Serbia the Right Choice Offering investment opportunities, a skilled labor force and the lowest corporate tax rate in Europe Soon after taking over as president of the World Bank last year, Paul Wolfowitz paid a visit to Belgrade. As the former United States deputy defense secretary is internationally renowned – if not notorious – for being a blunt-speaking neo conservative, the opinion he expressed about the state of Serbia was all the more striking.

“If someone had told me five years ago that Serbia would make so much progress in so many areas in such a short time, I would have said he was dreaming,” he said. Wolfowitz’s surprise was understandable.

Five years earlier, Serbia, and its sister republic of Montenegro, were the shattered remnants of the federal republic of Yugoslavia, following the 78-day conflict over Kosovo between NATO forces and the nationalist regime of Slobodan Milosevic. The conflict had resulted in bomb damage repairs estimated at $4.1 billion; the Yugoslav dinar was virtually worthless, annual inflation was about 80 percent and foreign debt was $12.2 billion.

Yet today, three years after Yugoslavia ceased to exist and Serbia and Montenegro came together in a looser union, there are few signs of that devastation.

Belgrade’s streets throb with fashionable life. Stylish shoppers parade along Knez Mihailova, one of the main boulevards. Gypsy musicians serenade at the street cafés in Skadarska, the city’s old Bohemian quarter, and, at the barges lining the Danube and Sava riverfronts, the young dance to a Serbian hybrid known as turbofolk.

However, poverty is still rampant, particularly in the more remote country areas, and there are an estimated 500,000 refugees and 250,000 displaced persons, which puts great strain on the social system. The actual unemployment rate is about 15 percent and last year inflation reached 15.6 percent.

There are also several critical issues that will come to a head this year. Entry into both the European Union and NATO is at risk, and much international aid is being lost because of what western governments perceive as the failure of the Belgrade authorities to bring to justice Rodovan Karadzic and Ratko Mladic, who have been indicted by the United Nations war crimes tribunal.

Secondly, negotiations are at least beginning to decide the future status of the breakaway province of Kosovo. And thirdly, Montenegro is planning to stage a referendum to decide whether it should withdraw from the union with Serbia.

Yet, in spite of these challenges, businesses are beginning to thrive throughout Serbia and optimism and affluence are returning – and with good reason.

Overall economic activity in Serbia and Montenegro last year showed an estimated growth rate of 6.5 percent. Foreign currency reserves have increased by more than 50 percent to $6.5 billion. An International Monetary Fund mission in October reported improving export performance, strong domestic demand and growing investment activity by local and foreign companies.

In an interview for this survey, Mladjan Dinkic, minister of finance, said that for the first time in six years the country has recorded a fiscal surplus of more than 1.3 percent of GDP. “This is much larger than we expected six months ago. In 2003 we had a budget deficit of 3.9 percent.”

Belgrade's Danube riverfront

Giving some reasons for his optimism, Dinkic points out that Serbia has the lowest corporate profit tax in Europe at 10 percent. “This is our biggest advantage over other central and eastern European countries. My goal is to cut personal income tax to 10 percent as well.”

He says the current account deficit is the biggest macroeconomic challenge the country faces. “Last year it reached 15.6 percent of GDP, which is huge. But I think that this year, thanks to export growth, it will be reduced to about 10 percent.”

Serbia’s economic buoyancy is reflected at the Belgrade Stock Exchange which recorded a turnover worth $664.5 million last year – 13 percent up from 2004. And Standard & Poor’s has raised its long-term sovereign credit rating from B+ to BB-.

The economic progress being made was recognized last September when Serbia was declared the leading reformer in creating jobs. It topped the ranking of 155 countries in a report published by the International Finance Corporation.

More than 10,000 new companies were registered last year and a similar number is expected this year, says Pedrag Bubalo, the minister of economy.

Now, say many analysts, is the right time to invest in Serbia and Montenegro. It is strategically located in the middle of a southeast Europe free trade area that provides duty free access to a market of 55 million people. Furthermore, Serbia and Montenegro is the only country outside of the former Soviet Commonwealth of Independent States that enjoys a freetrade agreement with the Russian Federation. This offers tariff-free access to a market of 150 million.

