Our objective is to examine how regional trade and investment practices are affected by the economic and political reforms currently taking place in the Balkans. Specifically, we will: endeavor to ascertain whether there is an emerging pattern in intra-Balkan trade and investment practices; analyze the effects of increases in intra-regional trade; and assess the extent to which developments in this area are compatible with the countries’ efforts to attain closer relations with the EU. Finally, we will try to address the question of whether or not investments in the Balkans are feasible and, if so, where they should be made.

(a) All three are infant democracies, characterized by polarized societies, political parties that exploit minority issues, and a political instability that is manifested in constant changes in government. They are also distinguished by tensions between ethnic minorities and majorities that threaten to spill over into nationalistic violence, and by the inadequate democratic political education of their citizen bodies.

(b) In economic terms, each country suffers from extended crises which are the result of attempts to make a rapid transition from centrally planned to free market economies. This has resulted in high inflation and unemployment rates, large foreign debts and budget deficits, and decreases in GNP and production.

(c) Lastly, all three countries are characterized by security problems (similar to the Bosnian Crisis) which arise from the volatility of the geographic area they occupy, and the absence of a military alliance after the dismemberment of the Warsaw Pact.

Although Bulgaria’s exports to Greece ranked fifth after Russia, Turkey, Germany, Albania, and Italy, statistics on the trade between the two countries indicate that their economic ties are expanding. In 1989, only 1.4 percent of Bulgaria’s total imports came from Greece. By 1995 this number had risen to 6.5 percent. Similarly, although in 1989 only 2.4 percent of Greece’s total imports came from Bulgaria, by 1992 this total had also increased to 6.5 percent.

In 1993 Bulgaria’s total trade turnover reached $8 billion-approximately 10 percent higher than 1992 levels. Since, however, growth of imports was three times higher than that of exports, the country continued to have a negative foreign trade balance-a tendency that is likely to continue in coming years.

The biggest increase that the country witnessed in its foreign trade was its trade with Balkan countries. Specifically, although its imports from the Balkans stayed almost constant, its exports rose by 16.4 percent. The net effect was an overall increase of 11.5 percent. As Table 3 indicates 18 percent of Bulgaria’s exports were absorbed by countries in the Balkan region, 35 percent by countries in Central and Eastern Europe, 30 percent by European Union and EFTA member countries, and 7 percent by Arab countries.

Romania’s exports to Greece include steel, cement and other building materials and were estimated to have a value of approximately $ 8 million in 1993. It is worth mentioning that in 1993 an effort was made to close a large-scale shipping deal between Greek concerns and Petromin-the Romanian company that controls approximately 100 bulk of the country’s carriers and ship repair facilities. The purchase, which was estimated at $360 million, was unsuccessful because of the Romanian Parliament’s fierce opposition to the deal’s conclusion. If the deal had gone through, Greece would have taken the lead in Romania’s foreign investment.

Despite increases in Greece’s trade in the region, however, statistics published by the Bulgarian Bank for Foreign Trade give Greek entrepreneurs some pause for thought. According to the Bank’s estimates, in 1993, 85 percent of Greek transactions had an average value of $20,000 compared to the $500,000 value of German transactions. This implies that a significant percentage of Greco-Balkan trade is oriented towards short-term ventures that seek to take advantage of the “consumer fever” that has seized these countries since the collapse of the Communist Block, and make a quick profit. But, how long will this consumerism last since these countries are experiencing a horrendous recession? More importantly, assuming that consumers regain their power, will Greek entrepreneurs be there to take advantage of it if they don’t make some sort of short- or at least medium-term investment?

All these circumstances have led total direct foreign investment in the country to fall from a value of $55.5 million in 1991 to $42.1 million in 1992, and $15 million in the first six months of 1993. Pitted against this difficult investment environment, Greece can be proud of its performance since it continues to be the number one foreign investor in Bulgaria. Table 6 below shows all foreign investors, in order of magnitude invested.

From 1990 to the end of last year, total investment in Bulgaria was estimated at approximately $780 million. Preliminary figures indicate that of this total some $300 million was attracted through privatization deals with half of the proceeds going to the exchequer and the rest paid in bonds.

To facilitate foreign investment, in 1992 the country set up the Bulgarian Privatization Agency with the specific task of selling off firms whose long-term assets exceeded 70 million levas. The Agency has performed poorly and, as a result, it has attracted a lot of criticism. Since its creation, it has managed to sell off 185 firms-only 10 percent of its target of 877. Its performance prospects for 1995 look brighter largely thanks to recent amendments to Bulgaria’s privatization law which are aimed at boosting management buy-outs and debt-for-equity swaps. For the meantime, however, criticism continues to mount and is mostly aimed at the low sale prices. An example of a much-disputed deal was the decision to sell off the Bulgarian precision toolmaker company, Magnitui Glavi, to the U.S. firm Design Review International for one dollar. The deal fell through after the buyer failed to sell the plant’s bad debts, but not before it had attracted a lot of negative publicity.

