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Avolta

Only the Best for Travellers

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Rajka Šinik Vulić, Director of Rome Business School Belgrade

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Aleksandar Vlahović, President Of The Association Of Serbian Economists

A Road To Avoid

Possible explicit or tacit punishment of Serbia by the EU, in response to what the EU deems to be inappropriate political decisions, could be a cause of immeasurable damage

In order to provide an adequate assessment of the negative economic impact of possible political decisions, it is first essential to recap the facts related to Serbia’s foreign trade connectivity and the international market. These facts show that the EU region represents Serbia’s largest trade and investment partner. Specifically, Serbia realises almost two-thirds of its total foreign trade turnover with EU member states. When we add the countries of the Western Balkans to this, the total exchange level reaches 75%. Serbia’s most important trading partners are Germany and Italy.

The total volume of Serbian trade with Germany and Italy in 2021 amounted to a value of approximately 10.5 billion euros, which accounts for approximately 23% of total foreign trade. These two countries are also Serbia’s most important export destinations, with the total volume of exports heading there in 2021 amounting to a value of approximately 4.5 billion euros. It should also be noted that the coverage of Serbian imports by exports to EU countries exceeds 80%, which – with the exception of the other Western Balkan states – is significantly higher compared to Serbia’s other trading partners, especially China and Russia, where this indicator stands at just 33%. Interestingly, Serbia’s exports to Bosnia-Herzegovina stand at the same level as our country’s total exports to China and Russia combined. Such disproportion in the quality of the trade exchange is a result of the nature of trade flows and, on the other hand, the level and quality of investments from these countries. In short, approximately 70% of FDI in Serbia comes from EU countries, particularly Germany, Italy and Austria.

The possible imposing of sanctions against Russia would certainly result in the price of natural gas being significantly higher, which will inevitably cause inflation to rise

And these are investments in the manufacturing/processing industry, which is a sector that directly raises our economy’s level of competitiveness. That section of the economy drives technical progress and high productivity. In contrast to the EU, the lion’s share of Serbia’s foreign trade exchange with Russia relates to imports of energy and fertilisers (almost 50% of total imports, or a third of total trade), while the Russian share of total FDI in Serbia remains negligible.

Thus, the possible imposing of sanctions against Russia would also mean hindering energy supplies, primarily supplies of natural gas, given that Serbia is 100% dependent on this Russian energy source. This shouldn’t result in the supply being disrupted, but it would certainly result in the price being significantly higher than promised, which will inevitably cause inflation to rise. Of course, it would also mean the loss of an export market for domestic producers of fresh and dried fruit, with those transport routes having already been hampered significantly due to the war.

Possible explicit or tacit punishment of Serbia by the EU, in response to what the EU deems to be inappropriate political decisions, could be a cause of immeasurable damage. It would jeopardise macroeconomic stability in the short term, following an expected drop in FDI from the region. Serbia’s external deficits have increased as a result of rising energy prices, though the issue of foreign exchange liquidity has not yet been raised, due to the level of foreign investment having remained above the current account deficit. A fall in foreign investment, and the possible withdrawal of companies from the EU that are already present, would lead to the inevitable growth of sovereign debt and/or the depletion of foreign exchange reserves, which would ultimately impact on the sustainability of the existing exchange rate level. Such a scenario would threaten planned medium-term economic growth, and consequently the level of employment.

Comment By Dragiša Mijačić

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