SERBIA AND MONTENEGRO: INVESTMENT CLIMATE STATEMENT 2006

UNCLAS SECTION 01 OF 26 BELGRADE 000220

SIPDIS

STATE PASS TO USTR
DEPT FOR EB/IFD/OIA

E.O. 12958: N/A
TAGS: EINV, EFIN, ETRD, KTDB, PGOV, SR, MW, Economic Development, USTR
SUBJECT: SERBIA AND MONTENEGRO: INVESTMENT CLIMATE
STATEMENT 2006

1. The following is Post's submission for the 2006
Investment Climate Statement:

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A.1. Openness to Foreign Investment
--------------

Serbia and Montenegro is quickly establishing a liberal
investment regime. Although the continuing transition has
not yet eliminated all structural barriers, both republic
governments, in Serbia and in Montenegro, recognize the
need to remove impediments, reform the business environment
and open the economy to foreign participation. For example,
in June 2004 the Serbian government launched an Action Plan
(together with the World Bank) identifying barriers and
working with the business community to eliminate these
barriers. Montenegro is implementing a comprehensive
Economic Reform Agenda, led by the Prime Minister and
supported by the USG and other international donors. The
attitude towards foreign investors is generally favorable.
Serbia and Montenegro has a long history of international
commerce, even under communism, and it once attracted a
sizeable foreign company presence.

Already, the country has attracted considerable interest.
Although cumulative levels of foreign direct investment
(FDI) are still low compared to elsewhere in the region,
Serbia and Montenegro could easily overtake other countries
in Southeast Europe. In 2003 alone, foreign direct
investment in Serbia and Montenegro amounted to around $1.3
billion, outperforming other countries in Southeast Europe.
FDI for 2004 was somewhat lower at an estimated $947
million, primarily due to a slowdown in privatization in
Serbia and political uncertainty following a change in
government in Serbia in March 2004. But 2005 witnessed a
rebound in investor interest, with FDI in Serbia estimated
to have reached USD 1.5 billion, much of that banking
sector. Serbian firms invested USD 59 million abroad in
2005.

Leading investor nations in Serbia and Montenegro include:
the United States, Greece, Germany, Austria, Slovenia,
Netherlands and Cyprus. The banking sector has attracted
investment from Intesa (Italy),Credit Agricole (France),
HVB Bank (Germany/Austria),Erste Bank (Austria),Nova
Ljubljanska Banka (Slovenia),EFG Eurobank (Greece),
Findomestic Bank (Italy),Pireus Bank (Greece),OTP Bank
(Hungary),and others. In the trade sector, France's
Intermarche opened its first retail outlet in Nis and plans
to develop operations throughout Serbia. German Metro Cash
and Carry has invested some EUR 60 million in Serbia.
Privatization of the two refineries owned by one of the
largest state-owned companies, the Oil Industry of Serbia
(NIS),and the government is placing other well-regarded
industrial companies up for sale. Privatization also is
reaching the tourism industry, with the sale or attempted
sale of several Belgrade hotels in 2005. This trend
should accelerate as the Agency for Privatization begins to
sell off some 100 non-core assets, that were spun off by
major state-owned companies during 2005, including many
hotels. For instance, the Agency just published the
prospectus for sale of a 135-suite hotel at Serbia's
premier ski resort that was owned by JAT Airways.

So far, Montenegro has achieved greater relative success in
attracting FDI. In the five-year period from 2000-2004,
inflows reached EUR 904 million, or USD 1,600 per capita,
compared to USD 400 per capita for Serbia during the same
period. To increase the inflow, the Government of
Montenegro established the Montenegrin Investment Promotion
Agency (MIPA) in 2005. According to MIPA, investment in
2005 reached EUR 315 million, or three times more than the
year before.

