This article examines the role of ethnicity and ethnic parties as stabilizing factors in Southeast European party systems. It compares two ethnically divided countries in Southeast Europe: Bosnia and Herzegovina, where ethnic identities that form the political cleavage are firm, and Montenegro, where they are malleable. Theoretically, it addresses the debate between scholars who either find stability or instability in East European post-communist party systems. The article traces the role of ethnicity in the formation and development of electoral contests and compares the two cases by utilizing measures of block volatility, based on analysis of official electoral data. We argue that party systems in ethnically diverse countries are stable at the subsystems level, but unstable within them. In BiH, firm ethnic identity stabilizes the party system by limiting competition between blocks, leading to closure. Malleable ethnic identity in Montenegro opens competition to non-ethnic parties seeking to bridge ethnic divisions, leading to more instability. We find that party system dynamics in ethnically divided new democracies depend on identity rigidity and cleavage salience, in addition to levels of heterogeneity.