Serbia’s Low Water Levels Expose Growing Pressure on Energy, Freight and Public Finances

Serbia is facing a broad economic disruption as historically low Danube water levels constrain fuel deliveries, hydropower production and bulk freight, while simultaneously increasing the cost of electricity, agricultural logistics and industrial supply.

During July, fuel imports reached only 25% of the planned monthly volume. Barges and tankers operating on the Danube across Serbia, Hungary and Romania were carrying just 30–40% of their normal loads, with some river sections effectively restricted to self-propelled vessels operating only during daylight. Overall shipping activity has declined by roughly half. The impact is concentrated in fuels, coal, fertiliser, grain and other bulk commodities, where replacing river transport with road or rail significantly increases costs. Lower vessel payloads also mean additional voyages, longer loading periods and more working capital remaining tied up while cargo is in transit.

Government opens refinery capacity as fuel deliveries weaken

The government responded on 5 August by deciding that part of the capacity at the NIS-operated Pančevo refinery would be made available to other domestic oil companies. The measure is designed to offset weaker deliveries of imported petroleum products while allowing Serbia to retain its strategic fuel reserves for a potentially more severe emergency.

The Pančevo refinery has annual processing capacity of approximately 4.8 million tonnes and normally supplies close to 80% of Serbia’s fuel requirements. Its role has become more important as low Danube levels undermine the reliability and economics of river-based supply. Serbia holds approximately 269,000 tonnes of strategic diesel reserves, but authorities are avoiding a broad release. Maintaining those stocks has financial value because replacing them during restricted navigation and elevated regional energy prices could be considerably more expensive than their current book value.

The government decision also creates a new commercial relationship between NIS and competing domestic oil distributors. Companies previously dependent on imports could obtain access to domestic refining, storage or wholesale supply, while NIS would assume a more explicit role in maintaining system security.

The commercial consequences will depend on the final arrangements covering processing charges, ownership of crude, allocation of refined products and working-capital responsibilities. Those terms will determine whether the arrangement remains commercially neutral for NIS or creates an additional regulated obligation.

NIS ownership remains linked to wider energy-security decisions

NIS continues to face the unresolved consequences of US sanctions affecting its Russian shareholders. Gazprom Neft and Gazprom together own 56.2% of the company, while the Serbian government holds 29.9%. The remaining shares belong to minority investors and employees. Hungary’s MOL has negotiated the acquisition of the Russian stake, while Serbia plans to acquire an additional 5% and increase its influence over strategic decisions.

A shareholders’ agreement negotiated with MOL contains commitments concerning historical refinery-output levels. The current drought has highlighted the importance of those arrangements because the Pančevo refinery becomes strategically more significant whenever river transport, road logistics or international pipeline supply is disrupted. The issue therefore extends beyond ownership of a downstream oil company to control over refining capacity that Serbia increasingly relies upon when conventional supply routes become constrained.

Hydropower and thermal generation face simultaneous restrictions

The water shortage is also reducing Serbia’s electricity generation capacity. EPS’s 1,140 MW Đerdap 1 hydropower plant has recently been producing approximately 5,000 MWh per day, equivalent to around one-third of its normal daily generation. Production during May and June was the lowest recorded for those months since Đerdap 1 began operating in 1970. The reduction affects not only electricity volumes but also the system services provided by the plant, including ramping, frequency support and evening flexibility that lignite-fired units cannot reproduce as quickly.

At the same time, low water levels are affecting cooling conditions at the Kostolac thermal complex. Serbia is therefore dealing simultaneously with lower hydropower availability and constraints on coal-fired generation during a period of substantial air-conditioning demand and expensive regional electricity. Hungary and Romania are experiencing even more severe restrictions affecting nuclear and hydropower production. That is limiting the availability of inexpensive electricity from Serbia’s northern neighbours.

Regional day-ahead prices for weekend delivery reached approximately €158/MWh in Hungary and €161/MWh in Romania, compared with around €111/MWh in Bulgaria and Greece. The price differential weakens the normal option of covering domestic generation shortfalls through competitively priced imports. Cross-border electricity remains physically available, but Serbia increasingly has to source it from markets already facing drought-related and nuclear-availability premiums.

The immediate financial exposure is concentrated at EPS. The utility must manage domestic tariff commitments while paying more for wholesale electricity, maintaining coal inventories and preserving hydropower reserves for peak evening consumption. A prolonged dry period could therefore reduce cash generation without requiring an outright physical supply shortage.

