In the previous year, the primary foreign investors in Montenegro were Serbia, Russia, and Turkey, whose combined investments represent more than one-third of the total foreign direct investment (FDI).

These three nations contributed approximately 318 million of the total 889 million in FDI, while investment from European Union (EU) countries was significantly lower at just 250.5 million.

“The extent of the integration process has not been reflected in the shift in the profile of investors, as EU countries do not occupy the top positions on the list. This statistic opens a wide area for research,” said Gordana Đurović, a full professor at the Faculty of Economics and former Minister of European Integration, in an interview with the Center for Investigative Reporting of Montenegro (CIN-CG).

Since the restoration of independence in 2006 and the declaration of EU and NATO accession as key priorities, the trend of foreign investment from non-Western bloc countries has persisted. More than 14.6 billion in FDI has been funneled into Montenegro to date, with ten countries accounting for almost nine billion of that, only four of which are members of both the EU and NATO, alongside Turkey, a NATO ally.

Among the top ten foreign investors from EU countries were Italy, Austria, Cyprus, and Germany, contributing a total exceeding three billion.

Leading the FDI list is Russia, which has invested more than two billion and has been among the top five investors every year since independence. Following Russia are Switzerland, Italy, and Serbia, each investing slightly over one billion, with Turkey, the United Arab Emirates (UAE), and Azerbaijan each exceeding half a billion in investments.

From 2006 to the present, total investments by EU countries account for less than half of the total FDI at 6.1 billion.

According to the Prime Minister’s Office, Milojko Spajić stated to CIN-CG that numerous significant projects in Montenegro have been executed by EU companies, including the submarine energy cable connecting Montenegro and Italy, constructed by the Italian company Terna. They also noted that many representative offices of foreign firms based in Serbia are indirectly investing in Montenegro.

The office anticipates a greater influx of investments from Western European nations as Montenegro progresses towards EU membership.

“Due to global events over the recent years, interest from Russian investors has waned, while interest from EU and other countries is on the rise. Therefore, we contest the notion that developed EU countries are not investing in Montenegro,” the cabinet asserted.

Nonetheless, data from last year based on the Central Bank of Montenegro (CBCG) statistics contradict these claims, as Serbia, Russia, and Turkey remain the top foreign direct investors.

Investments From Tax Havens

The top 20 largest investors in Montenegro post-independence also include tax havens, with the Virgin Islands contributing 184 million and Panama 173 million. When including revenues from other similar jurisdictions (Barbados, Bahamas, Belize, Jersey, Mauritius, Seychelles, Gibraltar, Bahrain, Cayman Islands, Marshall Islands…), the total exceeds 600 million euros. This figure surpasses Germany’s cumulative investment in Montenegro since independence, which is among the largest EU investors.

“This investment via offshore companies may suggest attempts to obscure the capital’s owner or origin. Domestic capital can also establish a company in countries recognized as tax havens, subsequently forming a company in Montenegro to benefit from lower tax rates in the parent company. In these instances, oversight by the Tax Administration is crucial,” explains Zarija Pejović, an economic analyst, to CIN-CG.

The supervisory role regarding the substantial capital influx into Montenegro has generally been lacking. Investments from undisclosed owners have contributed more to individual enrichment than to societal welfare or the welfare of citizens. Furthermore, Montenegro citizens have also utilized offshore companies to hide and legalize suspiciously acquired capital.

A global investigation into offshore financial activities, termed the Pandora Papers, was conducted by the International Consortium of Investigative Journalists (ICIJ) in collaboration with partners across 117 nations. The leaked database comprises nearly 12 million documents sourced from national registries in the British Virgin Islands, Panama, Belize, Cyprus, UAE, Singapore, the UK, Switzerland, among others.

This 2021 scandal remains unresolved judicially in Montenegro. The Panama Papers referenced former Prime Minister and President Milo Djukanovic and his son Blažo, who in 2012 entered secret asset management agreements through a network of companies operating from the UK, Switzerland, the British Virgin Islands, Panama, and Gibraltar.

Investments Do Not Contribute to National Development

It is not merely a matter of where funding originates.

Gordana Đurović highlights that the structure of investments does not reflect an active focus on the real sector nor on country development, which is critical. Since independence, Montenegro has heavily relied on growth and development through FDI.

“Net FDI inflows have averaged around 14 percent of GDP annually. This statistic illustrates a development model primarily focused on attracting FDI with insufficient export orientation, particularly in commodity exports,” Professor Đurović noted during her conversation with CIN-CG.

While FDI since independence has approached 15 billion, with net FDI nearly touching 10 billion, these funds have not been leveraged adequately for sustainable development, according to Đurović.

The investment structure since independence reveals that the largest portion of funding has been directed toward real estate (32.9 percent), while investments in the real sector reached only 31.6 percent. Additionally, 30.6 percent of FDI involved intercompany loans, effectively lending money to local firms by their parent companies abroad, which does not contribute to increasing core capital.

Zarija Pejović points out that the share of intercompany loans in FDI is 30.6 percent, indicating that parent companies prefer to lend to subsidiaries in Montenegro rather than recapitalize them. This approach allows them to decrease taxable profits through interest costs, ultimately lowering tax obligations in Montenegro on corporate profits.

Real estate investments are projected to surpass half of total FDI in 2023 and 2024, which is a concerning trend, especially as Montenegro fails to diversify its economic sector or promote exports, according to conversations with CIN-CG analysts.

“Investments from Serbia tend to be healthier since some funding is funneled into the real sector, thereby invigorating national development, whereas investments from Russia mainly target real estate, stalling progress,” Đurović asserts.