Since 2003, the United States has emerged as the single
largest investor nation in Serbia and Montenegro,
accounting for approximately USD 1 billion. The largest US
investors are:

-Philip Morris International (a subsidiary of the U.S.
diversified Atria Corporation),which purchased the Nis
Tobacco Factory through privatization for EUR 518.5 million
in 2003, becoming the largest foreign investor in Serbia;

-U.S. Steel Serbia, which acquired Serbias only steel
producer, Sartid, through bankruptcy in 2003, with
investment to date exceeding USD 150 million;

-Galaxy Tire, which purchased specialty tire producer Ruma
Guma through privatization in February 2003 with a total
investment of about USD 10 million;

-Ball Corporation, which constructed a major greenfield
production facility to manufacture beverage containers,
with investment expected to reach USD 75 million in Phase I
of the project;
-Coca-Cola Co., which joined forces with Greek Coca-Cola
Hellenic Bottling Co. (CCHBC) to acquire 100 percent of
water bottler Vlasinka from Serbian furniture maker Simpo
in February, 2005, for EUR 21.5 million. The estimated
value of the entire transaction, which also includes
investment for development projects, is expected to reach
EUR 100 million.

Other projects of interest include a planned USD 60 million
air cargo and logistics terminal that Dyncorp International
will build at Belgrade Airport, based on a USTDA
feasibility study. Microsoft opened a Development Center
in Belgrade during 2005, its fifth of this type in the
world, to continue expanding language support for
handwriting recognizers within Microsoft Tablet PC
technology and develop recognizers for the languages of
Central and Eastern Europe (CEE).

Serbia and Montenegro has enacted specific legislation
outlining guarantees and safeguards for foreign investors.
The former Yugoslav Law on Foreign Investments (January
2002),amended and formally incorporated into Serbian law
(2003),establishes the framework for investment in the
republic. The law eliminates previous investment
restrictions; extends national treatment to foreign
investors; allows for the transfer/repatriation of profits
and dividends; provides guarantees against expropriation;
and allows customs duty waivers for equipment imported as
capital-in-kind. In late 2002, the Government of Serbia
promulgated new tax incentives for foreign investors.
Montenegros Foreign Investment Law (November 2000)
provides the same rights and protections for foreign
investors.

Neither Republic employs screening mechanisms, and foreign
participation is welcomed in ongoing privatization
campaigns. However, a foreign investor or entity may not,
alone or with another foreign investor, establish an
enterprise in the production of and trade in armaments, or
in areas defined as restricted zones by law. A foreign
investor may establish an enterprise in the above-mentioned
field and areas, or invest his capital in it together with
a domestic entity, but without acquiring the majority
rights in the management of such an enterprise and only
with the consent of the Ministry of Defense of Serbia and
Montenegro.
The Republics' economic teams view foreign capital as vital
to the restructuring of the real sector and, as a result,
have fully expressed their commitment to remove barriers
and facilitate investor interest. Thus, reform efforts have
not been limited to the promulgation of the two foreign
investment laws. Rather, the governments understand the
need to reform a wide body of laws to improve the overall
business regulatory environment and thereby enable private
sector companies to grow and to compete.

To promote investment, the two republics offer various
resources. The Serbian Investment and Export Promotion
Agency (SIEPA) was established to provide direct assistance
to investors in Serbia. SIEPA works closely with
individual donors on various activities. In addition, the
Agency for Privatization provides information and works
with potential investors to educate them about the
privatization program and its potential opportunities.
Contact information for SIEPA is as follows:

Serbian Investment & Export Promotion Agency (SIEPA)
Vlajkoviceva 3/V
11000 Belgrade Serbia
Tel: (381)(11) 3398-510; 3398-550
Fax: (381)(11) 3398-814
[www.siepa.sr.gov.yu]

The Agency of Montenegro for Economic Restructuring and
Foreign Investments was established in 1990. However, this
agency's primary task was privatization and restructuring.
To place a greater emphasis on investment promotion and
fostering economic development, the Government of
Montenegro established the Montenegrin Investment Promotion
Agency (MIPA) in 2005. It seeks to bring Montenegro to the
attention of the international community as a competitive
investment destination by actively facilitating investments
in the country.

