BALKAN ECONOMIC DEVELOPMENT OUTLOOK

This conference session is based on the following background information:

·                                 Balkan Economic Growth Prior to the Global Financial Crisis

·                                 Consequences of the Global Financial Crisis

·                                 World Bank Group and IMF Forecasts for 2015 Balkan Economic Growth Rates

·                                 Common Challenges Shared by Balkan Countries

·                                 Impact of Greek Financial Crisis

·                                 Impact of Current Immigration to and Migration through the Balkans

·                                 Economic Growth Opportunities

Balkan Economic Growth Prior to the Global Financial Crisis

For 3 years prior to the 2008 global financial crisis, the average annual growth rate for all of the Balkan countries was higher than that of the EU. Pre-global financial crisis growth rates generally ranged between 5-7% per year with the Montenegrin annual economic growth rate reaching an all time high of 10.7% in the fourth quarter of 2007; however, the lack of Balkan financial reserves, social safety nets, access to capital and financial leverage – which many other European countries have to fall back on – left the Balkan countries with fewer options to cope with the global economic downturn which followed closely on the heels of the devastating 1990s Balkan conflicts.

Consequences of the Global Financial Crisis

The two main transmission channels for the spread of the global financial crisis between countries around the world were international trade and the exchange of private capital between states in the form of foreign direct investment.

There were severe consequences to the Balkans, principally including (i) an increase in national debt levels and (ii) a decline in (a) European and international market demand for Balkan products and raw materials, (b) foreign direct investment (FDI), and (c) remittance payments which are the wages and savings that are repatriated by Balkan emigrants living elsewhere and which represent significant and valuable foreign currency exchange.

National Debt Levels Increase

Prior to the 2008 global financial crisis, the Balkan region as a whole had national deficit levels below the EU average; however, since the crisis, slower economic activity reduced government tax receipts and increased government expenditures to deal with the consequences of rising unemployment, compelling governments to go to capital markets to make up shortfalls. This created new pressures for structural reform as debt levels rose accordingly.

In contrast to pre-crisis debt levels, debt levels as a percentage of GDP in 2009 soared in the region to 59% in Albania, 47% in Croatia, 43% in Bosnia and Herzegovina, 38% in Montenegro, 37% in Serbia and 26% in FYR Macedonia. In several cases, the IMF provided emergency credits to shore up government balances and defend exchange rates. By the first quarter of 2015, national debt levels as a percentage of GDP in the Balkans reflected a mixed picture: 168.8% in Greece, 29.6% in Bulgaria, 39% in Romania and 88% in Croatia.

Decline and Recovery of Balkan Exports

Balkan intra-regional trade is relatively resilient and strong, especially since the 2006Central European Free Trade Agreement. Intra-regional trade includes such product categories as iron and steel, steel products, aluminium, mineral fuels, electrical machinery and equipment, and beverages.

The most important export markets for the Balkan countries are in the EU where more than half, and in some cases up to two thirds or three quarters, of many Balkan country exports are destined. Export products include base metals, machinery and mechanical appliances, cars and automotive parts, chemical products, wood and wood products, textiles, agricultural products and footwear. The sudden drop in the European demand for Balkan exports due to the global financial crisis adversely affected components of Balkan economies, such as manufacturing output, employment, foreign currency reserves and national trade deficits. For example, in 2009, Croatian exports fell by 15% from the previous year, Greek exports fell 21.4% and Bulgarian exports fell 22.5%.

As global economies have been recovering since the crisis, the Balkan export outlook is generally favourable (and, in some cases, hinges on supplemental factors other than EU demand, such as the Serbian currency devaluation in 2010 that boosted exports). Although Montenegro experienced a 10% decline in 2014 exports compared to the previous year, in Croatia, 2014 exports rose 9.3% over the previous year, and FYR Macedonia exports were 17.4% higher during the first 8 months of 2014 compared to the same period the previous year. Turkey’s 2014 exports, which increased 4% over the previous year, reached $157.6 billion which was an all time record for the country. In 2014 the Bulgarian exports to the EU increased by 3.2% compared to the previous year, although the country’s exports to non-EU countries have been mixed, especially as exports to Russia and China have been affected by sanctions imposed against Russia and a slowing Chinese economy.

Impact on Foreign Direct Investment (FDI)

The Balkans have been highly dependent on foreign capital. During the global financial crisis, many foreign companies cancelled new projects and some even withdrew capital that had already been invested in short term projects. Some privatisations of large, state-owned enterprises were cancelled due to the low purchase prices that were offered.

Important Balkan economic sectors targeted by FDI include energy, telecommunications, banking and insurance, real estate, industrial production, and retail trade. There are five significant variables usually associated with legitimate FDI: trade liberalisation, competitiveness, the number and nature of restrictions on direct investment, the method of privatisation, and political stability. By contrast, it has been argued by some analysts that unusually large inflows of capital to certain locations could be suggestive of money laundering and corruption, which would be a relevant factor during consideration of the FDI amount documented by an allegedly affected country.

Important sources of FDI in the Balkans have generally included the Netherlands, Austria, the UK, Germany, Norway, Belgium, France, Cyprus, Russia, Switzerland, USA, Italy, Luxembourg and Spain, while Greece was formerly a noteworthy source. Prior to the global financial crisis, FDI in the Balkans had risen substantially. In 2007, for example, FDI represented 21.8% of GDP in Montenegro, 6% in Albania, 13.5% in Bosnia and Herzegovina, 12.6% in Kosovo, 8.5% in FYR Macedonia, 8.2% in Croatia, and 4.4% in Serbia. In that same pre-crisis year, Turkey received $22 billion in FDI which represents a record high for the period 2005-2015; however, this level declined to $8.5 billion in 2009 during the crisis and has only since recovered to $12.5 billion in 2014 which is only 57% of its previous high level. In another example of the impact caused by the crisis, Croatia’s annual FDI dropped from €3.5 billion in 2007 to approximately €400 million in 2010.

Although the crisis has considerably slowed the influx of investment into the region, some Balkan countries are well positioned to attract a renewed increase in FDI. One example of a Balkan country with an advantageous position is Bulgaria. In 2014, the country registered a 1.7% growth rate which exceeded the EU average, inflation was at 1.6%, and its public debt was 18.9% of GDP. In addition, Bulgaria is an EU member, has one of the region’s lowest tax rates, has a currency fixed to the Euro under a currency board arrangement, and has relatively low costs for a well educated labour force. Serbia has been experiencing a positive FDI trend of late, especially in its key business sectors such as IT (Siemens, Microsoft), the auto industry (Fiat), building materials (Lafarge), food and beverages (Coca Cola, Nestle, Carlsberg) and metal processing (US Steel).