Wildfires increase pressure on infrastructure operators

Extreme heat is adding another operational risk. Temperatures reached approximately 40°C as major fires developed around Deliblatska Peščara and Kraljevo. No large residential losses had been reported by Saturday morning, but emergency services, military units and state-owned companies had been mobilised. For utilities and infrastructure operators, the risks include transmission-line failures, damage to distribution infrastructure, restricted access to operating sites and higher emergency-response expenditure. The fires also increase the economic importance of forest management, water access, firebreaks and monitoring systems as components of infrastructure protection and broader economic resilience.

Zelenskyy visit links trade expansion with energy diversification

Ukrainian President Volodymyr Zelenskyy arrived in Belgrade on 7 August for his first official visit to Serbia. Discussions with President Aleksandar Vučić and Prime Minister Đuro Macut cover economic cooperation, energy, security and the EU accession processes of both countries. Commercial ties have expanded despite the political complexity of the relationship. Serbia-Ukraine merchandise trade reached US$442.2 million in 2025 and accelerated to approximately US$345.9 million in the first half of 2026.

Serbian exports accounted for approximately US$243.2 million during the six-month period, while imports from Ukraine reached about US$102.7 million. Serbia consequently recorded a bilateral surplus of approximately US$140.5 million. Serbian exports to Ukraine include electricity, mineral and chemical fertilisers, tyres, paper products, PVC flooring, detergents and other manufactured products.

Ukraine supplies Serbia with iron ore, rolled steel products, coal, aluminium wire, cellulose and frozen raspberries. Approximately 900 Serbian companies currently trade with Ukraine, including around 670 importers. The relationship therefore extends into Serbia’s manufacturing and industrial supply chains rather than being limited to state contracts or humanitarian activity.

Free-trade negotiations resume as logistics remain constrained

Serbia and Ukraine have resumed negotiations on a free-trade agreement. Ukraine remains the only European country with which Serbia does not have such an arrangement. Tariff reductions and customs simplification could strengthen Serbian exports of fertilisers, tyres, electrical equipment and food products, while improving Serbian manufacturers’ access to Ukrainian industrial inputs used in steel, metal processing, chemicals and packaging.

The timing also presents a logistics challenge. Intensified attacks on Ukrainian Black Sea ports have redirected more agricultural and industrial cargo towards road, rail and Danube routes. Those alternatives are now subject to the same low-water conditions affecting Serbian supply chains. Serbia’s possible participation in Ukrainian reconstruction extends beyond merchandise trade. Domestic construction and engineering companies, cable and electrical-equipment manufacturers, fertiliser producers and transport operators could participate in future infrastructure and industrial rehabilitation programmes.

Financing and payment security for such activity would depend substantially on the European Union, European Bank for Reconstruction and Development, World Bank and export-credit institutions.

Energy cooperation forms another part of the diversification agenda. Serbia has traditionally sourced more than 80% of its gas from Russia, but is seeking approximately 500 million cubic metres annually through European joint-purchasing arrangements, alongside Azerbaijani supplies through Bulgaria and future LNG access through Greece and North Macedonia. Belgrade’s commercial diplomacy therefore intersects directly with energy costs, the unresolved NIS ownership process and Serbia’s continued need for competitively priced Russian gas.

Budget deficit remains below annual ceiling

Serbia recorded a republican-budget deficit of approximately RSD51.6 billion, or €440 million, in the first six months of 2026. The result is significantly below the full-year budget ceiling of RSD337 billion, representing only around 15% of the authorised annual deficit. The fiscal position strengthened during the second quarter. The deficit stood at RSD97.9 billion after the first three months and RSD99.7 billion after five months, indicating that June generated a material surplus as corporate-tax receipts, VAT, excise revenues and the timing of capital expenditure affected the monthly balance.

The 2026 budget provides for RSD2.415 trillion of revenue and RSD2.752 trillion of expenditure, with the deficit limited to 3% of GDP. Capital expenditure remains unusually high at approximately 6.7% of GDP, reflecting commitments linked to Expo 2027, railways, roads, energy and urban development.

The first-half fiscal result provides some room to absorb energy-support measures and drought-related expenses without immediately breaching the budget framework. At the same time, the government must finance the Expo construction programme, preserve strategic fuel inventories, support EPS and potentially provide capital linked to the NIS ownership restructuring.

Public debt and reserves provide financial buffers

Preliminary Public Debt Administration data placed sovereign liabilities at approximately €41.3 billion in mid-July, equivalent to roughly 42–44% of GDP, depending on the GDP base and treatment of general-government liabilities. The debt ratio remains moderate by European standards, although the nominal stock has increased following international bond issuance and project-loan drawdowns.

Foreign-currency exposure remains the principal vulnerability. Almost four-fifths of public debt is denominated outside the dinar, with the euro representing the largest component. This leaves public finances sensitive to exchange-rate movements and international refinancing conditions even as the National Bank of Serbia maintains a tightly managed dinar. Non-residents held approximately RSD101.3 billion of dinar-denominated government securities at the end of March, representing 12.9% of the local-currency portfolio.

