BUSINESS AS "ZUZUL" - FM FACES CORRUPTION SCANDAL

C O N F I D E N T I A L ZAGREB 001936

SIPDIS


DEPT FOR EUR/SCE - KABUMOTO

E.O. 12958: DECL: 11/07/2014
TAGS: PGOV PREL HR
SUBJECT: BUSINESS AS "ZUZUL" - FM FACES CORRUPTION SCANDAL

Classified By: Ambassador Ralph Frank for reasons 1.4 (b) & (d).


1. (C) SUMMARY AND COMMENT: Opposition parliamentarians today
filed a motion for a vote of no-confidence in Foreign
Minister Miomir Zuzul after a week of swirling corruption
accusations. Zuzul has denied all wrongdoing in the business
deal at the center of the controversy, but the chief state
prosecutor has launched an investigation and PM Ivo Sanader
has backed off from earlier unconditional support for his FM,
saying he is "awaiting the facts." While those facts remain
murky, it is clear that attacks on Zuzul are taking a
political toll. With opposition claims that the Serb and
Pensioner parties from the ruling coalition will join the
hunt for Zuzul, Sanader may soon find the scandal too costly
for the GoC and seek the FM's resignation himself.


2. (C) Zuzul has been a consistent friend of the U.S. and
his experience as Croatian Ambassador to the U.S. has
naturally made him one of Post's key interlocutors within the
GoC. Zuzul's pro-American views, however, have become a
liability in the press, and his perceived inability to keep
his business deals separate from his official duties will
likely make him an increasingly ineffective advocate for U.S.
interests. END SUMMARY AND COMMENT.

THE IMOSTROJ/MTS CASE ) CONFLICT OF INTEREST?
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3. (U) The current scandal revolves around the sale of two
companies: Imostroj, a bankrupt arms manufacturer whose
assets were purchased by businessman and Zuzul relative Ivan
Karin at auction in June, and MTS, a consultancy company
owned by FM Zuzul's wife. Zuzul's accusers claim that after
Karin agreed to purchase 50 percent of MTS for 500,000 kuna
(approximately USD 80,000),the FM influenced the GoC's
September decision to write off a substantial portion of
Imostroj's debt. While Zuzul has denied any connection
between the deals, his credibility dropped when the press
immediately disproved his claims that Karin never actually
paid for his share of MTS. The GoC has defended the debt
write off as a simple social measure to allow employees to
receive their salaries.


4. (SBU) Zuzul has been dogged by negative press stories
since becoming FM late last year, and his efforts to defend
himself have become increasingly awkward. When the press
discovered he had under-declared rental income, Zuzul blamed
his accountant. When the press lambasted him for his
vociferous arguments for contracting directly with Bechtel
for a new segment of the Split-Dubrovnik road, Zuzul, who had
worked until a few months before the November 2003 elections
for a law firm which lobbied for Bechtel, claimed the Foreign
Minister played a natural role in all large international
deals. After Sanader was pressured into nixing the direct
contract and putting the roadwork out for bid, Zuzul's
perceived conflict of interest became an article of faith
among many in the press and public.

OPPOSITION SMELLS BLOOD, RULING PARTY ASSESSING DAMAGE
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5. (U) Leaders from the opposition Social Democratic Party
(SDP),Croatian Peasant Party (HSS),and Croatian People's
Party (HNS) claim they can muster 79 votes in a no-confidence
measure against Zuzul (two more than the required simple
majority),including votes from the Croatian Party of
Pensioners (HSU) and the Independent Serbian Democratic Party
(SDSS) of the ruling coalition. According to current
parliamentary rules, the Speaker must call the no-confidence
vote within 30 days of a request. The presidency of
Sanader's Croatian Democratic Union (HDZ) will m