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Russian investment in Bosnia Herzegovina falls short of promises

Aleksandar Brezar

In Bosnia and Herzegovina, a crucial aspect of Russia's image is that it is a strategic foreign ally with significant financial power. The media and political leaders of Republika Srpska (RS), the Serb-majority constituent part of Bosnia and Herzegovina, often mention Russia's investment power. It’s true that Russia has been the fifth largest investor in BiH since the end of the Bosnian War, and in 2014 Russia topped the list with 95 million out of 283.5 million euros of foreign investment in January-September that year.

However, there are inconsistencies and outright fallacies in the reporting of the situation. In 2013, Russia wasn't even in the top five, showcasing the ‘yo-yo’ tendency of its investors to spend sporadically, which run`s contrary to claims of long-term strategic involvement, at least in the financial sense. Its total of approximately 405 million euros invested in the last 26 years also pales in comparison, for example, to Austria's direct investments, which now total over 1.5 billion euros, or the money coming from neighbouring Croatia and Serbia. 

The 2017 report of the Central Bank of BiH (CB BiH) is also quite telling. According to data confirmed by the state Foreign Investment Promotion Agency (FIPA), Russian investors made losses of approximately 52 million euros in BiH in the past two years. FIPA officials said there could be various reasons for the negative trend, from Russian-owned companies operating at a loss to changes in ownership structures, or the withdrawal of capital.

This is in stark contrast with claims reiterated recently during the post-election change of government, with Bosnian Serb officials in particular again maintaining the importance of Russia as a key ally, on a par with the EU.

How large and how successful are Russian investments? Do the facts support the claims made by those who see the Kremlin as an invaluable partner?

The biggest recorded Russian investment in Bosnia so far was the purchase of RS oil industry facilities, which includes the Bosanski Brod and Modriča oil refineries, as well as the fuel distribution companies from Banja Luka that go under the umbrella name of Nestro Petrol. The state-owned predecessor NIRS was deemed to be of strategic importance to the Republika Srpska, but was nevertheless privatized in 2007 and sold to a Russian company called Neftegazinkor.

This was preceded by changes to the law that introduced a new method of privatization referred to as “direct choice by purchaser”. This law applies only to companies of strategic importance. The price is determined directly by the government based on criteria such as the company’s financial and technical condition and either accepted or contested by the purchaser. The sale is then approved by parliament. 

In practice, this law circumvented the usual channels for privatizing large state-owned companies. In this case, this enabled the party in power (Milorad Dodik's SNSD) to fully control the privatization process, since at the time it also had majority control in parliament. There was no public call for investors or potential buyers. The contract, which was signed in Banja Luka on 2 February 2007, was never made publicly available, so the sale of a strategically important company is shrouded in mystery, apart from what was claimed to have been leaked to the media at the time.

The end result, complicated by the further non-transparent sale of shares in the three original companies of the NIRS along with additional changes to the law on selling shares in public companies, is that Neftegazinkor ended up owning 80 percent of the conglomerate for an estimated price of around 120 million euros. Given how the Modriča oil refinery alone owned property worth 90 million euros and had over 100 million euros of assets, it becomes clear that this sale was made at a loss. It’s also worth noting that the publicized portion of the contract stated that the new Russian owners also promised to invest a further 979 million euros in NIRS, but there is no evidence that this has happened.

The story of Neftegazinkor is also rather interesting. The media speculated at the time that the company was in fact owned by Russian state oil giant Zarubezhneft. As Siniša Božić, head of an investors’ group, wrote in his 2011 analysis of the NIRS case, Neftengazinkor had total assets of around 700,000 euros, which begs the question of where the promised hundreds of millions of euros in investment would come from? Božić's investigation further showed that although Neftengazinkor was indeed partially owned by Zarubezhneft, the other 60 percent was equally divided between three anonymously-owned Moscow-based companies. 

None of the three anonymous investors exist anymore, and our own factchecking showed that in the meantime, the pretense of any company apart from Zarubezhneft owning NIRS has been dropped; on the Bosanski Brod oil refinery’s website, there's a direct link to Zarubezhneft's website in the upper-left corner, while the section on the refinery’s history states that the "Russian state-owned company Zarubezhneft JSC initiated total modernization of the Oil refinery Brod in 2007" (original wording from the site in English). At the time of writing, there is no mention of Neftengazinkor or the other three companies, and the purpose of this lack of transparency in the initial purchase is unclear.

More important are the obvious losses that the Zarubezhneft-owned conglomerate is making each year. In 2017 alone, the Bosanski Brod refinery saw a loss of 7.5 million euros, with total losses since it was sold coming to a whopping 300 million euros, according to a report by the state Foreign Investment Promotion Agency. As noted in the state auditor's report for the past year, the refinery's debt exceeds the value of its assets by more than 30 million euros. 

