 20-fold increase in public finance flows from the EU.

There is room for cautious optimism in 2020 for restarting negotiations but economic incentives are still needed

2020 holds greater promise. At the local level, annual data will soon be available that will make it possible to assess the negative impacts of tariffs on consumers in Kosovo. Such an assessment would empower the incoming Kosovo government with evidence on the economic benefits of suspending the tariffs. Given the solid nationalist credentials of the likely incoming government, suspending the tariffs would unlikely be perceived by the public as appeasement to Belgrade.

Internationally, a greater US involvement is likely to yield results. President Trump’s appointment of US Ambassador to Germany as US special envoy for talks between Belgrade and Pristina can be a source of positive leverage. The agreement to in principle resume direct rail and air services is evidence of US effectiveness. Furthermore, the new EU Foreign Policy Chief, Josep Borrell, could play a key role by putting on the table the promise of near-term economic support for parties to resume dialogue. This could be done credibly given the on-going review of the methodology for EU enlargement. The updated methodology, in part, aims to front load the economic benefits to candidate countries from EU integration.

Ukraine – Russia: in need of a rebalance?

The situation in Ukraine continues to impose economic costs on all parties

The conflict in Ukraine imposes significantly higher costs on Ukraine (compared to Russia) in both relative and absolute terms. External estimates from academics indicate that output in the Donbass region has fallen by about 50% due to factors directly attributable to armed conflict. In comparison, like for like estimates point to a fall in economic activity of about 15% in the rest of Ukraine. There are no readily available like for like comparison for assessing the impacts on Russia. However, the range of estimates of the relative impact of Western sanctions on Russia, suggest that sanctions have lowered economic output by 0.5 - 1.5%.

The cost of waging war is also lower for Russia. For most of the conflict, Russia’s direct military resource commitment has been relatively small (estimated at one battalion plus tactical operations combined with positional warfare and indirect fire). In contrast, Ukraine has incurred major losses while having to approximately double its military expenditure. This means Russia is able to perpetuate the conflict at a fraction of the cost incurred by Ukraine. While Ukraine’s recently improved readiness has enhanced its ability to increase costs for Russia, Ukraine’s ability to deploy this capability at scale is constrained by overall Russian military superiority and the threat of a massive invasion of Ukraine.

Rebalancing the cost equation of the Ukraine conflict and introducing a “Marshall Plan for Donbass” can help normalization

Under these circumstances, the outcome of negotiations in 2020 is unlikely to be successful or at best will be extremely unbalanced (disproportionately favoring Russia). In terms of economic instruments, there are two important steps that should be considered by Ukraine’s Western partners. First, there is a need to rebalance the cost dynamic (e.g. new rounds of more intense sanctions). Second, predictable and long-lasting resources need to be provided on an unprecedented scale that will economically integrate the Donbass region into Ukraine and Europe. A “Marshall Plan for Donbass” needs to be committed to ahead of further Zelensky - Putin negotiations. This should give confidence to Ukraine that with time the region will be integrated into Ukraine, even if in the short-term Russia continues to hold sway. Crimea is a more complex issue, with conditions in 2020 unlikely to be conducive for dialogue. However, there may be attempts to bundle the Crimea issue as part of the Donbass negotiations.

Georgia – Russia: from bad to worse

Georgia – Russia relationship goes from bad to worse in 2019

2019 saw the Georgia – Russia relationship hit lows not seen since Russia’s 2008 invasion of Georgia. Georgia still does not have diplomatic relations with Russia. Nevertheless, in recent years, relations improved with resumption of direct flights and more trade. However, in June 2019 an error of protocol sparked mass protests in Georgia against continued Russian occupation of two Georgian territories. In response, President Putin issued a decree banning all direct flights between Russia and Georgia. As a result, Russian airlines and consumers have incurred the biggest absolute losses. The impacts on the Georgian tourism sector were to a large extent mitigated due to good connectivity available through regional hubs such as Minsk, Riga, Almaty and Istanbul. In a more strategic context, the flight ban is a missed opportunity for Russia to recover its soft power potential and makes it more difficult to forge closer economic and human to human ties.