“The impact of real estate investments on economic growth is seen in enhanced consumption, driving up real estate prices, consequently making it challenging for the local populace to afford homes for fundamental needs,” Pejović explains.

The Prime Minister’s Office, however, contends that investments in real estate can also be beneficial for society.

“They do not inherently have a negative impact on the economy, particularly by fostering growth in the construction sector, boosting tourism, increasing business and housing capacities, and raising consumption related to real estate purchases, which typically yield faster returns compared to investments in the real sector,” they assert.

As they claim, this type of investment, primarily through the economic citizenship program, has spurred accelerated development in northern municipalities, notably the municipality of Kolašin.

Yet, numerous experts, architects, and urban planners have cautioned that Kolašin’s hastened urbanization project has led to the degradation of the city and its surroundings, with one contributory factor being the economic citizenship initiative. Accelerated urban development has similarly resulted in the degradation of other valuable locations throughout the country.

Investment in Companies Below Pre-Covid Levels

In the last couple of years, FDI has witnessed a notable decline, particularly after a rise in 2021 and 2022, with a sharp fall in investments directed towards companies and banks. In both 2022 and 2023, investments in local companies were below the amounts seen in 2020 during the Covid crisis, which was around 123 million. Considering inflation since 2020, the statistics raise concern. Investment was recorded at 123.8 million in 2020, significantly increased to 215 million the next year, and rose to 219 million in 2022, only to plummet to a mere 4 million in 2023. In contrast, last year saw a slight improvement, witnessing only 95.2 million invested in companies, nearly half of the 113.9 million in prior years.

Investment in real estate, however, has remained stable, averaging around 450 million annually over the past three years, despite the significant drop in company investments.

“The analysis of FDI trends in Montenegro indicates a recent downward trajectory, with a shift in the investment structure. The decrease in company and bank investments coincides with a rising trend in the real estate sector. This signals a decline in Montenegro’s attractiveness for investment, further compounded by political instability,” notes the 2024 White Paper from the Montenegrin Foreign Investors Council.

The uptick in investments was particularly evident in the post-pandemic era and following Russia’s invasion of Ukraine. In 2021, FDI surged and approached one billion. By 2022, it had surpassed one billion again, yet in 2023 and 2024, FDI has dipped below 900 million.

“Montenegro needs an increase in company investments and a decrease in real estate investments, as the former are the only type with a sustainable and measurable impact on the development of local communities and the country overall,” underscores Đurović.

According to various analyses, about 100,000 foreign nationals have temporarily settled in Montenegro. However, it is crucial to note that the uptick in spending and the influx of foreign citizens have not spurred significant investments in the real sector or created new employment opportunities, as indicated by CIN-CG contacts.

A 2023 study by BIRN revealed that 64 percent of nearly six thousand companies established in Montenegro by Russian citizens following the invasion of Ukraine employed only a single individual, and over 20 percent had no registered employees aside from the founders. The Montenegrin budget accrued merely 4.8 million euros in revenue from these companies in the first year of Russia’s aggression against Ukraine, per the BIRN report.

A Government Lacking Strategic Vision

Spajić’s office communicated to CIN-CG that the government prioritizes directing both foreign and domestic investments toward the real sector of Montenegro’s economy.

However, according to Đurović, the investment community perceives Montenegro, similar to other nations in the Western Balkans, as a place where security for individual property and investments is inadequate. There is also concern regarding insufficient oversight of foreign investors, slow responses to poor business practices, contract violations, and investment deadline infringements, she notes.

“We have consistently highlighted that Montenegro possesses unquestionable potential for foreign investment, as well as significant capability for economic growth and diversification. However, to fully realize this potential, a predictable and transparent business environment is essential. Respect for and strengthening the rule of law principles is critical for fostering a predictable and encouraging business landscape,” stated the Foreign Investors Council in Montenegro to CIN-CG.

They assert that they have raised these concerns over the years, yet the relevant indices remain stagnant.

The government stated to CIN-CG that Montenegro is actively pursuing measures to enhance economic stability, generate new employment opportunities, and improve competitiveness. They indicated ongoing efforts to tackle challenges in this endeavor, including the availability of a skilled workforce, infrastructure development, environmental protection, and restitution, which have hampered some real sector investments. They are also working on legislative enhancements to foster a more favorable investment atmosphere.

Despite this, the Montenegrin Foreign Investors Council believes that significant issues persist, notwithstanding the apparent strides made in the post-pandemic recovery, as articulated in their White Paper. Sat 2024.

“The reform initiatives introduced by the Government of Montenegro are inadequate to address the substantial challenges threatening the sustainability of the Montenegrin economy,” the publication asserts.

It points out that the GDP growth the Government celebrates is driven by increasing wages and pensions rather than productivity enhancements from production and investment, failing to contribute to long-term development. The stabilization of public finances also stems from foreign consumption, not genuine structural reforms. Additionally, the increase in minimum wages is deemed unsustainable as it is not anchored in the growth of the real sector.

The White Paper further notes that “the economy lacks a strategic vision and is heavily reliant on consumption; it grapples with a concerning trade deficit of 14 percent, or an insufficiency in exports, inflation rates exceeding the EU average in 2022 and 2023 that hinder the survival of small and medium-sized enterprises, especially in less developed areas, and an overcrowded public sector, which stands as the largest employer in the country; a lack of diversity in activities, and an excessive dependence on tourism.”

The document also presents crucial recommendations for immediate action: enhancing the agriculture, manufacturing, and technology sectors, reducing overemployment in the public sector, providing support to small and medium-sized enterprises, particularly in underdeveloped regions such as the north, and fostering a favorable environment for productive FDI.

Implementing any of these recommendations could significantly improve the composition of FDI in favor of the real sector and enhance the overall economic situation in Montenegro.

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