Serbia’s Strategic Balancing: Economic Diversification, EU Conditionality and Regional Stability
Serbia’s political and economic trajectory can be understood through its interaction with the EU and its gradual development in the region since 1999 under the Stabilisation and Association Process (SAP) (European Parliament, 2023).
The proceedings of a formal dialogue between Serbia and the EU were acknowledged in 2009, in the form of an application for EU membership, which resulted in Serbia being accorded EU candidate status in 2012 and Albania in 2014 (European Parliament, 2023). This paper argues that Serbia’s economic diversification between the EU, China, and Russia reflects an effort to maintain strategic autonomy, while the limits of EU conditionality and the potential use of sanctions risk reinforcing domestic resistance and regional instability. Although Serbia obtained EU candidate status earlier, developments over the past five years suggest that Albania’s accession process has progressed at a comparatively faster pace. Serbia’s growing economic diversification between Western and non-Western partners illustrates the limits of EU enlargement leverage in the Western Balkans. As external actors compete for influence in the region, coercive tools such as sanctions risk strengthening domestic political resistance rather than encouraging institutional reform, with potential spillover effects for regional stability. However, both countries are facing critical challenges in complementary sectors of activity which will be further analysed.
It is therefore imperative to analyse the dynamics of inward and outward FDI of these countries, which can be traced over the last decades.
This paper argues that Serbia’s economic diversification between the EU, China, and Russia reflects an effort to maintain strategic autonomy, while the limits of EU conditionality and the potential use of sanctions risk reinforcing domestic resistance and regional instability. While the majority of investments throughout this entire period has been represented predominantly by EU countries, individually and collectively, it is observable that Serbia’s attempts at diversifying its portfolio for multilateral engagement suggests an attempt to avoid full alignment with the EU. Relevant examples that can be traced within the graphic are the 2012 high-level talks between President Vladimir Putin and Tomislav Nikolic which proved successful in securing energy deals and even loans to cover Serbia’s deficit and guarantee that social services such as pensions and salaries would be paid on time, while the Deputy Prime Minister at the time, Aleksandar Vucic, secured a deal that would have invested up to 2.2 billion euros in Serbia’s energy sector on behalf of Germany (Balkan Insight, 2012). In recent years, Russian economic presence in Serbia has been particularly concentrated in the energy sector, including the TurkStream pipeline and related infrastructure, while the same period has also seen an increase in Russian investment activity and business relocation to Serbia (International Energy Agency, 2022). Recent FDI flows show a notable increase in Chinese investment in Serbia, which has contributed to diversifying Serbia’s investment structure, although the EU remains the dominant long-term economic partner. Serbia’s investment structure therefore reflects a strategy of economic diversification between Western and non-Western partners.
Analysts such as Stefan Vladisavljev have expressed concerns over the uncertain long-term impact of these investments and loans, as they are not regulated by the Belgrade government to ensure compliance domestically and regionally. Vladisavljev further elaborated on this position at CEPA, arguing that the lack of transparency over China’s investments and the ratification of such contracts without public debate or scrutiny has served to further entrench the ruling Serbian Progressive Party (SNS) (Vladisavljev, 2024). While Vladisavljev raises valid concerns regarding transparency and accountability, these issues may reflect broader structural limitations within Serbia’s institutional framework rather than the influence of a single external actor. Article 123 of the Constitution of Serbia states that ‘The Government shall determine and conduct the policy of the Republic of Serbia and execute laws and other general acts of the National Assembly,’ which by definition includes negotiating agreements prior to their ratification by parliament. In essence this is a common procedure everywhere, but as Vladisavljev notes, it is more about the image of China as a great actor. Vladisavljev promotes a strong reliance on the West while not providing any vision that would develop and enforce independent practices of the Serbian state, stating that one simply ‘would not expect Russia or China to criticize Vučić for undermining democratic values, but you would expect it from Brussels or Washington. At the very least, they should call out the use of brute force against peaceful protesters’ (Vladisavljev, 2024).
The duality of the current Serbian state — from stagnating or even regressing in the regrettable incident at the Novi Sad railway station, which can be said to have collectively contributed, alongside other circumstances including international criticism rather than direct involvement, to harsher and more drastic measures such as the recent judiciary reforms adopted in February — is compounded by the fact that the current ruling party and president are accusing foreign intelligence services of Croatia, Albania and Kosovo of involvement in protest movements related to the Novi Sad tragedy (Reuters, 2026). Prior to the adoption of these reforms, Vucic acknowledged that corruption was a problem he had been ‘dissatisfied’ with in terms of the recorded attempts to tackle it, while also expressing openness to pursue reforms together with EU bodies. After the reforms were adopted, the EU’s response was to passively warn the Serbian state by openly stating it was reconsidering the withdrawal of funds worth 1.6 billion euros allocated under the EU Growth Plan for the Western Balkans.
The redevelopment proposal for the Generalštab complex in Belgrade faced significant public opposition and political controversy due to its symbolic association with the 1999 NATO bombing. While some reports suggested that the investment group explored alternative projects in other Balkan states, including Albania, the status of the original Belgrade proposal has remained uncertain (BBC News, 2024). Despite the gesture of President Vucic — which may have been overly progressive from the perspective of the Serbian state, which should maintain a clearly separate identity from Yugoslavia, and in which the act of dismissing the memory of the Generalštab from the collective consciousness could play a dual role, the second being a token of diplomacy on which US-Serbian relations could grow tighter — it quickly backfired due to the lack of transparency and institutional accountability and operability.
