Balkans: Eurotension

Croatia is about to enter the EU, but the path to integration may not be smooth for the Balkan states

At any stage during the 1990s, if you’d asked a Serb or Croat about the prospects of joining the EU they would have either laughed in ridicule or broken down in tears of pain, frustration and outright mourning. 

The conflicts around the former Yugoslavia during the decade from 1991 were Europe’s most deadly conflagration since World War II and are rightly seen as a stain on the continent’s political and social history, leaving a legacy of war crimes that still lingers.

So it is nothing short of incredible that, just a dozen years since a ceasefire was called on the last -regional dispute, Croatia is about to join Europe’s club and Serbia is on the verge of graduating from the holding zone of ‘candidate country’ to being allocated a firm date for accession talks.


But while there is widespread enthusiasm both in the Balkans and around Europe for Croatia’s big day on 1 July there is still a degree of trepidation. The country’s economy is expected to slip into recession later this year and unemployment is on the rise, triggering fears among established states further north that Croatians could start moving around the union in search of work.

Britain’s foreign secretary, William Hague, confirmed in Zagreb a few days ago that the UK will impose a temporary employment ban on Croatians, but, just as with the Romania and Bulgaria bans, it must eventually must be lifted.


Free and uneasy

Ironically, Croatia’s local legal profession is itself riven with Euroscepticism, according to leading players at business law firms.

“There is fear about the free movement of services across the EU,” explains Sasa Divjak, founding partner of Divjak Topic & Bahtijarevic. “They fear that suddenly big law firms will come to Croatia and steal all the work from our hungry mouths and we will be left alone on the streets, with nothing to do.”

Divjak is far from sceptical himself, maintaining that both Croatia and Serbia have for a few years been targeted by Austrian and Italian law firms. Yet far from forcing local players to the soup kitchen, his and other progressive practices have prospered as a result of the enhanced competition.

Serbia is a significantly bigger market than Croatia and still years from taking a full and permanent seat at the Brussels table. But Divjak is right – leading firms in Austria and at least one Italian player have been active in the jurisdiction for some time. They came surfing in on a wave of optimism when peace was made in the Balkans in 2001 and the wider European economies were gearing up for boom times.

Those halcyon days are well and truly in the past and both local and regional law firms are suffering hangovers in Serbia and the wider Balkan region. Complicating matters in Serbia itself were elections last year that resulted in a three-way coalition comprising the Serbian Progressive Party (SPS), the Socialists and the United Regions of Serbia. While prime minister Ivica Dacic is from the old socialist party observers maintain the real power is held by his deputy, SPS leader Aleksandar Vucic.

The coalition has won plaudits internationally by playing ball with an EU-sponsored deal to resolve the long-running dispute with Kosovo. On the home front, Vucic has endeared himself to ordinary Serbs – if not perhaps to some in the business community – by launching a high-profile anti-corruption campaign.

This has already borne fat fruit, with the arrest at the end of last year of several big names, including arguably the country’s most prominent tycoon, Miroslav Miskovic, who has been charged with a variety of offences and is still jailed pending a trial date.

Populist fraud-busting measures are all well and good, but Serbia has some profound economic maladies that will be far harder to resolve than simply throwing the book at alleged corporate gangsters. The IMF was in Belgrade in May for what its officials described obliquely as a “health check”. The Serbian government had hoped for more, namely to restart loan talks that foundered last year, partially because of a row over the independence of the country’s central bank.

“There are some people on the government’s fiscal council”, comments one leading business lawyer, “who are saying that if the country doesn’t sort out its financial position in the next six months it will be bankrupt. I’m not sure it’s that bad, but where are the investors?”


Unhappy new year

Where, indeed? asks Mark Harrison, the founder of Belgrade firm Harrisons. “This is my 15th year in Serbia and it was the most pessimistic start to a year I’ve had in that time,” he says, referring to coalition stalemate over finances and speculation that there will be another election this year. “Everything was at a standstill, no one would do anything, ministers wouldn’t do anything.”

