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Businesses Seek Stability & Transparency

We still see great interest among American companies in investing and doing business in Serbia, but businesses are now naturally asking difficult questions about the future of trade relations and supply lines, in light of Russia’s war in Ukraine and broader economic uncertainties

Baron Lobstein Economic Section Chief at the U.S. Embassy in Belgrade, is set to leave Serbia soon, bound for another post. We took the opportunity to speak with him about the most pressing issues confronting economies across the world, including Serbia, at this moment. This inevitably meant discussing the war in Ukraine, sanctions against Russia and the broader implications of these developments for the Serbian economy.

World leaders today talk mainly about the failures of globalization (broken supply chains, food and energy price inflation and an intellectual property (IP) regime) and advocate solutions like reshoring, nearshoring or ‘friend-shoring’ production. How strongly is this view represented in U.S. government and business circles?

In my view, and in the view of most U.S. policymakers, the international rules-based system remains the world’s best hope for lasting, broad-based, global prosperity. Globalization has not failed, but economists agree it has shown limitations. A global economic order must be governed by rules that provide for fair competition and consequences for abuse. And supply chains are only as good as the logistics networks that keep them functioning. In times of crisis, such as Russia’s war of aggression against Ukraine, as well as during surges of demand or supply, these supply chains come under strain. When countries respond by retreating from the global market—or by introducing export controls on key commodities—these actions only worsen economic shocks for the rest of the world.

Of course, countries must provide for their economic security. This means having reserves or alternative sources of key resources in the event of emergencies or disruptions. To take one timely example, Germany, Serbia, and many other European countries are now learning the hard way that their excessive dependence on Russia for natural gas and oil was a mistake. We have long advocated for countries to diversify their sources of energy supply and, ideally, build up domestic production of renewably-sourced energy to boost self-sufficiency. Also, we learned during the Covid-19 pandemic—from Serbia’s example—that having multiple sources of vaccines and testing equipment is critical during a disease outbreak. This is not an argument against globalization, but in favor of diversity of supply and careful planning.

Where are ‘friend-shoring’ production locations for U.S. companies and how can countries become eligible to be considered ‘friend-shoring’ alternatives in a world that’s today marked by the war in Ukraine?

Having a commercial relationship with the United States does not require passing a political test. Unlike some other countries, we do not choose our trading partners based on their loyalty to a political ideology, but rather based on their adherence to commonly accepted standards of fair competition and fair treatment. The global economy is a system with rules and standards that ensure fair commerce and competition for all who subscribe to them.

In a real sense, Serbia is competing with the EU for its people’s future. This should serve as a stark message to Serbia’s leaders that they have no time to lose in bringing Serbia’s economic, legal, and political institutions and environment up to EU standards

Likewise, countries that show blatant disregard for those standards of conduct should face consequences, including economic and trade sanctions in extreme cases. I again cite the example of Russia, whose leaders have launched an unprovoked war on a neighboring country, destroying tens of thousands of lives, displacing millions, and causing global economic disruption. There can be no “business as usual” with such countries. Otherwise, rules are meaningless. Those who support Russia’s actions in Ukraine—by undermining the sanctions that have been put in place to respond to the Kremlin’s aggression—cannot expect the global community to protect their own principled interests in the future.

U.S. Ambassador Christopher Hill recently said that Serbia has become a key investment destination in Europe, and further noted that American companies have invested over four billion dollars in Serbia and that there is still great potential for further growth. To what extent do these possibilities (for Serbian growth and new investments including nearshoring and friend-shoring) depend on Serbia’s political choices in relation to Russia?

We still see great interest among American companies in investing and doing business in Serbia. American companies that are already in Serbia have reported positive, successful experiences here in general, but businesses are now naturally asking difficult questions about the future of trade relations and supply lines in light of Russia’s war in Ukraine and broader economic uncertainties. What is Serbia’s energy future? Will Serbia continue to make progress toward joining the EU? Executives of American companies have asked me these very questions in recent weeks, as they decide whether to invest in Serbia. The answers to these questions depend on Serbia’s choices. Accession to the EU, for example, requires that a candidate country align itself with the EU common foreign and security policy. Is Serbia prepared to do that? If not, what message does that send to the international business community? What will it mean for Serbia’s reputation globally? Of course, we hope Serbia will make the choice to align itself with Europe, where its true economic interests lie.

In addition to political factors, which other factors do you see as being important to the decision-making process of every foreign company considering investing in Serbia? What has been shown by the experiences of U.S. companies in Serbia to date?

In the three years that I have worked in Serbia, I have had the privilege to speak to many representatives of foreign companies who are considering investments here. Often these executives are not familiar with the Balkans beyond their dim memories of the 1990s. In these conversations, I have always spoken positively of Serbia’s improving business climate and the activism of the American Chamber of Commerce, NALED, and other business associations that have made this improvement possible. I speak about the dynamic, young, intelligent workers who have created an exciting new ecosystem of technology companies. I talk about the Serbian government’s genuine interest in attracting foreign investment to help build up export-oriented industries. Serbia has a very promising story to tell.