Many international companies are recognizing the country’s potential. Because of the Kosovo conflict, foreign direct investments are still relatively minimal, but they have never been as numerous or as substantial as they were last year, when they reached a total of $1.8 billion. This year they are expected to be worth at least $2.4 billion, says Milan Parivodic, the Serbian minister of international economic relations.

“Foreigners invested twice as much last year as they did the year before, especially in greenfield sites.”
Mladjan Dinkic, Minister of Finance

Finance Minister Dinkic says that the amount of investment Serbia needs for successful economic development is between $2 billion and $2.5 billion.

“Foreigners invested twice as much last year as they did the year before, especially in greenfield sites,” he says. “Many U.S. companies are here and more are coming.”

As a business location, Serbia and Montenegro has a number of advantages for investors. It is slightly smaller than Kentucky but, with a population of 10 million, it is second only to Romania as the largest market in the region and it is situated effectively on road, rail, air and water routes between Europe and the Middle East. It also has a relatively low-cost and highly skilled labor force.

In another interview for this survey, Boris Tadic, president of Serbia, pointed out that because of its central position in southeast Europe, Serbia has extensive experience as a hub of production for the whole region and its potential for business ranges from agriculture to high technology.

The U.S. is the single largest investor nation, accounting for well over $1 billion. Companies that have been quick to appreciate the country’s prospects include U.S. Steel, Colorado based Ball Corporation, France’s Michelin and a multinational clutch of beverage manufacturers including Coca-Cola, the Netherlands’ Heineken and Denmark’s Carlsberg.

Such investments are not without risks of course. Serbia and Montenegro is still in the process of transition from its socialist and nationalist past.

Structural and bureaucratic barriers still exist, but these are being tackled with the assistance of a variety of international organizations. Corruption and smuggling, which flourished during the years of international sanctions against the former Milosevic regime, are being actively and fairly effectively combated.

Vojislav Kostunica, prime minister of Serbia, told this report that the government achievement of which he was most proud was probably the establishment of its legal framework and the application of the rule of law.

The ongoing challenges, he said, were maintaining economic growth, improving the social situation of the people, fighting corruption and organized crime and resolving the status of Kosovo. “They are not easy tasks and it will not be an overnight process, but we are working on them.”

Turning to the country’s economic potential, he emphasized that Serbia and Montenegro’s free-trade agreement with the Russian Federation made it very attractive for western capital. “We are the east of the west and the west of the east,” he said.

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Back in Credit

European banks are jostling to join Serbia’s banking sector, where the privatization process is scheduled to be completed before the end of this year. Entry of a major U.S. bank is widely anticipated in financial circles.

Reform of the banking system, which began in 2001, has resulted in the closure of 25 Serbian banks. Four in which the state was the major shareholder were privatized last year.

“The prices we obtained were very high,” says Mladjan Dinkic, minister of finance. “In many cases, foreign banks paid more than three times the value of the capital to enter the market. The liquidation of those banks – rather than their rehabilitation – provided space for new banks to enter the market and develop very fast.”

One of the banks that was quick to recognize the potential of the Serbian marketplace has been Greece’s Eurobank EFG, which became the major shareholder of NSB (National Savings Bank) in September.

“We foresee a sustained period of above-average economic growth here,” says Theodore Karakasis, deputy general manager of Eurobank EFG’s international division. “Eurobank made the decision to invest, expand and become a major player in the Serbian economy because we see the potential in southeastern Europe, and we have the resources and welltrained executive talent behind us.”

“We foresee a sustained period of above-average economic growth here.”
Theodore Karakasis, Deputy General Managerof Eurobank EFG’sinternational division

Karakasis says he expects the bank’s top clients and businesses in Greece to respond to the opportunities in the region as well. The bank intends to focus on its own innovative product development and sales. One of its early actions was to introduce a proprietary credit card called Euroline.

“One of the problems for Serbia as a marketplace is that the depository base of the entire banking system is quite low,” says Karakasis. “So we have launched a number of attractive products to encourage people to bring money back into the system. This is proving reasonably successful.”