That has meant that the Serbian legal market has experienced a dearth of instructions involving external investment deals. Likewise, privatisation work has slowed – not least because the anti-corruption drive has flagged up issues with past deals. 

Still, say lawyers, ministers are talking a good game regarding the sale of state-owned telecommunications assets they failed to offload three years ago.

But overall, comments Alex Petrovic, a technology partner at Joksovic Stojanovic & Partners with a profound tone of resignation, “the Serbian economy is not too good at the moment. It has been badly affected by the global economic crisis, the crisis in the eurozone and that in Greece – a lot of investment used to come from Greece. The country’s public debt is rising – some people joke that the country is already bankrupt, but no one has informed the public. Others suggest that is far from the truth, maintaining the central bank has large reserves”.

To be fair, there are signs the economic position is improving, with Serbia’s move closer to the EUincreasingly appreciated by foreign investors. 

Patricia Gannon

“This is the largest market in the former Yugoslavia,” explains an enthusiastic Patricia Gannon, managing partner of Karanovic & Nikolic. “This is the market with a manufacturing hub and a good relationship and a trade agreement with Russia, and therefore we’ll see a lot of investment coming here.”

Gannon adopts that positive position while acknowledging regulatory downsides that are hangovers from the country’s recent Yugoslav communist past.

“We have restrictive employment legislation, making employment costs quite high,” she points out. “While salaries are rather low, you can’t get rid of people. Maternity leave is a full year and the court -system is slow and inefficient, clogged with red tape. But it’s the same across the Balkans.”


While maintaining that the overall Serbian legal market is in the doldrums, Harrison sees two areas of potential growth: agriculture and energy. His firm acted in the recent deal that saw Abu Dhabi-based Al-Dahra invest $400m (£255m) in the purchase of eight farm companies, widely seen as one of the biggest investments in Serbian agriculture for decades.

Lawyers say it is one of the few examples of foreign greenfield investment in the country and region. Others include Germany’s Bosch planning the launch next year of a car windscreen wiper factory in Pecinci, west of Belgrade, and Japanese electronics giant Panasonic buying a factory from another German manufacturer, Reum, in April.

Still, argues Harrison, foreign investors are thin on the ground. He maintains that the anti-corruption campaign may have deterred some, as there is a perception that even honest and valid deals have been caught up in the investigations. 

But ultimately, he says, the problem is more one of perception, dating back to the dark days of conflict.

“How many projects have there been in the past dozen years?” he asks. “The answer is you can count them on the fingers of two hands. There are favourable corporate tax rates – 10 per cent – and investors get €10,000 per new employee and other subsidies. Yet foreign investors don’t come here. That is a branding issue – people are waiting for the country to sort itself out.”

Bust shelter

Typical of jurisdictions across Europe, local business law firms are attempting to make up for the lack of deals by bagging restructuring work. 

Tijana Kojovic

“We have seen a boom in our insolvency practice,” relates Tijana Kojovic, a corporate partner at Bojovic Daisc Kojovic. 

She is also encouraged by the prospect of PPP deals on the horizon, especially in the energy sector, and mid-sized municipalities looking to improve infrastructure.

Gannon – who founded the Serbian Private Equity Association – maintains there is growing interest from venture capitalists. She reckons that “we are starting to see smaller-scale transactions involving consolidating industries and businesses – I’m hoping to see more of a cross-border nature to that as it would fall into our strategy within the region”.

Lowball games

Regardless, there is no denying that the Serbian and wider Balkan market has become more competitive since the onset of the global financial crisis. As a result, the few international firms in the region and the local players are facing intensifying downward pressure on rates.

“There’s pressure on fees,” acknowledges Petrovic, claiming that the foreign practices are feeling more of the pain because they have further to drop.

Harrison agrees: “There’s a lot low-balling going on – it’s getting quite ridiculous. We refuse to do it, but locals and internationals both do. They are literally throwing silly fee quotes about just to get the work. And the market has picked up on the fact that everything has to be pitched for and beauty-paraded.”

