Introduction

For international investors, the attractiveness of a market cannot be measured solely by wages, taxation, infrastructure or short-term economic growth. Political stability, rule of law, regulatory predictability, international alignment, reputational exposure and the ability of institutions to protect contracts and property are equally important.

Serbia is frequently promoted as an attractive destination for foreign investment because of its geographical position, relatively low labour costs, industrial capacity and access to European markets. However, investors should look beyond these advantages and carefully consider the country’s political and institutional environment.

Serbia remains outside the European Union and is instead an EU candidate country. Its accession negotiations have advanced in some areas, but substantial reforms remain necessary. The European Commission’s 2025 assessment describes a business environment affected by red tape, weaknesses in the rule of law, limited administrative transparency and significant political influence over economic activity. State-aid rules are not always implemented consistently, while state-owned enterprises continue to play an unusually large role in strategically important sectors.¹

For investors seeking long-term predictability, these factors deserve serious consideration.

1. Serbia Is Not an EU Member State

The first major consideration is structural: Serbia is not a member of the European Union.

Serbia has candidate status and has opened 22 negotiating chapters, but only two chapters had been provisionally closed by the end of the 2025 reporting period. The European Commission continues to identify substantial deficiencies in judicial independence, public administration, regulatory transparency, corruption prevention and the functioning of democratic institutions.²

This matters to investors because EU membership provides a common legal and regulatory framework covering areas such as competition policy, state aid, consumer protection, corporate regulation, environmental standards, data protection and judicial cooperation.

Serbia participates in various European agreements and has progressively aligned parts of its legislation with the EU acquis. Nevertheless, candidate status is not equivalent to EU membership.

Investors therefore face a regulatory environment in which European standards are being adopted unevenly and where institutional implementation remains a significant concern.

The European Commission’s 2025 report specifically states that Serbia’s business environment is hampered by red tape, weaknesses in the rule of law and limited efficiency and transparency of public administration. It also notes that state-aid rules are not always implemented because of political pressure to provide assistance to state-owned enterprises and large foreign investors.³

For an investor, this creates a fundamental question: is a favourable investment environment the result of transparent and predictable rules, or can it depend excessively on political relationships and government discretion?

2. Serbia’s Multi-Alignment Strategy: Between Russia, China, the EU and Ukraine

Serbia’s foreign policy is deliberately multidirectional.

Belgrade continues to pursue EU membership while maintaining close political, economic and military relationships with Russia and China. At the same time, Serbia has condemned Russia’s invasion of Ukraine at international forums, accepted Ukrainian refugees, provided humanitarian assistance and supported certain Ukrainian reconstruction and demining initiatives.

Yet Serbia has refused to join Western sanctions against Russia.

Reuters has described President Aleksandar Vučić as balancing Serbia’s EU candidacy against its relationships with Russia and China. Serbia has simultaneously expanded defence cooperation with Western countries while maintaining its traditional relationship with Moscow.⁴

This strategy can be interpreted politically as a form of strategic or Machiavellian balancing: Serbia attempts to extract economic, diplomatic and security benefits from competing geopolitical blocs without fully committing itself to any one of them.

This is not necessarily illegal or irrational from the perspective of Serbian statecraft. However, it creates an additional category of risk for foreign investors.

A company investing in Serbia must consider the possibility that geopolitical circumstances could change rapidly. A country positioned simultaneously between the EU, Russia, China and NATO may be able to exploit its strategic position during periods of stability, but it may also become exposed to competing sanctions regimes, export restrictions, political pressure and reputational risks during periods of geopolitical confrontation.

The result is a market whose political orientation can be considerably more difficult to predict than that of an established EU member state.

3. Serbia’s Growing Military Relationship with Israel

Another important consideration is Serbia’s rapidly expanding military relationship with Israel.

In April 2026, Reuters reported that Serbia and Israel planned to jointly manufacture combat drones. Serbia had already purchased Israeli military equipment, including Elbit Systems’ PULS artillery systems and Hermes drones in a deal worth approximately $335 million. Serbia also purchased additional missiles, drones and electronic-warfare equipment in 2025.⁵

Reuters further reported that Serbia exports ammunition and other military equipment to Israel.

This relationship has acquired particular significance because Israel’s military campaign in Gaza has generated extensive international allegations concerning violations of international humanitarian law and international criminal law. The International Court of Justice has issued provisional measures in the case concerning the Genocide Convention, while the International Criminal Court has issued arrest warrants for Israeli political and military leaders.

