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Identifier
Created
Classification
Origin
03ZAGREB579
2003-03-14 17:14:00
CONFIDENTIAL
Embassy Zagreb
Cable title:  

IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ

Tags:   ECON  MARR  HR  IZ 
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                       CONFIDENTIAL    

PAGE 02        ZAGREB  00579  01 OF 03  141724Z
						C O N F I D E N T I A L SECTION 01 OF 03 ZAGREB 000579 

SIPDIS

E.O. 12958: DECL: 03/07/2013
TAGS: ECON MARR HR MARR HR MARR HR IZ IZECON IZECON
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ

CLASSIFIED BY: ECONOMIC OFFICER ISABELLA DETWILER, REASONS 1.5 (B AND D
)

-------
SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 03 ZAGREB 000579

SIPDIS

E.O. 12958: DECL: 03/07/2013
TAGS: ECON MARR HR MARR HR MARR HR IZ IZECON IZECON
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ

CLASSIFIED BY: ECONOMIC OFFICER ISABELLA DETWILER, REASONS 1.5 (B AND D
)

--------------
SUMMARY
--------------


1. (SBU) THERE IS NO REAL CONSENSUS ON HOW HOSTILITIES IN
IRAQ COULD HURT THE CROATIAN ECONOMY. THE LOCAL MEDIA IS
FULL OF SPECULATION, HOWEVER, AND THE COMMENTARY AND
"ANALYIS" OFTEN BETRAY FAMILIAR -- ANTI-WAR -- BIASES.
TOURISM IS THE SINGLE LARGEST SOURCE OF FOREIGN REVENUE FOR
CROATIA, AND CONTRIBUTES ABOUT 20 PERCENT OF THE GDP. MOST
BELIEVE THAT HOSTILITIES IN THE GULF WOULD NOT DIRECTLY
AFFECT CROATIAN TOURISM. THERE ARE EVEN SOME WHO BELIEVE
HOSTILITIES WOULD HELP CROATIA BY KEEPING EUROPEAN TOURISTS,
AFRAID TO TRAVEL FAR, CLOSE TO HOME AND ON CROATIAN BEACHES.
HOWEVER, A TERRORIST ACT IN EUROPE -- OR WORSE, IN CROATIA
ITSELF -- COULD HAVE A DISASTEROUS NEGATIVE EFFECT ON
TOURISM AND THE ECONOMY.


2. (SBU) MOST LOCAL ECONOMISTS BELIEVE THAT, WHILE A
PROLONGED PERIOD OF HIGHER OIL PRICES WOULD ALMOST CERTAINLY
HAVE AN EFFECT ON THE ECONOMY, A SHORT BUMP-UP IN PRICES
WOULD HAVE ONLY A MARGINAL EFFECT. PRE-WAR JITTERS MAY ALSO
HAVE A HARD-TO-MEASURE EFFECT ON CONSUMPTION AND EXPORTS.
CONFIDENTIAL

PAGE 03 ZAGREB 00579 01 OF 03 141724Z
END SUMMARY.

--------------
EFFECT ON TOURISM
--------------


3. (U) THE HEAD OF THE CROATIAN EMPLOYERS' ASSOCIATION
SPECULATED THAT, IF SABOTAGE OR TERRORISM OCCURRED ANYWHERE
IN EUROPE, TOURISM IN CROATIA COULD SUFFER. HE CITED AS AN
EXTREME EXAMPLE THE SITUATION A FEW YEARS AGO WHEN THE NATO
CAMPAIGN OVER NEARBY KOSOVO WAS LAUNCHED AND WESTERN EUROPEAN
COMPANIES SHUNNED CROATIA AS PART OF AN "UNSTABLE AREA."
CRUISE SHIPS HAD PROBLEMS SECURING INSURANCE FOR ENTERING A
SUPPOSED WAR ZONE.

4 (C) REVENUES FROM TOURISM ACCOUNTED FOR 18-20 PERCENT OF
CROATIA'S GDP IN 2002. DESPITE UNCERTAINTIES OVER IRAQ,

INITIAL BOOKINGS FOR THE 2003 SEASON HAVE BEEN EXCELLENT.
ADDITIONAL BORDER CONTROLS COULD SLOW DOWN TRAVEL VIA
PERSONAL VEHICLES, WHICH IS HOW MOST TOURISTS COME TO
CROATIA. HOWEVER, "TIGHTER BORDER CONTROLS" HAVE SUPPOSEDLY
BEEN IN PLACE SINCE SEPTEMBER 11, WITH LITTLE OBVIOUS ADVERSE
EFFECT. NAYSAYERS SPECULATE THAT ALLOWING FOR PASSAGE OF
COALITION AIRCRAFT COULD ALTER FLIGHT SCHEDULES, AND AIRFARES
COULD INCREASE IF INSURANCE FEES GO UP.


