Business and Economics
Montenegro is seen by Abbreviationfinder as a middle-income country and has a business sector that has undergone major changes over the past twenty-five years. The country has gone from being a state with a planning economy within the Federation of Yugoslavia to being an independent state building a free market economy. The changes were particularly quick in 2006–08. At the same time, the country has become sensitive to economic changes in the outside world. In recent years, two companies, aluminum and steelmaking, have contributed to more than half of export earnings. A third source of income is tourism.
Montenegro is a small country with limited business and only a few percent of the area is arable land. Business information is uncertain as some farms are run as self-catering and some activities, especially in the service industries, are not registered and therefore part of an informal economy. Since 2002, the euro has been used as currency in Montenegro, although the country does not belong to the euro zone.
Before independence. When Montenegro was part of the Federation of Yugoslavia, the most important parts of business were state-owned. At the fall of the Federation in 1991, Montenegro, along with Serbia, remained a political entity but increasingly pursued its own economic policy. Liberalization and privatization started already in the early 1990s, but did not produce expected results at all. Internal contradictions and international trade sanctions intensified the economic problems and led to massive unemployment, and from abroad no investments came. Market reforms ceased, production quality and efficiency deteriorated, infrastructure fell short of resources for maintenance, and technology became obsolete in all parts of society. Difficulty, with accompanying commodity shortage and energy problems,
After the conflicts in the region ended, economic growth began in Montenegro. The transition to a market economy continued and the country was increasingly oriented towards the EU, where it began to be perceived as a stabilizing factor in the Balkan Peninsula. However, the restructuring was delayed by the fact that most government companies were unprofitable with excessive workforce and lacked competitiveness in the export market.
The first time as an independent country. From the mid-00s came a strong economic growth, driven by foreign investment in coastal tourism and increased demand for steel and aluminum exported by the country. In 2006–08, foreign trade increased more than in any other country in southeastern Europe. The construction sector, the real estate market and the banking, finance and insurance sectors also grew significantly, partly as a result of investments in the tourism sector. During these years, Montenegro received more foreign direct investment per capita than any other country in Europe.
However, the domestic market is small and so is the availability of domestic capital. This is mainly a result of low population numbers, low demand for consumer goods and a significant informal economy. The country is highly dependent on foreign demand and foreign investment. Therefore, the global financial crisis that began in 2008 led to severe negative effects in Montenegro in 2009, when GDP fell by 5.7 percent, and in 2010, when foreign direct investment was halved.
The 2010s. In 2010–11, weak GDP growth came, but in 2012 a stagnation followed, as a result of the euro crisis. Government involvement in the business sector is still extensive, as it has been difficult to privatize numerous activities, for example in the transport sector. In order to survive financially, a number of large companies have been forced into sharp reductions in the workforce, which has led to increased unemployment and thus reduced purchasing power within the country. Government debt grows, as the state feels compelled to subsidize large companies so that they do not go bankrupt. Since 2010, the aluminum smelter KAP in Podgorica has been the major problem for the country’s economy. In addition, the deficits in health insurance and pension systems are increasing.
Montenegro applied for EU membership in 2008, gained official status as a candidate country in 2010 and was able to start accession negotiations in 2012. This has meant that the country can receive more financial assistance from the EU than before, but at the same time the various EU bodies emphasize that Montenegro must continue with great efforts to fight corruption and organized crime, strengthen an independent judiciary and also reform the administration. In Montenegro, corruption is generally considered to be the most serious societal problem.
Both in the country’s current economic policy and under pressure from the EU, the IMF and the World Bank, it is emphasized that Montenegro’s business must be broadened. The economy rests on a too narrow base. At the same time, much foreign capital is needed to realize the plans that exist, mainly to strengthen the energy and transport sectors. The potential is great for expanding hydropower and making it possible to export electricity. However, such an extension is very expensive and it has a major environmental impact in Montenegro’s uniquely beautiful landscape. Serious environmental problems already exist in the country, despite the slight industrialization. Since ancient times, several areas have been heavily polluted by emissions from the metal industries.
About 38 percent of the country’s land is used for some form of agricultural production. More than nine-tenths of this is low-productivity grazing land, mainly for cows and sheep. The rest are arable land, fruit farms, vineyards and kitchen gardens. Most farms are small and the eggs are split into scattered teas. Today, 97 percent of the cultivated land is privately owned. Until the 1990s, there were also some large state farms, but they have been privatized. The ten large-scale farms that now exist are specialized in animal husbandry. Agriculture, especially livestock farming, is of great importance for employment in the northern part of the country.
The area yield is relatively low. The farmers usually have old-fashioned equipment and every year almost a third of the arable land is in the woods. Almost 11 percent of all agricultural land is irrigated. Many farmers live on a self-sustaining level and sell a small surplus of vegetables and potatoes on the local market. The most important crops have been potatoes, maize and wheat, but now most of the grain cultivation has ceased.
