By The Western Balkan (WB) region is crucial for the European Union, as it serves as a land bridge and the shortest transit route between the region and its central European core. The Western Balkans are strategically important to Central European countries like Hungary. On March 13-14, 2024, the Hungarian Institute of International Affairs will organize its traditional Balkans conference, the Budapest Balkans Forum. The event will bring together leading decision-makers and experts from the Western Balkans and Europe to discuss current issues and challenges in the region. The new types of threats, such as migration or energy supply security, are becoming more frequent.
The WB states’ importance as a transit route was demonstrated during the 2015-16 refugee crisis. Furthermore, Western Balkan economies are already closely integrated with the EU. The EU is their largest trade partner, the biggest source of incoming foreign investment and other financial flows, and the main destination for outward migration.
The Western Balkans is a geopolitical term coined by the governing bodies of the European Union in the early 2000s and referring to those countries in south-eastern Europe that were not EU members or candidates at the time but could aspire to join the bloc. Originally, the WB region consisted of seven countries – Albania, Bosnia and Herzegovina, Croatia, Kosovo, North Macedonia, Montenegro, and Serbia – but Croatia has since joined the EU.
After the beginning of the war in Ukraine in 2022, the EU gave higher political priority to further enlargement. It opened a new eastern front for potential enlargement (Ukraine, Moldova, and Georgia) and activated the stalled accession process in the Western Balkans.
The EU is the Leading Trade Partner and Investor in the WB States
In 2020, the European Commission adopted the Economic and Investment Plan for the Western Balkans, which aims to spur the long-term economic recovery of the region, support a green and digital transition, foster regional integration and convergence with the European Union. In 2023, the European Commission announced a new Growth Plan for the Western Balkans for 2024-2027, worth €6 billion, aiming to accelerate economic convergence, normalize Serbia-Kosovo relations, and boost intra-regional integration through the Common Regional Market. Now, the EU has almost equal imports and exports of services from the Western Balkans, with Serbia leading the EU’s trade with the region.
EU imports of goods to WB states Source: www.epthinktank.eu
The EU intends to normalize relations between Serbia and Kosovo and accelerate the integration of candidates into the Single European Market. The bloc also aims to boost intra-regional integration through the Common Regional Market, accelerate economic convergence, and set incentives to expedite regional governance and economic reforms. Economically speaking, the economies of the Western Balkans are already closely linked to the European single market in terms of labor movements, investment, and commerce.
The EU imports and exports in terms of products, exports have consistently outpaced imports by around 30 percent in 2021. Serbia accounts for 50 percent of the EU’s trade in commodities and 44 percen of its trade in services with the Western Balkans.
Throughout the 2000s and 2010s, FDI (Foreign Development Investments) inflows to the Western Balkans increased at a faster rate than the average for transition economies. However, the region’s FDI inflows have been rather steady since 2015. With 91.2 and 81.3 percent of GDP, respectively, Montenegro and Serbia had the biggest stocks of foreign direct investment in 2022. At 38.1 percent of GDP, Bosnia and Herzegovina had the lowest stock of FDI, although it was still more than the average of 30 percent for Eastern European nations.
WB states’ main trade partners. Source: www.epthinktank.eu
Corruption and State Capture – Main Challenges of Investments
The main problem with the Western Balkans states is their low level of development; the most advanced EU candidate, Montenegro, was the only one that has managed to exceed half (!) of the EU average in terms of gross domestic product (GDP) at purchasing power parity (PPP).
The economic performance of these countries is characterised by short booms and long stagnations. Northern Macedonia, for example, did not even come close to the EU standard of living between 2016 and 2023, while Serbia and Bosnia and Herzegovina made barely two percentage points gains between 2008 and 2019 and 2007 and 2017, respectively.
A basic explanation for this phenomenon is the high level of corruption, in which the countries in the region are roughly on a level with Ukraine. In the Balkans, the pervasive nepotism, clientelism, and the long tradition of embezzlement of public assets is highly typical. Another possible reason is the deep nexus between organised crime and politics, reinforced by the Balkan wars, and the blurring of the boundaries between the ruling party and the state organisation, or the state capture.
Hungarian Economical Advancement in the Region
Standing at the center stage of Hungarian foreign policy, the Western Balkans region is key to the security and prosperity of Hungary. When considering the challenges and opportunities presented there, Hungary’s key aim is to help maintain and promote stability throughout the region and support its more-than-timely integration into the European framework.