He says that Eurobank’s aim is to have a universal presence in the country. At present, NSB has 70 branches while Eurobank EFG has 24, 17 of which are in Belgrade.

As Eurobank EFG’s actions show, under the central bank’s current, fiscally conservative leadership, confidence in the Serbian banking system is being rapidly restored, both at home and abroad.

In addition to the closure of unviable banks, the dinar has been stabilized and bonds have been issued to repay foreign currency deposits frozen by the old regime.

Says Finance Minister Dinkic: “In 2000, when Milosovic’s era ended, there were zero savings in the banks. Now there is more than €2 billion ($2.4 billion).”

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Make Your Bid

The privatization of public enterprises in Serbia accelerated in the second half of last year following the implementation of new regulations concerning the sale of companies. As a result, 501 were sold, raising $471.2 million for the state.

This year the government’s privatization agency plans to sell an additional 300 enterprises through public auction, put 30 up for tender and sell 250 blocks of shares from its share fund portfolio.

Since its inception in 2001, the privatization process in Serbia has been widely praised as one of the most well-designed and transparent in Central and Eastern Europe.

“We could have issued bonds for all state-owned companies to citizens like they did in Russia,” says Predrag Bubalo, Serbia’s minister of economy. “But we decided to give 30 percent to workers and citizens and sell 70 percent of the companies to investors.

“It is very important that the new investors bring new equipment, new technology and modern management. Price is not important to me.” Most of Serbia’s companies have similar problems, he says. They lost their foreign markets when they were subjected to U.N. sanctions in the 1990s, so there was no investment, research and development ceased and connections with new technologies were lost.

“Our state companies have four main problems: old technology and equipment, too many employees and big debts,” says Bubalo. “We can reduce the debts, as most of them are owed to state creditors, and we can reduce the number of employees. New technology and equipment should be supplied by an investor.

“If you look at our corporate, registration, company and bankruptcy laws you will see that they are harmonized with E.U. and U.S. regulations,” says Bubalo.

“It is very important that the new investors bring new equipment, new technology and modern management.”
Predrag Bubalo, Minister of Economy

The main privatization methods are by tender and auction. Strategically important large enterprises are put up for tender with the aim of attracting investors who can become solvent strategic partners. Auctions are used to sell small and medium-sized enterprises, which comprise the largest number of socially and state-owned concerns.

Minority blocks of shares are privatized through the capital market, while large and complex systems undergo financial, legal and organizational restructuring so that they can be offered for sale in the most appropriate form for potential investors.

The new regulations allow for the write-off of debts of public companies that are being sold. Bubalo says that 75 percent of the country’s public companies have been privatized so far and that the privatization process should be completed by the end of 2007.

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NIS for Sale

One of Serbia’s major privatizations will be the disposal of all or part of the state oil company, NIS, which Merrill Lynch has been hired to conduct. The sale is expected to attract much interest and bids from some of Europe’s biggest oil companies. In addition to Royal Dutch Shell and BP, Austria’s OMV, Russia’s Lukoil, Hungary’s Mol and Poland’s PKN Orlen are said to have expressed interest.

NIS headquarters

Transferring NIS to private ownership is one of the conditions which the Serbian authorities have to meet in order to access the last tranche of a credit worth more than $966.6 million from the International Monetary Fund.

Merrill Lynch will receive a fee of more than $1 million plus a commission of 1.2 percent of the sum obtained from the sale. The Belgrade government and the IMF concluded their
agreement after the Serbian parliament adopted its 2006 budget and a number of laws reforming the country’s health system. One result of the agreement with the IMF will be a cancellation of part of the debt of $785.3 million which the Belgrade government owes to the Paris Club of creditors.

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Shopping Bonanza

With the standard of living improving and people earning and spending more, retail trade in Serbia increased by 22.5 percent last year.

Household goods are a major focus of attention. During 15 years of economic crisis, warsand sanctions, importedgoods were rarely available and much local production closed down for lack of supplies. As a result, Serbians, whose incomes increased by an average of 22 percent last year, are taking the opportunity to renew outdated household appliances and indulge in modest luxury items.