It must be noted, however, that the FDI outlook remains mixed for individual Balkan countries, such as FYR Macedonia which has seen its FDI fluctuate from €506 million in (pre-crisis) 2007, to €337 million in 2011, to €104 million in 2012, and €270 million in 2013. The outlook for FDI in the Balkans remains fragmented as FDI depends heavily on investor confidence which to a great extent is based on a country’s implementation of economic and institutional reforms that will ensure a globally competitive market economy in a stable economic, social and political environment in which to conduct long term, profitable business activities.

As FDI also supports the host country’s exports, prioritising the attraction of future FDI to a country’s industrial, financial and other self-sustaining business sectors – with less reliance on single event privatisations – will help to mitigate the effects of future crises when (not if) they occur.

Decline and Slow Recovery of Remittance Payments

Remittances represent a significant part of many Balkan economies and are a source for growth; however, the global financial crisis caused a serious decline in remittance payments as global consumer demand and trade plummeted, economies contracted and unemployment soared. As an example of the importance of remittance payments, the number of migrants working in Greece has in the past reached as high as 700,000-1 million individuals. Two-thirds of these migrants came from neighbouring Albania where remittance payments accounted for an estimated 10-12% of annual GDP before the global financial crisis yet represented only 5.7% of GDP in 2014. Kosovo has an unemployment rate of roughly 30% which not only fuels a significant unreported economy but encourages emigration to mainly Germany, Switzerland and the Nordic countries from which remittance payments are estimated to account for 15% of Kosovo’s GDP.

While emigration has historically been a safety valve for many unemployed Balkan citizens, remittance payments are expected to recover very slowly due to undesirably high and persistent unemployment rates in various parts of Europe.

World Bank Group and IMF Forecasts for 2015 Balkan Economic Growth Rates

The IMF World Economic Outlook forecast of 2015 economic growth rates listed Montenegro at 4.7%, Bosnia and Herzegovina at 3.5%, Kosovo at 3.3%, FYR Macedonia at 3.2%, Turkey at 3.1%, Albania at 3.0%, Romania at 2.7%, Greece at 2.5%, Bulgaria at 1.2%, Croatia at 0.5%, and Serbia at 0.5% (the latter rate is due in part to the severe floods in 2014).

The World Bank Group (WBG) Regular Economic Report on South East Europe (Issue No. 8 Fall 2015) identifies private investment as “the main driver of growth” in Albania, Bosnia & Herzegovina, Kosovo, FYR Macedonia, Montenegro and Serbia which are the countries covered by this report. With the help of low oil prices, low inflation and modestly growing consumer demand in the EU which is a key Balkan target export market, the WBG expects economic growth in this region to average 2.6% in 2016 as global financial markets remain volatile due to the uncertainty about China’s economic growth rate and the U.S. interest rate rise.

The 2015-2016 expected growth rates are also attributed to increased domestic consumption (especially in Bosnia & Herzegovina and Kosovo) and private sector investment resulting from greater access to credit and the investment of more retained earnings. Exports are also outpacing imports especially in countries supported by strengthening Foreign Direct Investment such as Serbia and FYR Macedonia.

In analysing the foreseeable Balkan economic outlook, however, the WBG reports that productive capacity, government revenue receipts and economic growth rates will be tempered by: high unemployment; the emigration of young, educated Balkan citizens to other countries in search of better employment opportunities; a high level of non-performing loans in the banking sector which must be reduced in order to increase access to credit thereby supporting entrepreneurship and job creation; ageing societies in which the average Balkan inhabitant is now 13.5 years older than the global average and the difference will widen to 21.1 years in the next 50 years with the added UN forecast that the Balkan population will shrink 25% during that time period; and gender gaps in labour participation.

The WBG reports that gender gaps in labour participation and entrepreneurship represent a missed opportunity for lifting Balkan per capita income as per capita income loss due to gender gaps is significantly higher in the Balkans than in the EU. For example, in Kosovo only 21.4% of women were active in the 2014 labour market which translates to more than a 28% per capita income loss in Kosovo compared to the estimated 10.5% average per capita income loss due to gender gaps in the EU. According to 2013 WBG data, women’s labour force participation rates for other Balkan countries are: 32.2% in Turkey, 42% in Bosnia and Herzegovina, 51.1% in FYR Macedonia, 51.7% in Albania, 52.1% in Montenegro, 53.5% in Serbia, 56.9% in Romania, 58.4% in Croatia, 58.6% in Greece, and 63.7% in Bulgaria.

Analysts widely agree that structural reforms are still needed to: improve revenue collection by governments; broaden the tax base; stimulate employment by reducing labour law rigidity and introducing labour market reforms; reduce bureaucracy and establish one-stop registration offices; deepen international integration and connectivity to improve global competitiveness and expand business trade networks beyond established markets and products; improve energy efficiency and the management of natural resources on which key industries depend; and support investment through improved governance such as applying the law in a non-discriminatory manner as well as protecting all forms of property and contract rights.

Common Challenges Shared by Balkan Countries

There are certain common challenges currently shared by many Balkan countries, and these are associated with 4 types of transformations that are concurrently taking place: post-conflict reconstruction; post-Communist transition; social, economic and political reforms that aim to achieve a market economy open to competition and with labour market reforms; and deeper integration in Euro-Atlantic institutions. Within the context of these challenges, many countries are dealing with ethnic tensions, corruption, organised crime and political cronyism amidst unsatisfactory levels of media freedom and judicial independence along with high unemployment which pushes economies underground and creates black and grey markets.

Impact of Greek Financial Crisis

Not to be overlooked is the impact that the Greek financial crisis has had on other Balkan countries. The prolonged Greek debt crisis has diminished domestic demand and available credit for business and consumers. As a result, this situation, which is exacerbated by capital controls, has already reduced the country’s importance as a trading partner and source of foreign direct investment for the rest of the Balkans. As an example, for many years Greece was Albania’s second largest export market but now ranks in fifth place. Between 2008 and 2014, Bulgarian exports to Greece contracted by 1.9%, but during that period Bulgarian exports to the EU as a whole soared by 50%. Similarly, Greece, which was formerly one of the largest foreign investors in the region, has become less significant in recent years. For example, in Bulgaria between 2008 and 2014, foreign direct investment from Greece declined by 7.6%.