Foreign participation has recovered but remains well below levels around 2019, when international investors had a considerably larger presence in the domestic dinar-debt market. The next monetary-policy meeting is scheduled for 13 August. The reference interest rate has remained at 5.75% throughout 2026, while annual inflation declined to 2.7% in June.

Drought-related food inflation, expensive imported electricity and higher road and rail freight costs complicate the outlook for monetary easing despite the lower headline inflation rate. Gross foreign-exchange reserves reached approximately €29.61 billion at the end of June, covering 6.8 months of imports and equivalent to 164% of the M1 money supply. The reserve stock represents Serbia’s principal buffer against energy-import shocks, financial-market volatility and pressure on the domestic currency.

Foreign investment inflows fall as profit transfers increase

Foreign direct investment amounted to approximately €600 million in the first four months of 2026, more than 40% below the comparable period of 2025. Meanwhile, foreign-owned companies transferred approximately €1.3 billion abroad through dividends, reinvested-earnings adjustments and other investment-income channels.

The figures do not constitute conventional capital flight because mature foreign-owned companies routinely distribute accumulated profits and such transfers can occur alongside new investment. Nevertheless, the difference between new FDI and outbound investment income is significant as Serbia moves from an investment model heavily dependent on new greenfield projects toward one involving a larger base of established foreign-owned companies distributing accumulated earnings. This increases the importance of the quality of reinvestment. Government subsidies are increasingly relevant to technology transfer, export capacity, supplier development and recurring domestic capital expenditure rather than employment creation alone.

Proposed corporate tax reforms associated with Serbia’s eventual EU accession would also make certain cross-border profit-transfer structures more difficult without evidence that applicable tax obligations have been met. Because implementation of the principal measures is linked to EU membership, the provisions would not immediately increase tax revenues. They nevertheless establish a future framework for tighter control of related-party payments, withholding taxes and beneficial-ownership documentation.

Major companies report continued revenue growth

Delta Holding generated €564 million of revenue and €70 million of EBITDA in the first half, representing increases of 7.2% and 6.1%, respectively. The group paid approximately €126 million into Serbia’s budget and expects full-year revenue above €1.3 billion, with EBITDA approaching €170 million. Growth was recorded across distribution, logistics, real estate, hospitality, automotive operations and agriculture. Delta DMD increased revenue by 14%, while the reconstructed Sava Centar hosted more than 230 events and over 1 million visitors during the first six months.

Delta’s EBITDA margin declined slightly to approximately 12.4%, as expansion-related expenses absorbed part of the revenue growth. New hotels, logistics capacity, agricultural modernisation and e-commerce investments are requiring capital before reaching mature returns.

Atlantic Grupa’s Serbian distribution operation generated €159.9 million of first-half revenue, an increase of 9.1%, making Serbia the company’s largest distribution market. Coffee, led by Grand Kafa and Barcaffè, remained Atlantic Grupa’s largest product category across its overall business, generating €156.3 million of revenue. A1 Serbia reported turnover of €224 million, compared with €200 million a year earlier. EBITDA increased from €77 million to €82 million, while capital expenditure remained at €21 million.

EBIT declined from €31 million to €28 million, indicating that depreciation and investment-related charges increased despite operating revenue and EBITDA growth. The company results show continued activity in household consumption, telecommunications, hospitality and distribution, while higher labour, financing, equipment and logistics costs are limiting the conversion of revenue growth into wider margins.

Agricultural output faces new pressure from extreme heat

Serbia entered the 2026 agricultural season expecting a wheat harvest of 3.845 million tonnes, 4.5% above 2025. Raspberry production was forecast to increase by 14.6%, while sour-cherry production was expected to rise by 96.3%. Spring planting figures were less favourable for several major crops. Maize acreage declined 3.8%, soybean acreage fell 7.5% and sugar-beet acreage dropped 5.7%. Sunflower acreage increased by 3.5%. Those estimates were established before the most severe phase of the summer heat. Persistent temperatures close to 40°C and limited rainfall are now creating risks for maize, soybeans and sugar beet during periods when the crops are particularly sensitive to water availability.

The USDA had previously forecast that Serbia’s maize harvest could recover to approximately 6.7 million tonnes, compared with only 3.5 million tonnes in the previous weak season. A further poor maize harvest would tighten livestock-feed availability, reduce export volumes and weaken earnings for grain traders, storage operators and inland ports. Wheat provides some protection because harvesting was completed before the most severe August conditions. Disruption in the Black Sea region could also support export prices. Transporting agricultural surpluses remains a challenge while Danube vessels continue operating with loads substantially below their normal capacity.