Jovan Ilic, general manager of Eltim, the leading distributor of a wide variety of high-quality imported electronic goods, says that although salaries and wages are still relatively low by international standards, the pursuit of quality is a key element for Serbian shoppers. “From 1996 our growth has been unstoppable,” he says.

The earnings of the country’s biggest outdoor advertising agency, Alma Quattro, reflect Serbia’s changing fortunes. Created in 1994, in the middle of the trade embargo, the agency survived the difficult years, now earns more than $2.6 million annually and has a 65 percent share of the Serbian outdoor advertising market.

In its early years it was cold-shouldered by everyone it approached except Alma International, a Greek company. “As Serbians and Greeks have similar mentalities, we agreed to do business with each other,” says Kosance Dimitrijevic, the agency’s managing director.

Alma Quattro was subsequently acquired by JCDecaux, one of the world’s leading outdoor advertising companies, and is now positioning itself to be the hub for outdoor advertising across southeast Europe.

“Geographically speaking, we are in the main crossroads of Europe, and we intend to use that to our advantage,” says Dimitrijevic. “There are opportunities here and it is exciting to see them all developing.” For Eltim general manager Ilic, increasing sales over the past three years have turned his thoughts towards the idea of entering into a joint venture with a view to constructing four or five big department stores on the outskirts of Serbian cities. At the moment, the company is a family business with 13 retail outlets and 130 wholesale distributors.

Ilic’s objective is to have a presence in every town in Serbia. Eltim is an exclusive representative or an official distributor in Serbia of the leading international electronic equipment manufacturers. The company also specializes in a wide range of products from bathroom items to audiovisual systems. “We have signed distribution contracts with all the big companies,” says Ilic. “But what is important for the Eltim concept is that all the goods people see in Eltim department stores are of European quality and are imported exclusively by Eltim.”

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Cookies Make a Comeback

Some of Serbia’s top brands are beginning to return to both the regional and global marketplaces after a decade of sanctions.

Bambi, the country’s leading confectionary manufacturer, and Simpo, the top furniture maker, are once again exporting their products to the European Union and Australia.

Both are making a substantial contribution to Serbia’s accelerating economic recovery. Exports surged last year, registering 44.6 percent growth in the first eight months, more than half of which went to E.U. markets. They ranged from steel, produced by U.S. Steel’s $200 million investment in Sartid, Serbia’s only steel mill, to raspberries, of which Serbia has the world’s second-largest crop.

Economists deduce that the increase in exports is being driven by the initial effects of the government’s privatization process and the restructuring of many of the larger state-run companies. However, a considerable factor is the opening up of old export markets by long established Serbian companies that began as traditional family businesses such as Bambi and Simpo.

In Bambi’s case, its foreign sales have been helped by its specialization in producing cookies with a high nutritional value. Since 2003 production has increased by 10 percent annually. And this total does not include 35,000 tons of imported sweet products. Bambi began manufacturing a generic type of cookie, called Plaz-ma, with Italian equipment in 1967, which soon became popular. Since then Bambi has pioneered cookie-making technology and today produces more than 60 different cookie and waffle products.

The company, which is listed on the Belgrade Stock Exchange, now has five divisions, three making confectionary products, a fourth producing frozen food and a fifth handling mineral water under the brand name Duboka.

“Marketing research a couple of years ago showed that almost 95 percent of Serbian families use our products, especially our Plazma cookies,” says Miroslav Miletic, Bambi’s CEO.

He is particularly proud of the company’s cookies, which, he says, are more nutritional than other confectionary and, in grounded form, can be mixed with milk, juices or tea. “Plazma is traditionally designed. It has the same vanilla taste and quality that it has had for 38 years, and we produce more than 7,000 tons of it every year, 20 percent of which is exported.”

Bambi has been an export-oriented company throughout its history, Miletic says. It is now selling its confections to North America and Australia as well as the E.U. and the former Yugoslav republics.