Now let’s turn our attention to investments in the form of joint ventures. According to the Chamber of Trade and Industry in Sofia, there were 330 legally-registered joint venture arrangements by the end of 1992. By May of 1993 this number had increased to 410, with a total value of $125 million. An August 1994 press release by the Commission of Foreign Investment of the Ministry of Industry placed the total value of joint venture arrangements at $0.5 billion. More than 34 percent of this total represented foreign company investments. The sectors that were identified as attracting the most investors were the construction, transportation, and trade sectors. Respectively these sectors accounted for 19.8, 19.3, and 17.9 percent of all foreign investment.

As Table 8 suggests, most of this investment has come from the Netherlands (10.7 percent), Switzerland (7.1 percent), and the U.S. (6.5 percent.) It should be noted, however, that the average size of foreign investments is low. Specifically, the share of investments under $100 (the minimum required amount to register on LTD) is 64.5 percent of all investments. Only a nominal 2.8% of foreign investments has been between $10,000 and $100,000.

Germany holds top position for investment value since two-fifths of all its investments have an average value of $1.25 million. On the other hand, the smallest average investments belong to Turkey ($7,000) and Russia ($9,450). Greece is also at the lower end with an average investment size of $20,000.

In 1993 foreign direct investment in Romania reached $227 million-significantly lower than the $279 million the country attracted in 1992. The majority of incoming capital came from Western Europe (68 percent) and North America (17 percent). A notable trend was the increased number of larger-scale investment policies.

To overcome the recession that plagues the country’s economy, foreign analysts estimate that Romania will need an annual investment of $1.5 billion. This means that foreign direct investment currently makes up less than 20 percent of what is needed. With the second largest population in Eastern Europe after Poland, Romania’s foreign investment needs are much greater than those of Bulgaria or Albania.

For Greek businessmen, however, Albania is a fertile ground. Backed by the Greek Government’s decision to subsidize 35 percent of all investments (under 2008/1992), and banking on the assistance that they will receive from the large Greek minority resident in Albania, Greek businessmen are increasingly interested in entering the Albania market. An attractive prospect for their involvement is tourism which, as regulated under a new law (7665/21.1.93), holds great potential.

All in all, Greece’s economic presence in the Balkan’s should not be overexaggerated. Especially since the Greek economy is currently not doing well, and since the organized presence of countries like Germany and Italy will quite possibly push aside some of Greece’s competitive advantages such as geographic proximity.

As was pointed out earlier in this analysis, the Balkan nations have a remarkable pattern of resemblances in their economic and political developments. Not surprisingly, post-war economic development in the region continues to promote similar economic structures. For example, in the post-war era Greece attempted to industrialize early on, but lost its impetus in the early seventies. For Bulgaria, on the other hand, the move to industrialize came much later on and was largely the result of reforms. As Greece’s industrialization process slows down and Bulgaria’s accelerates, it is becoming increasingly likely that the two countries will end up having two rather similar production profiles. This, of course, will have to be taken into account when considering the medium- to long-term prospects for trade and investment between the two countries. Regardless, in the present early stages of the region’s economic liberalization, such similarities are helping to further advance Greece’s economic interaction with its Balkan neighbors.

Nonetheless, if Greek entrepreneurs are to continue to actively participate in the economic life of the region, they cannot rely on the existing economic ties and similarities. They have to find ways of turning other factors that are currently playing a critical role in the region’s continued growth into competitive advantages. In this regard, there are three areas factors that Greek entrepreneurs will need to pay particular attention to as they try to expand their economic activity in the region: Financing; Legislation and Regulation; and, Infrastructure.

In a speech given last January, U.S. President Bill Clinton urged American Businesses to “reach out” and tap into eastern Europe’s potential $500 billion market. Clinton said that this would help solidify market reforms and lead to “real security” in the region. He also stressed that “more trade and investment is good for the United States”-a familiar theme for him since expanding trade and US exports is the cornerstone of his economic policy. Clinton concluded by announcing U.S. government support for two investment funds in Central and Eastern Europe. The Overseas Private Investment Corporation (OPIC) has agreed to guarantee political insurance to U.S. overseas investors and provide $340 million in loan guarantees. Clinton pointed out that, coupled with other U.S. programs, this loan guarantee would help generate more than $4 billion in private investment in the region. This American initiative serves to further underscore the region’s importance.

