Russia's Economic Footprint in Bosnia and Herzegovina

  • Center for the Study of Democracy
  • 20.2.2018 09:58

Russian strategy of keeping Bosnia and Herzegovina neutral and blocking integration with the Euro-Atlantic community has been successful. Russia has sought to amplify secessionist sentiments in RS, thus stirring tensions in Bosnia and Herzegovina. Many regional observers feel that the secessionist aspirations of RS could potentially lead to a new regional conflict.

Russia has been one of the key political players in Bosnia and Herzegovina since the Dayton Accords brought the 1992 – 1995 war to its end. According to the peace agreement, Bosnia and Herzegovina consists of two entities – the Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS) with roughly equal territories – and the Brcko District. It is in RS, the entity with a Serb majority, that Russia has gained the most traction. Russia has particularly backed RS’s opposition to the Transatlantic integration of Bosnia and Herzegovina, as well as RS secession initiatives.1 Many regional observers feel that the secessionist aspirations of RS could potentially lead to a new regional conflict.

Russia holds a permanent seat on the Peace Implementation Council (PIC) and the Steering Group of the PIC, thus guiding the work of the High Representative in Bosnia and Herzegovina involved in interpreting the Dayton Peace Accords. In addition, the leadership of the RS has developed its own independent foreign policy vis-à-vis Russia, including the establishment of a quasi-diplomatic mission in Russia outside Bosnia’s official diplomatic representation in 2006. The President of RS, Milorad Dodik, has used Russia’s support to preserve his political credibility in the eyes of the RS electorate and to gain significant leverage in decision-making on the state level.

Russia’s corporate footprint in the country as a whole grew more than twice over the past decade, from 2.6 % in 2006 to around 5.7 % in 2015 in an otherwise shrinking economy. Bosnia and Herzegovina is completely dependent on Russian gas supplies. Russian companies also control the country’s two refineries, both located in Republika Srpska. Russia has backed the Republika Srpska leadership in its increasingly antagonistic relationship with the FBiH and the central government.

 

Russia has sought to amplify secessionist sentiments in RS, thus stirring tensions in Bosnia and Herzegovina

 

In exchange for the political support of RS, Russia has reciprocated economically via a number of economic interventions. Most of Russia’s economic footprint in Bosnia and Herzegovina is concentrated in RS. Russia has consistently been the largest foreign investor in the entity and the fourth largest in Bosnia and Herzegovina, with around EUR 547 million of foreign direct investment (FDI) in the country over the 2005 – 2016 period. The revenues of Russian enterprises in RS make up 42 % of the total revenue of all foreign companies in the entity, while the combined turnover of EU-based firms is only 27 %. Russia’s corporate footprint in the entity is concentrated in only five companies, which are all in the energy, banking, and pharmaceutical sectors, making up a significant part of the regional economy’s value-added.

Similarly to many countries in Central and Eastern Europe, Russia’s economic footprint is channelled primarily through the oil and gas sectors. Bosnia and Herzegovina is completely dependent on Russian gas supplies. Although the country imports oil not only from Russia but also from Croatia and Serbia, Russian companies control the country’s two refineries, both located in RS. Russia has been exerting significant pressure on Bosnia and Herzegovina utilizing the short-term nature of its gas supply agreement (the contract is renegotiated every year), gas debts of local central heating plants, and one of the highest gas import prices in Europe charged by Gazprom. In addition, a Russian pipeline project, South Stream, dominated the energy policy agenda of the government for years, derailing Bosnia and Herzegovina from pursuing alternatives for diversification of supply via Croatian liquefied natural gas (LNG) or a planned Ionian-Adriatic Pipeline (IAP), which would connect the country to the Trans-Adriatic Pipeline (TAP) and, thus, to Caspian and Middle Eastern gas. Foreign investment deals, privatization tenders, and many other intergovernmental economic agreements with Russia have been marred by allegations of high-level corruption and money laundering operations, primarily, it is claimed, to sustain a powerful group around President Dodik. Through financial support to the leadership in Banja Luka, the capital of RS, Russia has increased its ability to influence the entity’s institutions. This, in turn, has bottlenecked decision-making processes at the central level and delayed the country’s progress in making reforms needed to pursue a Euro-Atlantic path. Additionally, Russia has backed the RS leadership in its increasingly antagonistic relationship with FBiH and the state government. A vivid example was Russia’s support for a September 2016 referendum organized by the RS leadership on the recognition of a controversial national day for RS. Russia has sought to amplify secessionist sentiments in RS, thus stirring tensions in Bosnia and Herzegovina, which could pull the whole Western Balkans away from integration into the Euro-Atlantic institutions.

 

Russia has used its economic footprint in key economic sectors to put a dent in efforts to centralize authority over the country’s economy

 

In general, the Russian strategy of keeping Bosnia and Herzegovina neutral and blocking integration with the Euro-Atlantic community has been successful. EU talks have stalled, while continued economic stagnation in the country has sapped reforms. The negotiations have not progressed not only because of Russia, but primarily because of the lack of political will among nationalistic political elites to speak with one voice, and the lack of democratic and economic reforms. The lack of an efficient coordination mechanism makes all necessary reforms difficult to implement in practice. However, Russia has used its economic footprint in key economic sectors to put a dent in efforts to centralize authority over the country’s economy. The feuds between the entities’ governance of key sectors, such as energy, existed before Russia, but the Kremlin has fuelled these divisions to its benefit. To achieve its objectives, Russia has used RS leadership, which stands to directly benefit from increased Russian capital inflows. In an environment of glaring institutional weaknesses in the areas of energy governance, bank supervision, and fiscal prudence, the country, and especially the RS, has become vulnerable to corrosive capital. In the meantime, the Energy Community warned both the state and entity authorities in fall 2017 that Bosnia and Herzegovina could fall under sanctions for non-adoption of the previously-agreed commitment to institute a law on a regulatory body for electric energy and gas, transmission, and the electric energy market, which is a condition of the Energy Community’s Third Package. As a result, the country is facing financial penalties and, in the long run, possible removal from the Energy Community. However, the energy sector is by far not the biggest obstacle for the completion of EU talks.


The text was produced by the Center for the Study of Democracy and supported by a grant from the Center for International Private Enterprise (CIPE) in Washington D.C. The full study is available here.

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