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CONTEXT AND TRENDS
A tiny Balkan state of around 600,000 people, Montenegro is a "great place to do business," according to lawyers. Principally, its appeal derives from the relative paucity of both international and domestic competitors and its legal framework....

CONTEXT AND TRENDS

A tiny Balkan state of around 600,000 people, Montenegro is a "great place to do business," according to lawyers. Principally, its appeal derives from the relative paucity of both international and domestic competitors and its legal framework. "Montenegro is quite liberal in the sense that it doesn't have protective foreign exchange regulations like Serbia so in that sense the country is very open," notes one partner.

The country has been attracting interest from international law firms since the mid nineties, when the incumbent government began selling off state assets. "Privatisation kicked off in 1996 and has been continuous since then so there's still work to be done, companies to be sold by the government. Of all the privatisations which have been done to date I would say 95% have been done by Belgrade law firms," notes one lawyer. Since these early days, several firms have seized on the opportunity and committed to the country and leading Serbian practices including Bojovic Dasic Kojovic, Harrisons Solicitors and Karanovic & Nikolic all have offices in the capital, Podgorica.

Today, privatisation work makes up a small proportion of firm's mandates as the state has released a good proportion of its assets. But, it retains some interests and, in need of funds, is looking for buyers for certain land and industries, including the Port of Bar, the only passenger port in the country, and some former military plots.

Historically one of the stronger economies in the Balkans, Montenegro has been afflicted by the recent economic downturn. Financially, the country is heavily dependent on tourism and the sale of its main export aluminium, and the global financial crisis has seen both reduce. The country has been borrowing heavily to balance the deficit which has seen the public debt double to 47% of the GDP in two years. In June 2012, the country's deteriorating economic outlook prompted Standard & Poors to downgrade its long-term foreign and local currency sovereign credit rating in from BB to BB-, three steps below investment grade, citing the impact of a reduction in external financing and concerns that the country would not meet its projected GDP.

If the government is to stop the economic decline, one of the key issues it must resolve is what to do with its two largest industrial groups, KAP, a heavily-indebted and loss-making aluminium plant and the country's largest single source of GDP, and Zeljezara Niksic, an insolvent steel mill. Patience among KAP's creditors is said be wearing thin. "Half of the industrial GDP comes from that one aluminium factory which consumes half their electricity," notes one partner. With the company failing to pay its bills, the energy provider is threatening to cut off KPA's supply of subsidised power. While the state has bailed out the company with its creditors already this year, paying the first tranche of its loan a €22 million payment to Deutsche Bank, there is a further €131 million due by 2014 that the government has said it will have to further increase the sovereign debt if it is to meet the payments. The precarious situation is complicated by the fact the company is jointly controlled by the Montenegrin government and the Central European Aluminium Company (CEAC), owned by a Russian billionaire Oleg Deripaska, which both hold 30% stakes. Currently the two investors are in court and the government failed in its bid to relinquish the Russian investors of their stake through a vote with management in 2012.

Rather than turning to the IMF for funding, the country's government prefers to raise money on the international markets. "They've done two bond issues, which were about €200 million apiece. About two weeks ago we were asked to do a quick loan to lend the government €150 million. The country needs money but they are going to investment banks and they paying a lot for it," says one lawyer.

Montenegro's government is, however, taking steps to ensure its economic security, namely implementing the legal reforms deemed necessary for it to join the EU. On gaining independence from its union with Serbia, which was established three years earlier amid the breakup of the former Yugoslavia, through a referendum in 2006 the country immediately applied to join the EU. The process of harmonising the country's laws with those of EU member states has not been entirely smooth. "There is a lack human resources required to properly understand EU regulations and properly implement them. Basically what you have is some sort of semi importation of EU rules. If you look at The Company's Law you can find provisions that are copied from the EU company law directive but not entirely, something very important is always missing which makes the whole notion of for example capital decreases not sufficiently regulated. It is not deliberate it is just an inadvertent omission." Despite the slow progress, the EU opened accession talks with the government on June 29 2012 after it deemed the country had taken significant steps towards meeting EU standards, particularly in terms of the rule of law and fundamental rights. One legislative development saw the country adopt amendments to the law on the election of municipal councillors and members of parliament in September 2011. A comprehensive reform of the public sector, focusing on public administration, has also begun. The ruling party, the Democratic Party of Socialists (DPS), which has been in power for more than two decades, has even attempted to gain leverage, pushing the upcoming parliamentary elections forward to October 14 in the hope its anticipated win will be viewed favourably by the commission. While these advances suggest Montenegro will eventually be granted EU status, several areas of concern highlighted by the commission including the independence of the judiciary, corruption and organised crime need to be addressed before it may happen.

The impact of the crisis in the Euro zone has been felt locally and as credit has become expensive companies have been unable to refinance, leading to the inevitable onset of restructurings. Nonperforming loan portfolios in particular have occupied lawyers of late. "We've been working on a big restructuring deal, we're talking over €150 million. It isn't the first restructuring so it may end in insolvencies," says one partner.

While tourist are not flocking to Montenegro's shore in the abundance they once were, the tourism industry may yet prove the country's saviour. An integral part of the economy, it is currently where "80% of the work is" according to lawyers. "Montenegro is heavily based on tourism what we've found there is heavy commercial activity centred around the massive developments on the coast. That's where the real activity is." The developments reputedly attract healthy investments from Russia and Middle Eastern parties. In June 2012 Montenegro's Council for Privatization and Capital Projects revealed that the State Oil and Company of Azerbaijan Republic (Socar) will be investing in a €258 million project to develop military land in Kumbor into a resort.

One project, which would certainly increase the number of visitors to the country and perhaps ease the budget deficit is the government's plans to establish a railway between the Port of Bar and Serbia. "What they've been doing is trying to get a railway between the port of bar to Serbia, they have been trying get the Austrians, Straabag, or the Chinese involved," notes one lawyer. Without the money to finance the deal in the national coffers, the EBRD (European Bank for Reconstruction and Development) is backing the project. "EBRD is very active they are trying to sell the Port of Bar so we're getting ready for privatisation. They are looking round like crazy for projects they can finance," notes one partner.