Hungary’s economic interests in the Western Balkans are determined by its geographical proximity and the presence of the Hungarian minority community living there. The region is a prime target for Hungarian foreign trade and investment. Hungary also supports the gradual integration of the Western Balkans into the EU in its economic interest, thus the region’s early integration into the EU Single Market if this is not an alternative to full membership.
Hungary’s economic presence has grown significantly in recent years: between 2015 and 2022, exports of goods to the region increased by almost 150 percent, exceeding €4.5 billion in 2022. The dynamics of Hungarian export growth towards the Western Balkans is faster, about 60.7 percent, than towards the EU 27 member states (22 percent).
With large Hungarian companies such as the Hungarian multinational oil and gas company, the MOL Group, OTP Group in the bank sector, and 4iG, the Hungarian majority-owned provider in telecommunications, Hungary is seen as a stable partner throughout the region.
The Euro-Atlantic integration of the Western Balkans is another strategic interest for Budapest. Both parties can derive realizable benefits from EU and NATO membership. On the one hand, from a security policy perspective, and on the other hand, from an economic perspective.
“One of the pillars of Hungarian Balkan policy is the exploration of untapped economic opportunities and the deepening of activities that exert economic influence.” The context is European integration. The government’s long-term goal is that when the Western Balkan countries eventually become part of the Common Market, a well-established and proven system of trade and economic relations will be in place, and this system will be operational at the levels of large corporations, businesses, and SMEs as well,” explained Julianna Ármás, a researcher and Balkan expert at the Hungarian Institute of International Affairs (HIIA).
Julianna Armas. Source: www.hiia.hu
At the corporate level, OTP has been present in the Serbian and Montenegrin markets for over 20 years and, more recently, in Albania. By 2021, OTP Bank Serbia has become the institution with the largest market share in the Serbian credit market, and with a balance sheet total of 5.6 billion, it is considered the second-largest bank in the country. This has successfully strengthened the effectiveness of regional expansion and the realization of the previously set strategy.
The Hungarian-owned bank is the market leader in Montenegro in every respect, with approximately 28 percent market share and the largest credit offering. In 2018, OTP Group also carried out acquisition activities in Albania, acquiring Banka Societe Generale Albania, which made it the owner of the fifth largest Albanian bank – highlighted the researcher.
In Albania, the Hungarian multinational pushed into the place of Greek (and French) banks that were withdrawing due to the euro crisis. By acquiring Alpha Bank Albania, OTP has become the fifth-largest local market player in terms of total assets and the third-largest in terms of the customer loan portfolio. OTP is one of the most active financial institutions in the acquisition market.
In last year, a Memorandum of Understanding (MoU) was signed between the Hungarian-owned company and the Albanian government for the implementation of a high-capacity underwater data cable investment between Egypt and Albania,”
She added: Behind such projects of 4iG lies the Hungarian government strategy, which emphasizes the importance of digitalization for the development of 5G, making the given country a more attractive market for other investing companies, as it possesses a certain level of digital infrastructure.
The increase in exports can be attributed to the establishment of HEPA, the Hungarian Export Development Agency. HEPA operates under the guidance of the Ministry of Foreign Affairs and Trade and maintains offices in various locations worldwide. The region has offices in Podgorica, Skopje, and Belgrade that aim to manage developments in the Western Balkans. In this target region, HEPA engages in export promotion activities, assists Hungarian companies in their export activities, and stimulates bilateral economic relations.
HEPA launched a special program, the Western Balkans Investment Scheme (WBIS), to encourage Hungarian companies to invest in the region. The CED, the Central European Development Network, can also be mentioned as an organization that encourages development – summarized by Julianna Ármás.
“The Hungarian oil and gas giant, MOL, is more present in sectoral collaborations; it is no coincidence that the Balkans are also considered an important location for the future of Hungarian energy supply security,”
said Cintia Viola, who is also an expert on the region at HIIA.
Cintia Viola. Source: www.hiia.hu
MOL operates gas stations in Bosnia and Herzegovina, Montenegro, and Serbia under the names INA, Tifon, and EP, as well as its own name. In Serbia, MOL is the market leader in fuel retail and has been operating a fuel terminal since 2019. In addition, the Hungarian multinational is also present in Croatia and Slovenia, where it operates refineries.