While the U.S. just now seems to be mobilizing and showing its good will, however, the European Union has done so from the early 90’s through its Phare and Interreg programs. The first of these, Phare, is a flexible investment program for Eastern Europe, adapted to each country’s special needs. The program has a dual purpose: to provide know-how to state and private enterprises, while at the same time providing bridge financing for investments in infrastructure. The two prerequisites for participation in Phare, are respect for democracy and respect for the free market system.

In its five years of operation, Phare has allocated 4,284 million ECU to eleven countries. Bulgaria, Romania, and Albania joined the program in 1991. In the period from 1991-1993, they had received a total of 762 million ECU (Bulgaria 277, Romania 360, and Albania 125.)

In 1994, the European Parliament also recognized the importance of financially supporting the Balkan small and medium enterprise (SME) sector. To do this, that same year it created the Interreg program and allocated 150 million ECU for SME support through Phare.

Interreg which was highly successful has now been succeeded by Interreg II, which aims to: further develop cross-border economic activities, enhance agriculture and rural development, and promote the better use of indigenous potential. It has a budget of DRS 180 billion, two-thirds of which are supplied by the EU.

Last February, at the second Congress on Balkan Business Cooperation, the Greek Deputy Minister of National Economy, George Romaios, announced that Greece had further “decided to allocate DRS 40 billion in 1995 to subsidize private sector activities.” This amount was in addition to a the DRS 60 billion that the government had allocated to private sector support in 1994. The big news at the conference, however, was the establishment of the Black Sea Bank and the Balkan and Black Sea Business Centre (DIPEK).1 The future performance of both of these commercial entities could prove to be detrimental to the successful presence of Greek business in the larger area.

Will Greek business be able to create a lasting presence and play an active economic role in the region? When considering economic issues in the Balkan context we must not forget that political and economic considerations go hand in hand, and that frequently political issues take precedence over economic needs. To create a lasting economic presence in the area, therefore, Greece will need to first of all experience a shift in paradigms. Specifically, Greece will have to recognize that aggressiveness and nationalism are not appropriate vehicles for economic interaction. Consequently, the Greek government will need to abandon all rhetoric of Greece’s “economic hegemony” and replace it with milder terminology advocating “economic cooperation”. As its

Balkan neighbors try to modernize, Greece must also stay true to its tradition of peaceful entrepreneurial activity in the region. It must not forget, after all, that when it has strayed from that tradition, as it did in the 19th Century when it started to think of “parenting the Balkan people” (e.g. the Voulgary’s Federation case), this has quickly led to the decline of previously prosperous Greek communities. As they enter regional markets, Greek businessmen will have to face growing distrust. An aggressive stance could only aggravate matters.

In 1994 the leadership of the Greek Ministry of National Economy took a step in the right direction by shifting from what has traditionally been a reactive foreign policy to a proactive one. It can only be hoped that it will continue to adopt foreign policy that can pave the way to economic development.

In Bulgaria, Britain’s Rover Group signed a $6 million deal to assemble its Maestro cars in the city of Varna. Its director, Philip Birley, describes the experience by noting: “We had to jump through a lot of hoops. The laws seemed to change every week, along with the governments. There was no consistency. It was a very hard slog.”

Kraft Jacobs Suchard, a unit of the Phillip Morris Companies, encountered a different problem when it decided to buy the Republica chocolate factory. The son of the factory’s former owner had inherited part of the building in accordance with the country’s restitution law. He couldn’t sell all of the factory, however, because the state owners had made some additions which did not belong to him.It took Suchard two years to iron out all of the legal wrinkles so that the $20 million investment could finally go through.

Plans to privatize the national airline, Balkair, also encountered problems. Here the deal fell through because of an unresolved dispute over who should pay to rebuild Sofia’s airport.

What then should Greek businessmen do to turn such adverse legal and regulatory circumstances in their favor? They should look for opportunities where they can help streamline the existing regulations while in the process benefiting from the changes. A good example in the Bulgarian context is the area of foreign exchange regulations. Currently, the regulations that govern Bulgaria’s foreign exchange allow local banks to operate foreign currency accounts. Local banks are, however, reluctant to operate such accounts without technical assistance from foreign banks. A foreign bank that can provide this much-needed assistance not only helps to improve the country’s commercial infrastructure but also gains a competitive advantage since it is in a position to be first in the identification of promising business opportunities. In this case, the Greek banking industry has taken steps to take advantage of the opportunity presented by the Bulgarian financial sector. The Vardinoyiannis Group (through Xios Bank) has already opened a branch in Sofia. Greece’s Ionian Bank and its Commercial Bank have also moved to set up a $500 million Balkan Investment Fund.

