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The EU, UAE and Captive States

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It is important to understand the dynamics behind captive state phenomenon in international relations. It is borne of a global system characterised by stark inequalities in resources between countries. This power imbalance leads to wealthy states being able to leverage power and control over economically less privileged states.

Countries with the wealth and know-how to engage in lobbying in foreign capitals can use this influence to enhance their progress towards achieving strategic ambitions.

The recent report by Tactics Institute, The Security Cost of Enlargement Fatigue, outlines how even some powerful, wealthy European Union member states are unable to resist the lobbying power of wealthy regimes. This phenomenon is allowing governments with poor human rights records to gain a foothold in economically weak states on the periphery of the EU. You can download the report here.

The Tactics report outlines the way that weak states in the Balkans, burdened with relatively small economies, high unemployment and influential organised crime networks can become “captive” as powerful states invest in their arms industries, which still retain capacity and quality from the Soviet era.

Balkan weapons are making their way to groups like ISIS and al-Qaeda in the Middle East, but also in the EU. Says the report: “once the economy of production, distribution and political ‘redistribution’ of arms trade has been established, it is difficult to uproot, especially at a point in time when EU political leverage is waning and the political consensus underpinning the Euro-Atlantic partnership is not in peak form.”

This burgeoning Balkan weapons export phenomenon is lubricated by wealthy states’ ability to lobby and sway EU capitals, who are then more inclined to turn a blind eye to what is happening on the EU’s periphery, even if spells an increased security risk.

Balkan weapons are making their way to groups like ISIS and al-Qaeda, operating in the Middle East, but also in the EU. Once the economy of production, distribution and political “redistribution” of arms trade has been established, it is difficult to uproot, especially at a point in time when EU political leverage is waning and the political consensus underpinning the Euro-Atlantic partnership is insecure.

Captive Serbia

Serbia is the best example of the captive state phenomenon in Europe. "Third countries" have stepped in as investors in Serbia’s struggling economy at a time when the prospect of EU accession appears remote and Brexit has increased ambivalence about membership.

The UAE has invested in Serb aviation, with Air Serbia now 49% owned by the UAE’s state-owned company Etihad. It has also invested in construction (Belgrade's riverfront), agriculture, and the defence industry to create a portfolio unmatched anywhere in the Balkans. The investments signal a commitment to Serbia on the part of the Emiratis. This is soft power at a new level, with the aggressive investment and power dynamics mirroring those usually seen in the worlds of finance and banking.

The phenomenon is certainly controversial. The UAE's aggressive investment in the Serbian agriculture industry has drawn the attention of GRAIN, an NGO fighting illegal land grabbing practices. The 2016 GRAIN Report identified UAE-based companies Al Dahra and Al Rawafed as going beyond what are usually considered transparent investment practices. In 2012, Abu Dhabi's Al Dahra Agricultural holding announced plans to develop 9,000 hectares of farmland in Serbia with a €300 million investment in Serbian farming companies. The build-up of this agricultural portfolio was financed by the Abu Dhabi Development Fund, which approved a US$400m credit line to Serbia to invest in irrigation and provide loans to farmers. Two years ago, the grain production company, Elite Agro LLC, registered in Abu Dhabi, acquired the 100% ownership in Al Rawafed Holding, becoming the sole owner of 12,000 hectares of arable land in Serbia and one of the largest landowners in the country.

The relationship between state-owned investors and state-owned companies does not end there. In October 2013, the Abu Dhabi state-controlled strategic investment company Mubadala Development penned a series of agreements for investment in aerospace manufacturing, telecoms, renewable energy, and semiconductors. The suspicion is that the Mubadala agreements were as much political as they were economic, with concerns raised about corruption and a lack of transparency.

The above trend has been replicated in Serbia’s construction and engineering industries, with Arabtec holdings, in which the Abu Dhabi investment fund has a 21% share, setting up its regional headquarters in Belgrade.

The UAE can now compete with the EU’s financial muscle, and EU candidate countries are naturally tempted. In March 2014, the UAE’s Department of Finance signed a loan agreement with Serbia of €750m to support the Serb economy and bolster bilateral investment.

Arms, Transparency & the EU

It has been two decades since the end of hostilities between national armies and militias in post-Yugoslav states and in that time weapons stockpiles have fed organised crime and terrorist networks in Western Europe. Weapons are trafficked in the EU’s Single Market, with illegal networks exploiting high levels of political and administrative corruption. The corruption presents a systemic challenge to EU member states, but it can lead to a captive-state phenomenon in smaller, weaker states

Chapter two of the Tactics report, The Serbian Defence Industry & the Middle East, connects the dots between the UAE’s investments in Serb real estate, agriculture, air transport, electronics, and arms manufacturing. In 2017 the UAE emerged as the single most crucial contractor for the Serbian defence industry in terms of exports, with Saudi Arabia coming third. Serbia's leading export to both countries are mortars and mines, but rocket launchers, assault rifles, pistols and other arms have made their way to the Middle East: Yemen, Libya, Syria and Iraq. Over the last decade the UAE has also invested in specific production lines in Serbia, including a coastal defence missile system.

The ruling Serbian Progressive Party (SNS) that has dominated Serb politics for over a decade occupies all the managerial positions in the Serbian defence industrial conglomerate. The President and former Prime Minister Aleksandar Vučić has played a pivotal role in paving the way for the increased Emirati influence. Investment boosts lucrative personal connections and all sides share an interest in minimising transparency to maximise power. From a security point of view, the EU faces a huge challenge and must reclaim its collective power to develop a coherent response.

For much more on Serbia and the phenomenon of captive states, download Tactics Institute’s new report, The Security Cost of Enlargement Fatigue, here.

*Image shows plans for the Belgrade Waterfront development.