But almost every conversation then becomes more complicated. The companies ask me about corruption. They ask whether the judicial system effectively protects property rights and the sanctity of contracts. They ask whether their companies will be able to find enough qualified employees. They ask when Serbia might finally join the European Union. They wonder whether they will be able to power their businesses with clean energy sources here. These are important questions for every business executive considering a new investment. In the EU, business managers feel they can generally trust that rules exist and will be followed and enforced transparently. These are issues Serbia will need to tackle if it wishes to continue attracting high-quality investment to this growing economy.

The U.S. has offered Serbia alternative gas supply options that would ease Russia’s grip on the country’s energy, but how realistic is this plan in terms of logistics and vis-à-vis the potential environmental impact?

Serbia has a number of alternative gas supply options available to it in the next two years that could help improve the country’s energy independence and security—if it actively invests and enters into contracts with alterative suppliers. Once the interconnector with Bulgaria is complete, Serbia can access supply from either the floating liquefied-natural-gas terminal at Alexandroupolis, Greece, now under construction, or the Trans-Adriatic Pipeline, which will expand its capacity if its market test later this year is successful. Serbia could also cooperate with Romania to receive natural gas from the Black Sea, as well as build a link to Croatia’s Krk gas terminal. Of course, any use of hydrocarbon fuel entails environmental consequences. We hope Serbia and other countries around the world will eventually move to 100-percent clean energy sources, but that will not happen overnight.

Aside from Russia, Serbia is also focused increasingly on Chinese investments. How come we lost U.S. investors like U.S. Steel, and possibly the United States International Development Finance Corporation (DFC), only for them to be replaced by Chinese alternatives. Who is to blame, if anyone, and does this represent a lost diplomatic opportunity?

When businesses decide to enter or exit a market, it is usually for commercial reasons. U.S. Steel made the difficult decision to sell the steel plant in Smederevo in 2012 in the wake of a global economic crisis that had resulted in several unprofitable years for the plant. Chinese company Hesteel took over the Smederevo plant four years later, by agreement with the Serbian government, in a different economic environment. DFC is a government agency, subject to shifting political priorities and budget resources.

If the improvements continue, and if Serbia’s policymakers lead development in the right direction, acquisitions of successful startup companies are only the beginning of a much bigger future for Serbian innovation

While DFC does not have permanent staff in Belgrade currently, Serbia has not “lost” DFC, and I am not aware of any Chinese alternative. DFC is actively cooperating with the Serbian Ministry of Finance, the National Bank of Serbia, and commercial banks in Serbia to develop a $400 million loan guarantee program to benefit small and medium-sized businesses in Serbia that have been affected by current economic disruptions, including the Covid-19 pandemic. That program is moving ahead, and we hope to see more DFC-sponsored investments to promote Serbia’s economic growth and resilience.

USAID is increasingly supporting not just the development of traditional SMEs, but also innovation projects with scale-up capacity. How attractive to U.S. companies is their potential for innovation?

If you are looking for evidence of the attractiveness of Serbian innovation to American investors, you could start with the acquisitions of Serbian electronic gaming companies 3Lateral and Nordeus by U.S. firms in just the last three years. When American companies like these enter foreign markets, they don’t start from scratch; usually they look to invest in existing startups with an impressive product or technology and the potential to grow. Serbia has become attractive to American technology investors specifically because Serbia’s business environment has become fertile ground for innovative startups like 3Lateral and Nordeus. This has happened through a combination of a strong education system and improved business regulation. If improvements continue, and if Serbia’s policymakers lead development in the right direction, these acquisitions are only the beginning of a much bigger future for Serbian innovation.

On the flip side of the development coin, Serbia is facing a significant brain drain. How does the U.S. support Serbia in dealing with this challenge?

Serbia is not alone in facing the challenge of brain drain. This is a problem in many countries in Europe, and especially in the Western Balkans. It is a complex problem with many causes. To a great degree, Serbia and other countries have become victims of the success of the European Union. Many people leaving Serbia are seeking opportunity and higher living standards in Germany, Austria, and other EU countries. In a real sense, Serbia is competing with the EU for its people’s future. This should serve as a stark message to Serbia’s leaders that they have no time to lose in bringing Serbia’s economic, legal, and political institutions and environment up to EU standards. We are working with our EU partners to support these efforts—it is the central motivation for everything we do here. We are doing it through assistance on economic inclusion for marginalized communities, by helping to bring new sources of financing to smaller businesses, and by advising U.S. companies that are interested in investing in Serbia and bringing new jobs here. We are ready to support regional economic integration efforts, and we are urging all parties toward near-term normalization of relations between Belgrade and Pristina. I am proud to have been a part of the U.S. Embassy team working on these and other issues for the past three years, and I hope I can look forward to seeing our efforts bear fruit in the coming years.

ATTRACTIVENESS

The acquisitions of Serbian electronic gaming companies 3Lateral and Nordeus by U.S. firms clearly demonstrate the attractiveness of Serbian innovation to American investors

CONCERNS

Rule of law and transparency of enforcement are some of the issues Serbia will need to tackle if it wishes to continue attracting high-quality investment to this growing economy

GRATITUDE

I am proud to have been a part of the U.S. Embassy team working on a number of issues for the past three years, and I hope I can look forward to seeing our efforts bear fruit in future