Those foreign firms form a small group. Two big Vienna-based players – Schoenherr and Wolf Theiss – and the Austrian branch of CMS. The mid-sized commercial Italian law firm Studio Legale Sutti also has a presence in the region, as has the German practice Specht Böhm. Kinstellar – the CEE breakaway from Linklaters – is also in Belgrade.

Despite Harrison recently breaching the walls of the Serbian profession, the local approach to foreign lawyers is still a delicate matter.

There are suggestions that the Serbian bar authorities have intentionally ensnared them in red tape because, says one overseas lawyer, “to be blunt, we were doing all the work. Firms that in the past have made piles of money on M&A, foreign investment and privatisations have noticed there is now nothing on the market and they are looking to kick people out”.

The local Serbian business law market consists of no more than around 10 top-tier firms, with that group fairly evenly split, say foreigners, between those with a strong protectionist bent and -others who recognise that competition is a fact of professional life which they are going to have to live with.

There are mutterings among the former group that the foreign firms ignore the spirit and, at times, the letter of local bar rules, not least by operating LLPs in a jurisdiction where they are technically banned.

But Kojovic is one local lawyer who welcomes the cut and thrust of competition, particularly from the Vienna-based practices.

“The Austrian firms are serious competitors,” she acknowledges. “I’m happy they’re here because, on balance, they have boosted fees in the market. Fees are generally higher here than in, say, Bulgaria.”

But according to local lawyers the Austrians in the Balkans have not been exempt from the harsh economic climate starting in 2008. It is widely suggested that headcounts have been trimmed, but despite the tough times the locals do not anticipate that any of the Vienna firms will follow France’s Gide Loyrette Nouel by cutting and running. Gide bailed out of Belgrade in 2011 after seven years in the country, relocating its Balkans desk to Budapest.

“The Austrian firms are likely to stay in Serbia,” predicts Alex Petrovic. “They have a long-term strategy here. If nothing else there will always be a need to support Austrian companies, which are the biggest investors in the country.”

Local practitioners also broadly agree there is an oversupply of one- to two-year PQE practitioners in Serbia. Harrison maintains he is seeing a glut of CVs crossing his desk and reckons there are around 25 per cent too many lawyers on the market.

“They’ve been kicked out of their firms because, plainly, there isn’t the work for them,” he concludes.


As the bunting is draped around Zagreb in preparation to celebrate Croatia becoming the 28th member of the EU, local business lawyers will – at least in the short term – be shouting the loudest.

Preparations for accession have provided a mini-boom for the country’s top-tier legal practices as Croatia’s business leaders try to work out precisely what EU membership – with its labyrinthine bureaucracy – means to them. 

Indeed, plenty of top executives have been flummoxed by the difference between EU regulations and directives, as well as having little knowledge of the wider history and structure of the union.

It has been a diplomatic high-wire act politely to explain the implications, says Sasa Divjak, a founding partner of Zagreb’s Divjak Topic & Bahtijarevic. According to him, the country’s financial services and insurance sectors are the most interested in coming to terms with the new world after 1 July. 

“We’ve been instructed to explain to select executives what is going to happen, starting from the basics,” he says.

Nonetheless, local lawyers maintain that the country’s politicians and leaders have positioned the country relatively well for membership, with around 95 per cent of local legislation having been synchronised with EU directives and regulations in the past four years.

“However,” says Divjak, “this needs to be explained to clients – there are still businesses out there that are not fully aware of what is going to happen.”

More widely, Croatian lawyers are banking on the local real estate market picking up, as well as on instructions to start flowing in from the energy sector and some PPP infrastructure projects.

Nonetheless, serious concerns hang over the Croatian market despite the feel-good factor of EU membership.

