DAS STEPHENS REVIEWS RELATIONSHIP, URGES CROATIA'S

C O N F I D E N T I A L ZAGREB 001277

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E.O. 12958: DECL: 07/09/2014
TAGS: PREL PGOV EFIN MASS KAWC HR NATO
SUBJECT: DAS STEPHENS REVIEWS RELATIONSHIP, URGES CROATIA'S
REGIONAL ENGAGEMENT


Classified By: PolOff Justin Friedman, reasons 1.5 (b and d)

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


1. (C) During her June 28-30 visit to Zagreb, EUR DAS
Kathleen Stephens reviewed developments in our bilateral
relationship. Satisfaction with the NATO Istanbul Summit was
an important theme. Government interlocutors agreed that
progress on refugee returns and the search for Gotovina must
continue and intensify. The GOC reaffirmed its recognition
of the special obligations it has in the region. DAS
Stephens reinforced our continued expectation that the
government move toward signing an Article 98 Agreement and
provide increased support for the new government of Iraq.
Government officials described how EU accession was helping
spur economic reforms. End Summary.

NATO - GOT WHAT WAS WANTED AT ISTANBUL
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2. (C) President Mesic told DAS Stephens he was pleased that
the Istanbul Summit had gone as expected. Although the press
had commented negatively about the length of his meeting with
President Bush (one paper had it at 28 seconds),Mesic said
he was satisfied. FM Zuzul also expressed satisfaction in
his meeting with DAS Stephens, noting the Summit Communique
had given Croatia a mechanism for advancing its own
candidacy, giving Croatia greater influence over the tempo of
its approach. He said now that Croatia had the chair of the
Adriatic Charter (A3) for the next six months, the A3 would
be priority number one. Commenting on the wide political
consensus in Croatia for pursuing NATO membership, Zuzul
joked that now the opposition parties were criticizing the
HDZ government for not advancing Croatia's candidacy fast
enough.

NO MOVEMENT ON ARTICLE 98
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3. (C) DAS Stephens strongly urged FM Zuzul to move forward
on our long-stalled discussion of an Article 98 agreement,
noting that the lack of an agreement constrains our ability
to assist Croatia to make progress on its NATO Membership
Action Plan. Zuzul said the GoC cannot move on Article 98,
as it would have serious consequences for Croatia's relations
with the EU. He said he had told both Secretary Powell and
Secretary Rumsfeld that while Croatia understands the U.S.

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need for an agreement, there would have to be a softening of
the EU's anti-Article 98 stance before Croatia could make a
move. Zuzul added that UK Minister for Enlargement Dennis
McShane had told him that while London was not firmly with
the EU position on Article 98, it was not prepared to protect
Croatia in Brussels if it signed an agreement with the U.S.

RECOGNIZING INTERIM IRAQ AUTHORITY
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4. (C) In her meetings with Mesic and Zuzul, DAS Stephens
urged the GoC to join with other leading democracies in
supporting the democratic transition in Iraq. President
Mesic agreed that it was necessary to send a message of
tolerance, adding that the UN must play a role, which Croatia
would support. FM Zuzul responded that the GoC will try to
do more in Iraq including putting together a civilian medical
team together with Macedonia and Albania to provide care to
Iraqi civilians. Zuzul said that a statement welcoming the
Transitional Authority would be issued that same day. He
said Croatia wanted to be more diplomatically active in Iraq,
adding that the GoC would create an Ambassador-at-large
position with responsibility for Iraq.

MORE FOR AFGHANISTAN
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5. (C) Zuzul said he believed that President Mesic would not
oppose expanding GoC efforts in Afghanistan. Zuzul said the
GoC was working with Germany with an eye toward contributing
to a provincial reconstruction team. (Note: Croatian troops
are in their third rotation in Afghanistan. End Note.)

ICTY COOPERATION
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6. (C) DAS Stephens welcomed Croatia's improved cooperation
with the ICTY but cautioned that the Gotovina issue would
continue to be an obstacle to Croatia's integration into
Euro-Atlantic institutions. The Minister of Justice said
that Carla del Ponte had given Croatia six months to find
Gotovina. State Prosecutor Bajic said he was pleased with


the cooperation the police and intelligence services were
providing in the search for Gotovina. He noted that no one
was saying that Gotovina was not in Croatia any more, and
that his goal was to find Gotovina, regardless of where he
might be.