Despite Greece’s diminished economic activity in the region, however, in the short to medium term, the Balkan countries that have been impacted by the Greek debt crisis are expected to boost exports to other destinations which have been emerging from recessionary or negligible growth periods. And as many of these countries become more closely integrated with the EU by actions such as harmonising their banking regulations, integrating their energy network and implementing market economy reforms, the impacts once sustained from the Greek debt crisis will be mitigated over time.

Impact of Current Immigration to and Migration through the Balkans

The financial impact of immigration to or migration through a country is dependent upon a number of factors including: the characterisation of the migrants (e.g. economic migrants, or asylum seekers from war and persecution), the level of skills and education of the migrants, the countries of origin which affects the prioritisation of migrants seeking legal residency, and the extent of the immigration or migration; the ability or inability of the host country to effectively organise, process and assimilate, transfer or deport the immigrants; the extent to which the remaining immigrants become legally documented or remain undocumented and go “underground”; and the degree of resulting socio-economic isolation or assimilation of immigrants into their new host societies which will affect levels of social harmony or dissent, crime and the underground gray economy that expands with undocumented and disenfranchised workers. These factors, in turn, impact economic growth depending on the effect that the immigration has on such factors as the labour market and GDP productivity; the amount of various types of tax revenues generated for the host country by the level of consumption and economic activity of the immigrants; and the level of government expenditures associated with immigration such as for social welfare, administrative and security services.

Migration to and through Europe is largely comprised of economic migrants and asylum-seekers. According to the World Bank Group bi-annual Regular Economic Report on South East Europe, Issue No. 8 Fall 2015: “The SEE6 countries (Albania, FYR Macedonia, Kosovo, Montenegro, Serbia and Bosnia and Herzegovina) are among the top migrant-sending regions in the world. Today the equivalent of one quarter of the current population of SEE6 lives outside their home countries.” “Since the early 1990s, there has been a steady flow of migrants from the SEE6 to the EU with roughly 4.9 million people having left their countries.” “Low growth since the global financial crisis, chronically high unemployment, income levels at a third of the EU average, and vulnerability to external shocks and natural disasters, have constrained domestic income generation in the region. As such, people continue to emigrate in search of better economic opportunities.”

Based on reports by Frontex, the UN Refugee Office and national government data, during the first 7 months of 2015, 340,000 asylum seekers entered the EU. Of these, 158,456 refugees and migrants arrived in Greece by sea, while 1,716 entered by land through Turkey, which represents five times more individuals than the number for the corresponding period of the previous year. Of the individuals arriving in Greece which is a main entry point for immigrants arriving in the Balkans, roughly 89,000 were Syrians and 32,000 were Afghans fleeing war-torn regions. By 19 September 2015, UNHCR reported that 442,440 migrants had entered Europe. In an effort to reach northern European nations, most immigrants attempt to travel through FYR Macedonia, Serbia and Hungary, except many of the traditional routes have recently been blocked by the construction of border fences, thus impeding the Balkan departure of many immigrants, a significant percentage of whom are robbed and left without money or resources to continue to their destinations.

One type of financial impact on the Balkans from the current wave of asylum seekers from war-torn countries can be illustrated by the case of Germany where, in 2015, the country is expected to face a total influx of around 800,000 refugees mainly from the Middle East and Africa that is estimated to cost Germany up to €10 billion. Germany currently has a population of 81 million people of whom 10 million are immigrants as reported by the 18 September 2015 Financial Times. According to German Foreign Minister Frank-Walter Steinmeier on 29 August 2015, 40% of all refugees who migrate to Germany are residents of Western Balkan countries; however, individuals seeking asylum from war-torn countries are prioritised over individuals from safer countries seeking asylum or the right to remain. As a result, Balkan migrants to Germany are potentially facing a return to their native countries. On 5 September 2015, Reuters reported that Germany is expected to reject up to 75,000 asylum requests this year by migrants mainly from South Eastern Europe as Germany considers expanding the list of countries deemed safe which may include Albania, Kosovo, and Montenegro. Among the countries already deemed safe are Bosnia-Herzegovina, FYR Macedonia and Serbia. This will cause a reduction in the level of remittance payments to Balkan countries and impact the countries’ unemployment rates which, in turn, will impact the relevant Balkan economies.

The current scale of immigration and migration will have a mounting financial impact on the Balkans as subsequently documented as well as undocumented immigrants become absorbed into legitimate businesses (e.g. healthcare, financial services, engineering services, construction, agriculture, textile and garment production, maintenance, tourism support, fishing, odd jobs – and in many cases become subject to exploitation) or organised crime (e.g. sale of illegal drugs and counterfeit products, theft, prostitution). The conclusive net impact of this migration wave is yet to be calculated from data that is currently being compiled from documented as well as reasonably estimated financial revenues and expenditures associated with the subject.

This issue requires broad, strategic planning without undue delay by the wider European region which has demonstrated a need for migrants in a balanced and sustainable way, especially with European labour shortages looming on the horizon as the EU’s working-age population is projected to shrink by 13 million by 2030. For example, Serbia’s population has declined by more than 5% since 2002 due to low birth rates and the emigration of young professionals to other nations, while Germany’s population is expected to decline by 18 million individuals by 2060 due to low birth rates and an ageing population.

Economic Growth Opportunities

The challenges to Balkan economic development create both deterrents as well as opportunities for private sector investment in the region which is a proven engine for economic growth. Most Balkan countries to their credit have universal primary education, high literacy rates, reasonably well-developed transportation links and public health systems, and relatively efficient agricultural sectors. Except for Kosovo, their populations are rapidly ageing and diminishing as several Balkan countries are exporting skilled and unskilled labour due to high unemployment rates. Planning by a central government is giving way to planning that is activated by market forces which is resulting in a re-allocation of capital. Today, EU membership aspirations have become a common organising factor for the region’s governments and a force for reconciliation among them as well as their constituents. Integration with Euro-Atlantic institutions has helped to raise investor confidence and galvanise foreign investment and capital flows into the region.

