Confidence in the Serbian economy stepped up a level two months ago when the country’s voters re-elected prime minister Aleksandar Vucic. The result implies there will be stability in the region for the foreseeable future which could increase the amount of foreign direct investment (FDI), in a further boost to the economy.
One of the Serbian government’s main goals is to maintain stability so as to attract FDI, in addition to restructuring both public debt and the public sector. However, the task is not without its challenges.
“Serbia is behind many countries in terms of FDI so the only way is up,” says Karanović & Nikolić competition head Rastko Petaković. “The government has been trying to attract FDI through tax relief, credits and subsidies, and investors are starting to come in from other European countries as well as China and Russia.”
“The local market is old-fashioned and local companies have to know how to go worldwide”
Recent foreign investor transactions include the construction of a factory by Chinese car parts company Mei Ta just outside Belgrade and the privatisation of steel mill Smederevo, which could be close to a Chinese deal. Some Russian banks are also entering the market, although the country’s primary interests – energy and infrastructure projects – suffered a blow last year with the cancellation of the Southstream Pipeline.
Apart from these high-profile transactions the level of FDI activity across the board is still low.
“We’re still missing FDI in mid-sized companies as the main deals are supported by foreign governments,” says Stankovic & Partners partner Nenad Stankovic. “Serbia is a relatively small country so it’s hard to change. But we have to invest in the local companies planning an exit from Serbia, such as those in IT, as they are easy to export.
“The local market is old-fashioned and local companies have to know how to go worldwide.”
“The banks are still reticent to give out new loans. There’s only a certain pool of security that can be balanced”
The country could well attract further investment with its entry into the EU. However, that process looks set to take some time – negotiations are slow due to some tough decisions having to be taken with regard Kosovo and how to bring its laws into line with EU directives.
As a result, regulatory work has been on the up in Serbia in the past few years as the country looks to harmonise its laws with EU regulations. Corporations have been required to acquaint themselves with the relevant rules and enforcement efforts have been stepped up a notch as a result.
Dawn raids
For law firms, one of the fastest growing practice areas associated with regulatory enforcement is data protection, as Serbian companies export their data and filing systems abroad.
But the Serbian Commission for Protection of Competition has also introduced a more extreme method of enforcement – dawn raids.
“The antitrust authority carried out dawn raids for the first time in Belgrade last year,” remarks BDK Advokati managing partner Tijana Kojović. “They’ve done three dawn raids in a short timeframe which shows they are likely to continue with this dynamic tempo.”
“Serbia is behind many countries in terms of FDI so the only way is up”
The raids were conducted in relation to an investigation into the distribution of e-cigarettes and related ‘e-liquids’, after allegations of resale price fixing.
Press attention on the wider region has intensified in general in the past year, with numerous officials in nearby Romania arrested for taking bribes.
“Compliance has been a growing area for the past five years,” says Kinstellar partner Branislav Maric. “There’s been a proliferation of cases in the US due to the Foreign Account Tax Compliance Act (FATCA) and this reflects what is going on here, and the moves to good market practice. Companies are taking the view that if they report themselves they could see some leniency.”
With FDI still comparatively low in Serbia the legal market has seen few changes. The market is too small to spark the interest of German, UK or US firms, with the only foreign entrants to the marketplace being of Austrian origin.
“Austrian firms have managed to secure a larger footprint as they’ve been following the companies operating through Vienna,” explains Petaković. “They’ve been able to do that because there are no major world players apart from maybe Freshfields Bruckhaus Deringer and Baker & McKenzie.”
With the likes of Kinstellar, Wolf Theiss and Schoenherr acting for clients coming into the region, many of the local firms argue they are not really their direct competitors. But the fact remains that Serbia is a small market and although this is preventing global firms from coming in, it leaves little room for manoeuvre.
“The government is hoping it can update the country’s dilapidated infrastructure and there is considerable potential”
“The legal market has been preserved for years and there are the same players,” says Schoenherr partner Slaven Moravcevic. “There have been some local spin-offs but there’s been no real change and it’s not so interesting for the UK and US firms.”
These spin-offs include the establishment of dispute resolution boutique Mihaj Ilic & Milanovic by three lawyers from Karanović & Nikolić last year, while Bojovic & Partners was spun out of BDK in 2013.
“There’s been dynamic development in the mid-market and among small firms, but there have also been spin-offs from the larger firms,” says Kojović. “I don’t see the business reason for spin-offs as the market is already saturated and has been for years.”
Non-performing loans
One aspect of work keeping Serbian lawyers busy has been the hot topic of non-performing loans (NPLs). As a result of poor economic conditions before and after the world financial crash the NPL ratio in the country is one of the highest in Europe, at around 23 per cent. Now, the government is attempting to reduce their number in the region as the economy appears to be improving.
“A few banks have been offloading these problematic loans,” adds Petaković, “but we are still waiting to see a renaissance in that respect. We are still waiting for major deals in Serbia.”
“The legal market has been preserved for years and there are the same players”
There are several obstacles stopping banks from taking action against NPLs, including the need for banks to clear their balance sheets and form separate entities.
“The banks can then start selling assets from separate entities,” explains Kinstellar partner Selma Mujezinović. “When all banks do this, they can lend. But the banks are still reticent to give out new loans. They are cautious and there’s only a certain pool of security that can be balanced.”
A big feature of 2016 will be the restructuring of NPLs as new investors such as private equity funds come into the market. Private equity houses in Belgrade are said to be looking into how they could restructure and acquire NPLs, which would lead to an increase in liquidity.
The rise in GDP growth in the past year will also help.
“This is the big development in the pipeline, as there will be corporate restructuring on both the debt side and the borrowers’ side,” explains Kojović, “but no-one wants to make the first move. We are expecting something to happen at the end of the year.”
Restructuring work
As NPL work for law firms picks up, so does work on restructurings and insolvency proceedings in general. The problem has been the failure of companies to file for bankruptcy early enough, which has seen some creditors left with nothing.
“There are lots of companies that have still not been privatised and they have to choose between restructuring and bankruptcy,” says Stankovic. “Companies have huge piles of historic debt and we’ve been helping them to negotiate with creditors, banks and state authorities.”
“It’s a big project, to take the city’s municipal waste and get energy out of it”
The government has been looking at further privatisation of state-owned assets but its plans came to a dead end last year when it abandoned the sale of Telekom Srbija.
One new focus is a public-private partnership (PPP) contract intended to introduce waste-to-energy facilities in the city of Belgrade. The authorities invited companies to submit applications last year to construct, operate and maintain the facilities that will transform the city’s waste into electricity and heat.
“The government is hoping it can update the country’s dilapidated infrastructure and there is considerable potential in this area,” says Kinstellar partner Branislav Maric.
“It’s a big project, to take the city’s municipal waste and get energy out of it,” adds Wolf Theiss partner Miroslav Stojanovic. “Not many of these schemes have been implemented yet and it’s a groundbreaking part of the PPP law.”
The PPP initiative is likely to see a host of Serbian firms win work advising bidders as well as banks. However, while the major firms are expected to pick up instructions they continue to compete in a comparatively small market. The country is growing and the economy is stabilising, but Serbia still has a long way to go.