“Poor become poorer”: Western Balkans Hit hard by War in Ukraine

Food and energy prices are going up as economic growth goes down in the Western Balkans, jeopardizing regional hopes to catch up with living standards in the European Union (EU) anytime soon. Experts argue that the EU should finally include the region in its budget to stop bleeding out the labor force and fuel hope for a more economically stable future.

The countries of the Western Balkans face skyrocketing inflation, with fears of food shortages and social unrest as Russia’s war of aggression in Ukraine enters its fifth month. The economists Helvetas Mosaic talked to point out that pressure will be on the poor, with Balkan governments having a much narrower path to intervene than their counterparts in richer western European countries.

“Inflation had emerged even before the war, and chances are that prices are going to increase further,” said Jelena Žarković, an associate professor in the Faculty of Economics at the University of Belgrade.

“The spending on food, bills and energy takes the biggest share of incomes in our region. About 40% of a household budget are spent on these commodities – exactly the ones that are growing more expensive right now,” Žarković added. “It makes a huge impact on living standards.”

Annual inflation in six Western Balkans countries – all of whom are in a queue to join the European Union – has been averaging nine to ten percent in recent months, and spiking as high as 13.2% in Bosnia and Herzegovina in April.

According to the Bosnian Statistical Office, the mounting prices have hit everyday necessities, with transport being 28.9% more expensive than one year ago, followed by food and nonalcoholic beverages (20.6%) and accommodation costs and bills (9.9%).

“The poor become poorer because of price increases,” said Branimir Jovanović, an economist with The Vienna Institute for International Economic Studies.

Even worse, Jovanović added, is that the crisis is not going to be over anytime soon. “We are looking into long-term consequences. The war might last quite some time. But even after it’s over, we’ll have cold relations between the EU and Russia."

Price caps on food

To illustrate what the current inflation means for the societies in the Western Balkans, Jovanović looks to recently published data from Eurostat. According to the statistical agency, 8.6% of the EU’s population couldn’t afford a proper meal every second day in 2020. While an empty stomach affects less than two percent of people in wealthy European countries like Switzerland, it hits about 15 percent of the population in Montenegro and Serbia, two Western Balkan countries that Eurostat included in the study.

“That’s why increased food and energy costs will have way more social consequences in the Western Balkans,” said Jovanović, who was formerly an adviser to the Finance Minister in North Macedonia.

Serbia, the biggest country in the region, experienced panic buying of sugar in late May that caused shortages across the country. Even before the war, the Serbian government introduced a price cap on sunflower oil, wheat flour, pork and sugar. The latter costs 89.99 Dinar per kilogram (0.77 Euro).

This is how most countries in the region reacted to inflation caused by the pandemic and enhanced by the Ukraine crisis, Jovanović said. Price caps were introduced not only in the Western Balkans, but also in Croatia, Hungary and Bulgaria. Meanwhile, Western Europe hasn’t seen government-dictated prices except for on fuel and electricity.

“Some may deem a price cap on certain agricultural products as populism. But it’s also tackling poverty,” Jovanović argues. “Food prices influence people a lot, and social unrest is always possible.”

But Henrik Böhme, an economic journalist with the German public broadcaster Deutsche Welle, thinks that intervening in the free market causes more harm than good.

“It would be way better to provide people endangered by poverty with state help. Through price caps the state also ends up helping the ones who can easily afford more expensive oil or flour. That way, even rich profit from a price cap,” Böhme said in December, when Serbia first introduced a price cap.

Modest growth

In addition to inflation, “the economies of the Western Balkans now face an unusually uncertain outlook,” according to a World Bank Spring 2022 report. The report says that lower exports, disruptions in supply chains, and lower tourism revenues “would also likely lead to a slowdown in growth.”

The World Bank forecasts this year’s growth to be an average of 3.1% for six countries, ranging from 2.7% in Bosnia and North Macedonia to 3.9% in Kosovo. Even so, this growth would be slightly larger than the EU’s average estimated growth of 2.9%. “Macroeconomically speaking, companies in countries like Germany and Austria depend much more on Russian fossil fuels than factories in Serbia or North Macedonia,” says Jovanović.

With his fellow economists from the Institute, Jovanović authored a report in April stating that the possible embargo on Russian gas might push the Western Balkans into stagnation or even recession. Although it is rarely used for factories, natural gas is important for keeping houses warm in the Balkans. There is a total dependance on Russian supplies for North Macedonia and Bosnia, and Russia supplies about 90 percent for Serbia.

At the end of May Serbian president Aleksandar Vučić agreed on the terms for further imports of gas from Gazprom, Russia’s state-owned energy corporation. “Serbia, which hasn’t joined international sanctions against Russia, is extending its contract with the gas giant, maintaining a balancing act of seeking European Union membership while also keeping close ties with the Kremlin,” according to a Bloomberg news article.

Serbia is also the only country in the region with noteworthy exports of agricultural goods to Russia. Overall, however, Western Balkans’ trade won’t suffer much while being cut off from the Russian market by Western sanctions. According to Eurostat, among non-Western Balkan partners, the EU buys 81% of regional exports, compared to only 2.7% of goods exported to Russia.

Time for the EU to provide more funds

Experts share concerns that the pandemic and the Ukraine war combined will deepen the economic gap between the region and EU. Žarković says that Balkan countries did introduce a “helicopter” aid package during the COVID-19 outbreak, trying to support purchasing power and prevent social unrest. “Employment was mostly preserved. However, that meant additional debts, which decrease maneuvering room amidst the current crisis.”

Additionally, the EU established an unprecedented 750 billion Euro fund to fight economic consequences of the pandemic. A part of this will end up in the Western Balkans – but its impact will be rather insignificant. “A Croatian or Greek citizen would get ten to eleven times more per capita than a Serbian or Albanian,” Dušan Reljić of the German Institute SEP recently told the monthly magazine Cicero. These economical discrepancies cause further brain drain and disappointment with the slow and half-hearted process of EU enlargement, Reljić argues.

That’s why some experts think it’s high time for the EU to include Western Balkans fully in its budget. “As an Institute, we have argued for this for years now,” Jovanović says. “The pandemic and Ukraine crises speak in support of our arguments, because they open additional space for Russian or Chinese influence in the Balkans. If the EU doesn’t want these countries as new members, then they should at least be included in the budget.”

Nemanja Rujević is a journalist with the German broadcaster DW and a reporter for the Belgrade-based weekly magazine Vreme.

This article appeared in the Summer 2022 issue of Helvetas Mosaic. Subscribe to never miss an issue.

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