In Albania, ETBA has moved in to shoulder the construction of the economic and financial “architecture” of the country-a project estimated at DRS 30-33 billion. The project is being carried out with the assistance of the World Bank. Also in Albania, Greek bankers are involved in the efforts of the Bank of Africa to found the Apollonia Bank. The Bank of Africa will invest $3 million and take 10 percent of Appolonia’s shares, while Greek investors will hold 50 percent and Albanians will control the remaining 40 percent.

Finally, Eurobank (a member of the Latsis Group) has set up the Euromerchant Balkan Venture Capital Fund. participants in this venture include the Bank of Economic Restructure and Development (BERD), the IFC-a subsidiary of the World Bank, and a number of leading Greek companies. George Gontikas, Eurobank’s CEO, says that the capital fund’s objective will be to “equip with every financial means the investment initiatives of Greek and foreign corporations in the Balkans”.

For the legislative and regulatory environment to be conducive to foreign investment, however, there are also a number of things that the countries themselves have to act on. For one thing, each country must sign agreements with its neighbors that will guarantee the security of any investment. Also, where it doesn’t already exist, legislation must be enacted to eliminate double taxation.

Already there are a number of infrastructure development projects being planned in which the Greek private sector is involved. The most important of these is probably the construction of a pipeline that will connect Burgas with Alexandroupoli. It is easy to understand the importance of this project if one takes into account the pipeline’s ability to carry enough crude oil to meet one-fourth of Europe’s needs. The pipeline will also relieve the tanker fleets of the Black sea countries from having to sail through the Bearing Straights since it will transport the oil to the Aegean. The economic importance of the project continues to grow as oil production forecasts are increasingly calling for a great elevation in oil production in the former Soviet Republics.

Greece’s Foreign Minister, Carolos Papoulias recently met with Boris Yieltsin to further discuss this project.

A second very important infrastructure development project that will need to be undertaken is a project to upgrade the existing road network in the Balkans. Although the distances Greek and Balkan commercial centers are comparatively small, many of the existing transportation networks are in dire need of expansion and repairs. The 250km motorway that connects Thessaloniki to Sofia, for example, is in fairly good condition. The same, however, cannot be said of the Thessaloniki-Vidin motorway that connects Greece to the Danube and Rhine rivers. Work also has to be done to complete the Egnatia motorway.

Last but not least, on the infrastructure development agenda should be the establishment of new border stations to ease the congestion problems that plague Promachon. Greece should also refurbish the port at Ormenion-a move that will facilitate the transportation of goods to and from Burgas and Varna.

Why? Let’s pick Bulgaria as a case study-it is a country with an educated, highly-skilled, low-cost workforce. But above all, the strategic importance of both Bulgaria and Romania is the role that they can play in strengthening Greece’s economic relations with Russia. These two counties can become a modern “Trojan Horse” for Greece’s economic infiltration of the vast Russian market. Investment in a country like Bulgaria, therefore, is a need for Bulgarians, a necessity for Greeks, and common sense for other investors.

In terms of ideal investment targets, those vary depending on the life of the investment. Short-term investments will be most profitable in commerce, services, and in industries like paper, glass, food and textiles. Medium-term investments should be directed to sectors like tourism, construction, and office equipment manufacturing. Finally, long-term investments should concentrate on telecommunications, manufacture of electronic equipment, chemical and heavy manufacturing activities, and the energy sector. Motor Oil, is already moving in this area and has established a small number of gas stations. In overall terms, when determining their investment strategies, investors should keep in mind that the process of privatization-no matter how slow it is-favors a medium-term investment cycle.

Investment strategies should also take into account any special country circumstances. In Romania, for example, investments can be made in the areas of agriculture and agricultural equipment, pesticides, textile and leather manufacturing, telecommunications, constructions, tourism and medical equipment. In Albania, tourism, banking, and services in general seem to be the safest since anything else would constitute a high-risk venture while the economy is still stagnant.

In conclusion, we find that in this transitional, but historically exceptional era, the Balkans are a very promising region despite the seriousness of existing problems. As history has shown, the Balkan people are risk-takers. If investors fully weigh the opportunities and existing constraints they can take calculated risks and still benefit.

Although the Balkans might have appeared as an Eldorado for Greek entrepreneurs, even as recently as the early 90’s, circumstances have now changed. Carefully thought-out business initiatives supported by the right amount of government regulation can result in highly successful business ventures.

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