“The country is badly organised and not fully understood,” comments Patricia Gannon
of Karanovic & Nikolic. “It’s not
a very competitive market, salaries are high and taxes are ludicrous. It won’t attract the manufacturing sector because costs are too high; the hospitality and services sector might have some scope.”

Indeed, Mark Harrison of Harrisons is even harsher.

“The economy is still in recession – it’s a mess; it is difficult for foreign law firms to practise,” he says.

Alex Petrovic at Joksovic Stojanovic & Partners says his firm would be sceptical about expansion into Croatia – and Slovenia, for that matter – because of political and cultural issues.

Rest of the region

For the 35 years he was calling the shots, Marshal Josip Broz Tito successfully kept the lid on sectarian enmities in the Balkans under the umbrella of Yugoslavia. But after his death in 1980, it only took a decade for that patina of harmony to splinter spectacularly and violently.

Now the region consists of a variety of states and quasi-nations but understandably, after Serbia and Croatia, only a few have business law professions registering on the international radar.

Ironically, much of the attention outside those two main jurisdictions focuses on the smallest country in the region, Montenegro. While it may have a population just eclipsing 625,000, its position on the stunning coast of the Adriatic has triggered a rush of property developers keen to turn the coastline into a billionaire playboy paradise – the Balkan Riviera.

“Montenegro represents a large proportion of our turnover,” says Patricia Gannon, managing partner of Karanovic & Nikolic, which has offices in Belgrade, Zagreb, Banja Luka and Sarajevo in Bosnia and Herzegovina, Skopje in Macedonia as well as the Montenegro capital of Podgorica. Her firm was instructed recently on a deal for an underwater energy cable connecting Italy with Montenegro. But Gannon maintains most of the action is around the high-end leisure sector.

“It’s a very small country, but with huge potential for tourism and hospitality,” she says. “It’s sometimes frustrating because occasionally the country is managed like a banana republic. But infrastructure, energy, waste water treatment and financing are all big areas.”

Mark Harrison of Harrisons Solicitors agrees that tiny Montenegro is one of the few economic bright spots in the Balkans. His firm has just doubled its presence in the country to eight lawyers, with the office targeting international tourist developments on the coast involving Middle Eastern and North African investors.

“People mistakenly believe the big investors in that field are Russian,” comments Harrison. “That’s not true – it’s Abu Dhabians, Egyptians, Qataris and Omanis.”

There are slim pickings for business law firms elsewhere in the Balkans. Tijana Kojovic points out that the Republika Srpska side of Bosnia is effectively an extension of Serbia.

“We understand their laws and their legal environment. And there’s almost no local law firm capacity there,” Kojovic says.

Gannon’s firm has opened in both Banja Luka and Sarajevo because “if you want to do business in Bosnia, you have to be in both”. She claims the offices match each other in turnover.


Albania remains a rank outsider in the region, with one partner saying parts of Tirana are “as close as one can get in Europe to the slums of Rio de Janeiro”.

Karanovic & Nikolic is “tiptoeing around” the idea of working in Albania, with Gannon saying: “We see it as a growth market that is full of opportunity. But for us to open there would represent a huge cultural change.”

Sasa Divjak of Zagreb’s Divjak Topic & Bahtijarevic says there is progress in Albania, “with the Americans pumping in substantial amounts of cash for infrastructure work”. Nonetheless, regional law firms are not rushing to Tirana.


Population: 7.2m

GDP: $42.9bn


Population: 4.3m

GDP: $63.8bn


Population: 2.8m

GDP: $12.7bn


Population: 2m

GDP: $10.2m

Bosnia and Herzegovina

Total GDP: $17.3m


The Federation of Bosnia and Herzegovina

Population: 2.3m

Republika Srpska

Population: 1.4m

Sources: International Monetary Fund, Statistical office of Serbia, Croatia Bureau of Statistics, Bosnia and Herzegovina Centre for Social Research, Federation of Bosnia and Herzegovina Office of Statistics, City of Banja Luka, Albanian Institute of Statistics, Macedonia State Statistics Office