Strategic Analysis: Russian Business Activity in Bosnia-Herzegovina (Abstract)

Bosnia and Herzegovina is comprised of two so-called entities, the Federation of Bosnia-Herzegovina and Republika Srpska (which occupy 51% and 49% of the countrys territory, respectively). The countrys unique governance structure has resulted in a relatively weak (or, at best, decentralized) central government in charge of foreign, diplomatic and fiscal policy.

The tension that has existed between the countrys two entities has roots in the ethnic makeup of the country, which has also been the basis for Russias foreign policy toward the country. Moscow has maintained very close relations with the Serb leadership of Republika Srpska, to which many observers attribute the entitys obstructionism with regard to the countrys overall aspirations to join the EU and NATO and the difficulty it has experienced making much-needed economic and political reforms.

A significant factor has been the leverage that Russia has been able to exercise over Bosnia and Herzegovina and, most notably, over Republika Srpska in the economic and financial threat domain. This has primarily been realized via the role that Russia plays within Republika Srpska and, in turn, the influence of this entity over national leadership. For its part, the Federation of Bosnia-Herzegovina has only limited economic and financial ties to Russia.

Republika Srpska, on the other hand, has its own trade office in Moscow that is separate from the official embassy of Bosnia and Herzegovina and has also received a number of significant and politically well-timed Russian-backed loans in recent years. Although Russian trade with Bosnia and Herzegovina, as a whole, has been overshadowed by that involving EU member states, Russia has become among the largest contributors of FDI to the country. Russia emerged in 2011 amidst the decline in investment from the countrys other partners as the single largest contributor in this category.

Although the overall role of Russia in the trade picture of Bosnia and Herzegovina is not as dominant as the countrys Western partners, the strategic leveraging by Russia of its targeted investments especially in Republika Srpska raises serious concerns. Among the reforms that have been asked of Bosnia and Herzegovina include the privatization of its key assets, a move that will expose them to potential Russian strategic purchase. Officials have discussed (in some occasions for years) the Mostar Aluminijum Company (Aluminij), BH Telecom, Hidrogradnja Sarajevo, Energoinvest Sarajevo, Elektroprivreda BiH, Energopetrol, Aluminij, Bosnalijek, Fabrika Duhana Mostar and the VC Corridor. In February 2015, the Federation government released a list of fourteen companies it planned to privatize by the end of the year. The ongoing attempts to privatize companies (by both Republika Srpska and the Federation) leave an opening for Moscow to gain further traction in the country. Any privatizations should be monitored for Russian involvement.


Excerpted Deals and Transactions:

  • Bosnia is presently highly dependent on Russian natural gas supplies, with one major natural gas pipeline delivering Russian gas (by way of Ukraine, Hungary and Serbia) with distribution centered in Sarajevo.
  • In early March 2015, Gazprom Export signed a direct gas supply contract with Republika Srpska (bypassing intermediaries from the Federation entity for the first time). This separate agreement permitted Moscows specialized pricing scheme (which is discounted significantly for geopolitically friendly countries) to apply to Republika Srpska in a targeted fashion.
  • In a visit by Dodik to Moscow in September 2014, an agreement was reached to establish a joint company for the construction of a South Stream branch in Republika Srpska(and for Russia to own 60% of the functioning pipeline management subsidiary). When South Stream in Republika Srpska was conceived, there were discussions regarding a potential linkage to the Federation entitys natural gas grid. Srbijagas had reportedly discussed extending a branch of the pipeline to Sarajevo, but certain stipulations were laid out that were deemed unacceptable.
  • In a February 2007 deal, Zarubezhneft acquired two companies that were being privatized by Republika Srpska: the Rafinerija Nafte Brod oil refinery and the Modrica motor oil plant. In both cases, the companies were privatized without a tender. Moreover, sources indicate the tender was awarded to Russia because Moscow had refused to guarantee a long-term supply of oil to the Brod refinery, unless it was under Russian ownership.
  • In 2011, Republika Srpska granted a Zarubezhneft-NIS joint venture, Jadran-Naftagas, a 28-year exclusive concession for the exploration of oil and gas reserves on its territory. The company is focused particularly on three individual sites for exploration, two in northern Bosnia (i.e., Republika Srpska) and one in eastern Herzegovina. NIS intends to triple its production in both Bosnia and Serbia by 2020.
  • The Republika Srpska has been the recipient of a number of timely loans from Moscow. In April 2014, President Dodik announced that the entity was to receive a 270 million loan from Moscow to forego the renewal of an existing IMF facility, because of the objectionable political and legislative conditions. Following the extreme flooding in May 2014, Moscow offered emergency assistance and investment to Republika Srpska, and, in September of that year, Dodik announced the receipt of a Russian loan, totaling between 500 to 700 million, meant to bail out the entitys budget deficit and steady its finances.
  • In February 2012, Russias Sberbank established a presence in Bosnia with the purchase of Austrias Volksbank (providing Moscow with a forward deployed presence in the countrys financial industry and an ability to execute local money transfers in more discrete ways than would otherwise be the case). At the time of the acquisition, Volksbank had branches in 8 CEE countries, including 51 in Bosnia and Herzegovina (the most in any CEE country save for Hungary, with 52 branches). The acquisition gave Sberbank a top ten position in Bosnia.