Consequently, investors with environmental, social and governance policies, human-rights screening requirements or institutional ethical mandates should carefully examine Serbian companies involved in the defence sector and their relationships with Israeli defence companies.

The issue is not simply whether an individual Serbian company is legally responsible for a particular act committed in Gaza. The broader question concerns supply-chain exposure.

SIPRI reports that Israel’s defence industry experienced substantial growth during the Gaza war, with Israeli arms companies benefiting from increased demand for military technology.⁶ Serbia’s decision to deepen its cooperation with Israeli defence companies, including joint drone production, therefore creates an increasingly visible connection between the Serbian defence-industrial sector and Israel’s military-industrial complex.

For investors applying strict ESG or human-rights criteria, this may represent a material reputational risk.

4. Regional Political Tensions

Serbia’s relationship with its neighbours is another factor that investors should not ignore.

Relations with Croatia continue to experience antagonistic political exchanges. Relations with Kosovo remain unresolved and the EU-facilitated normalisation process has repeatedly encountered difficulties. Serbia also maintains close political relations with the leadership of Republika Srpska in Bosnia and Herzegovina, creating additional sensitivity in relations surrounding Bosnia’s internal constitutional order.

The European Commission’s 2025 Serbia report notes continuing tensions concerning Kosovo and states that Serbia has repeatedly undertaken activities contrary to its obligations under the Agreement on the Path to Normalisation, including lobbying against Kosovo’s membership in international organisations. The Commission also highlighted insufficient steps regarding accountability for the September 2023 armed attack in Banjska/Banjskë.⁷

Relations with Croatia, meanwhile, were described by the Commission as being marked by “ad hoc antagonistic public exchanges and diplomatic demarches.” Serbia also reacted negatively to the trilateral security and defence cooperation between Croatia, Albania and Kosovo.⁸

These tensions matter economically because political disputes can affect cross-border infrastructure, energy cooperation, transportation, tourism, labour mobility and regional supply chains.

The Western Balkans are economically interconnected. A political crisis involving Serbia can therefore produce consequences extending beyond Serbia’s borders.

5. The Continuing Problem of War-Crimes Accountability

One of the most serious institutional concerns is Serbia’s continuing difficulty in processing war-crimes cases from the Yugoslav wars.

The European Commission’s 2025 assessment is unusually direct. It concluded that Serbia had yet to demonstrate a genuine commitment to investigating and adjudicating war-crimes cases.

In 2024, Serbia’s War Crimes Prosecutor’s Office filed eight indictments against ten individuals. At the end of the year, proceedings were ongoing in only 17 cases, while more than 1,800 pre-investigative cases remained outstanding.

The Commission also reported that Serbia continued to avoid indictments against high-level suspects and that cases frequently took excessively long to process.⁹

The problem is not merely historical.

The ability of a state to investigate serious crimes, prosecute powerful individuals and enforce judicial decisions is an important indicator of institutional capacity. Weaknesses in this area can also raise broader concerns regarding judicial independence and political interference.

The Commission separately concluded that undue pressure on Serbia’s judiciary remained a concern and that prosecutorial autonomy was insufficiently protected.¹⁰

For investors, rule-of-law problems are not abstract political questions. They can affect contract enforcement, property disputes, regulatory decisions, corruption investigations and the predictability of administrative processes.

6. Organised Crime and Security Risk

Serbia also operates within a Western Balkan region that has long faced significant organised-crime challenges.

Europol has identified numerous criminal networks originating from or operating through the Western Balkans. In October 2024, Europol announced the arrest in Spain of senior members of the Serbian Vračar Clan, a criminal organisation connected to murder, attempted murder and kidnapping across Serbia and several EU countries.¹¹

The broader Western Balkans also remain a significant source of illicit firearms entering European markets. CEPOL, the EU agency responsible for law-enforcement training, has described the region as a significant source of illicit firearms, noting that illegal weapons trafficking fuels organised crime and violence within the region and the European Union.¹²

This does not mean that Serbia as a country is synonymous with organised crime, nor that ordinary Serbian businesses are inherently criminal or unsafe.

The investment concern is instead structural: companies operating in sectors vulnerable to corruption, procurement manipulation, illicit finance, smuggling or politically connected business networks may face greater compliance and due-diligence requirements.

International companies should therefore conduct particularly rigorous beneficial-ownership, sanctions, anti-bribery and third-party due diligence when entering the Serbian market.

7. The Opportunity Cost: Other Western Balkan Markets

The argument against Serbia should not be interpreted as an argument against investment in the Western Balkans as a whole.

