Over the past year, the leading foreign investors in Montenegro were Serbia, Russia and Turkey, whose investments collectively account for more than a third of total foreign direct investment (FDI).
These three countries invested around 318 million out of a total of 889 million FDI. Investments from European Union (EU) countries are significantly smaller, amounting to only 250,5 million.
"The depth of the integration process has not been reflected in the change in the profile of investors, so the top of the list is not dominated by EU countries. This is a statistic that leaves a lot of room for research," he said in an interview with the Center for Investigative Reporting of Montenegro (CIN-CG). Gordana Đurović, full professor at the Faculty of Economics, former Minister of European Integration.
The trend of investment from countries outside the Western bloc continued after the restoration of independence in 2006 and the declaration of accession to the EU and NATO as key priorities. Since then, more than 14,6 billion in foreign direct investment (FDI) has flowed into Montenegro. Of that, 10 countries invested the most, around nine billion, and among them, only four are members of both the EU and NATO (EU), along with Turkey, which is part of the NATO alliance.
Among the top ten foreign investors from EU countries were Italy, Austria, Cyprus and Germany, whose total investment amounts to just over three billion.
The top FDI destination is Russia, with more than two billion, which has been among the top five investors every year since independence. It is followed by Switzerland, Italy and Serbia, each of which invested slightly more than one billion. The top ten also includes Turkey, as well as the United Arab Emirates (UAE) and Azerbaijan, each with more than half a billion in investments.
Total investments by EU countries from 2006 to date account for less than half of total FDI - 6,1 billion.
From the Prime Minister's Office Milojko Spajić They tell CIN-CG that some of the most significant projects in Montenegro have been implemented by EU companies, such as the submarine energy cable between Montenegro and Italy, which was implemented by the Italian company Terna, and that a large number of representative offices of foreign companies headquartered in Serbia are indirectly investing in Montenegro.
Furthermore, they claim that, in line with the path towards the EU, a greater inflow of investments from Western European countries is expected in the future.
"Due to global events over the past few years, there has been a decline in interest from investors from Russia, parallel to an increase in interest from investors from the EU and other countries, so we cannot agree with the statement that developed EU countries are not investing in Montenegro," the cabinet claims.
However, data from last year, which we have cited based on statistics from the Central Bank of Montenegro (CBCG), refute these claims, as Serbia, Russia and Turkey are still the leading foreign direct investors.
A lot of money comes from tax havens
The top 20 largest investors in Montenegro since independence also include tax havens - the Virgin Islands with 184 million and Panama with 173 million. And when income from other similar addresses is added to these figures (Barbados, Bahamas, Belize, Jersey, Mauritius, Seychelles, Gibraltar, Bahrain, Cayman Islands, Marshall Islands...), they exceed 600 million euros. That alone is more than what, for example, Germany, which is one of the largest investors in the EU, has invested in Montenegro since independence. Investments from non-transparent zones are actually much higher, because offshore companies coming from Cyprus, Great Britain, the Netherlands or some other countries are not included here, because there is no data available on how much of the investment from these destinations came from offshore companies and how much from companies with a transparent ownership structure.
"This investment through offshore companies may indicate hiding the owner of the capital or the origin of the capital. Domestic capital can also establish a company in countries that are considered tax havens, and then establish a company in Montenegro, which will then be taxed at a lower rate in the parent company. In these cases, supervision by the Tax Administration is crucial," he tells CIN-CG. Zarija Pejović, economic analyst.
There was generally no supervision of the huge capital entering Montenegro. Investments by hidden owners had more of an impact on the enormous enrichment of individuals than on the well-being of society and citizens. Investments through offshore companies were also often used by Montenegrin citizens, who thus hid traces of suspiciously acquired capital and legalized it in the country.
A global investigation into offshore financial dealings called the Pandora Papers It was led by the International Consortium of Investigative Journalists (ICIJ) with partners from 117 countries. The leaked database contains nearly 12 million documents collected from country registries in the British Virgin Islands, Panama, Belize, Cyprus, the United Arab Emirates, Singapore, the United Kingdom, Switzerland, and so on.