It is clear that the Serbian state is facing many challenges, but it is equally notable that several scholars argue EU conditionality in the Western Balkans has had limited transformative impact because domestic elites adapt to external demands without implementing structural reforms, which further undermines the state’s self-reliance and stability (Vachudova, 2005; Bieber, 2018; Vukov, referencing Džankić).
In light of the currently unstable geopolitical situation across European and Balkan regions, it should be noted that a large body of sanctions literature argues that economic sanctions generate immediate economic disruption but limited long-term political compliance, as target states adapt economically and politically over time (Hufbauer et al., 2007; Pape, 1997). In several cases, sanctions have been accompanied by coercive measures or military escalation. For example, recent U.S. and Israeli operations against Iran targeted nuclear facilities, missile infrastructure, and military assets, significantly degrading these capabilities rather than resolving the issue through sanctions alone; and the case of Venezuela has been addressed through means of hard power, including the capture of Venezuela’s president — making all three cases presented by Hufbauer et al. illustrate the limitations of sanctions as a standalone tool. Despite Serbia having a lower international profile, it represents a relevant economy in the Western Balkans and, as the 2010–2024 outward FDI data shows, it plays a significant role in the strategic investment diversification of several peers in the region, including Bosnia and Herzegovina. The situation in Bosnia and Herzegovina is highly tense, as the Bosnian Serb political leadership in Republika Srpska and its leader Milorad Dodik has been constantly threatening and pressuring domestic institutions towards secession (International Crisis Group, 2025).
This should be handled carefully by the greater regional actors such as the EU and its neighbouring members like Croatia, as further sanctions could indirectly and conditionally lead to ethnic conflicts across all regions with Serb minorities — such as Albania, Croatia, Bosnia and Herzegovina, and Kosovo — a dynamic often described as a spillover or snowball effect, given Serbia’s kin-state status in the region.
If the EU genuinely cares about the development of the region, it should push towards a much better understanding of the background against which it is engaging with the Western Balkans — especially when it comes to Serbia — and provide more transparent and direct dialogue with its officials, while demonstrating a more proactive role in solving the challenges present in the region rather than providing bureaucratic frameworks and deadlines.
Understanding Serbia’s geopolitical and economic balancing strategy is therefore essential for designing more effective and sustainable EU engagement in the Western Balkans.
Bibliography
1. European Parliament (2023) ‘The Western Balkans’, European Parliament Fact Sheets on the European Union. Available at: https://www.europarl.europa.eu/factsheets/en/sheet/168/the-western-balkans [Accessed 10 March 2026].
2. Balkan Insight (2012) ‘Serbia gets economic support from Russia, Germany’, Balkan Investigative Reporting Network, 12 September. Available at: https://balkaninsight.com/2012/09/12/serbia-gets-economic-support-from-russia-germany/ [Accessed 10 March 2026].
3. International Energy Agency (2022) ‘Accelerating energy diversification in Central and Eastern Europe’, IEA Commentaries. Available at: https://www.iea.org/commentaries/accelerating-energy-diversification-in-central-and-eastern-europe [Accessed 10 March 2026].
4. Vladisavljev, S. (2024) ‘Hidden costs: China’s growing economic grip on Serbia’, Center for European Policy Analysis (CEPA). Available at: https://cepa.org/article/hidden-costs-chinas-growing-economic-grip-on-serbia/ [Accessed 10 March 2026].
5. Reuters (2026) ‘Serbia’s judiciary overhaul could jeopardise EU membership bid, say critics’, Reuters, 11 February. Available at: https://www.reuters.com/world/serbias-judiciary-overhaul-could-jeopardise-eu-membership-bid-say-critics-2026-02-11/ [Accessed 10 March 2026].
6. BBC News (2024) ‘Belgrade’s Generalštab complex: Plans for redevelopment face backlash’, BBC News. Available at: https://www.bbc.com/news/articles/cx2y8lg9e2jo [Accessed 10 March 2026].
7. Vachudova, M.A. (2005) Europe Undivided: Democracy, Leverage, and Integration after Communism. Oxford: Oxford University Press. Available at: https://academic.oup.com/book/10194; / https://archive.org/details/europeundividedd0000vach ;
8. Bieber, F. (2018) ‘Patterns of competitive authoritarianism in the Western Balkans’, East European Politics, 34(3), pp. 337–354. Available at: https://www.tandfonline.com/doi/full/10.1080/21599165.2018.1490272 ;
9. Vukov, V. (2026) ‘How economic governance makes or breaks EU enlargement’, The Loop (ECPR), 16 February. Available at:
https://theloop.ecpr.eu/vukov-how-economic-governance-makes-or-breaks-eu-enlargement/
10. Hufbauer, G.C., Schott, J.J., Elliott, K.A. and Oegg, B. (2007) Economic Sanctions Reconsidered. 3rd edn. Washington D.C.: Peterson Institute for International Economics. Available at: https://www.sciencedirect.com/science/article/abs/pii/S0022199608000597 ;
11. Pape, R.A. (1997) ‘Why economic sanctions do not work’, International Security, 22(2), pp. 90–136. Available at: https://web.stanford.edu/class/ips216/Readings/pape_97%20(jstor).pdf ;
12. International Crisis Group (2025) ‘Bosnia in deadlock as Serbs strain for exit’, Crisis Group Europe & Central Asia Report, 11 June. Available at: https://www.crisisgroup.org/cmt/europe-central-asia/bosnia-and-herzegovina/bosnia-deadlock-serbs-strain-exit [Accessed 10 March 2026].