The region contains several markets that may offer investors alternative combinations of EU integration, political alignment and economic opportunity.

Croatia is the clearest example. It is an EU member state and operates fully within the EU’s legal and regulatory framework. For companies seeking access to the European Single Market, this provides a fundamentally different institutional environment from Serbia.

Albania and Montenegro are also EU candidate countries, while Bosnia and Herzegovina is an EU candidate country as well. They therefore face their own political, institutional and economic problems and should not be presented as risk-free alternatives. Nevertheless, investors may find opportunities in these markets depending on the sector and their strategic objectives.

Montenegro, for example, has made EU accession a central component of its foreign-policy strategy. Albania has likewise pursued a strongly Western and Euro-Atlantic orientation. Bosnia and Herzegovina remains considerably more complicated, particularly because of its internal political structure and the crisis surrounding Republika Srpska.

The appropriate comparison is therefore not “Serbia is bad and its neighbours are perfect.”

Rather, the question is which jurisdiction provides the best combination of market access, regulatory predictability, political alignment, institutional quality and long-term stability for a particular investment.

8. A Risk-Based Investment Perspective

The case against investing in Serbia should consequently be understood as a risk-management argument rather than a blanket prohibition.

Serbia possesses genuine economic advantages: geographical proximity to the EU, an industrial base, relatively competitive labour costs, infrastructure connections and a large domestic market compared with several neighbouring Western Balkan states.

But these advantages must be weighed against several structural risks:

1. Serbia remains outside the European Union.
2. The rule of law and judicial independence remain significant concerns.
3. Political influence over economic activity and state-owned enterprises remains substantial.
4. Serbia pursues a highly flexible foreign policy between the EU, Russia, China and other geopolitical actors.
5. Its military-industrial relationship with Israel is expanding, creating potential ESG and reputational exposure.
6. Relations with Kosovo, Croatia and aspects of Bosnia and Herzegovina remain politically sensitive.
7. The domestic prosecution of war crimes remains inadequate according to the European Commission.
8. Organised crime and illicit firearms trafficking remain significant regional security problems.
9. Regulatory and administrative unpredictability can increase compliance and operational costs.
10. Serbia’s eventual EU accession remains uncertain in terms of both timing and the pace of institutional reform.

For investors whose priorities are long-term legal predictability, EU market integration, geopolitical alignment and strong institutional safeguards, these factors deserve substantial weight.

Conclusion

Serbia should not simply be dismissed as an unattractive investment destination. Such a conclusion would be economically simplistic.

The more defensible conclusion is that Serbia represents a market in which the potential returns must be evaluated against a comparatively high level of political, regulatory, geopolitical and reputational risk.

The country’s strategy of maintaining relationships with competing geopolitical powers may provide Belgrade with considerable diplomatic flexibility. However, the same flexibility can create uncertainty for companies that depend upon predictable Western regulatory frameworks.

For investors seeking a Western-oriented Balkan base, Croatia provides the most straightforward EU option. Albania, Montenegro and Bosnia and Herzegovina provide additional opportunities, although each carries its own risks and should be assessed individually.

Ultimately, the question is not whether Serbia has economic potential. It clearly does.

The question is whether that potential compensates an investor for the additional political, legal, geopolitical and reputational risks associated with operating there.

For investors unwilling to accept those risks, alternative Western Balkan markets may provide a more predictable strategic environment.

Notes

1. European Commission, “Serbia 2025 Report,” SWD(2025) 755 final, November 4, 2025.
2. European Commission, “Serbia,” Directorate-General for Enlargement and Eastern Neighbourhood, accessed August 27, 2026.
3. European Commission, “Serbia 2025 Report.”
4. Reuters, “Ukraine’s First Lady Makes Her Premier Visit to Belgrade,” May 12, 2024.
5. Reuters, “Serbia and Israel to Jointly Manufacture Combat Drones, Vucic Says,” April 14, 2026.
6. Stockholm International Peace Research Institute (SIPRI), “The SIPRI Top 100 Arms-Producing and Military Services Companies, 2024,” November 2025.
7. European Commission, “Serbia 2025 Report.”
8. Ibid.
9. European Commission, “Serbia 2025 Report,” section on domestic processing of war-crime cases.
10. European Commission, “Serbia 2025 Report,” Chapter 23: Judiciary and Fundamental Rights.
11. Europol, “Two Key Figures of Notorious Serbian Clan Arrested in Barcelona,” October 25, 2024.
12. CEPOL, “Strengthening the Fight Against Firearms Trafficking in the Western Balkans,” December 17, 2024.