REGIONAL ISSUES
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7. (C) DAS Stephens observed that many leaders in the region
are now looking to Croatia as a positive model to emulate on
a broad range of issues including ICTY cooperation. She
suggested that it was time for the GoC to start playing a
more active role in South Central Europe. Zuzul responded
that for obvious reasons, the GoC had been reluctant to be
seen as playing a too-aggressive role in the region. The GoC
was now prepared to do more. The Belgrade-Split rail
connection had recently reopened, and the SaM was now talking
seriously about replacing military with police to patrol the
Croatian border.


8. (C) Similarly, Zuzul said that Croatia had had a go-slow
policy with KOSOVO. However, Croatia had historically good
connections to KOSOVO and many Croatian businesses were eager
to exploit their ties with Kosovar firms. Zuzul offered DAS
Stephens to use his good offices to provide a back channel to
the KOSOVO leadership. He said he was ready to make a
similar offer to the EU and UN, but would proceed cautiously
to avoid giving Belgrade the impression that Croatia favored
the Kosovars. DAS Stephens thanked Zuzul for the offer and
urged that the GoC could best help by reinforcing our message
about standards. Our core standard was that KOSOVO become a
place where non-ethnic Albanians (e.g., Serbs) could live
safely. Only when that was in place could the status of
KOSOVO be taken up. Zuzul agreed, as he was concerned that
the status quo could not be sustained and should not be the
objective of the international community.


9. (SBU) Mesic welcomed the Serbian election results and
planned to attend President-elect Tadic's inauguration. (In
the end, only FM Zuzul attended the ceremony, both Mesic and
Sanader's offices announcing that scheduling conflicts
prevented their attendance.)

IPR MOU
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10. (SBU) Zuzul told DAS Stephens that the GOC is finally
ready to completely clarify the IPR MOU implementation.
(Note: there are two laws that need to be amended to bring
the MOU into effect -- the Patent Law and the Drug Law. The
Minister of Science has promised to facilitate the amendments
to the Patent Law, while the Minister of Health has called
such amendments "complicated." End note.)

EU ACCESSION IMPETUS FOR REFORM
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11. (U) Martina Dalic, State Secretary of the Ministry of
Finance, described reforms needed for EU accession as the
number one priority. They include tackling the external debt
problem and the internal reforms needed for accession.


12. (SBU) The Ministry is combing the tax code to close
loopholes and remove senseless exemptions. The purpose of
these changes is not so much to produce revenue as to help
create a more transparent system, with which it would be
easier to comply. More emphasis would be put on collection.
The Ministry had drafted a proposal to cut income and profit
taxes. Longer term, as spending is ratcheted down, the GOC
wants to cut payroll taxes to improve competitiveness.
Overall, the government needed to be downsized to "provide a
space for the private sector."


13. (SBU) When Ambassador Frank asked about the
privatization process, Dalic noted that the privatized
sectors of the economy were clearly the most successful.
Privatization was necessary for the further development of
the energy and tourism sectors. Dalic also discussed the
concept of Public-Private Partnerships, which she felt could
be useful in bringing managerial skills from the private
sector to struggling public companies when "local problems"
prevented a traditional privatization.

PRESS INTERVIEW
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14. (U) DAS Stephens' interview with Bruno Lopandic, foreign
affairs correspondent of state-owned "Vjesnik," ran July 2
under the headline "We expect Croatia's stronger engagement


in Iraq." Regarding Croatia's reluctance to sign an Article
98 Agreement, Stephens recalled the position of the HDZ
during the election campaign, and regretted that "time had
not been found yet (for the government) to implement this."


15. (U) The following day, "Vjesnik" ran a commentary by
Lopandic in which he lamented, "no matter how hard the
authorities are trying to prove otherwise, there is no
denying that relations between the two countries have
deteriorated...Croatia still has not learned the importance
of keeping its word. The Racan government first said a
secret 'maybe' with regard to Iraq that was followed by a

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public 'no.' The HDZ, on the other hand, made all kinds of
promises when it was in the opposition but once it was in the
ruling party, called upon official Washington to be
understanding because it could not fulfill U.S.
expectations." Other media also picked up on the theme that
the USG has not let the HDZ off the hook on either Article 98
or Iraq.

CONCLUSION
--------------


16. (SBU) DAS Stephens' visit was extremely successful in
pressing home the message that the U.S. is a firm friend of
Croatia, but that it expects Croatia to live up to its
obligations, be they to fulfill promises on Article 98 or to
bring Gotovina to justice. The GOC also made clear that it
is serious about completing Croatia's pro-NATO, pro-European
orientation.

DAS Stephens has not cleared this message.
FRANK


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