Next year Bambi celebrates its 40th anniversary and after that Miletic expects that the company may be taken over by one of the multinational companies. He believes that, before long, multinationals will be very active in Serbia.

Like Bambi, Simpo is a brand well known nationally and abroad. One of the most popular of its pieces of furniture before the break-up of Yugoslavia was its music cabinets. Over a period of ten years it exported 300,000 annually to the U.S. “That’s a total of three million,” says Dragomir Tomic, Simpo’s president. “I’m sure you will still find some of these cabinets in American homes.”

Simpo originated in 1963 as a small furniture factory in Vranje, one of the least-developed parts of Serbia, but when Tomic joined the company in 1965, it was at the point of bankruptcy. A year later, under his direction, it was exporting its furniture to Germany and two years later to all European countries and the U.S, where it established ten assembly plants.

The Simpo Group now employs a staff of 7,000, has 80 department stores and other outlets, a turnover of $96.6 million and is one of the largest furniture producers in Europe.

In addition to its full range of wooden furniture, it produces mattresses, upholstery, decorative fabrics and hand-woven carpets. Its other interests are widely diversified and include transportation hotels and the biggest sheep farm in Croatia.

Furniture is at the heart of Simpo’s business, however, and it is on the point of returning to the American market. “We have informed our U.S. business partners about the development stage we are going through at the moment,” says Tomic, “and we expect that American interest in our products will start soon.”

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Highways to the Future

Anew subway station, a new port on the Danube and a new bridge across the river are three of the biggest infrastructure projects in progress, as Serbia continues to reconstruct and modernize its communications systems.

“The wars devastated our infrastructure,” says Velimir Ilic, minister of capital investments. “First of all we had to get the whole telecommunications network up to a European level so that users would get quality service.”

The telecom network was followed by the building or repair of 200 miles of highways and several thousand miles of regional roads. Eighteen railroad bridges and four river bridges have been reconstructed and border passes have been renewed in the past two years. Belgrade international airport’s buildings and runways have been reconstructed and its flight control equipment renewed, and on the railroads more than 50 locomotives and 1,200 carriages have been either built or restored.

All were big projects, says Ilic. Funding had to be sought from such international bodies as the World Bank and the European Bank for Reconstruction and Development as well as local bodies.

The tendering process is under way for the railway station and 390,000 square feet of offices within it. Several U.S. and Canadian companies are bidding, he says. Tendering is also in progress for a concession to build a 180-mile highway from the border with Hungary to Pozega in central Serbia and another for a highway from Nis to Dimitrovgrab.

Serbia has traditionally had great expertise in civil engineering. One company, Mostogradnja, built Krk Bridge in Croatia, which is the longest pedestrian bridge in the world and is featured on the cover of the Guinness Book of World Records.

“We expect the opening of new traffic corridors through our country will provide us with a lot of new work,” says Branko Knezevic, Mostogradnja’s general manager. “So we are interested in a strategic partnership which would enable us to become competitive in international markets again.”

Capital Investments Minister Ilic says that it is not hard to justify investment in the projects because Serbia has a very strategic position, and the amount of traffic on its roads, trains and the Danube will quickly make such investments profitable. “Last year alone, our railway increased its transport of goods and passengers by 25 percent,” he adds.

Investment in the telecom sector is already paying off. One engineering company, Telekomunikacija, which constructs and maintains telecommunication networks, achieved net profits of 45.5 percent on its gross business last year, making it the country’s second-mostprofitable medium-sized business.

“This year is a priority time for investments in the telecom sector. Investing after 2008 will already be too late to get a good market position.”
Zoran Njegovanovic, General Director, Telekomunikacija

Zoran Njegovanovic, the company’s general director, says Telekomunikacija’s game plan is to increase its capacities by 20 to 30 percent a year and, within three years, to take over the construction, transport and maintenance of the telecommunications network in central and southern Serbia. The state-run Telekom Serbia lost its monopoly last June and is currently being restructured. Consequently, a radical transformation of the sector is expected with foreign investors playing a leading role.

