A recent statement from the EU on Trepça is the latest sign of a renewed EU-US push to force a conclusion to the Kosovo-Serbia negotiation process to normalise bilateral relations.

• The EU's foreign affairs spokesperson, Maja Kocijančič, recently called for the inclusion of Trepça in the paused negotiations between Kosovo and Serbia to normalise their bilateral relations.
• The call is the latest sign of renewed and concerted international pressure on the two governments to reach a comprehensive agreement.
• The success of negotiations will depend on the EU's ability to provide a credible path towards EU integration for Kosovo and Serbia.

On 5 February, the EU spokesperson for foreign affairs, Maja Kocijančič, stated that the Trepça mining and smelting complex in northern Kosovo should be part of the paused dialogue between Kosovo and Serbia to normalise their bilateral relationship. The ownership structure of the Trepça complex, a producer of lead, zinc and silver, is the subject of specific dispute between the two governments, which are involved in a broader ongoing negotiation process. Until now, the Trepça complex has been left out of the discussions. IHS Markit assesses that the EU's willingness to focus specifically on this contentious issue is indicative of a renewed drive by the EU and US to broker a definitive and comprehensive agreement between Kosovo and Serbia.

Trepça

Kocijančič's statement on including Trepça in the negotiation process came in response to Kosovo's parliament adopting a new statute for Trepça on 31 January. The move, which aims to restore the mine's operating level from the current minimum capacity, is the culmination of a legislative process that began in 2016, when the Kosovan parliament passed a law that placed 80% of the share capital under government ownership (the remaining 20% will be owned by Trepça's employees). The law was opposed by Serbia, which claims ownership over the complex. During the 1990s, Trepça was directed by individuals loyal to former Yugoslav president Slobodan Milošević. These parties arranged loans secured against the mine's future production. This has provided the basis for the dispute over ownership, with the Serbian authorities claiming that the bulk of the debt, and therefore ownership, has been held by commercial banks later nationalised by Serbia. Kosovo disputes the legality of such previous arrangements.

Trepça and its untapped mineral reserves are seen by Kosovo's policymakers as key to the country's economic growth and development. Unsurprisingly, therefore, Kocijančič's statement was criticised by Kosovo's Prime Minister Ramush Haradinaj as "unacceptable" and damaging to the country's sovereignty. We assess that the willingness of EU officials specifically to raise the contentious issue of Trepça is indicative of a renewed EU and wider international effort to reach a permanent solution that also would need to cover such strategic assets.

A new push for a Comprehensive Agreement

In mid-2018, there was new impetus to find a permanent settlement between Kosovo and Serbia through a suggested land swap. The plan was endorsed by the presidents of Kosovo and Serbia, Hashim Thaçi and Aleksandar Vučić. The proposal, however, was met by strong domestic opposition, especially in Kosovo, where the plan was criticised by Prime Minister Ramush Haradinaj, and much of the opposition. Negotiations were further damaged by the imposition of a 100% tax on Serbian goods by the Kosovan government, in response to Serbia successfully lobbying against Kosovo's membership in Interpol.

However, on 13 December 2018, Haradinaj published a draft Comprehensive Agreement between Kosovo and Serbia. The 30-page document aimed to provide an alternative to the land-swap proposal advocated by President Thaçi, offering a framework for future negotiations. The draft document includes some upfront concessions to Serbia, including granting levers to encourage Kosovan compliance through scope to take direct legal action at the Permanent Court of Arbitration if Kosovo fails to honour its commitments. In exchange, Serbia would be required to recognise Kosovo's independence. This move contrasts with Haradinaj's otherwise more hawkish stance towards negotiations with Serbia: he has maintained, for example, that the 100% customs tariff on Serbian imports will remain in place until Serbia recognises Kosovo, despite diplomatic pressure from the EU and the US.

Five days after the publication of the draft Comprehensive Agreement, US Pesident Donald Trump sent a letter to Thaçi, emphasising the need for a comprehensive agreement that balances the interests of both Kosovo and Serbia, and saying that such an agreement was "within reach". This, in tandem with the upfront concessions Kosovo appears to be offering to Serbia in the draft Comprehensive Agreement, suggests that this proposal was likely to have been drafted in liaison with the US authorities, who retain significant influence in Kosovo.

Outlook and implications

The publication of a draft Comprehensive Agreement, with the likely involvement of the US authorities, and the latest EU call for the inclusion of Trepça in the Kosovo-Serbia dialogue, appear to be strong indicators of a renewed, concerted US-EU effort to bring the outstanding dispute between the two countries to an end. This would require achieving a comprehensive agreement that covers all the issues currently subject to dispute, including strategic assets such as Trepça.

The abolition or suspension of the 100% duty on Serbian imports by Kosovo would be a key indicator that negotiations are about to recommence. This would in turn be contingent on Kosovo being given some face-saving concessions in return, given the prior resolute stance by Prime Minister Haradinaj to uphold the tax. This could, for example, include new commitments by the Serbian authorities to implement outstanding agreements previously reached between the two governments, including those on energy. Another key factor that will be crucial in coaxing the two countries to reach a compromise is the ability of the EU to promise a credible pathway to EU integration. This could be seriously compromised by the potential European Parliament election, which may well result in a change to the EU political landscape which indicates significantly reduced appetite for further EU enlargement. EU statements to accelerate or delay such integration thus represent an important indicator of the likelihood of a final deal being reached.

Posted 14 February 2019 by Dijedon Imeri, Senior Analyst, Country Risk, S&P Global Market Intelligence