Issue 19 – Kosovo – November 12, 2010
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Issue 19 – Kosovo – November 12, 2010 Kosovo—is it a country? Seventy-one countries1 around the world say yes, but most of our Serbian friends would emphatically say no, and it would not take long for you to realize how emotionally charged this subject is. This is not the same as kidding your Southern relatives over the outcome of the US Civil War. The events are too recent; the experiences firsthand—not something read from a textbook. To diffuse the situation, it might be best to steer the conversation in a different direction. Map: This map shows Kosovo as a separate state.2 For us, Kosovo appears initially of little interest. There’s no stock exchange yet; it’s a small landlocked country—slightly smaller than Connecticut—with a population of only 2 million; and it’s one of the poorest countries in Europe on a per capita basis. We examine it here because of an opportunistic experience that Frontaura associate Eric Dahl had in September and October. Eric spent three weeks in Kosovo as part of the Kosovo-America Emerging Leaders Program that the US State Department sponsored. He was one of 13 individuals to participate in this business exchange 1Currently, 71 countries recognize Kosovo, including the US, Canada, and most of Western Europe. Notable countries that do not recognize Kosovo include China, Russia, and Serbia. Five EU member states—Cyprus, Greece, Romania, Slovakia, and Spain—also do not recognize Kosovo; some because of they do not want to create a precedent given separatist movements within their own countries. Because of China and Russia’s permanent seats on the UN Security Council, the UN does not recognize Kosovo as a country. 2 Map source: http://m.wikitravel.org/en/Balkan. Frontaura Capital LLC – Frontaura Observer #19 – November 12, 2010 Page 1 program exploring economic development in Kosovo and fostering business ties between the US and Kosovo. The countries in our portfolio are often post-conflict situations, where the country has emerged from war, or political or economic chaos. During their post-conflict transformations, most investors ignore these countries, misperceiving them as still too risky. The period from the end of the conflict to the point where normalization occurs can offer great rewards for early investors as valuations climb when investor perceptions slowly change. Therefore, while we cannot invest in Kosovo yet, it is a fascinating case study of the type of situation we like. Eric’s program allowed us to get an earlier and more in-depth view than we otherwise would. We have found other countries of the former Yugoslavia to be fertile investing ground, with up to 10% of the Frontaura portfolio invested there. We own stocks in Macedonia, Montenegro, and Serbia, all trading on trailing PEs between 4 and 7, as they have not recovered fully from their 2007-2008 selloff. Eric took side trips to Macedonia and to Albania, another interesting post-conflict country, having emerged from a half-century under an isolationist dictatorship. Kosovo is predominantly ethnic Albanian, and thus it identifies more with Albania on its southwestern border, than it does with Serbia. Picture: On the left, a statue of Bill Clinton, located on Bill Clinton Boulevard, constructed in 2009. On the right, the ―Newborn‖ sculpture created to commemorate Kosovo’s independence in 2008.3 Primer: 1999 Kosovo burst into international headlines in the late 1990s, when NATO intervened in the Kosovo War. Conflict between Orthodox Serbs and Muslim Albanians in Kosovo goes back at least to World War II, although its most recent incarnation has its roots in 1980s, when Slobodan Milosevic implemented anti-Albanian laws in Kosovo, then an autonomous providence of Yugoslavia. Albanian resistance groups formed; Serbian nationalists retaliated; and by the late 1990s, Kosovo Albanian refugees began to stream into Albania and Macedonia. Popular sentiments in the US and 3 Picture sources: http://www.rferl.org/content/Kosovo_Hails_ExPresident_Clinton_Unveils_His_Statue/1866814.html http://www.underconsideration.com/speakup/archives/004483.html Frontaura Capital LLC – Frontaura Observer #19 – November 12, 2010 Page 2 Western Europe were with the ethnic Albanians, and in March 1999, NATO initiated a three-month bombing campaign against Serbia—its ―humanitarian war.‖ Kosovo Timeline 1389 Battle of Kosovo fought between Serbs and their allies against Ottoman Turk invaders. While the battle was inconclusive, eventually the Ottomans begin to rule Kosovo. Nevertheless, the battle becomes a symbol of Serbian national identity. 1912-1913 First Balkan War begins with Albanian uprising against Ottoman empire. The Balkan League of Bulgaria, Greece, Montenegro, and Serbia drives Ottomans from Balkans. 1918 World War I ends. Treaty of London places Kosovo under Serbian control. Albania established as an independent state, ruled until 1941 by King Zog. 1941 Albania and Kosovo occupied by Italian forces, who establish a fascist government that persecutes Serbs. 