“This year is a priority time for investments in the telecom sector,” says Njegovanovic. “Investing after 2008 will already be too late to get a good market position.”

At present the country has only 34 fixed connections per 100 citizens. Of these 30 percent are analog lines and, with much of the rest of the world installing fifth-generation digital lines, Serbia’s most modern connections are already out of date.

Njegovanovic expects Telekom Serbia to be divided into segments and the mobile telephony, fixed-line and services sectors to be sold off separately.

If this happens, Telekomunkacija’s plan is to sell 50 percent of its shares so that it can move into the market of construction, exploitation and maintenance. “We see our chance with this platform and all potential investors should be able to recognize a good investment opportunity in this,” he says. Ideally he would like a foreign business partner who could provide technological expertise.

“But the most important issue for my company would be fresh capital to enable us to expand in all areas.”

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Pink Power

When Zeljko Mitrovic established Pink in 1988 as a young rock musician, he would never have imagined that he would now be taking steps to make Belgrade the center of film production in southeast Europe. He named the company Pink, he says, “because it is a color associated with a cheerful life, full of hope.” He displays an optimism that surely helped in making his dream a reality. Today Pink is the most successful and popular private media company in the region, and it plans to construct a motion picture city on a 128,000 squarefoot site near Belgrade airport that will eventually include 12 studios.

“It will certainly be the biggest production complex in the region,” says Mitrovic.

The objective for Pink’s project is to enter into co-productions with U.S. motion picture companies. This will encourage collaboration between American producers and Serbian talent to make films in Serbia more economically than in the U.S. or in the E.U. Completion is scheduled for 2007, and by then, Pink’s terrestrial network will have expanded further in the region. Its operations already exist in Serbia and Montenegro and Bosnia and Herzegovina.

With its television content, Pink has the ability to bring people together in a society that was in conflict until a few years ago.

Mitrovic sees his complex of television networks as a platform for communication between the now disjointed former Yugoslavian republics and its neighbors, although he ensures each network is independently operated. “The networks differ from one another and each has its own characteristics to match the different market conditions of each region,” he says. He is particularly proud to have established the Bosnia and Herzegovina network because of the complicated circumstances involved.

In less than two decades, Pink has become a powerful news and entertainment enterprise which now includes audiovisual production and replication facilities, record labels, radio stations and terrestrial and satellite television channels.

The group has experienced steady and significant growth, developing a solid, commercially viable operation that is wholly dependent upon advertising revenues. In 2004 total advertising expenditures in Serbia reached an estimated $96.5 million. Television advertising accounts for $60.3 million, of which Pink has a 50 percent share. Last year the Pink group had more than 15 percent growth with turnover of around $48 million.

“American companies have a lot to offer Serbia through this period of transition and economic development.”
Zeljko Mitrovic, President of Pink

In 2003, Pink was the fourth-largest importer of American goods in Serbia. For the past 10 years Pink has been the biggest buyer of U.S. TV programs in southeast Europe. It now has exclusive rights to broadcast the output of Warner Bros. and Paramount and has excellent relations with all the other major American production and distribution companies.

As part of its business and social philosophy, Pink has promoted awarenessraising against sex trafficking and media piracy. Mitrovic continues to place great emphasis on his business relationship with U.S. companies. “Both Pink and Serbia are good and responsible partners for the U.S. and U.S. companies,” he says. “While Serbia’s future will include its integration into the E.U., which will be a positive step, I believe that it’s particularly important for Serbia to have an expanding and deepening relationship with the U.S.”

American companies have a lot to offer Serbia, he says, especially through this period of transition and economic redevelopment. “There are opportunities here for American companies. Many of the top companies have come and been successful, but I would like many more to follow suit.”

A key element of Pink’s success, he says, is its ability to adapt international trends quickly to the circumstances of the region – an advantage it has over its foreign competitors.

Mitrovic’s optimism is contagious and is reaching into households across the region. As he points out, “if you have lived in Serbia for the past decade, you have endured both beautiful and ugly things. War, revolution, turmoil, changes. Yet one still has the power to be beautiful, cheerful and optimistic.” You can still see la vie en rose.

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