Inquiries on investment opportunities in Montenegro can be
directed to:

Petar Ivanovic, Director
Montenegrin Investment Promotion Agency (MIPA)
Atinska 36
81000 Podgorica, Montenegro
Tel/fax: +381 81 655 583, 655 584, 655 586, 655 479
Website: www.mipa.cg.yu
E-mail: info@mipa.cg.yu

Montengrin Agency for Economic Restructuring
Jovana Tomasevica bb
81000 Podgorica Montenegro
Tel: (381)(81) 242-640 or 246-411
Fax: (381)(81) 245-756

Both agencies are relatively small and lack resources to
shepherd investors through the process from start to
finish. Potential investors should discuss specific
projects/interests with relevant line ministries to obtain
the necessary support from the government.

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A.2. Conversion and Transfer Policies
--------------

The republics foreign investment laws guarantee the right
to transfer and repatriate profits in Serbia and
Montenegro, respectively.

Serbias Law on Foreign Exchange (enacted originally as a
federal law in May 2002) establishes a foreign exchange
market and provides for current account convertibility. In
May 2002, the National Bank of Yugoslavia (now the National
Bank of Serbia) notified the IMF that it accepts the
obligations of Article VIII (2),(3) and (4) of the IMF
Articles of Agreement. IMF members undertaking these
obligations commit to refrain from restrictions on payments
and transfers for current international transactions, and
from engaging in discriminatory currency arrangements or
multiple currency practices without IMF approval. The
Foreign Exchange Law also permits local and foreign
companies to hold a foreign exchange account in one or more
banks authorized for international operations. These
accounts can be used to make or receive payments in foreign
currency.

The National Bank of Serbia and the Ministry of Finance
have proposed a new Law on Foreign Exchange that would ease
restrictions on foreign transactions; it should be
presented to Parliament early in 2006. Some of the major
changes proposed: 1) Provisions on foreign credit
transactions will be included, thereby nullifying the
existence of the separate 1992 Law on Foreign Capital
Transactions, which is currently in force; 2) new forms of
foreign trade financing will be introduced to assist
companies in obtaining working capital; 3) the period by
which exporters must repatriate export earnings and
importers must proceed with importation after payment will
be extended from 90 to 180 days; and 4) provisions for
secured transactions are outlined more thoroughly to
promote a modern financial market and to attract foreign
investors.

Montenegro uses the Euro as its domestic currency. There
are no difficulties in the free transfer of funds exercised
on the basis of profit, repayment of resources or residual
assets.

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A.3. Expropriation and Compensation
--------------

Serbia and Montenegro provides legal safeguards against
expropriation. Protections are codified in laws adopted by
the republic governments. There have been no cases of
expropriation of foreign investments in either republic.

However, both republics have outstanding claims related to
property nationalized under the Socialist Federal Republic
of Yugoslavia. On May 30, 2005, Serbia adopted the Law on
Reporting and Registration of Nationalized Property that
sets out two phases for restitution. The first allows
citizens whose property was nationalized after March 9,
1945 to register their claims by June 30, 2006. Churches
and religious organizations are not obligated to register
their property claims because a separate law being drafted
will address their claims. After the registration deadline,
the Government of Serbia will then determine which
compensation model to use to best address these claims,
given budgetary constraints. The total value of
nationalized property is estimated at between USD 60-150
billion, according to Finance Minister Dinkic.

In 2004, Montenegro's Law on Replacement and Settlement of
Restitution Rights was ratified. In the last year,
municipalities formed restitution committees, and the
government established the Restitution Fund from which
compensation is already being made to claimants.