Although the trade partners for each country in the region vary, Germany, Italy, Austria and Slovenia are among the region’s most important trading partners. In addition, Balkan inter-state trade is also increasing. For example, Bosnia and Herzegovina’s main export trade partners are Croatia, Serbia, Slovenia and Montenegro along with Germany, Italy and Austria. Montenegro’s largest export client is Serbia. Bulgaria’s main trading partners include Romania, Greece, Germany and Italy. Eight percent of Romania’s 2014 world-wide exports were shipped to Turkey and Bulgaria. Kosovo’s largest export markets are Albania and FYR Macedonia along with Italy and Germany. As a result, Balkan countries hold a shared stake in each other’s success and prospects for a strengthened Balkan trade network continue to be favourable.

Turkey is one of the fastest growing emerging economies. Between 2004 and 2014 during which the global financial crisis hit world markets, GDP in Turkey increased by 105%, with an annual average real GDP growth rate of 4.2%. Public debt decreased from 74% to 35% of GDP and the budget deficit decreased from 10% to 0.8% of GDP. This performance has put Turkey in the list of one of the fastest growing emerging economies. Living standards have also increased significantly in the country as per capita GDP more than doubled during this period.

Although the Balkans remain highly dependent on recovery in Europe where the region conducts most of its commercial trade, the ultimate responsibility for economic development and regional integration rests with the region’s elected officials and community leaders who should be held accountable by citizens for a lack of progress in taking the necessary measures that will create a favourable Balkan economic development outlook.

BALKAN ENERGY STRATEGIES 

This conference session is based on the following background information:

1.                             The Balkan Countries

2.                             Balkan Energy Strategy

3.                             Balkan Energy Sources in Brief

4.                             Turkey’s Role in the Balkan/EU Energy Market

5.                             Regional Energy Initiatives

6.                             Background Information, including country highlights, on Balkan Gas, Oil, Coal and Renewable Energy Sources

The Balkan Countries

Of the 11 Balkan countries, 4 (Bulgaria, Croatia, Greece and Romania) are EU Member States, 5 (Albania, FYR Macedonia, Montenegro, Serbia and Turkey) are EU candidate countries and 2 (Bosnia and Herzegovina and Kosovo*) are considered to be potential EU candidate countries. This fact is relevant to the financing, technical support and development of a Balkan energy supply and distribution network by various international institutions and countries for the benefit of the Balkans and the wider European region.

Balkan Energy Strategy

As energy plays a critical role in the development and sustainability of any economy, the continuing development of the Balkan energy network as an energy supplier as well as a hub for the wider continental region concurrently with the region’s integration into Europe’s energy markets will provide a diversification of supply sources, supply routes and energy mixes in order to increase Balkan energy security. Implicit in this reform process is the adoption of EU rules on competition and third party access to energy infrastructure to increase competition and make the energy sector more attractive for foreign investment.

Balkan Energy Sources in Brief

The primary and/or growing Balkan energy sources are derived from solid fossil fuel (coal), natural gas, oil and renewable energy sources (RES).

Coal-fired power plants produce as much as 2/3 of electricity in at least five Balkan countries while Turkey is planning to double its coal power capacity in four years. Notwithstanding the global issues associated with CO2 emissions from coal combustion, investments in regional coal-fired power plants continue to be made; however, the current relatively low cost of energy produced by these plants is expected to increase as EU candidate countries are required to harmonise their legislation with EU laws which include a system of higher tariffs for heavy carbon emission facilities due to climate change, public health and environmental pollution concerns.

Use of natural gas is a dominant trend; geo-political tensions with one of Europe’s long time, principal gas suppliers have resulted in plans to diversify continental gas sources to increase energy security; regional gas supply networks are under development in order to bring gas to Europe from the Caspian Basin, Central Asia, the Middle East, and the Eastern Mediterranean; and Liquified Natural Gas (LNG) prices have been falling while new terminals are being planned. According to Deloitte, as Australian LNG producers target Asian markets, the cost-efficiency of North American LNG producers provides a competitive, trading advantage with the European continent. According to Iran’s Deputy Oil Minister in July 2015, Iran is coordinating plans to provide Europe in 5 years with LNG which is expected to be more cost effective than sending natural gas via a pipeline.

Crude oil prices per barrel have fluctuated widely (roughly $38-$125) during the last five years, which includes (a) recessionary, negligible growth and slow recovery periods for many economies that resulted in a plummeting demand for the commodity and (b) the emergence and re-emergence of suppliers such as southern Iraq, Iraq Kurdistan and Iran despite the security and geo-political issues; however, these fluctuations are not expected to impact the long term trajectory of the sector. Subdued economic recoveries, moderately rising demand and additional suppliers are maintaining downward pressure on oil prices as long as global supplies are not threatened by various sources of conflicts (e.g. international sanctions, tensions, war) that disrupt supplies and delivery routes.

Wind, solar and hydro-power energy, which are converted to electricity, represent the principal RES in the Balkans, while lesser used RES include geothermal and biomass, and wave/tidal has been under consideration in the Greek island of Crete where electricity energy needs grow 8% per year largely due to tourism. The cost of RES remains an issue as some are generally higher than conventional energy sources; however, for those countries that have instituted policies to derive a significant percentage of their total gross energy consumption from RES in the short to medium term, RES investments will continue and prices will continue to decline with technical improvements, innovations, economies of scale and government incentives where offered.

Turkey’s role in the Balkan/EU energy market

In addition to the fact that, by 2030, Turkey is projected to consume as much energy as all of the remaining Balkan countries combined, Turkey’s role in the Balkan/EU energy market is growing as the country is becoming an increasingly important transit hub for oil and natural gas supplies from Central Asia, Russia, and the Middle East to Europe and other Atlantic markets, especially as Europe represents the world’s second largest natural gas market. The country is in the process of diversifying its energy sources and developing its energy supplies as it increasingly becomes an energy exporter as well as importer.

Regional Energy Initiatives

Through various initiatives, the European Commission, the International Finance Corporation of the World Bank Group, the United Nations and other relevant international institutions support the aims of transforming the Balkan energy market to achieve energy sustainability, efficiency, security and reliability through the development of an integrated energy network, harmony of regulation, diversification of supplies and market liberalisation. The following are examples of such initiatives:

The European Energy Union plan presented by the European Commission in 2015 is a strategy to (1) create an integrated energy network, (2) increase energy security and efficiency and (3) increase research for new energy sources. This plan includes building new energy storage capacity and delivery routes, sharing available energy supplies across borders, reducing reliance on single or dominant energy suppliers, and increasing competition in a liberalised energy market.

