Features, INVESTMENT CLIMATE

Russian investors to loose Montenegro

Presidential candidate Milo Djukanovic who has supported pro-Western foreign policy orientation of his country, has won Montenegro’s Presidential election. That may result in a further decline in Russian investments in the economy of Montenegro. So far, Russia has been the main investor in Montenegro, and Russian and Western-oriented analysts see the prospect situation quite differently.

RYAN | Barbara Gertie

In Montenegro, ethnic Montenegrins make up less than one half of the total population. That is why even though most of the country’s residents have pronounced themselves in favor of the European development, opinions regarding future relationships with Russia differ. The pro-Russian standing has been most emphatically expressed by Boro Djukic, ethnic Serb born in Montenegro and now holding a Russian passport, a former Russian honorary consul in Montenegro.

As he said, “Over the past ten years Russia has brought to Montenegro and invested, including in tourism, three billion euro. But the real figure, as far as I am aware, is much higher and amounts up to 4.5 billion euro. Russian investments and Russian tourism reach 30% of the national GDP. Those investments are being impeded and controlled. If it is known that an investor is from Russia, such investments are subjected to a very strict control. The sites are visited by all sorts of inspections, inspectors, so people just do not get a chance to work. To a great regret, economically, that is under a tough control. Now all of investments from Russia are very much questioned. Montenegro is comfortably seated on an economic branch called Russia, but it insistently keeps sewing it”.

According to the statistics, Montenegro with its somewhat 650,000 population, is annually visited by some 200,000 Russians while 80,000 Russians own some housing in the country. Montenegro’s economy started booming since the beginning of the century, mainly due to hundreds of millions of euro of Russian investments, as well as to the Russian tourism which made the towns on Montenegro’s Adriatic shore the places of regular or even permanent residence for the quite distinguished Russian individuals. In 2015, investments from Russia amounted to one third of all foreign investments. But despite those facts, in June 2017 Montenegro became NATO’s 28th member-state.

The impression is though, that apart from tourism, real estate and services, all other Russian investments in Montenegro end up in a failure. Investments by Oleg Deripaska resulted in a scandal and an international arbitration. In 2005 he bought a 58.7% stake in Podgorica aluminium smelter via Cypriot Central European Aluminium Company (CEAC). In 2009 Podgorica aluminium smelter which at that moment generated 40% of the national exports, was nationalized to avoid bankruptcy. Nevertheless, it was Deripaska’s investment that became the catalyst for further buildup of Russian capitals in the country. Despite the loss of Podgorica aluminium smelter, Deripaska still is an investor in the Porto Montenegro full service yachting marina project.

For the Balkans region, Montenegro is a unique country in the sense that Russia’s investments there are not fully concentrated in the energy sector. Within its territory, Montenegro does not have any large pipelines or oil refineries. Its energy needs are satisfied by local hydropower plants and imported fuel. Its energy market is under control of local and Greek companies. 70% of the national GDP is generated by services which are further stimulated by the growing real estate and tourism industries. In the said sectors, enterprises with Russian investments account for 5%.

Most of Russia’s investments in Montenegro are in real estate and HoReCa sectors. Nevertheless, in the inland areas Russian investors have also got some industrial presence. In the aggregate, Russian owners control about 40% of Montenegro’s real estate. According to the Russian Embassy in Montenegro, some 6,000 Russia’s citizens are country’s permanent residents. The share of the permanently residing in Montenegro Russians is especially high at Budva sea resort. Accumulated Russian investments reached $1.3 bln in 2016.

In the current situation though, the benefits of maintaining good relations with Russia seem doubtful. Unlike Western countries, Russia does not provide financial support via grants, infrastructure development subsidies, for example, neither can it offer an attractive economy modernization and an elevated competitiveness model. Despite a rather dynamic Montenegro’s GDP growth at two to three percent per annum, its economy needs to be dramatically reformed. There is a problem of a high budget deficit, significant sovereign debt at 70% of the national GDP (as of 2016), and high unemployment rate at 17.5% in 2016. Generally, Montenegro faces the very same problems as various other regions where nature was most generous in providing recreational resources and which therefore chose a respective economic development path.

Certainly, Russia’s investments in Montenegro did not fall due to Montenegro’s choice of different investors only. It is more about Russia’s reaction to Montenegro’s alinement to the sanctions. In 2012-2014 Russian foreign investments were at their ever maximum between $ 160 and $170 bln, while in 2015 they dropped down to $40 bln. Over the subsequent years though, they have started demonstrating a certain recovery. Russian investors have reduced their investments due to, among other matters, political reasons, and are in a search of other markets which do not support anti-Russian sanctions. Another reason is, Russians have become less interested in spending vacations in Montenegro which transformed itself from an “almost Serbia” into a politically unamicable state. But the major reason, according to foreign analysts, is rather earthly and is due to the declining value of the Russian ruble and global oil prices seen over the said period. That is indirectly evidenced by the fact that a decline in the Russian tourists inflow has been significantly less evident than the drop in the Russian investments. It is also noteworthy that a dramatic deterioration in the bilateral relationship in 2016 when Podgorica accused the Kremlin of an involvement in an attempted coup, did not have any negative impact on the Russian investments dynamics as the investments even made certain gains as compared to the most problematic 2015. No negative aftermath was either produced in April 2017 by the decision of the Federal Supervision Service for Consumer Protection and Welfare which banned imports to Russia of 13. Jul Plantaze, the largest national winemaker, claiming its wines are of a low quality.

Russia’s abilities to apply tough economic measures in respect of Montenegro are limited. Neither can it transform its economic presence into some political influence. Russian investments in Montenegro are mainly generated by the strata of the Russian society which in the Western sources is usually referred to as the middle class. In Russia, this portion of the population is usually seen as the lower wealthy class. These people position themselves too far away from the official policies of the Kremlin and hence can not be politically headed and directed by whatever government agencies. The drop in the Russians’ consumership has also resulted in a decline in the real estate prices in Montenegro. Henceforth, the profitability of respective investments has gone down. Respectively, the tourists’ inflow over the first six months of 2017 nosedived since to a significant extent it is generated by the Russian owners of the housing in Montenegro. In the second half of the year though, the index demonstrated a certain recovery.

At the moment, a growing presence of China in Montenegro may be observed. It sees the country as a segment of the new Silk Road. In 2014 China’s Exim Bank extended a credit facility to Montenegro amounting to over €800 mio and intended for building Podgorica-Kolašin highway. The Montenegro’s €100 mio worth fleet modernization project has also been implemented through cooperation with China. Other investors in Montenegro are Arab countries, whereas the share of Western Europe remains fairly low as somewhat 5% of the overall foreign investments.

By Roman Mamchits

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