EU hopeful Serbia builds unexpected alliance with Emirates

By Aleksandar Vasovic and Regan Doherty BELGRADE/ABU DHABI (Reuters) - From animal feed to missiles and loans, Serbia is banking on an unlikely alliance with the United Arab Emirates to upgrade its vital farming industry, revive military production and get badly needed cheaper finance. For the UAE, the new relationship offers an early back door route into the European Union, which Belgrade wants to join, and access to the former Yugoslavia's once mighty arms industry while much of the Middle East is consumed by unrest or war. Almost two decades after communist Yugoslavia's violent breakup, Serbia is struggling with high public debt and unemployment while its manufacturing industry and living standards lag way behind the EU's. Serbia has succeeded in drawing some investment from more obvious sources such as the EU, its traditional Slavic ally Russia and China, which much of the world is courting. However, the Socialist-led government's friendship with the Gulf came as a surprise. Until last year, Belgrade had only token relations with the UAE and bilateral trade totalled a mere 20 million euros (17.4 million pounds) in 2012. Now the talk is of billions of euros in loans and investments. "Serbia is diversifying the portfolio of investors to as many countries as possible... In addition to the EU, we have Russia with energy deals, China with infrastructure investments and now we have the Gulf," said Sasa Djogovic of Belgrade-based Institute for Market Research. EYE ON EU MEMBERSHIP Deputy Prime Minister Aleksandar Vucic said it all started after he met Abu Dhabi's crown prince Mohammed bin Zayed Al Nahyan over lunch there last year. "We discussed everything including history and geography and afterwards he walked me to my hotel room and our friendship began," Vucic said in a recent TV broadcast. Very quickly this friendship translated into business arrangements. The first deal was a $40 million equity investment by Abu Dhabi's Etihad airline in Serbia's indebted JAT Airways. A $400 million sovereign loan for agriculture has been agreed with the UAE's Development Fund, as well as another $400 million deal with the Al Dahra food producer, which wants to lease bankrupt socialist-era farms. Earlier this month, Vucic announced that the first 100 million euro instalment of a 200 million UAE loan slated for investment in irrigation, would be disbursed soon. Serbia has also signed memorandums of understanding with several UAE companies, including Mubadala, a unit of Abu Dhabi's investment fund, on possible production of microchips and aircraft parts. Naz Masraff, an analyst with the London-based Eurasia Group, said the UAE's interest was clear. "It is certainly in line with their efforts to diversify their investments and increase presence in Eastern Europe," she said. UAE firms are also active in property and tourism in neighbouring Montenegro which has begun EU entry negotiations. Serbia, a country of 7.3 million people, plans to start EU accession talks in January and hopes to join by 2020. Investing there offers the UAE a chance of eventual direct access to the huge EU market before costs rise and red tape descends. "They (UAE) feel it's better to put up their money now, rather than wait," a Gulf-based diplomat who asked not to be named told Reuters. "When buying into the EU, there are public procurements, procedures, regulatory hurdles ... but dealing with Serbia now is much easier." WEAPONS SWEETEN THE DEAL Unlike other Balkan countries, Serbia has said it does not want to join NATO, which bombed the country in 1999 to halt its military operations against ethnic Albanians in Kosovo. Free of some of the Western alliance's rules and restrictions on weapons sales, Serbia has more independence in reviving the once flagship defence industry that was brought to its knees by the wars of the 1990s and a United Nations arms embargo. The friendship with the UAE could help those efforts. Earlier this year Belgrade announced arms deals with the UAE, including exports of armoured personnel carriers and the joint development of a guided surface-to-surface missile. In global arms trade terms, this business remains modest and the weaponry relatively low-tech, but it has the potential to grow. "The total value of all the weapons deals (with UAE) so far would be about 200 million euros," said a defence ministry official who asked not to be named. "This cooperation can be extended to various other weapons systems, parts and equipment." Serbia is also offering trainer and light attack aircraft, along with self-propelled howitzers and artillery ammunition. Tim Ash, the head of Standard Bank's emerging markets research, said the UAE's interest in the Serbian arms industry and surplus weapons was based on its regional aspirations. "Abu Dhabi is a major geopolitical player in the Middle East and access to arms gives it greater reach and leverage in conflicts in the region, such as in Syria," Ash said. Serbia, for its part, has sought a long-term, low-interest sovereign loan from the UAE worth between 2 and 3 billion euros. Vucic went to Abu Dhabi on October 26 and Serbian media said the loan, seen as crucial for Serbia's financial stability, would be on the agenda. Serbia needs fresh funds to prop up its budget and repay some of its public debt, which is forecast to amount to 65 percent of gross domestic product this year. The jobless rate is around 25 percent, while GDP per capita, at about $5,200, is only 16 percent of the EU average. It is also seeking a new loan deal with the International Monetary Fund to reassure investors that its finances will be stabilised. The IMF ended a previous 1 billion euro deal with Belgrade last year, blaming inflated state spending and debt. BUSINESS AND POPULISM The government said the UAE loan would be spent on investment and debt repayment, but analysts fear it may ease up on unpopular economic reforms. "The key here will be whether the ... UAE loan will tempt the Serbian government to get complacent about reforms," Masraff said. However, she added: "The government will still need to tap into international markets in 2014 and a commitment to reform will also be key for securing an IMF deal." Serbian analysts say Vucic's Progressive party would benefit if the UAE relationship produces significant economic results, and it could go for early elections next year, hoping to cement its hold on power. Recent opinion polls give the party unprecedented support of more than 40 percent. However, analysts say this could melt away when the government imposes planned austerity measures, including wage cuts and a shrinking of the public sector. Any possibility of new investment from the UAE and more jobs could become the trump election card, said Milos Damnjanovic, an analyst with the South East European Studies programme at Britain's Oxford University. "There's a political component in it. It has been used for populist purposes," he said. (Editing by Zoran Radosavljevic and David Stamp)