This 2021 scandal has still not reached a judicial conclusion in Montenegro. The Panama Papers mention the former prime minister and president of the country Milo Djukanovic and his son Blažo who in 2012 entered into secret asset management agreements hiding behind a network of companies from the UK, Switzerland, the British Virgin Islands, Panama and Gibraltar.
No investment in the country's development
It's not just a problem of where the money comes from.
Gordana Đurović points out that, even in terms of structure, investments do not indicate active investment in the real sector, and thus the development of the country, which poses a challenge, because since independence, Montenegro has relied almost entirely on growth and development from FDI.
"Net FDI inflows averaged around 14 percent of GDP annually, which speaks to a development model based predominantly on attracting FDI, while there is a lack of export orientation, especially in commodity exports," Professor Đurović explains to CIN-CG.
However, although since independence, FDI has been approaching the figure of 15 billion, of which net FDI is almost 10 billion, these funds have been insufficiently used for development, explains Đurović.
The structure of investments since independence shows that most of the money went into real estate, 32,9 percent, investment in the real sector amounted to 31,6 percent, while 30,6 percent of FDI went into intercompany debt, i.e. lending money to local companies by parent companies from abroad, which represents investments that do not increase core capital.
Zarija Pejović explains that the share of intercompany debt in FDI amounts to 30,6 percent, which indicates that parent companies, instead of recapitalizing subsidiaries in Montenegro, prefer to lend them money and thus reduce taxable profit through interest rate expenses, and thus reduce the tax liability to Montenegro on the profit of legal entities.
Real estate investments will exceed half of total FDI in 2023 and 2024, which is a worrying trend, given that Montenegro is not diversifying its economic sector and not encouraging exports, say CIN-CG interlocutors.
"Healthier investments come from Serbia, because some of the money goes into the real sector - thus stimulating the country's development, while money from Russia mainly goes into real estate, which freezes development," says Đurović.
"The effect of real estate investments on economic growth is expressed in increased consumption. This leads to an increase in real estate prices, which in turn makes it more difficult for the domestic population to purchase real estate for basic, existential needs," says Pejović.
The Prime Minister's Office, however, claims that real estate investments can benefit society.
"They do not necessarily represent a negative impact on the economy, especially through the growth of the construction sector, the increase in tourism, business, housing capacities and the growth of consumption associated with the purchase of real estate, which are generally investments with a faster return compared to investments in the real sector."
As they state, such investments contribute to employment, strengthening supporting activities, and increasing budget revenues through taxes and fees.
"It is also important to note that this type of investment, predominantly through the economic citizenship program, has encouraged the accelerated development of northern municipalities, especially the municipality of Kolašin," the Prime Minister's Office told CIN-CG.
However, according to warnings from several experts, architects and spatial planners, the accelerated urbanization project of Kolašin has led to the devastation of this city and its surroundings, and one of the reasons was precisely the institute of economic citizenship. Accelerated urbanization has also led to the devastation of other valuable spaces in the country.
Investment in companies less than during the Covid crisis in 2020.
In the last two years, FDI has declined significantly, after rising in 2021 and 2022, and the decline in investments in companies and banks has been particularly pronounced. Both last year and 2023, investments in domestic companies were lower than in the year of the Covid crisis - 2020, when it amounted to 123 million. If we add inflation compared to 2020, the data is worrying. Thus, in 2020, investments amounted to 123,8 million, a year later significantly more - 215 million, and in 2022, an increase of 219 million was recorded, only to experience a huge drop in 4 - only 2023 million were invested from abroad. Last year, the situation improved slightly, but there were only 95,2 million investments in companies, which is almost half the amount in 113,9.
While investment in companies has decreased significantly, analysis of CBCG data shows that investment in real estate has not declined - over the past three years, it has averaged around 450 million annually.