Despite the auditor's note that Zarubezhneft has made a pledge to cover the debt, Siniša Vukelić, editor-in-chief of, the most RS prominent business portal, explained at the time of the publication of the audit (April 2018) that the accumulated losses, including those of other members of the NIRS group, were the same as the annual budget of the Republika Srpska. This made it, he said, a "serious systemic issue" that could potentially lead to the collapse of the RS entire economy in one fell swoop.

Both the Republika Srpska government and Russian representatives have claimed that there is no reason for concern. The Russian ambassador in Bosnia and Herzegovina, Petar Ivantsov, stated that Russia "has pumped more than 250 million euros" into BiH, while the Serb member of the BiH Presidency Milorad Dodik had repeatedly said there are benefits from Russian investment, while refusing to acknowledge that there are any problems. 

But the problems are quite obvious, and have plagued other Russian investment projects as well.  What was announced as an even bigger investment project that would have dwarfed the NIRS privatization instead became an example of a clear lack of planning followed by terrible execution. When Russian billionaire Rashid Sardarov's Comsar Energy announced in 2011 that an agreement had been reached for a 400 million-euro investment in the expansion of the Ugljevik thermoelectric plant, this project was quickly dubbed the investment of the century. By 2013, this number had grown to more than 850 million euros of direct investment, with growing rumours that a complete takeover of the state-owned electric energy giant Elektroprivreda RS (ERS) by Comsar was the reason for a rather strange investment in a coal-operated plant in a town of barely 4,000 inhabitants. Sardarov was presented in the media as a billionaire businessman, with no reports of his being mentioned in the Panama Papers or connections to key Russian political figures. All of this was glossed over: it seems that the size of the investment in a tiny Bosnian town left most of the media awestruck.

In both 2011 and 2013, Comsar's local management in Bosnia claimed that the construction of a 600MW coal-fired plant would begin shortly, but apart from preparation work done by 2013, further developments have stalled. It’s claimed 35 million euros have been invested in this project and the hydroelectric plant in the town of Rudo. The importance of this project to the RS government was reinforced in 2016, when further annexes to the contract with Comsar came to light. As originally revealed by Capital, the annexes were woefully underreported on in the domestic media, although they proved to place questionable obligations on the RS government itself. 

The document included promises to "delay the application of any European Union laws as well as adjust their contents" in order for those laws to have the least possible impact on Comsar. The other questionable amendment to the original contract found in the annex relieved Comsar of any responsibility to "any damage to persons (who are non-signatories of the contract), waterways or habitat coming as a result of any operations of any persons conducted prior to the conclusion of this contract". As clearly seen in the excerpts of the annex published by Capital in 2016, the RS government decided to protect an investor at the expense of its citizens and the environment.

The most recent news related to Sardarov's plans is that neither the investment of the century nor the industrial megastructure in north-eastern Bosnia will probably ever materialize. First, an analysis of the Environmental Impact Assessment (EIA) study on the power plant’s SO2, NOx and dust emissions filed by Comsar demonstrated that Comsar’s data was false, while the study proved to be missing key information needed to assess the plant’s environmental impact. This analysis, conducted by an RS-based NGO, Center for Environment, was first submitted to the RS Mining and Energy Ministry, making it extremely difficult to disregard and continue state support for the project. 

Then came the second blow: the Secretariat of the Energy Community filed a dispute settlement procedure against Bosnia and Herzegovina for its non-compliance with the requirements of the Environmental Impact Assessment Directive. The Secretariat also stated in a ‘Reasoned Opinion’ that the environmental impact assessment procedure for the planned Ugljevik 3 thermal power plant (TPP) in Republika Srpska was not carried out in compliance with the Energy Community’s environmental laws, making this a veritable scandal in international energy circles. But Comsar is not relenting: while filing for an extension to their current concession permit, the Russian company is allegedly still looking for a partner company to participate in the construction of Ugljevik 3. On its website, Comsar's overview of Ugljevik 3 states that "it will become operational in 2019". 

However, further complications for this project keep piling up, accompanied by numerous health and environmental hazards, rumours are now swirling that Comsar might end up suing Republika Srpska for approximately 50 million euros in compensation for the delay. The main reason for the delays reported in the media and repeated by some RS officials has nothing to do with health or the environment. It’s being said that Comsar’s project is on hold due to low market prices for electricity, making it unprofitable for the investor.

In part 2 of our story on Russian investments in Bosnia and Herzegovina, we look at a mis-managed privatization attempt that shut down an aluminum purification factory, constant promises of salvation for a branch of a fallen industry giant via Russian money. We also examine why Russian companies keep investing in a country that has proven extremely difficult to profit from.  

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