The Energy Community, of which Albania assumed the Chairmanship in January 2015, is an international organisation with members including the EU and 8 other contracting parties, 6 of which are Balkan countries – Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, Serbia – along with Moldova and Ukraine. The aim of the Energy Community is to extend the EU internal energy market to South East Europe and beyond on the basis of a legally binding framework through actions that are consistent with the European Energy Union objectives.

Southern Gas Corridor Initiative – An EU initiative that supports the development of an expanded natural gas network in South East Europe to ensure natural gas supplies to the Balkans and the wider European continent from Caspian and Middle Eastern regions including Azerbaijan, Turkey, Georgia, Turkmenistan, Kazakhstan, Iraq, and Mashriq (Middle East) countries with Uzbekistan and Iran as future potential sources. [Note: In July 2015, Iran’s Deputy Oil Minister reported that plans to deliver Liquified Natural Gas from Iran to Europe beginning in approximately 5 years would be more cost effective than the delivery of natural gas via a pipeline based on current cost data.]

The European Union Emissions Trading System (EU ETS), which is effective in the 28 EU Member States as well as the European Free Trade Association countries of Iceland, Norway and Liechtenstein, is an EU initiative to combat climate change and reduce industrial greenhouse gas emissions cost-effectively. It is the first and largest international system for trading greenhouse gas emission allowances, covering more than 11,000 power stations and industrial plants as well as aircraft operators performing aviation activities within the system’s jurisdiction. The EU ETS covers installations from sectors principally consisting of power and heat generation, energy-intensive industries (oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals), and commercial aviation, which are responsible for approximately 45% of total greenhouse gas emissions from the 28 EU countries. Emissions of greenhouse gases from installations participating in the EU ETS are estimated to have decreased by at least 3% in 2013.

The USAID Clean Energy Investment Project, which began in 2013, is a three year initiative in FYR Macedonia that supports investment in energy generation from renewable sources and the development of energy efficiency technologies that reduce overall energy consumption without sacrificing productivity.

Background Information, including country highlights, on Balkan Gas, Oil, Coal and Renewable Energy Sources

GAS

Russia and Balkan Natural Gas Imports

Russia has been a major supplier of natural gas imported by EU, Balkan and other neighbouring countries primarily transiting through Ukraine; however, heightened geo-political tensions have resulted in disruptions to natural gas deliveries from Russia which have adversely impacted the affected countries and spurred plans to diversify natural gas sources.

Development Plans to Diversify Natural Gas Supplies

South Caucasus Pipeline – This existing pipeline begins in Azerbaijan and supplies Georgia and East Turkey. It will connect with the Trans-Anatolian Pipeline for future gas distribution.

Trans-Anatolian Pipeline (TANAP) – Construction began March 2015. Gas from the offshore Shah Deniz II natural gas field project in Azerbaijan, which is financed in part by the European Bank for Reconstruction and Development (EBRD), will be transported from the South Caucasus Pipeline through Georgia across Turkey to its western border with the EU (north-west Greece) at which point it is to connect with the Trans-Adriatic Pipeline.

Trans-Adriatic Pipeline (TAP) – TAP A.G. is the joint venture that will build and operate the pipeline which is deemed to be one of the most important projects on the EU list of Projects of Common Interest. Natural gas from the Shah Deniz II field in Azerbaijan will be distributed from north-west Greece (where the Trans-Anatolian Pipeline will end) via Albania and the Adriatic Sea to Italy and further to western Europe. Construction is expected to begin in 2016. The first gas sales to Georgia and Turkey are targeted for late 2018, followed by the first deliveries to Europe approximately one year later. There is a 25 year contract for the first stage of gas to be supplied by Azerbaijan for delivery via TAP. TAP A.G. also plans to construct an underground natural gas storage facility in Albania with reverse flow capabilities. The European Investment Bank (EIB), the largest international financier in the Western Balkans, launched the initial TAP project appraisal and confirmed in February 2015 that TAP is among its priority projects as the EIB plays a key role in the TAP development operations.

Ionian-Adriatic Pipeline (IAP) – The IAP is a proposed natural gas pipeline with reverse flow capability that will deliver gas supplied by Azerbaijan. The IAP will connect with the Trans-Adriatic Pipeline in Fier, Albania, travel through Montenegro and Bosnia & Herzegovina and end in Croatia where the IAP will be connected to the existing gas transmission infrastructure of Croatia and may in the future be connected to the proposed LNG terminal in Krk, Croatia.

Proposed Turkish Stream – Since Russia cancelled South Stream, the proposed Turkish Stream concept would export Russian gas across the Black Sea to north-western Turkey and possibly to southern Europe. In the summer of 2015, Russia halved its proposed capacity whereby Turkey would use one half and the remainder would be distributed. No agreement has been finalised as of August 2015 and, if finalised, the scope of the plan may be modified to a Russia/Turkey project.

Balkan Country Highlights

Turkey – In addition to the fact that Turkey relies on imported gas and oil to meet 97% of its energy needs, Turkey is also primed to become a significant natural gas pipeline hub. However, currently most of its natural gas pipeline connections only bring natural gas into the country, as growing demands have left little natural gas for export. Turkey is the second largest consumer of Russian natural gas. Since 2010, Turkey has experienced some of the fastest growth in total energy demand among countries in the Organisation for Economic Cooperation and Development (OECD).

Natural gas represents roughly one third of the country’s total primary energy supply and 46% of electricity production. Domestic production represents 1-2% of the country’s needs. Its natural gas imports (86% from pipeline, 13% from LNG) are principally supplied by Russia (57%), Iran (20%), Azerbaijan (10%), Algeria (8%) and Nigeria (2%) based on 2013 data. [LNG is principally delivered by Algeria, Nigeria, Qatar, Norway, Egypt, Netherlands and France.] Turkey is vulnerable to gas supply disruptions due to insurgent activity as well as cold weather in exporting countries. In addition, Turkey’s imported gas from Russia is currently carried through (1) the Blue Stream pipeline under the Black Sea direct from Russia and (2) the Western pipeline which transits through Ukraine. If there is a disruption in supplies through the Western pipeline, Ukraine might be able to meet its gas import requirements if Germany and Poland provide a reverse flow of gas to Ukraine; Turkey, however, would experience a loss of much needed gas imports, especially as it has a limited capacity to process any LNG imports and the country’s storage capacity of the gas it consumes is only 5% which is the lowest storage capacity in Europe (compared to Austria, Slovakia, Hungary with a capacity of 50% of what they consume and France, Germany, Italy with more than 20% capacity). Key elements of Turkey’s overall gas security policy are diversifying its long-term supply contract portfolio, forming an energy hub from Central Europe and the Middle East to Europe, increasing natural gas storage facilities, cutting back contractual supplies, and fuel switching to alternative fuels in power generation.