5. (U) THEN THERE IS THE OPPOSITE POINT OF VIEW. MINISTER
OF ECONOMY LJUBO JURCIC RECENTLY SAID IN AN INTERVIEW WITH
BUSINESS WEEKLY "POSLOVNI TJEDNIK" THAT A WAR IN IRAQ COULD
ACTUALLY HAVE POSITIVE EFFECTS ON CROATIA,S ECONOMY,
PARTICULARLY ON TOURISM. "IT IS EXPECTED THAT EUROPEANS WILL
CONFIDENTIAL

PAGE 04 ZAGREB 00579 01 OF 03 141724Z
CHOOSE TO TRAVEL TO CLOSER DESTINATIONS RATHER THAN TO ASIA
AND OTHER DISTANT PLACES," HE SAID. HE ADDED THAT THE REST
OF CROATIA,S ECONOMY HAD LIMITED TIES WITH IRAQ. INDEED,
DESPITE DIRE PREDICTIONS OF A CRISIS IN TOURISM
POST-SEPTEMBER 11, CROATIA HAD ITS BEST TOURISM SEASON IN
OVER A DECADE LAST YEAR, ALBEIT ALMOST A YEAR AFTER THE
ATTACKS. JURCIC'S OPTIMISTIC COMMENTS WERE ECHOED RECENTLY
BY PRESIDENT MESIC IN THE DAILY, "VECERNI LIST."

--------------
PROBLEMS IN THE NEIGHBORHOOD
--------------


6. (C) IN A FEBRUARY 25 MEETING WITH THE AMBASSADOR, DEFENSE
MINISTER ZELJKA ANTUNOVIC EXPRESSED CONCERN ABOUT CROATIA'S
VULNERABILITY TO REACTIONS EMANATING FROM NEIGHBORING BOSNIA
AND HERZEGOVINA (BIH) TO HOSTILITIES IN IRAQ. SHE WORRIED
THAT THE GOC DECISION TO PROVIDE LIMITED LOGISTICAL SUPPORT
FOR POTENTIAL ACTION IN IRAQ COULD MAKE CROATIA MORE OF A
TARGET.


7. (U) THESE CONCERNS ARE ECHOED IN THE PRESS BY A NUMBER OF
CROATIAN ACADEMICS AND COMMENTATORS WHO POINT TO THE PRESENCE
OF AL-QAIDA TERRORIST CELLS IN BIH. "THEY WILL PRIMARILY
TARGET COUNTRIES SUCH AS GREAT BRITAIN AND THE U.S.," WROTE

CONFIDENTIAL

CONFIDENTIAL PTQ7299

PAGE 01 ZAGREB 00579 02 OF 03 141724Z
ACTION EUR-00

INFO LOG-00 NP-00 AF-00 AGRE-00 AID-00 ACQ-00 CEA-01
CIAE-00 CTME-00 INL-00 DODE-00 DOTE-00 SRPP-00 EB-00
EXIM-01 E-00 FAAE-00 FBIE-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 IO-00 ITC-01 LAB-01 L-00 VCE-00
AC-01 NEA-00 NSAE-00 NSCE-00 OMB-01 OPIC-01 PM-00
ACE-00 SP-00 IRM-00 SSO-00 SS-00 STR-00 USIE-00
EPAE-00 PMB-00 PRM-00 DRL-01 G-00 NFAT-00 SAS-00
SWCI-00 /009W
-------------- 448E13 141739Z /38
R 141714Z MAR 03
FM AMEMBASSY ZAGREB
TO SECSTATE WASHDC 9709
INFO AMEMBASSY BELGRADE
AMEMBASSY BUCHAREST
AMEMBASSY BUDAPEST
AMEMBASSY LJUBLJANA
AMEMBASSY ROME
AMEMBASSY SARAJEVO
AMEMBASSY SKOPJE
AMEMBASSY SOFIA
AMEMBASSY TIRANA
AMEMBASSY VIENNA
USOFFICE PRISTINA
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHDC

CONFIDENTIAL

PAGE 02 ZAGREB 00579 02 OF 03 141724Z
C O N F I D E N T I A L SECTION 02 OF 03 ZAGREB 000579

SIPDIS

E.O. 12958: DECL: 03/07/2013
TAGS: ECON MARR HR MARR HR MARR HR IZ IZECON IZECON
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ

ONE CROATIAN POLITICAL SCIENTIST, "BUT STRONG SECURITY
MEASURES THERE COULD EASILY DIVERT THEM TO OTHER COUNTRIES
SUCH AS CROATIA, NOW THAT IT HAS SIGNED UP TO THE VILNIUS
GROUP STATEMENT ON IRAQ.8

--------------
OIL RESERVES
--------------


8. (SBU) ACCORDING TO THE MINISTRY OF ECONOMY, IF THE PRICE
OF OIL INCREASES DRAMATICALLY BECAUSE OF HOSTILITIES IN IRAQ,
THE MINISTRY WOULD INTRODUCE MEASURES TO CUSHION A PRICE
SHOCK, SUCH AS CUTTING TAXES ON PETROLEUM, WHICH MAKE UP A
SUBSTANTIAL PORTION OF THE PRICE. THIS OF COURSE WOULD HAVE
AN ADVERSE EFFECT ON THE BUDGET, ALREADY UNDER SEVERE
PRESSURE ON BOTH THE REVENUE AND EXPENDITURE SIDES. MANY
OBSERVERS ALREADY DOUBT THAT THE GOC WILL MEET THE TARGETS IN
ITS PRECAUTIONARY IMF AGREEMENT.


9. (U) ON FEBRUARY 20, THE GOC ADOPTED A "DECREE ON
MANDATORY SUPPLIES OF OIL AND PETROLEUM PRODUCTS" AIMED AT
BULKING UP THE OIL RESERVES FROM A 15-DAY TO THREE-MONTH
SUPPLY. WHILE THE PRESS LINKED THIS MEASURE TO THE
POSSIBILITY OF A WAR IN THE GULF, IN REALITY THE DECREE WAS
THE RESULT OF A LONG-PLANNED EFFORT TO MAKE CROATIAN
LEGISLATION TRACK WITH EU REQUIREMENTS, ACCORDING TO THE HEAD
CONFIDENTIAL

PAGE 03 ZAGREB 00579 02 OF 03 141724Z
OF THE ENERGY DEPARTMENT AT THE MINISTRY OF ECONOMY.


10. (U) THE EFFECT OF THE DECREE IS GRADUAL: MAJOR IMPORTERS
(INA, THE STATE PETROLEUM COMPANY, CONTROLS ABOUT 85-90
PERCENT OF THE MARKET) MUST HAVE IN "STRATEGIC RESERVES" THE
EQUIVALENT OF 10 PERCENT OF THE PREVIOUS YEAR'S IMPORTS BY
APRIL 1. THIS NUMBER WILL INCREASE TO 15 PERCENT BY JANUARY
1, 2004. NOT UNTIL 2006 WILL COMPANIES BE REQUIRED TO
MAINTAIN 25 PERCENT OF THEIR PREVIOUS YEAR'S IMPORTS -- I.E.,
A "THREE MONTH SUPPLY." THE PRODUCTION DEPARTMENT AT INA
TOLD US THAT THE COMPANY HAD BEGUN BUILDING UP ITS STOCKS
THREE MONTHS AGO, AND WAS CLOSE TO THE APRIL TARGET ALREADY.
INA IS ALSO ABLE TO COUNT A CERTAIN AMOUNT OF CROATIA'S
PROVEN OIL RESERVES TOWARDS ITS STOCKS. THEREFORE, IT DOES
NOT HAVE TO GO OUT AND BUY LARGE STOCKS OF PETROLEUM AT
TODAY'S HIGH PRICES.

