* Serbia seeks investment beyond obvious sources
* UAE wants route into EU market before Serbia joins
* Belgrade tries to revive arms industry with UAE funding
* Abu Dhabi extends influence in turbulent Mideast -analyst
By Aleksandar Vasovic and Regan Doherty
BELGRADE/ABU DHABI, Oct 31 (Reuters) - From animal feed tomissiles and loans, Serbia is banking on an unlikely alliancewith the United Arab Emirates to upgrade its vital farmingindustry, revive military production and get badly neededcheaper finance.
For the UAE, the new relationship offers an early back doorroute into the European Union, which Belgrade wants to join, andaccess to the former Yugoslavia's once mighty arms industrywhile much of the Middle East is consumed by unrest or war.
Almost two decades after communist Yugoslavia's violentbreakup, Serbia is struggling with high public debt andunemployment while its manufacturing industry and livingstandards lag way behind the EU's.
Serbia has succeeded in drawing some investment from moreobvious sources such as the EU, its traditional Slavic allyRussia and China, which much of the world is courting.
However, the Socialist-led government's friendship with theGulf came as a surprise. Until last year, Belgrade had onlytoken relations with the UAE and bilateral trade totalled a mere20 million euros ($28 million) in 2012.
Now the talk is of billions of euros in loans andinvestments. "Serbia is diversifying the portfolio of investorsto as many countries as possible... In addition to the EU, wehave Russia with energy deals, China with infrastructureinvestments and now we have the Gulf," said Sasa Djogovic ofBelgrade-based Institute for Market Research.
EYE ON EU MEMBERSHIP
Deputy Prime Minister Aleksandar Vucic said it all startedafter he met Abu Dhabi's crown prince Mohammed bin Zayed AlNahyan over lunch there last year.
"We discussed everything including history and geography andafterwards he walked me to my hotel room and our friendshipbegan," Vucic said in a recent TV broadcast. Very quickly thisfriendship translated into business arrangements.
The first deal was a $40 million equity investment by AbuDhabi's Etihad airline in Serbia's indebted JAT Airways.
A $400 million sovereign loan for agriculture has beenagreed with the UAE's Development Fund, as well as another $400million deal with the Al Dahra food producer, which wants tolease bankrupt socialist-era farms.
Earlier this month, Vucic announced that the first 100million euro installment of a 200 million UAE loan slated forinvestment in irrigation, would be disbursed soon.
Serbia has also signed memorandums of understanding withseveral UAE companies, including Mubadala, a unit of Abu Dhabi'sinvestment fund, on possible production of microchips andaircraft parts.
Naz Masraff, an analyst with the London-based Eurasia Group,said the UAE's interest was clear. "It is certainly in line withtheir efforts to diversify their investments and increasepresence in Eastern Europe," she said.
UAE firms are also active in property and tourism inneighbouring Montenegro which has begun EU entry negotiations.
Serbia, a country of 7.3 million people, plans to start EUaccession talks in January and hopes to join by 2020. Investingthere offers the UAE a chance of eventual direct access to thehuge EU market before costs rise and red tape descends.
"They (UAE) feel it's better to put up their money now,rather than wait," a Gulf-based diplomat who asked not to benamed told Reuters. "When buying into the EU, there are publicprocurements, procedures, regulatory hurdles ... but dealingwith Serbia now is much easier."
WEAPONS SWEETEN THE DEAL
Unlike other Balkan countries, Serbia has said it does notwant to join NATO, which bombed the country in 1999 to halt itsmilitary operations against ethnic Albanians in Kosovo.
Free of some of the Western alliance's rules andrestrictions on weapons sales, Serbia has more independence inreviving the once flagship defence industry that was brought toits knees by the wars of the 1990s and a United Nations armsembargo. The friendship with the UAE could help those efforts.
Earlier this year Belgrade announced arms deals with theUAE, including exports of armoured personnel carriers and thejoint development of a guided surface-to-surface missile. Inglobal arms trade terms, this business remains modest and theweaponry relatively low-tech, but it has the potential to grow.
"The total value of all the weapons deals (with UAE) so farwould be about 200 million euros," said a defence ministryofficial who asked not to be named. "This cooperation can beextended to various other weapons systems, parts and equipment."
Serbia is also offering trainer and light attack aircraft,along with self-propelled howitzers and artillery ammunition.
Tim Ash, the head of Standard Bank's emerging marketsresearch, said the UAE's interest in the Serbian arms industryand surplus weapons was based on its regional aspirations.
"Abu Dhabi is a major geopolitical player in the Middle Eastand access to arms gives it greater reach and leverage inconflicts in the region, such as in Syria," Ash said.
Serbia, for its part, has sought a long-term, low-interestsovereign loan from the UAE worth between 2 and 3 billion euros.Vucic went to Abu Dhabi on Oct. 26 and Serbian media said theloan, seen as crucial for Serbia's financial stability, would beon the agenda.
Serbia needs fresh funds to prop up its budget and repaysome of its public debt, which is forecast to amount to 65percent of gross domestic product this year. The jobless rate isaround 25 percent, while GDP per capita, at about $5,200, isonly 16 percent of the EU average.
It is also seeking a new loan deal with the InternationalMonetary Fund to reassure investors that its finances will bestabilised. The IMF ended a previous 1 billion euro deal withBelgrade last year, blaming inflated state spending and debt.
BUSINESS AND POPULISM
The government said the UAE loan would be spent oninvestment and debt repayment, but analysts fear it may ease upon unpopular economic reforms. "The key here will be whether the... UAE loan will tempt the Serbian government to get complacentabout reforms," Masraff said.
However, she added: "The government will still need to tapinto international markets in 2014 and a commitment to reformwill also be key for securing an IMF deal."
Serbian analysts say Vucic's Progressive party would benefitif the UAE relationship produces significant economic results,and it could go for early elections next year, hoping to cementits hold on power.
Recent opinion polls give the party unprecedented support ofmore than 40 percent. However, analysts say this could melt awaywhen the government imposes planned austerity measures,including wage cuts and a shrinking of the public sector.
Any possibility of new investment from the UAE and more jobscould become the trump election card, said Milos Damnjanovic, ananalyst with the South East European Studies programme atBritain's Oxford University.
"There's a political component in it. It has been used forpopulist purposes," he said.
- Politics & Government