Political volatility is expected in 2020 but economic initiatives can create opportunities for collaboration

2020 is an election year in Georgia, with an uncertain outcome. According to the latest polling data, no political party has more than 20% of public support. The ruling party still leads but current polls suggest it is unlikely to win an outright majority. However, there is high uncertainty in the polling data as about 1 in 3 survey participants either refused to answer or do not support any political party. During the period in the lead up to elections, Georgia is particularly vulnerable to external meddling. For example, Russia may give a platform and engage in dialogue with fringe political groups in Georgia to resolve an engineered crisis or credit them with a removal of the ban on direct flights. There is also continued concerns about how Russia might react to any developments related to Georgia’s closer integration with NATO.

On a more optimistic note, Georgia’s closer cooperation with the EU on economic issues has not been a source of confrontation with Russia. The joint statement, by foreign ministers of Georgia, Moldova and Ukraine, calling for an enhancement of integration with the EU could also create opportunities for cooperation with Russian investors and business community.

Kosovo status quo has a high cost

Policy Pulse - 6 May 2019 - George Anjaparidze

Key policy messages:

Normalization of relations between Belgrade and Pristina will facilitate the inflow of much needed Foreign Direct Investment (FDI)
Kosovo has an unsustainable economic model and desperately needs FDI to support export-oriented growth and improve competitiveness
Serbia stands to benefit by reducing uncertainty for its path to EU accession, which will unlock additional FDI inflows

The Macron-Merkel summit in Berlin on 29 April did not deliver a breakthrough in normalization of relations between Belgrade and Pristina. However, this style of “Summit diplomacy” may prove to be effective if it is choreographed with on the ground dialogue and negotiations.

The challenge at hand is to restart structured dialogue between Belgrade and Pristina despite a deteriorating political situation on the ground. A crucial component of any future dialogue needs to include a focus on economic issues (see our brief on the role of economics in conflict resolution).

Kosovo needs FDI to put the economy on a sustainable growth path. The current economic model is flawed. Growth is largely driven by an increase in consumption fueled by remittances. An uncompetitive production base in Kosovo has meant that the increase in consumption demand has mainly been met by imports.

Kosovo lags behind in securing FDI flows (see Chart). Furthermore, the FDI flows that materialize from diaspora are targeted at non-tradable and low-productivity sectors. Kosovo desperately needs FDI to support export-oriented growth and improve competitiveness. Major privatization deals have been held back in the tourism, extractive minerals and infrastructure sectors because of the persistent political uncertainty in relations between Belgrade and Pristina. The perpetuation of the status quo robs Kosovars the opportunity to create a sustainable livelihood in Kosovo.

More broadly in Serbia, FDI flows have fared better as business environment reforms have had a favorable impact. Although, Serbia still lags behind some regional peers (see Chart). The bigger opportunity for Serbia comes from the prospects of EU membership. The EU strategy for Western Balkans targets 2025 as the accession year for Serbia. As part of this process, Serbia needs to bring its national legislation in line with the EU and normalize relations between Pristina and Belgrade. If it succeeds, the gains will be significant only one of which is FDI.

In the three years leading up to accession neighboring Bulgaria and Romania experienced average annual FDI inflows of 16.2% and 8% of GDP. Normalization of relations between Belgrade and Pristina, would signal to investors that the most contentious issue on Serbia`s path to EU accession has been overcome. The reduced uncertainty will unlock additional FDI inflows to Serbia. It can help secure better outcomes in privatization of state-owned enterprises, infrastructure assets and spawn productive private sector led growth.

As the Macron-Merkel Summit demonstrated, normalizing relations between Belgrade and Pristina will not be easy. It will require crafty diplomacy, political maneuvering as well as robust economic analysis to help policy makers understand the cost of inaction.

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