The Law on Foreign Investment provides safeguards against
arbitrary government expropriation of foreign investments.
Serbias Law on Expropriation (2001) defines justifications
for possible expropriations and procedures that must be
followed under law. The law enumerates various economic
and security circumstances affecting Serbias common
interests in which expropriation is permitted: education,
public health, social welfare, culture, water management,
sports, transport, power and public utility infrastructure,
national defense, local/national governments needs or
or
territorial autonomy agencies, and the
exploration/exploitation of mining and other resources.
Special procedures are outlined for expropriations related
to major natural disasters. The Government of Serbia
issues a determination on common interests; the law
designates Serbias Supreme Court as the appellate
mechanism.

Following this determination, a proposal for expropriation
may be filed with the competent local authorities. The
authorities are obliged to hold proceedings and issue a
decision. The Ministry of Finance is designated to resolve
complaints filed against first-instance decisions.

In the event of an expropriation, Serbian law requires that
compensation be provided in the form of similar property or
cash approximating the current market value of the
expropriated property. The law stipulates various criteria
for arriving at the amount of compensation with respect to
different types of land (agricultural, vineyards, forests)
or easements that affect the value of the land. If a
a
compensation agreement is not reached within two months of
the expropriation order, the local municipal court will
intervene and decide the compensation.

Republic of Montenegro
--------------

Montenegro provides safeguards from expropriation actions
through its Foreign Investment Law. Article 29 states that
the government cannot expropriate property of a foreign
investor unless there is a compelling public purpose
established by law or on the basis of the law. If an
expropriation is executed, compensation must be provided at
fair market value plus one basis point above the LIBOR rate
for the period between the expropriation and the date of
payment of compensation.

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A.4. Dispute Settlement
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Arbitration
--------------

The Foreign Trade Court of Arbitration (founded in 1947) is
located within the Serbian Chamber of Economy. Arbitration
is voluntary and conforms to the U.N. Commission on
International Trade Law (UNICTRAL) model law. The court
focuses on foreign trade or international commercial
disputes (including investment) involving domestic and
foreign parties. The courts arbitration rules promote a
speedy and efficient process (no more than one year).
Arbitration commences when the parties have mutually
requested arbitration and accepted the courts
jurisdiction. Its decision is final and binding.

Once an issue has been decided, the arbitration award must
be executed upon notice from the court to the losing party,
which is given a deadline to comply. If no payment is made
within the time allotted, then the party benefiting from
the decision notifies the local commercial court. The
commercial court then orders payment. The same procedure
applies for decisions of foreign arbitration courts (as per
the 1958 New York Convention). Complaints against the court
of arbitration are not recognized unless a procedural flaw
is alleged.

Serbia and Montenegro is a signatory to the following
g
international conventions regulating the mutual acceptance
and enforcement of foreign arbitration: the 1923 Geneva
Protocol on Arbitration Clauses, the 1927 Geneva Convention
on the Execution of Foreign Arbitration Decisions, the 1958
New York Convention on the Acceptance and Execution of
Foreign Arbitration Decisions; the 1961 European Convention
on International Business Arbitration; and, the 1965
Washington Convention on the International Center for the
Settlement of Investment Disputes (ICSID).

Arbitration has not been employed to a large extent during
the last 10 years given the absence of foreign companies
from the market. Additionally, although the Courts
arbitral decisions may be enforceable in Serbia, they may
not be recognized in Montenegro. Consequently, many foreign
companies include a clause in contracts that requires
third-country arbitration if disputes arise. Foreign
arbitral decisions would be enforceable in both the Serbian
and Montenegrin court systems.


A new Law on Arbitration is currently in the drafting
process. A new working group has been formed and a second
draft version is complete. The second version covers
International and Domestic Arbitration. The draft is
clearer and follows the UNCITRAL Model Law more closely.

In November, 2004, the International Court of Arbitration
in Paris issued a ruling in favor of U.S. company Valeant
Pharmaceuticals (formerly ICN Pharmaceuticals),ordering
that the U.S. company be permitted to repatriate USD 50
million in the dissolution of a joint venture. At this
time, it appears that the Government of Serbia and Valeant
are near a settlement.