--------------
WORST CASE SCENARIOS
--------------


11. (U) INDEPENDENT ECONOMISTS HERE AGREE THAT VOLATILITY IN
WORLD OIL PRICES COULD HAVE ADVERSE EFFECTS ON CROATIA,S
ECONOMY. SUSTAINED HIGHER OIL PRICES COULD BUMP UP INFLATION
AND PUT DOWNWARD PRESSURE ON THE CROATIAN KUNA. DEPENDING ON
THE DURATION OF A MILITARY CAMPAIGN, THE IMPLEMENTATION OF
SECURITY MEASURES COULD PUT ADDED PRESSURE ON THE STATE
BUDGET BY LOWERING REVENUES FROM TOURISM. ACCORDING TO ONE
ESTIMATE PUT OUT BY A GROUP OF BUSINESSES, IF THE WAR IN IRAQ
EXTENDS LONGER THAN TWO TO THREE MONTHS THE STATE BUDGET
COULD SUFFER $200 MILLION IN LOSSES AND PROJECTED GDP GROWTH
CONFIDENTIAL

PAGE 04 ZAGREB 00579 02 OF 03 141724Z
IN 2003 COULD BE TRIMMED BY 0.8 PERCENT.

--------------
EFFECTS ON OTHER BUSINESSES LIMITED
--------------


12. (U) SOME 53 PERCENT OF CROATIA,S EXPORTS IN 2002 WENT
TO THE EU, WHICH IS NOT EXPECTED TO BE DIRECTLY AFFECTED BY
THE CONFLICT. A RECENT ARTICLE CONTAINED INTERVIEWS WITH
SEVERAL EXPORTERS. A FEW CROATIAN EXPORTERS NOTED PRE-WAR
CONSUMER NERVOUSNESS IN OTHER MARKETS, SUCH AS BRITAIN AND
TURKEY. NO ONE DISCUSSED -- OR THE JOURNALIST DID NOT REPORT
-- THE POSSIBILITY OF EXPANDED EXPORT OPPORTUNITIES IN AN
IRAQ UNDERGOING RECONSTRUCTION AND RENOVATION AFTER OVER A
DECADE OF SANCTIONS.


13. (C) KONCAR, A STATE-OWNED MANUFACTURING AND ELECTRONICS
FIRM THAT EXPORTS TO IRAQ UNDER THE UN ADMINISTERED
PROCUREMENT PROGRAM, COULD ONLY IDENTIFY EVENTUAL, POSSIBLE
RAW MATERIAL PRICE INCREASES AS A NEGATIVE. ANOTHER COMPANY
THAT EXPORTS DREDGING EQUIPMENT SAID A 26 MILLION EURO
CONTRACT THAT IT HAD NEGOTIATED WITH A BELGIAN PARTNER AND
THE IRAQ GOVERNMENT LAST SUMMER WAS EXPERIENCING DELAYS IN
BEING FINALIZED. HOWEVER, PRIVATELY MFA OFFICIALS HAVE
EXPRESSED HOPE THAT CROATIAN COMPANIES WOULD BENEFIT FROM

CONFIDENTIAL

CONFIDENTIAL PTQ7300

PAGE 01 ZAGREB 00579 03 OF 03 141725Z
ACTION EUR-00

INFO LOG-00 NP-00 AF-00 AGRE-00 AID-00 ACQ-00 CEA-01
CIAE-00 CTME-00 INL-00 DODE-00 DOTE-00 SRPP-00 EB-00
EXIM-01 E-00 FAAE-00 FBIE-00 VC-00 FRB-00 H-01
TEDE-00 INR-00 IO-00 ITC-01 LAB-01 L-00 VCE-00
AC-01 NEA-00 DCP-01 NSAE-00 NSCE-00 OMB-01 DHS-00
OPIC-01 PM-00 ACE-00 SP-00 SSO-00 SS-00 STR-00
USIE-00 EPAE-00 PMB-00 PRM-00 DRL-01 G-00 NFAT-00
SAS-00 SWCI-00 /010W
-------------- 448E22 141739Z /38
R 141714Z MAR 03
FM AMEMBASSY ZAGREB
TO SECSTATE WASHDC 9710
INFO AMEMBASSY BELGRADE
AMEMBASSY BUCHAREST
AMEMBASSY BUDAPEST
AMEMBASSY LJUBLJANA
AMEMBASSY ROME
AMEMBASSY SARAJEVO
AMEMBASSY SKOPJE
AMEMBASSY SOFIA
AMEMBASSY TIRANA
AMEMBASSY VIENNA
USOFFICE PRISTINA
DEPT OF COMMERCE WASHDC
DEPT OF TREASURY WASHDC

CONFIDENTIAL

PAGE 02 ZAGREB 00579 03 OF 03 141725Z
C O N F I D E N T I A L SECTION 03 OF 03 ZAGREB 000579

SIPDIS

E.O. 12958: DECL: 03/07/2013
TAGS: ECON MARR HR MARR HR MARR HR IZ IZECON IZECON
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ

IRAQ'S POST-WAR CONSTRUCTION.