Agricultural production increased by only 0.3 percent per year 2001–10, and it has varied considerably between years. In 2006–07, the country was hit by drought, 2010 by massive floods and 2013 by an abnormally cold winter. The problems for the farmers are compounded by the fact that the costs for seeds and fertilizers are rising while the selling prices are unchanged. Many growers are unable to pay their loans and lack opportunities and motivation to continue growing the land. The economic crisis also worsens the situation. Arable land is abandoned, production is shrinking and more and more food has to be imported. Only arable products are exported to wine and tobacco products.
In a narrow zone along the coast, the climate is favorable for growing olives, citrus fruits, grapes and plums. The most fertile land is in the Zeta Valley, south of the capital Podgorica. There it is produced for sale including tobacco and vegetables such as tomatoes, peppers and cucumbers. In the narrow river valleys in the north there is a limited cultivation of fruits and vegetables. More than 60 percent of agricultural production is animals, and mainly milk, dairy products and lamb are sold.
The country’s first comprehensive inventory of forest land was carried out in 2010. It showed that the productive forest land is considerably more extensive than previously estimated. 60 percent of the land area is wooded and the proportion of forest land is higher than in other countries in southeastern Europe. The quality means that the forests can be considered among Europe’s best, but a large part of them are difficult to access due to the difficult topography.
Two-thirds of the forest land is state-owned. Just over half are deciduous trees, mainly beech and oak, and slightly less are conifers, mainly spruce. Deciduous trees are primarily used as fuel, while fir is used as a building material. Forest is an important resource for the rural population as it provides timber as well as medicinal plants, fungi and fruits. Forests are also important as protection against erosion in the heavily hilly landscape. A new forest type is being prepared and it contains many of the EU’s principles for sustainable forestry. Montenegro has five national parks, which together occupy 10 percent of the country’s area.
Sea fishing is carried out on a small scale, mainly with age-old equipment. In the first place, sharp herring, sardines, hake and mullet are fished. More than a dozen fish farms grow fish and mussels. The fish is sold locally, while some of the mussels are exported to Serbia. Most of the fish consumed in Montenegro is imported, especially from Italy, when Italian fishermen land catches in Montenegrin ports. The availability of offshore fish may allow for increased withdrawal.
The watercourses in the mountain regions have very clear water. They therefore attract more and more anglers who mainly find trout and carp. This form of tourism is also increasing off the coast where, among other things, you catch tuna.
The mining industry contributed 1.5 percent in 2010 to GDP and 1.4 percent to employment. Primarily, lignite is extracted (see Energy), bauxite and sea salt. For the country’s economy, bauxite extraction plays an important role, but internationally it is now very small. Other valuable minerals also exist, such as lead, zinc and copper, but they are not currently mined.
Even before independence in 2006, bauxite extraction and the activities of the aluminum smelters, which are connected to it, constituted the important basis for the area’s economy. So it became even more so in independent Montenegro. In 2008, these two operations accounted for close to one-seventh of the country’s GDP. Bauxite is found in karst areas in much of the country and is extracted in the area around Nikšić in the west, both in open and underground offenses. The bauxite quarry began in 1948 and reached its highest level in 1989. Then it shrank sharply during the crisis years of the 1990s. As part of the privatization of Montenegro’s business sector, the Russian-owned company CEAC 2005 became part owner of both the mining operations in the company RBN (Rudnici Boksita Nikšić) and in the aluminum smelter KAP (see Industry and service).
Operations were modernized and bauxite production increased up to and including 2008. The global economic crisis subsequently caused aluminum demand to fall very sharply and then demand for raw material bauxite. In 2009, bauxite extraction was only one-fifth of what it had been a year earlier. In order to save the entire business in the bauxite and aluminum sector, the state took over half of CEAC’s ownership in 2009. Bauxite production increased in 2010-11 but then declined again, as a result of reduced demand for aluminum in Europe and an inefficient mining with high costs. As a result, employment has again declined in the mining industry. Bauxite has also been exported, especially during the years when the smelter had production problems.
The importance of the mining industry has also been reduced in recent years as a result of the decline in sea salt and the mining of marble and limestone. An Australian mining company has been investigating the possibilities of profitable mining of Montenegro’s zinc/lead deposits with secondary copper and silver production since the beginning of the 2010s.
The energy supply is partly met by large domestic resources on lignite and water energy, but all oil and natural gas used must still be imported. Most years, about two-thirds of electricity has come from hydropower plants and one-third from the country’s only coal-fired thermal power plant. However, an uncertain and insufficient supply of electricity is a growing problem and 30 percent of electricity was imported in 2011.
Water energy comes from two large and seven smaller power plants. It was expanded 30 to 40 years ago, and since then there have been no resources for more facilities. Less than a fifth of the country’s potential for water energy has so far been expanded, and in the energy plan that applies from the beginning of the 2010 there are a number of projects in the Morača River waiting for funding. The plan also includes 13 smaller projects in small watercourses. However, there will be no increased capacity for generating water energy until 2018. The supply of water energy will be reduced in some years due to drought.
