Hard Profit Overcomes Hard Feelings In Ex-Yugoslavia's Oil Industry

The standard western European diagnosis for the region's ills runs as follows: The Balkans is the continent's major crisis spot and the sickness can be blamed on poverty and economic backwardness.

But in the West's view the sickness needs more than a hearty dose of financial aid. Instead it prescribes a period of peace and quiet for its fractious patient. A combination of both treatments may do wonders for the health of the former Yugoslavia's oil industry.

The leaders of nine non-European Union Balkan countries, 15 EU members, the United States, Canada, Japan and Russia gather in Sarajevo on July 30 to find ways to bring about a 'Pact on Stability' for the Balkans. Aimed at encouraging democratic and economic reforms in the region following the Kosovo war, it hopes to reverse years of decline in the former Yugoslavia.

Reviving the oil industry could be one way out for all. Ten years of transition in Eastern Europe, have largely passed the former Yugoslavia by - excepting Slovenia - while the other war ravaged states have so far failed to bring their GDP figures back to 1989 levels.

Assessments vary, but according to local sources, of the neighbouring states, Croatia will lose at least 1.5 billion dollars from its 1999 GNP, Macedonia 0.5 billion dollars and Bosnia-Herzegovina (including Republika Srpska) close to a billion dollars.

While cooperation between so many recent former battlefield enemies might seem unlikely, in an indirect way the Kosovo war has recreated some of the old economic links between the republics of pre-1989 federal Yugoslavia, especially in the energy sector and particularly in the oil industry.

After NATO began destroying oil refineries in Serbia, the heads of the Croatian oil monopoly INA in Zagreb discreetly took over the processing of oil from Serbia's oil fields in Vojvodina. The processed derivatives were shipped back to Serbia along the River Sava. The Bosnian refineries in Bosanski Brod, in Republika Srpska, made a similar offer.

Both were unmoved by old associations, only by profit motives, as both Croatian and Bosnian refineries have unused capacity. But the exchange does recall a happier time for the Balkan industry.

Ten years ago the Yugoslav market for oil derivatives - an annual consumption of 15.5 million tons - put it in the top half of Europe's oil trade. The country's 1,813 petrol stations employed 10,000 people selling 5.5 million tons of petrol and oil products a year.

Since the crises began the cars have become more numerous, but do not drive as far. In 1989 over three million automobiles were on the country's streets, burning an average 834 kilograms of petrol a year each. The equivalent figures for 1998 across the now divided former Yugoslavia are five million cars burning about 600 kilograms of petrol.

The federal units were mainly dominated by local oil monopolies 'Jugopetrol' in Serbia, 'Naftagas' in Vojvodina, 'Jugopetrol Kotor' in Montenegro, 'Petrol' in Slovenia, 'INA' in Croatia, 'Enegropetrol' in Bosnia-Herzegovina, and 'Markpetrol' in Macedonia.

These local monopolies still competed across the federal market. Market leader INA of Croatia was selling close to 30 percent of its product to the other Yugoslav republics in 1989, even as the Serbian companies Jugopetrol and Naftagas were selling seven percent of their output to Croatia.

Then as now the countries had spare refinery capacity. In 1989 the Yugoslav federation could process 26 million tons of crude oil a year, though only 60 per cent of this capacity was actually used. Though old fashioned, the refineries, topping up domestic product with imported crude oil, mostly shipped across the former Yugoslavia from the port at Krk Island, Croatia, were able to meet almost all domestic needs.

Ten years later, the five's oil industries, even the former market leader Croatia, are all worse off. The production of crude oil in Croatia has dropped from three to one million tons. In Serbia though - under pressure of sanctions - output was deliberately kept up regardless of the cost.

The capacity of the Bosnian refinery in Bosanski Brod in Republika Srpska has been cut in half due to damage during the war there, while more recently, the refineries in Pancevo and Novi Sad in Serbia were destroyed by NATO bombers.

But even areas that escaped destruction have not seen more sales on the domestic market, as local buyers have turned to cheaper, imported derivatives.

Domestic markets have been slashed across the former federation. The average monthly salary in former Yugoslavia came to about some 800 DM in 1989. At the end of 1998, according to the Strategic Marketing & Media Research Institute in Belgrade, the average monthly salary was 353 DM in the Federation of Bosnia and Herzegovina, 740 DM in Croatia, 1,056 DM in Slovenia, 312 DM in Macedonia, and 152 in Serbia and Montenegro.

These salaries are likely to fall up to the end of 1999, as all the states have felt the effects of the Kosovo crisis and the three months of NATO bombardment.

None of the five have seen a rise in the consumption of oil derivatives over the last ten years. This may be due to other reasons than the state of the Balkan oil industry. In some states the number of automobiles has doubled, whilst the official consumption of petrol has only risen in Slovenia. Thus either the standard of drivers is pretty low, or that the new borders mean they cannot drive as far, but most likely, unregistered consumption - i.e., of black market smuggled petrol has risen to new levels in the former Yugoslavia.

Most of the new states have expressed the wish to privatise the oil industry, but these magic hens are no longer laying golden eggs. Prospective foreign partners are urging the closure of uneconomic plant, such as the works at Sisak and Lendava in Croatia.

Other foreign investors only want to use their shares to get access to local market share, whether exporting from the former Yugoslavia, or importing into new areas like southern Serbia, and are not interested in restoring old plants. Only a few defend these inefficient industries, citing the likely increased trade with Serbia, its own plant destroyed by US missiles.

However some state owners seem reluctant to give up their share. Officially they say they are defending their nation's economic independence. But for most, oil is still worth more than most tradable goods in their shattered economies. They snap up the products, while the companies themselves are rendered ever more worthless by spiraling debt, unpaid loans and trading losses.

Only one refinery in Macedonia has been opened up to foreign and domestic buyers for full privatisation, and only this year. And only Slovenia has legally cleared the way to allow foreign competitors to buy into the domestic network of petrol stations.

All this only further reinforces the five's case for looking back across the borders of the former Yugoslav republics for new trade. Of course the Federal Republic of Yugoslavia is in the worst position. Not only have its refineries been destroyed, but also it is also formally surrounded by an oil embargo. But, the independent former Yugoslav states will probably ignore that.

Dimitrije Boarov, an economics journalist based in Novi Sad, writes for the Belgrade weekly Vreme.