Legal System
--------------

The union and republic constitutions serve as the
foundation of the legal system and create independent
judiciaries in Serbia and Montenegro. Unlike the United
States and the United Kingdom, which use common law, Serbia
and Montenegro has adopted European civil law. However,
higher court decisions can be used as guidance by lower
r
courts.

Serbia and Montenegros judiciary historically lacked
independence and was subjected routinely to political
manipulation during the socialist and Milosevic periods.
Judges were appointed based on party affiliation. During
the Milosevic regime especially, the court system was
severely undermined, with judges often rubber-stamping
regime actions. Judges who challenged the regime were
simply removed. Officials are now focusing on a range of
issues to overhaul the court system: accountability, salary
levels, training, selection/appointment process,
execution/enforcement of judgments, budget, court
organization and responsibilities, and ethics. The U.S.
Government, through USAID, is providing assistance on
reform of the court system, primarily commercial courts but
also general jurisdiction courts and magistrates.

Union Judicial System
--------------

There is only one court of the State Union, the Court of
Serbia and Montenegro, and its jurisdiction is set forth in
the Constitutional Charter: disputes between institutions
of Serbia and Montenegro on questions on their jurisdiction
pursuant to the Constitutional Charter, disputes between
the state union and its member states regarding the
question of their jurisdiction over citizens' complaints
for violations of rights guaranteed by the Constitutional
Charter, issues of consistency of member states
Constitutions with the Constitutional Charter, and similar
issues.

The Constitutional Court is a separate court of the
Republic of Serbia, with its jurisdiction set forth in the
Constitution of the Republic of Serbia. It mainly decides
the constitutionality of certain laws. Montenegro's
Constitutional Court has a similar function.

Republic of Montenegro Judicial System
--------------

Montenegros Law on Courts defines a judicial system of
three levels: basic courts, superior courts and the Supreme
Court. It also establishes two courts with special
jurisdiction for commercial matters. Two new courts were
established in 2005: appellate and administrative Courts.
While the administrative courts are operational, start-up
of the appellate courts is awaiting appointment of judges.

The basic courts exercise original jurisdiction over civil
and criminal cases. There are 15 courts for 21
municipalities. Two superior courts in Podgorica and Bijelo
Polje have appellate review of municipal court decisions.
Superior courts also decide on jurisdictional conflicts
between the municipal courts.

The two commercial courts (which also handle economic
crimes) have been established in Podgorica and Bijelo
Polje. Their jurisdiction: shipping, navigation, aircraft
(except passenger transport),intellectual property rights,
bankruptcy, and unfair trade practices. The superior courts
hear appeals of commercial court decisions, and superior
court decisions may be appealed to the Supreme Court. The
Supreme Court is the court of final judgment for all civil,
criminal and administrative cases.

The commercial court system faces challenges. Some reform
proposals have suggested the creation of a High Commercial
Court or dedicating a chamber of the Supreme Court to
commercial cases. Some judges have also suggested
designating a particular court with assigned competency for
specific areas in order to streamline caseloads and develop
specialized expertise for complicated economic
crimes/matters.

Republic of Serbia Judicial System
--------------

Serbia's court system consists of: municipal courts (138),
district courts (30),commercial courts (17),the High
Commercial Court (1),the Supreme Court (1) and the
Constitutional Court (1). Municipal courts are the court of
first instance for civil and criminal matters. District
courts hear appeals from the municipal level but also serve
as courts of first instance for serious civil and criminal
cases.

The Supreme Court is the highest court in the republic,
with jurisdiction over all civil and criminal cases,
uniform implementation of law, equal protection, questions
pertaining to judiciary practice, and jurisdictional issues
between lower courts. The court hears appeals from the
District Courts and the High Commercial Court. The Supreme
Court also has a division that reviews decisions of
administrative bodies. The Constitutional Court, which is
distinct from the Supreme Court, issues binding
interpretations of the constitution and rules on challenges
regarding the constitutionality of laws and regulations.