"The analysis of FDI inflows in Montenegro shows a downward trend in the recent period, with changes in the structure of investments. Namely, there is a decline in investments in companies and banks, while an increase is occurring in the real estate sector. This signal reflects the weakening of Montenegro's investment attractiveness, which was also affected by political instability in the country," states the 2024 White Paper of the Montenegrin Foreign Investors Council.
The growth trend in investments was particularly pronounced in the post-pandemic period and after Russia's aggression against Ukraine. In the first year of the invasion in 2021, FDI increased and approached the figure of one billion. The following year, in 2022, the figure was over one billion. However, in 2023 and 2024, FDI amounted to less than 900 million.
"Montenegro needs more investment in companies and less in real estate, because only such investments have a sustainable and measurable effect on the development of local communities and the country as a whole," Đurović points out.
According to data from several different sources, there are around 100.000 foreign citizens who have temporarily found a home in Montenegro. However, it is important to note that increased spending and the arrival of foreign citizens have not triggered significant investments in the real sector, nor the creation of new jobs, CIN-CG interlocutors point out.
A 2023 BIRN study found that 64 percent of the nearly six thousand companies opened in Montenegro by Russian citizens after the invasion of Ukraine had only one employee, and over 20 percent had no registered employees other than the founder. The Montenegrin budget received only 4,8 million euros in revenue from these companies during the first year of Russia's aggression against Ukraine, the BIRN study found.
A government without a strategic vision
Spajić's office told CIN-CG that the government's priority is to direct investments by investors, especially foreign ones, into the real sector of the Montenegrin economy.
However, according to Đurović, the perception of the investment community is that Montenegro, like other countries in the Western Balkans, is a country where security for private property and investments is not strong enough. The country is also not in favor of the lack of control over foreign investors, the lack of quick response in the event of poor business operations and breach of contracts, violation of investment deadlines, and so on, she adds.
"On several occasions, we have emphasized that Montenegro's potential for foreign investment, and thus the development and diversification of the economy, is unquestionable and significant. However, for their full valorization, it is necessary to ensure a predictable and transparent business environment. Respect and strengthening the principles of the rule of law are necessary to ensure a predictable and stimulating business environment," the Foreign Investors Council in Montenegro told CIN-CG.
They state that they have been pointing this out for years, but the indices are not improving.
The government, however, told CIN-CG that Montenegro is actively taking steps to strengthen economic stability, create new jobs, and increase competitiveness. They say they are working to address challenges in that process, including the availability of a qualified workforce, infrastructure development, environmental protection issues, and restitution, which have halted some investments in the real sector. They say they are working to improve the legislative framework in order to create a more favorable investment climate.
However, the World of Foreign Investors in Montenegro believes that fundamental problems remain, despite the apparent progress in the post-pandemic period, as highlighted in their White Paper. Sat 2024.
"The reform steps taken by the Government of Montenegro are insufficient and inadequate to face the serious challenges that threaten the sustainability of the Montenegrin economy," the publication states.
It is emphasized that the GDP growth that the Government boasts about is based on the growth of wages and pensions, and not on the increase in productivity from production and investment, which does not contribute to long-term development. The stabilization of public finances is also a consequence of foreign consumption, and not real structural reforms. It is also stated that the increase in minimum wages is of questionable sustainability - because it does not rely on the growth of the real sector.
The White Paper also states that "the economy lacks a strategic vision, is dependent on consumption; an alarming trade deficit of 14 percent, or a shortage of exports; inflation that was above the EU average in 2022 and 2023, which made it difficult for small and medium-sized enterprises to survive, especially in underdeveloped regions; and the problem of an overcrowded public sector, which is the largest employer in the country; a lack of diversification of activities; and an overreliance of the economy on tourism."
The White Paper also contains recommendations for urgent action: developing agriculture, manufacturing, and technology sectors, reducing overemployment in the public sector, providing support to small and medium-sized enterprises, especially in less developed regions such as the north, and creating a favorable environment for productive FDI.
If any of this were to be fulfilled, the structure of FDI would be significantly more favorable for the real sector and the overall economic situation in the country.
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