Note: Although Turkey supports natural gas transit across Turkey via pipelines, it does not appear to be as supportive of LNG transit. Ukraine, Romania, and Bulgaria have all, at one time or another, proposed building LNG import facilities on their Black Sea coasts. However, the only way for an LNG tanker to reach such a facility would be through the Turkish Straits, and Turkish authorities have indicated that they would not allow LNG vessels to transit the straits for safety reasons. Additionally, the straits are already a major shipping chokepoint, especially for cargo classified as hazardous (which includes LNG as well as crude oil and other petroleum liquids).

Croatia – produces between 60-65% of its gas consumption and imports the rest from Russia. The proposed Ionian-Adriatic Pipeline (IAP), which is a project supported by Croatia, Albania, Montenegro and Bosnia & Herzegovina, will deliver Azerbaijan gas to these European countries along the pipeline which will connect with the Trans-Adriatic Pipeline in Albania and Croatia’s gas infrastructure. Since South Stream collapsed, Croatia is developing a feasibility study for an LNG terminal in North Croatia which could be built by 2019-2020. One challenge is the cost of LNG from Qatar, Africa and North America which is currently more expensive than piped Russian gas. Croatia launched tenders for offshore oil/gas exploration in the Adriatic and wants to be a net gas exporter by 2020. (By 2018, Australia and the US plan to boost LNG exports putting downward pressure on global LNG prices.)

Greece – Two-thirds of the country’s gas requirements are supplied by Russia via Turkey and Bulgaria while most of the remaining requirements are met by Algeria in the form of LNG to the Revithoussa terminal near Athens. There is a proposal for a floating LNG terminal for storage and re-gasification near Kavala in the North Aegean. Bulgaria, Romania and Serbia have expressed an interest in the LNG proposal as potential joint venture partners. There are distant prospects of importing gas from Cyprus and/or Israel.

Romania – Gas represents 30% of gross inland energy conumption. Romania produces 85% of its own gas needs, while 15% of its gas consumption is supplied by Russia. At Port Constanta, there is an LNG terminal and re-gasification facility under construction with the support of EU financing and an expected 2018 completion date. There is a proposal to import gas from the Greek LNG terminal which will eventually be linked to the Trans-Adriatic Pipeline. Romania aims to (a) become a growing gas consumer, a gas exporter as well as an important transit hub, and (b) reduce its energy costs as well as carbon emissions by diversifying its gas sources and substituting gas for diesel fuel and other oil products where feasible, including in ships.

Serbia – Natural gas represents 12% of its total inland energy consumption. It produces roughly 10% of the gas consumed and imports 90% of its gas which is delivered from Russia through Ukraine and Hungary at prices relatively high compared to other countries such as Hungary and Ukraine. With the cancellation of the South Stream project by Russia, Serbia aims to develop its energy infrastructure, especially as it lacks gas storage capacity, and diversify its energy sources. One option under consideration is to build a connection to the Trans-Adriatic Pipeline through neighbouring countries in order to bring Azerbaijan gas through Turkey, Greece, Albania and Southern European markets. Another option under consideration is for Serbia to develop access to a proposed North Croatian LNG terminal with the support of US and EU finds that have been offered.

Kosovo – In Kosovo, which is lacking reliable and affordable energy sources, there is an absence of natural gas resources or pipeline to import gas. Medium term gas delivery and consumption is unlikely but the long term feasibility exists with outside assistance from the Energy Community, World Bank Group and other institutions.

FYR Macedonia – has no domestic production and its relatively small imports are from Russia through Ukraine. The country has only one main gas pipeline and less than 15% of its capacity has been used primarily by industrial customers.

Montenegro – relies principally on electricity and currently has no domestic gas production or distribution system. Gas consumption is limited to the use of cylinders. There is, however, a medium term Gas Development Master Plan commissioned by the European Investment Bank. According to the Economy Minister in February 2015, Montenegro aims to diversify its energy sources and reduce its energy costs through the (a) delivery of Azerbaijan gas to Montenegro via the proposed Ionian-Adriatic Pipeline and (b) planned expansion of the regional gas infrastructure network to include more natural gas and LNG supplies. As a transit hub, the country expects to benefit financially from the future collection of gas transit fees. Gas exploration in the Adriatic Sea may result in future extraction and another supply source.

Albania – According to the Deputy Minister for Energy and Resources on 26 March 2015, electricity is the only source of energy in the country and is “very much dependent on weather conditions”. Albania currently has no natural gas import capacity; however, with the construction of the Trans-Adriatic Pipeline (TAP), the country will have three connection points and this will permit the country to become a gas importer, consumer and transit hub. This will enable the country to reduce its exclusive dependence on electricity, begin diversification of energy sources and contribute to the further development of the South-Eastern European energy network consistent with the Energy Community aims. TAP is expected to contribute €500 million to the Albanian economy, boost employment as many domestic companies are scheduled to be involved in the project, deliver gas to all sectors of the economy (households, business, industry) and allow for closer international relations between Albania and Azerbaijan from which the gas deliveries will originate.

Bosnia and Herzegovina – Two of the country’s three autonomous entities import gas from Russia which is delivered via Ukraine, Hungary and Serbia, while the third autonomous entity– the Republic of Srpska – obtains gas directly from Russia, bypassing BH Gas.

Bulgaria – Natural gas is the least used energy source and represents 14% of total energy consumption. Roughly 90% of the consumed gas is from Russia, most of which is delivered through Ukraine. Bulgaria has the least developed gas infrastructure and highest gas prices in all of Europe; however, there is an LNG terminal under construction in the Port of Ruse which will expand the country’s role in the development of a natural gas supply and distribution network in South East Europe.