14. (SBU) A CONTACT AT THE MINISTRY OF FINANCE TOLD US THAT
THE GOC HAS LITTLE OR NO OFFICIAL DEBT OUTSTANDING WITH IRAQ.
A NUMBER OF CROATIAN COMPANIES HAVE BEEN OWED MONEY SINCE
BEFORE THE GULF WAR, BUT HAVE BEEN COLLECTING THEIR DEBT IN
INCREMENTS OVER THE YEARS THROUGH THE UN COMPENSATION
COMMISSION PROCESS. OUR CONTACT FELT THAT WHILE COLLECTIONS
WERE A FRACTION OF CLAIMS, THEY MAY WELL APPROACH THE REAL
VALUE OF WHAT THE COMPANIES COULD LEGITIMATELY EXPECT.

--------------
CENTRAL BANK RUNS THE NUMBERS
--------------


15. (C) THE HEAD OF THE RESEARCH DEPARTMENT AT THE CROATIAN
NATIONAL BANK ALSO DISCOUNTS ANY MAJOR EFFECTS ON THE
CROATIAN ECONOMY, AT LEAST IF ANY CONFLICT IS OVER FAIRLY
SOON. FORTUNATELY, INFLATION IS ALREADY RELATIVELY LOW, AND
OIL MAKES UP A FAIRLY SMALL SHARE OF THE TOTAL CONSUMPTION
BASKET. THE NATIONAL BANK BELIEVES THAT IF OIL PRICES
REMAINED AT $30/BARREL FOR A PROLONGED PERIOD (MORE THAN
THREE MONTHS), INFLATION COULD BE BUMPED UP BY A PERCENTAGE
POINT. "THIS WOULDN'T KILL US," OUR NATIONAL BANK
INTERLOCUTOR TOLD US. ALSO, HE RECOGNIZED THAT OIL PRICES
ARE EXPECTED TO FALL SUBSTANTIALLY AFTER THE CONCLUSION OF
CONFIDENTIAL

PAGE 03 ZAGREB 00579 03 OF 03 141725Z
HOSTILITIES.


16. (SBU) THERE WOULD BE A STRONGER NEGATIVE EFFECT ON THE
BALANCE OF PAYMENTS. THE CROATIAN NATIONAL BANK ESTIMATES
THAT THE CURRENT ACCOUNT DEFICIT COULD RISE BY 0.3 TO 0.5
PERCENT OF GDP BECAUSE OF HIGHER OIL PRICES SHOULD PRICES
REMAIN AT $30/BARREL FOR A LONG PERIOD OF TIME.


17. (SBU) THE BANK ALSO TRIED TO LOOK AT THE EFFECT ON
CROATIAN EXPORTS, PRINCIPALLY TO EUROPE, OF A CONFLICT, BUT
THE EFFECTS WERE IMPOSSIBLE TO QUANTIFY. OUR INTERLOCUTOR
SAID IT WAS GENERALLY ACCEPTED THAT PRE-WAR UNCERTAINTIES
WERE DAMPENING GROWTH IN EUROPE AND AROUND THE WORLD.

--------------
COMMENT
--------------


18. (SBU) ALTHOUGH HOSTILITIES IN IRAQ LIKELY WOULD NOT HAVE
A SIGNIFICANT IMPACT ON THE CROATIAN ECONOMY -- AT LEAST AS
LONG AS THEY DO NOT DRAG ON -- THE OFFICIAL AND MEDIA
ANGST-MEISTERS WILL CONTINUE TO PROPAGATE GLOOMY FORECASTS,
MAKE DUBIOUS CONNECTIONS AND PROJECT SCENARIOS TO EXTREMES.
TERRORISM IN EUROPE (OR WORSE, IN THE REGION) AND THE OVERALL
STATE OF EUROPEAN ECONOMIES WOULD MORE SEVERELY AFFECT THE
CROATIAN ECONOMY.
ROSSIN

CONFIDENTIAL

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