Event

On 21 November, Kosovo decided to raise a prohibitive 100% tariff on goods imports from Serbia and Bosnia and Herzegovina after it first imposed 10% in early November. Such a measure is primarily politically motivated as it comes in retaliation for Kosovo’s third failure to join Interpol that Pristina considers as resulting from Belgrade’s lobbying. The decision has been condemned by the EU, for violating the Central European Free Trade Agreement (involving Kosovo and six other Balkan states) and the Stabilisation and Association Agreement (SAA), and by the USA, Kosovo’s major sponsor. Pristina has claimed it will maintain this measure until Serbia recognises Kosovo as a sovereign state, a permanent demand since it declared its independence in 2008.

Impact

The latest developments will have economic and political consequences. The 100% tariff imposed on Serbian goods is likely to harm more Kosovo than Serbia because of the former’s bigger exposure as the latter is its first import market with a 15% share. Kosovo only accounts for 3% of Serbia’s exports which partly explains Belgrade’s intention not to impose similar tariffs against imports from Kosovo. A tightening in Serbia’s import regulations hitting Kosovo exports is nevertheless a possible option. In Kosovo, those tariffs might lead to higher inflation and goods shortages – as imports from Serbia are expected to tumble and the domestic economy is unable to offset the lost markets – until the necessary economic adjustment takes place. In such a context, the shadow economy and illegal bilateral trade are likely to be boosted to the detriment of the government’s public finances.

Since Serbia is not expected to meet Kosovo’s demands, those import tariffs are likely to remain in place for an undetermined period of time. It is notably a way to protect the poorly competitive Kosovo industry – especially the important agriculture – and to strike back against Serbia’s and Bosnia’s impeding documentation requirements against Kosovo exports. Although the domestic economy keeps growing by an average 4%, it continues to be severely hindered by structural weaknesses, from wide infrastructure gap to high unemployment and a narrow export base which translates into a chronically deep current account deficit (7.2% of GDP in 2018). The situation will definitely not improve with costs incurred from higher import tariffs on Kosovo’s main import market.

This being said, the motivation behind protectionist tariffs has predominantly political grounds. After ties have improved since a 2013 breakthrough agreement, the decision on tariffs will contribute to further escalate already rising tensions with Belgrade. Since the summer, the two countries have been discussing, with the EU mediation, of an exchange of territories (a Serb-populated enclave in Kosovo’s North against ethnic Albanian municipalities from Serbia’s South) against Serbia’s recognition of Kosovo, which remains a sine qua non condition for an EU membership. However, given a majority opposition in parliament and among the population against a touchy and controversial land swap, both Kosovan and Serbian presidents, Mr. Thaci and Vucic respectively, are increasingly in an uncomfortable position. Moreover, the recent arrest of Kosovo Serbs in North Kosovo suspected to be involved in the murder of a moderate Serbian politician in early 2018 has triggered protests from local Serbs and strong criticism by Serbian president as Kosovo police rarely intervenes in the region. Therefore, given heightened bilateral tensions, negotiations on border adjustments could be compromised whereas Serbia’s recognition of Kosovo will remain a highly complicated achievement.

The political outlook seems more uncertain with EU pressures on Kosovo to ease tensions with Serbia and comply with existing regional agreements, Russia’s support to Serbia, waning US involvement and particularly an overall rising nationalist rhetoric in the Balkans. There is a rising risk to see miscalculated local violent clashes in North Kosovo where the controversial tariffs might be circumvented by the local Serb population. The negative trend is also illustrated by the upcoming Parliament’s vote on transforming Kosovan security forces into a regular army. If no progress is recorded in offering positive prospects to Kosovo and Serbia – namely sovereignty recognition and EU accession – radicalisation is expected to increase on both sides with the ultimate risk of some military actions. This does not bode well for political stability and could lead to a downgrade in Credendo’s political violence risk rating (3/7) next year.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com