OIL

Turkey’s Role in the Balkan/European Oil Market

In addition to the fact that Turkey relies on imported oil and gas to meet more than one half of its energy needs, Turkey is also playing an increasingly important role in the transit of oil. It is strategically located at the crossroads between the oil-rich former Soviet Union and Middle East countries, and the European demand centres. It is home to one of the world’s busiest transit lines, the Turkish Straits, through which significant volumes of Russian and Caspian oil (roughly 70% crude oil and 30% petroleum products) move by tanker via the Dardanelles and Bosporus Straits to Western markets. Through the port of Ceyhan, most of the Caspian and Iraq crude oil imports to Turkey are destined for Europe. In addition, Turkey currently has two crude oil import pipelines: the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan and a pipeline from northern Iraq to Turkey; however, supplies through the Iraq pipeline and its branches have been periodically impacted by the regional territorial conflict with Islamic State, episodes of sabotage, and regional Iraq Central Government/Kurdish Regional Government disagreements.

Balkan Country Highlights

Turkey – Oil, natural gas, hydropower and coal plants account for 97% of Turkey’s energy mix. According to the World Bank, about 60% of Turkey’s power is derived from fossil fuels, of which oil is one of the primary energy sources, accounting for roughly more than one quarter of the country’s total primary energy supply. During the last 10 years, 85-90% of the oil used by Turkey has been primarily imported from Iran (26%), Iraq (27%), Saudi Arabia (10%), Nigeria (8%), Kazakhstan (8%) and Russia (3%) which was formerly the largest source of Turkey’s crude oil.

Greece – Oil has been the dominant energy source in Greece, accounting for roughly 45% of the country’s total primary energy supply. According to the International Energy Agency, Greece has a very small amount of domestic oil production as 99.5% of the country’s oil consumption has been derived from imports. Greece primarily imports crude oil from Russia (33%), Saudi Arabia (17%), Iraq (17%), Libya (13%) and Kazakhstan (9%). There are ten oil terminals in Greece (in which six can accept crude oil) and four refineries operated by Hellenic Petroleum and Motor Oil Hellas. (In 2012, 44% of crude oil supplied to Hellenic Petroleum came from Russia.) Greece’s oil product exports have significantly increased in the last decade. As a net exporter of refined oil products, nearly 40% of the country’s total exports were gasoline/diesel oil in 2012. The destination of oil product exports include Turkey (22%), Singapore (9%), Lebanon (7%) and Libya (7%). In prior years, Iranian oil imports represented between one third to one half of Greece’s oil imports; however, these oil imports were reduced substantially due to sanctions against Iran and Greece’s debt crisis which affected its ability to pay for the oil, thereby increasing Greece’s reliance on Russia for oil.

FYR Macedonia – has only one existing oil refinery owned 81% by Hellenic Petroleum, and it produces more than 90% of the country’s total refined products. The country imports more oil products than crude oil.

Serbia – Coal represents 55% of the primary energy mix in Serbia followed by oil (27%), gas (13%) and renewable energy sources (5%). Serbia is primarily an energy importer of oil which, along with coal products, constitutes more than 80% of its yearly energy consumption. Although the country produces oil and gas in small quantities, it is heavily reliant on imports, mostly from Russia. Russian state companies have a significant investment interest in Serbia’s energy sector. For example, Russia bought a majority stake in the company that imports, processes and distributes petroleum products. One proposed project is for the construction of a pipeline from Kostanja-Romania to the NIS’s oil refinery in Pancevo with the aim to transfer Russian oil within the shortest route to the refinery unit which would be used as a vehicle for exports of primarily diesel type fuels to Bosnia and Herzegovina, Montenegro, Albania, Croatia and Slovenia which currently face a growing demand for these products.

Bulgaria – Domestic oil production is minor as Bulgaria relies on oil imports mostly from Russia. (Bulgaria imports about 75% of its primary energy resources – oil, gas, nuclear fuel, coal – from Russia.) Oil exploration is ongoing in the Black Sea and on the Romanian border. A significant part of Bulgaria’s oil industry income is derived as a transfer point on east-west and north-south transit lines.

Romania – 52% of Romania’s energy needs are covered by coal, gas and oil; 27% from renewable energy sources; and 20% from nuclear power. Although Romania has significant oil/gas reserves, coal deposits and hydroelectric power, Romania relies largely on oil and gas imports from Russia and other countries.

Albania – 53% of Albania’s primary energy sources, including oil which is predominant, are imported and there has been recent foreign investment in Albania’s oil sector, including refinery capability.

Bosnia and Herzegovina – Bosnia is dependent on oil imports from Croatia, Serbia, Montenegro and Hungary, according to the OSCE. There is no domestic oil production, and there are virtually no oil stocks; however, there is an oil refinery producing oil derivatives.

Montenegro – There is no domestic oil production. The country’s primary energy production, primarily from hydro-energy, lignite, firewood and industrial wood wastes, accounts for roughly half of total primary energy consumption. For the country’s remaining energy needs, Montenegro imports petroleum products including crude oil, diesel oil and gasoline.

Croatia – Croatia, which produces 20% of its domestic oil requirements and has refinery facilities, is heavily reliant upon imported oil which for years has represented approximately two thirds of its energy mix. Croatia’s oil reserves are located southeast of Zagreb, along the Hungarian border, and along the Adriatic Sea – an area which has been the subject of ongoing exploration.

Kosovo – Kosovo’s main source of energy generation is lignite which produces 97% of the country’s electricity. The country ranks fifth in the world for lignite reserves. Only 16% of the country’s imports consist of alternative fuel sources including petroleum.

COAL

In Serbia, Croatia, Bosnia, FYR Macedonia and Montenegro, 65-70% of electricity is produced from coal-fired power plants. More than half of Bulgaria’s electricity is produced from this source while in Kosovo, 97% of electricity consumed is from coal-fired power plants. In Turkey, it is estimated that 25% of electricity is generated from coal.

Most countries in the Western Balkans along with Greece produce energy from lignite, which is the most polluting form of coal; however, most of the region’s lignite and other coal power stations will have to be replaced or modified at some point by EU countries or those aspiring to EU membership in order to meet EU regulations. Yet, Greece, Turkey and Croatia have plans for new or upgraded plants. There is an increasing trend to import coal from outside southeast Europe due to environmental and cost reasons. Italy’s Enel has proposed building a coal-fired thermal power plant near the Albanian port of Durres. The plant plans to use imported coal and “clean coal” technology to supply the Albanian grid and the Italian market via a proposed underwater interconnector across the Adriatic Sea. Turkey is planning to double its coal power capacity in four years.