The new Law on the Organization of Courts establishes
(valid from January 1, 2007) new Courts of Appeals to
review District Court decisions; decisions of those courts
may be appealed to the Supreme Court. The Courts of
Appeals will be located in Belgrade and three other cities.
The new law also establishes an additional court, the
Administrative Court, with original jurisdiction in cases
arising from decisions of administrative bodies. The
Supreme Court will hear appeals from the Administrative
Court's decisions. In addition, Courts for Misdemeanors and
a High court for Misdemeanors of the Republic of Serbia
will be established as of January, 2007.

Most commercial cases are heard by 17 regional commercial
courts of first instance. The commercial court system has
four divisions: litigation; commercial law offenses;
bankruptcy/liquidation, and execution of decisions.
Approximately 240 judges sit in the commercial courts, 65
of them in Belgrade. The High Commercial Court reviews
decisions of the first instance commercial courts, and its
rulings may be appealed to the Supreme Court.

Execution of Judgments
--------------

Serbia has a new Law on Execution, approved in November,
2004, which establishes procedures for the execution of
claims. Generally, to execute judgments, a final judgment
is required so that the court can order payment, seizure of
goods/property or direct that action be taken or cease. If
a lower court's decision is confirmed on appeal, the case
is returned to the first-instance court for the final
judgment. The judgment holder must then proceed to the
competent court and submit a petition for execution. The
court order is actually carried out by officers of the
court, who may seek police assistance in executing the writ
(e.g., seizing property). A separate expedited enforcement
procedure has been enacted that allows claimants to submit
certain types of authenticated documents to the court and
initiate the execution phase without a first instance court
procedure to obtain a judgment.

Foreign judgments are recognized in Serbian and Montenegrin
courts, based on an application for recognition/enforcement
to the relevant SAM court. Enforcement of foreign judgments
in both Serbia and Montenegro is governed by a single law,
now applicable in the Union, which dates from the former
Yugoslavia (Official Gazette no. 32/82 72/81 and 46/96,
,
Articles 86-101). Under this law, the court does not review
the decision but decides on whether the requirements for
recognition are fulfilled, based on the following issues:
whether defendants were duly apprised of the complaint and
allowed to present their case in the original proceeding;
whether the same matter is neither pending nor has not been
decided in local courts between the same parties; whether
the foreign judgment pertains to matters that are the
exclusive jurisdiction of SAM courts (e.g., real estate);
whether execution of the foreign judgment contravenes SAM
law; whether SAM decisions are recognized by the foreign
country's court; whether the decision is final and
conclusive, and whether the decision is clear.

Law on Business Companies
--------------

On November 15, 2004 the Serbian Parliament adopted a new
Law on Business Companies. The law provides greater clarity
both in organizing and operating a company and in settling
disputes in both small and large firms. The law is more
consistent with international business practices and adds
modern provisions for corporate governance and protection
of investors.

Limited liability Company (LLC) provisions of the law were
made more flexible, and a new provision for closely-held
(closed) joint stock companies was added. The minimum
capital requirement for establishment of a Serbian LLC is
only 500 Euro or its equivalent, which is much less than
that required for large companies.

The new law provides for two types of joint stock
companies: closed and open. This is a change from the
existing law, and it follows other European company laws.
A closed joint stock company is much like an LLC, but it
can be easily converted to an open joint stock company if
it wishes to go public.

The new Serbian closed joint stock company will have
required minimum capital of 500 Euro equivalent (like an
LLC),and it will be free to impose restrictions on
transfer of its shares for example, a requirement of
board approval, or a right of first refusal in favor of
other shareholders, whenever a shareholder wishes to sell
to a third party. It may not, however, offer its shares
publicly and it may not have more than 100 shareholders.
In most other respects a closed company will resemble an
open company, and a closed company may become an open
company at any time so long as it adopts and agrees to
follow the rules and requirements for an open company.