Cintia Viola reminded: “In addition to financial investments and energy projects, the Hungarian presence is extremely dominant in the agricultural sector as well, especially in Serbia and Bosnia-Herzegovina. The Mészáros Group is very active in these sectors as well as the hospitality and tourism industry. According to the researcher, since the sewage network in the Western Balkans is underdeveloped and waste utilization is also problematic, Hungarian companies–with high expertise in these fields – are welcomed locally. HEPA also had bilateral projects to support infrastructure development, water management, and waste management.
“In the bilateral infrastructure project, it was possible to apply for a budget of 1.5 billion,” said Julianna Ármás. She added: “Since then, there have been other foreign market and bilateral infrastructure supports, but none specifically focused on the Balkans.” Most projects are realized in Serbian territory, particularly in Vojvodina, mainly due to the common language and historical-cultural connections.
Returning to energy security, Viola Cintia highlighted the role of the Balkans as an energy distribution hub. “In geographical terms, we can also consider Greece as part of the region. It plays a significant role in energy security due to its location.”
As the Russian-Ukrainian war shows, Hungary has a fundamental interest in developing the southern energy network. The main problem is that these networks often run parallel to each other.
For example, the pipeline systems of the two neighboring countries, Albania and North Macedonia, are not connected.
However, there are encouraging signs, such as the Bulgarian-Serbian gas interconnector completed at the end of 2023, with an annual capacity of 1.8 billion cubic meters, approximately 60 percent of Serbia’s annual gas consumption. This allows Serbia to import gas from Azerbaijani and Greek LNG terminals, making a significant step towards replacing a substantial portion of Russian gas.
Regarding Bosnia and Herzegovina, researchers noted that the country heavily depends on energy exports, which arrive through Serbia, and that both the Serbian and Hungarian governments are interested in developing their energy supply.
Hungary has significant capital stocks (FDI stock in North Macedonia, Montenegro, and Serbia; in 2022, the value of investments was 1.92 billion euros, which means this ratio more than doubled compared to 2015.
The value of Hungarian capital stock in Serbia reached 1,320 million euros in 2022. The second largest Hungarian FDI stock was in Montenegro in the same year, amounting to 314 million euros. Hungary realized a capital stock of 286 million euros in North Macedonia in 2022, making it one of the largest investors in the country.
Examining the existing European Union capital investments in the region, the researchers at HIIA summarized that, in terms of FDI stock share, the EU is clearly the largest investor in the Balkans, ahead of other players such as China and Turkey.
France was specifically highlighted, as it is strong in various sectors in Montenegro and North Macedonia. French companies have mainly appeared in defense industrial collaborations in Serbia, particularly in defense procurements.
Hungary Could Act as a “Trumpian Vanguard” in the Balkans
József Juhász, a professor at ELTE and a Balkan expert, believes that it is in Hungary’s interest – regardless of governments – to build relationships in the Western Balkans from the perspectives of neighborhood-security policy, minority protection, and trade investment.
According to the professor, the Orbán government’s clear goal is to rally the so-called illiberal states of the region around it, thereby allowing it to shine in the region’s leadership role and improve its broader international bargaining position.
József Juhász. Source: MTA
This foreign policy strategy “contains elements that are incompatible (one cannot be an ally of both Serbs and Bosniaks, Serbs and Kosovars at the same time), and on the other hand, Hungary is too small both as a political ally and as an economic sponsor to be the leading power in the Western Balkans,” Juhász emphasized.
The professor stated: “The current Orbán allies – Aleksandar Vucic in Serbia, Milorad Dodik in the Bosnian Serb Republic, Hristo Mickovski in North Macedonia – although grateful to Budapest for its lobbying activities to accelerate EU integration, economic aid, and capital investments, would immediately replace Hungary for a more financially powerful patron (e.g., the Turks).”
Regarding the question of whether Hungary can serve as the “gateway to the EU” for the region, József Juhász takes a negative view. “Today in Western Europe, it is very counterproductive if Budapest lobbies for someone; Western European leaders don’t want to see another ‘Fico’, an Orbán-ally president or prime minister at the European Council negotiations.”
“However, just like in other dynamic regions of the world, Donald Trump’s return to the presidency will also trigger tectonic changes in the Balkans. It will definitely have an impact on the current EU-Western Balkans relationship in the region as well. In this, Hungary would certainly like to act as a sort of “Trumpist vanguard,” Juhász summarizes.
