Twenty years after the bloody breakup of the former Yugoslavia, Serbia and Croatia are at war again, albeit a cold one.

The two countries’ relations hit a new low this week, with an overblown spy affair dominating the headlines in both Belgrade and Zagreb.

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The story erupted last weekend, with the spectacular arrest of an alleged Croatian spy after what was described as a months-long coordinated effort by Serbian security services. At first, not much was revealed except that the man, a former military officer, was caught just as he was about to defect to Croatia.

As more details emerged, it turned out that the suspect, a retired low-ranking officer of the Serbian rebel army in the 1991-1995 war, was indeed spying for the Croats, supplying them with information about his former colleagues.

This reportedly led to several war crimes indictments by Croatian courts.

On Tuesday the accused, 56-year old Cedo Colovic, pleaded guilty in what was probably one of the shortest trials in Serbia’s history. He was sentenced to three years in prison, the minimum penalty for espionage under Serbian law.

The Croatian government, which is counting its last days before 11 September parliamentary elections, denied any links to Colovic.

“This looks like a script from Communist-era propaganda films”, said Croatian foreign minister Miro Kovac in a televised interview on Wednesday. He also accused Serbia of launching a “diplomatic aggression” against Croatia and warned that “this will not be tolerated”.

Most analysts agree that the spying affair was indeed fabricated, or at least blown out of proportion.

“It seems that the authorities were trying to demonstrate that Serbia still has some teeth left in its jaws”, said Predrag Mihajlovic, the deputy editor-in-chief of Belgrade-based Blic daily newspaper.

Aleksandar Dimitrijevic, a former head of Serbian military intelligence, described the case as “pure media hype”.

But if Serbia pulled this instrument from the Cold War era toolkit, it’s because it has some grounds for feeling victimised.

Earlier this year, Croatia blocked the opening of two chapters of EU enlargement talks with Serbia, demanding concessions on several bilateral issues.

The two important chapters were eventually opened in early July, but only after German chancellor Angela Merkel exerted some serious pressure on Zagreb to soften its stance.

Just this week, Croatia’s ruling HDZ party successfully blocked the Serbian Progressive Party, led by Serbian prime minister Aleksandar Vucic, from being admitted to the ranks of European Peoples Party (EPP), the dominant coalition in the European Parliament.

Joining the EPP would significantly boost Vucic’s standing on international scene, where many still eye him with suspicion because of his ultranationalist past.

EU or Russia?

Vucic doesn’t have to worry about polls, since he recently emerged victorious after early elections in May, which he called to consolidate his power. But he didn’t win as much votes as he hoped for, and is now facing a stronger opposition in parliament. Also, the opinion polls do show a slow, but steady decline in his popularity.

Tougher challenges lie ahead. With about €350 in average monthly incomes, Serbia is among the poorest countries in the region. The biggest foreign investor, Italian carmaker Fiat, is reportedly preparing to shut down its only plant next year.

Meanwhile, the International Monetary Fund and The World Bank are demanding more cuts in the public sector, which would add tens of thousands to the army of the unemployed.

Lately, Vucic is finding increasingly difficult to balance between his proclaimed goal of leading Serbia into the EU, while still maintaining good relations with Russia and reigning in domestic nationalists, which demand a pivot towards Moscow.

Russia recently stepped up its efforts to drive a wedge between Serbia and the West. Last week, Russia’s ambassador to Belgrade Aleksandar Chepurin warned of “attempts to create organised chaos in the Balkans, much in the way it was done in Ukraine and the Middle East”.

Vucic also faces a growing protest in Belgrade over government’s plan to build a luxury apartment complex on the city’s waterfront. The project, financed by a shady company from United Arab Emirates, triggered mass demonstrations this summer when several tenants were forcibly removed from the area, and their homes were destroyed. Another big anti-government rally is scheduled for September 29.

Echoing Chepurin’s words, the government claims that the waterfront protests are sponsored by billionaire George Soros and unnamed foreign intelligence agencies in order to start “a colour revolution”.

Patriotic chest-banging

The aim, according to several government officials, is to destabilise Serbia and force it to give up its claims on Kosovo, the predominantly ethnic Albanian former province which declared independence from Serbia after Nato intervention in 1999.

Moreover, Serbia is under increasing efforts to exert pressure on Milorad Dodik, the leader of Serbian statelet in the neighbouring Bosnia-Herzegovina, to give up the idea of organising a referendum on establishing “Serbian Statehood Day”, scheduled for 25 September.

The referendum, which some fear could lead to secession, is branded illegal by Bosnia’s Constitutional Court and most of the international community, but Dodik still plans to proceed, and Vucic is trying to maintain a neutral stance.

With all these problems both at home and abroad, the spy affair was a welcome distraction.

The good news is that Serbo-Croatian cold war has no real potential to ever turn hot. Serbia’s armed forces are in no condition to start any real conflict in the neighbourhood, and Croatia is firmly tethered by Nato. But they can still bark at each other.

In the Western Balkans in general, and in Serbia in particular, patriotic chest-banging almost always works to boost politicians’ popularity.

This article is the second in a series about the situation in Western Balkan countries. The first one was from Croatia, the following one will be from Bosnia