Lignite is present in both the northern and eastern parts of the country, but at present mining is only taking place in the north, close to the border with Serbia. The mining company Rudnik uglja in Pljevlja is jointly owned by the state, an Italian company and many small shareholders, and the ownership also includes the coal-fired power plant, which is adjacent to the mines. These activities have meant that Pljevlja has become the place in the country that has the biggest environmental problems. From the mines in Pljevlja also comes lignite for heating. In the years 2010–11, significantly more lignite was mined than previously, and long-term plans are in place to build a second coal-fired power plant and further expand coal mining.
In order to avoid increased energy imports, efforts are being made to stimulate the use of biomass, build wind turbines and also start using solar energy. One of the most important measures in the short term is to streamline energy use in power-consuming industries, such as the KAP aluminum smelter. When it has been in full swing, it alone has used more than a third of all the electricity produced in the country. Funds from the European Development Bank (EBRD) are expanding the power grid in different parts of the country, and the plans also include later linking the electricity networks in several countries.
Fossil fuel imports accounted for almost 13 percent of the total import value in 2010. The state therefore encourages foreign companies to search for crude oil and natural gas offshore, and in the summer of 2013, the bidding process was opened to exploit the occurrences found.
Industry and service
The metal industry together with the food and tobacco industries account for four-fifths of all industrial production in the country. In addition, production of building materials and consumer goods such as fabrics, clothing and shoes. In the wooded northern Montenegro, sawmills and other simpler timber industries have some significance.
The metal industry comprises the country’s two by far the largest companies, KAP (aluminum smelters) and Tosçelik Nikšić (steel mills), and is the industry that is most important for the country’s economy. The aluminum smelter KAP outside Podgorica usually takes care of most of the bauxite extracted in Montenegro and produces semi-manufactured aluminum hydroxide which in a subsequent process is processed into aluminum. The company was privatized in 2005 and gained Russian majority ownership. The global financial crisis of 2008–09 caused major losses. In addition, the operation was controversial because of the heavily polluted water and air in the fertile Zeta Valley. Before the crisis, aluminum accounted for more than half of the country’s export earnings, and to save the business, the state took over most of the company.
Prior to 1991, the steel mill in the city of Nikšić was the largest in Yugoslavia and used inputs from different parts of that country. Since Montenegro became independent in 2006, the raw material is imported. Raw steel was one of the new country’s two important export products and the biggest customer was Serbia. The company had been privatized as early as 2005 and subsequently had foreign majority owners. But reduced demand led to financial problems exacerbated by employee and owner conflicts. Periodically production was down and in 2011 it was facing bankruptcy. In order to save production and employment, the state took over most of its ownership and in 2012 managed to find a new majority owner, the Turkish mining company Toscelik. Modernization and restructuring have meant that the steel mill in 2013 only has 320 employees, compared to about 7,000 in the early 1990s. The production problems meant that the export of crude steel varied greatly between years. Internationally, Montenegro’s steel production is now very small.
The food industry is the industry that is most important to employment. However, its real scale can be difficult to calculate, since much of the processing of agricultural commodities takes place in small companies, often in the informal sector. Hygiene and sanitary conditions are not consistent with international standards everywhere, which can hinder the export of meat and other animal products. In some major workplaces, tobacco products and wine and other alcoholic beverages are produced.
Service during the 00s was the fastest growing main industry. Growing tourism generated ever-increasing revenues and increased employment and led to growth in not only hotels, restaurants and retail, but also in banking and real estate. In 2011, the country was visited by just over 1.2 million tourists. Banking and financial services also increased with the growing influx of foreign direct investment.
Therefore, when the international financial crisis came in 2008–09, it became negatively felt by most service industries in Montenegro. The subsequent euro crisis then made it difficult to get back to the pre-financial crisis level.
Note: the capital city of Montenegro is Podgorica with a population of 189,000 residents (2019). Other major cities include Nikšic, Pljevlja, Bar.
During the 1990s, when Montenegro together with Serbia was a state, foreign trade was very small as a result of war and international trade sanctions. Since peace entered into trade, trade has increased steadily, especially since Montenegro became independent in 2006. This applied to trade with the other Länder of the former Yugoslavia as well as with the EU countries. Imports doubled during the period 2006–08, while exports increased somewhat more slowly. This resulted in a growing trade deficit. As a result of the global financial crisis, 2009 saw a sharp decline in foreign trade, but already in the following year exports began to increase and later imports as well. The deficit in the trade balance thus decreased, but in 2011 import costs still corresponded to 150 percent of export earnings.
Most of the exports are aluminum and steel. In addition, in small volumes, raw materials from agriculture and the mining industry as well as consumer goods at a low technological level. Wine exports have increased during the 2010s. Most of the import costs relate to the purchase of machinery and equipment for factories and civil engineering, as well as refined oil products. Food imports are increasing every year and electricity has also been imported during the 2010s.
The most important trading partner is Serbia, which accounts for about a quarter of Montenegro’s foreign trade. In 2010, more than half of exports went to countries within the EU, while almost 40% of imports came from there. In recent years, however, the EU’s share in foreign trade has decreased. The most prominent trading partners in the EU are Italy and Germany, formerly also Greece. In 2012, China was also marked as an importing country and Croatia as an exporting country.