1945 After fall of Nazi Germany, communist state of Yugoslavia incorporates Kosovo as a province of Serbia. Albania remains an independent communist nation ruled by Enver Hoxha. 1981 Yugoslav economy falters. Albanians in Kosovo demand greater autonomy from Serbia. Anti-Serbian riots break out in Pristina. 1985 Albanian ruler Enver Hoxha dies. New regime attempts to introduce liberal reforms. 1989 Slobodan Milosevic expels Albanian ministers from Yugoslav government, and bans teaching of Albanian in schools. Parallel Albanian institutions begin to form in Kosovo. 1992 Communist regime collapses in Albania. 1991-1995 Series of wars lead to creation of independent states of Bosnia and Herzegovina, Croatia, Macedonia, and Slovenia. NATO launches air strikes against Bosnian Serbs in 1995. 1997 Democratic government of Albania collapses amidst economic crisis. KLA (Kosovo Liberation Army) begins attacks on Serbian forces in Kosovo. 1999 NATO launches air strikes against Serbian forces in Kosovo and Serbia, in reaction to reports of civilian massacres and growing refugee populations in neighboring countries. Serbia capitulates after three months, and Kosovo becomes a UN-administered region. 2004 Anti-UN and anti-Serbian riots break out in Mitrovica, at border of Kosovo and Serbia. 2008 Assembly of Kosovo declares independence with backing from US. Table: Key events in Kosovo history. Because of NATO actions, Kosovo Albanians idolize all things American. In fact, Kosovo is likely the most pro-American, Muslim4 country on the planet. American flags dot the capital. Bill Clinton remains a hero in Kosovo, along with Tony Blair and Madeleine Albright. The UN, however, does not get the same treatment. Albanian Kosovars generally view the ten years under UNMIK (United Nations Mission in Kosovo) rule as a lost decade. UN rule only ended in February 2008, when the Assembly of Kosovo declared independence from Serbia. Growing Pains Only two years old, the country is still very much in its infancy. To illustrate this, Eric’s schedule changed twice due to unexpected cancellations. Originally planning to meet with Central Bank Governor Hashim Rexhepi, Eric instead had to meet with his deputy because authorities arrested Rexhepi in July on charges that included bribery and money laundering. Later, a second meeting—this time, with Kosovo President Fatmir Sejdiu—was cancelled because the Constitutional Court of Kosovo forced him to step down from office in September for violating the constitution!5 4 Kosovar Albanians tend to be very secular Muslims. Calling themselves ―Muslim-lite,‖ Kosovo Albanians only converted to Islam in 16th century under Ottoman rule. Saudis financed construction of hundreds of mosques throughout Pristina after the war, but attendance is low. Alcohol flows freely at bars, nightlife is vibrant, and revenues are high (at least, by Kosovo standards) at Bier Peja, the country’s largest brewery. 5 Sejdiu’s departure actually precipitated the breakup of the ruling coalition government in October. The immediate consequences will be new elections in December, stalled negotiations with Serbia, and a possible halt to the privatization of PTK, Kosovo’s state-owned telecom company, which could leave a major deficit in the 2011 budget. As we write this, events are still unfolding and outcomes are unclear. Frontaura Capital LLC – Frontaura Observer #19 – November 12, 2010 Page 3 Growing pains are evident in the capital as well. At first view, Pristina does not live up to its name. Yugoslav planners designed the city for an upper limit of 250,000 residents. In the aftermath of the war, however, the city grew to over half a million, and continues to grow. As a result, downtown is exceptionally badly organized. Traffic is endemic, and roads are at far beyond capacity. Zoning regulation is lax to the point that construction firms build first and obtain permits later—if at all. Neighborhoods expand haphazardly, and short of bulldozing whole city blocks, the municipal government can do little about it. The underlying cause of the disorderliness is Pristina’s extraordinary growth over the past decade. Precise figures are not available because the Kosovo government has not conducted a census since 1981, when Pristina had a population of 100,000. All accounts indicate however, that Pristina has grown (and improved) rapidly since 2000. This growth is due to two reasons. Waves of refugees returning from abroad after the war overwhelmingly relocated to the capital, rather than their familial villages. The second factor is the post-war population boom. The median age in Kosovo is 26, and nearly a quarter of the population enrolls in primary or secondary school. Kosovo Albanians buck the Eastern European trend, where populations are aging and shrinking. As a result, construction is booming in Pristina, and there are even whispers of an early real estate bubble. Those concerns aside, Pristina has a vibrancy that is difficult to quantify, and that defies the country’s otherwise daunting macroeconomic indicators. Picture: View of construction in downtown Pristina.6 The indicators, however, are indeed grim.