An open company, by contrast, is subject to detailed
capital maintenance requirements, may sell its shares to
the public, and may not impose any restriction on the
resale of its shares.

Under the new law, a joint stock company is permitted to
issue only one class of common stock, which may have only
one vote per share. Preferred stock must be non-voting,
with certain exceptions, and preferred stock always has
preference over common stock with respect to dividends and
distributions on liquidation of the company.

A number of other changes encourage good corporate
governance and protect investors, mirroring current
international best practices:

-A legal duty of care and duty of loyalty to the company,
including provisions on personal conflict of interest, have
been added. Changes also hold directors (and in some cases
other control persons) more accountable to shareholders.

-Directors can be elected only by shareholders.
-Cumulative voting is specifically permitted and is
required in large joint stock companies.

-The structure of the board is simplified, making a
supervisory board optional. The distinction between and
roles of directors (who are elected by the shareholders)
and the management team (who are appointed by the
directors) is spelled out more clearly.

-Directors will have only one-year terms and will always be
up for election or re-election at each annual shareholder
meeting.

-Also, shareholders can remove a director at any time
without proof of cause.

Small and closely-held companies (whether partnerships,
LLCs or joint stock companies) may be able to mix
shareholding, directing and management. However, large
joint stock companies are required by the new law to have a
number of independent directors, and the new law contains a
definition of the term independent director that follows
current precedents in Europe and the United States.

The changes also expand the rules for lawsuits against
directors and other persons in control of a company of any
type (partnership, LLC or joint stock company) including
controlling shareholders in some cases - based upon
international models. Under the new law, a separate
supervisory board is no longer required in a joint stock
company. Instead, a company may have a supervisory board,
internal auditor or audit committee that acts as an
independent body with specific legal power to provide
financial and legal oversight and supervision, including
ding
oversight of the companys outside audit firm and of the
companys legal compliance.

The changes add new detail to the procedural rules for
convening and conducting shareholder meetings. More
detailed restrictions are placed on proxies (voting
representatives) to prevent the abuse of managers voting
shares of employee-shareholders. Under the new law, a proxy
must be in writing and can be revoked by the shareholder at
any time including at the shareholder assembly. The new
law also expands the prohibition against managers voting
employees shares.

Regarding court action, the new law specifies the courts
powers, and the types of orders it can issue, in more
detail than is found in other laws.

Finally, the new law contains a number of provisions to
comply with requirements of the European Union Company Law
Directives.

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A.5 Performance Requirements and Incentives
--------------

---

Neither the union nor republic governments impose any
performance requirements as a condition for establishing,
maintaining or expanding an investment.

Limited incentives are offered to foreign investors. In
Serbia, tax holidays are available (based on size of
investment and jobs generated) along with customs relief on
in-kind imported equipment. In Montenegro, the government
offers both duty exemptions for imported equipment.

Law on Concessions
--------------

The Law on Concessions was adopted by the Serbian
Parliament in May 2003. It eases the process of obtaining
and utilizing concession licenses. It also regulates the
conditions and procedures for obtaining a concession to
exploit natural resources, use property in the public
domain and or conduct activities of general interest.

The law defines a concession as the right to use natural
resources, assets of general use or to perform activities
of common interest, which a competent state body (Grantor)
concedes to a domestic or foreign person (Grantee) for a
limited period of time, under the terms prescribed by the
law and upon the payment of a concession fee.

The object of a concession may be: 1) researching and
exploiting raw materials (minerals); 2) constructing,
renovating, maintaining and utilizing of: various water
supply facilities; roads; public railway infrastructure;
air traffic facilities; river traffic facilities and ports;
telecommunication facilities; oil pipelines, gas pipelines
and other gas and oil facilities; public utilities; power-
generating and heating facilities; river and lake banks;
medical institutions; sports and recreation facilities,
sports fields and areas; tourist facilities and
infrastructure; 3) using thermal springs; 4) other
activities specified by the law as activities of common
interest.