While some financial institutions such as the European Investment Bank are not financing new coal-fired power plants, there are institutions such as Chinese state banks and the China Development Bank that have reportedly signed financing agreements for lignite power plants in Serbia and Bosnia and Herzegovina. China is also reported to be participating in three other coal projects in Bosnia and Herzegovina and one in Romania.

Balkan energy reform plans that include less reliance on fossil fuels and more reliance on renewable energy sources and energy efficiency innovation are slow to be adopted by Balkan countries for a variety of reasons including the widespread availability and low current cost of coal, state ownership of energy production facilities, lack of competition, and the ability of countries to use their own domestic coal resources which is favourable to vested coal-mining interests and those employed in the sector.

While building coal-fired plants may make economic sense in the short term, one current issue concerning Balkan energy strategies is the question of how Balkan countries with EU membership aspirations plan to reconcile their continuing reliance on coal-fired power plants with:

(a) the carbon price set by the EU Emissions Trading System. In August 2015, the price was approximately €8 per tonne, but this is projected to rise to about €30 per tonne which would significantly increase the cost of energy generated from this source, and energy costs, in turn, impact national economies; and

(b) the EU commitment to reduce carbon emissions by 40% on 1990 levels, increase the share of renewables by at least 27% and increase energy efficiency by at least 27% by 2030.

RENEWABLE ENERGY SOURCES

Renewable Energy Sources (RES) – Wind, solar and hydro-power energy, which are converted to electricity, represent the principal RES in the Balkans, while lesser used RES include geothermal and biomass. There are a growing number of institutions (e.g. European Commission, International Finance Corporation of The World Bank Group, USAID), organisations (e.g. Green for Growth Fund) and programmes which support financing RES projects that include the development of infrastructure that serves effective distribution.

Balkan Country Highlights

Montenegro – Montenegro domestically produces only 2/3 of its electricity consumption, part of which is generated by hydro power which is the country’s only renewable energy source (RES). More than 50% of the country’s electricity use is devoted to space heating. Although the country does not have a renewable energy target for 2020, Montenegro has one of the greatest potentials for solar energy in South East Europe. As there is significant unexploited potential of RES in Montenegro, especially high quality hydropower potential, analysts suggest that it would be economically justified for Montenegro to double the current use of RES and include energy from solar, wind and biomass sources in the RES mix; however, only a very small percentage of the economic potential of RE sources is expected to be fully realised in the short to medium term.

Bosnia and Herzegovina – There is potential for the country to develop RES, including wind, solar, biomass and geothermal energy, although the infrastructure cost relegates these energy sources to being considered as future, long-term investments. There are currently no existing wind or solar power plants in the country, and, although 12 potential locations have been identified as feasible for wind and solar power plants, there are only wind power plants in the planning stages according to the OSCE.

Albania – Albania relies on hydropower for 90% of its electricity production. There are 83 hydro power plants in the country. (e.g. the river Drin generates about 90% of the electricity used by Albania’s local industry and households.) Dependence on hydropower brings challenges: electricity production can vary with climate change as well as through competition with the agriculture industry that has irrigation requirements.

Romania – Renewable energy sources, mainly from hydropower, constitute approximately 27% of the country’s total energy production. The Romanian government developed a National Renewable Energy Action Plan which aims to increase energy consumption from renewable sources to 38% by 2020.

FYR Macedonia – According to the National Energy Agency, hydro-electric power is the principal source of renewable energy with the potential to supply 10-20% of the country’s electricity requirements. Only 0.04% of the country’s total energy consumption is derived from solar energy and is limited principally to systems for heating water. Wind energy has not yet been significantly developed. Note: According to the National Energy Agency, biomass accounts for 9.5% of total energy consumption; however, as biomass includes the use of wood almost exclusively by households in the country, analysts have questioned the sustainability of this energy source from the perspective of the environmental consequences of wood burning and the length of time required to renew this wood energy source.

Greece – RES produce 21% of electricity in Greece (which has a 40% target for 2020 that is unlikely to be met in the absence of extensive reforms to its legal and regulatory framework which must be improved to encourage more investment in renewable energy). Wind, solar and hydro-power represent the major RES for electricity production. Wind power produces 7.6% of electricity demand in Greece (compared to 39.1% of electricity demand in Denmark). Worldwide, the country ranks fourth as a leader in solar photo voltaic (PV) power per inhabitant. Solar PV electricity generation is dedicated primarily to solar water heating systems, providing roughly 7.6% of annual electricity demand.

Croatia -RES account for roughly 15% of energy consumption. In 2013, the government adopted a national action plan for RES until 2020 which shifts the focus from encouraging wind farm construction to energy production from biomass, biogas, co-generation plants and small hydro-electric power plants. The most important barrier for a wider deployment of renewables in energy production is their cost which is still higher than the cost of conventional energy sources.

Bulgaria – Wind, solar and hydro represent the main RES which produce roughly 13% of the electricity. According to official figures, Bulgaria has fully achieved, in advance, the objectives of the “Europe 2020” strategy on the consumption of energy from renewable sources; however, there is a question regarding the sustainability of electricity produced by RES. For example, the mandatory purchase of renewable energy from the electricity distribution network is one factor that has caused a significant increase in the the energy cost to households and businesses. The reason is that the difference between the purchase price and the market cost is covered by the National Electric Company (NEK), which passes on part of its losses to the final consumers.

Kosovo – The use of RES to generate energy in Kosovo is virtually negligible, although the University of California at Berkeley noted that 38% of the country’s energy consumption could potentially be generated from wind, hydro and solar power, whereas 90% of its electricity consumption is generated from coal.

Serbia – RES represent only 6% of the country’s energy mix. Although hydro power exists and licences have been issued for wind energy projects, the investment potential remains unsatisfied.

Turkey – The country’s utilised RES are primarily hydro, and to a lesser extent wind and solar generation. Hydro-power provides 23% of the country’s energy needs while geothermal currently produces .03% of Turkey’s energy.

* This designation is in line with United Nations Security Council Resolution No. 1244/1999 and the International Court of Justice Opinion of 22 July 2010 on Kosovo’s declaration of independence.

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