A foreign physical or legal person cannot be granted a
concession for specific activities in Serbia where, in
accordance with the law regulating foreign investments, a
foreign entity may not establish a company. A concession is
granted by a public tender. By exception, if a public
tender could endanger national security, the government may
proceed without a public tender. A concession may be
granted for up to 30 years. The concession fee is
determined depending on the type, quality, purpose and the
market price of the natural resource or assets in question,
i.e., depending on the type of activity, market terms,
duration of the concession, estimated risk and expected
profit.

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A.6. Right to Private Ownership and Establishment
-------------- --------------

The union and republic constitutions guarantee the right to
ownership and establishment, although private ownership of
urban land is not yet permitted. A foreign physical or
legal person incorporated pursuant to the laws of either
republic is considered to be a legal person. Foreign
investors may acquire property rights for buildings and
rights for other immovable assets to be used for their
business activities. They may acquire residential property,
such as apartments, but not ownership rights over the land
itself (unless the land is in rural areas). Foreign
investors are permitted to hold land-use rights for up to
99 years, and such rights can transfer with the sale of
buildings on such sites. By law, urban lands are held by
the municipal governments. Rural lands are regulated
differently and investors may acquire the land rights.
Serbia is now drafting a new constitution, but political
developments could further delay the process. It is
expected that the new constitution will permit ownership of
urban lands.

In Montenegro, a foreign investor, foreign legal person or
foreign individual may acquire property. Article 12 of the
Montenegrin Foreign Investment Law specifically permits
foreign investors to purchase real estate through a
contract. This right is explicitly reinforced by the Law on
Property and Law Relation. The Act states that foreign
natural and legal persons carrying out activities in
Montenegro can, based on reciprocity, acquire real estate
in order to perform the activities related to the
investment. This same law also permits the acquisition of
property (houses and apartments) by foreign persons even if
they do not have any investment or business activity in
Montenegro.

--------------
A.7. Protection of Property Rights
--------------

Mortgages/Secured Transactions
--------------

The mortgaging property and chattels was formerly regulated
by Chapter XXVIII of the Yugoslav Law on Contract and
Torts. The two republics have now passed separate laws on
secured transactions to establish a clear, transparent
framework.

In July 2002, Montenegro enacted its Law on Secured
Transactions and established a collateral registry at the
Commercial Court in May 2003. The registrys operational
guidelines have been drafted and approved by the commercial
court.

In June 2003, Serbia passed a secured transactions law, the
Law on Registered Charges on Movable Assets. A Business
Services Agency was established in January 2005, which will
maintain a collateral registry in addition to registering
new businesses.
In December 2005, Serbia adopted a new Law on Mortgages
that will allow banks to mortgage buildings under
construction. The previous law did not permit the entering
of unfinished buildings into the land registries, making
securing of loans during construction very difficult. In
the event a debtor is unable to repay the loan, the new law
permits sale of the mortgaged property within six months
instead of the former three- to five-year period. This new
law should provide incentives for housing construction, by
ensuring better legal protections for creditors and
debtors. The law also broadens the availability of
mortgages through more flexible conditions for such loans,
which are now permitted not only for completed construction
but also for projects under construction, including
subdivisions of a property, unregistered objects and land.
The GOS hopes that this law will lower interest rates, by
better protecting creditors. An owner who grants a mortgage
to a lender will not be able to change the physical
structure of the property without the creditors consent,
but is allowed to rent it or sell it. If the pledged real
estate is subject to bankruptcy, the law states that the
creditor has priority in any distribution. The law also
will permit establishment of a Central Mortgage Register.

These laws substantially improve the inadequate scope of
previous Yugoslav law. Unlike that law, these new laws
address non-possessory pledges on moveable property. The
law also prioritizes claims based on possession. With
respect to land, central registries are typically not
completely current. Both republic governments are making an
effort to modernize their cadastral systems. The World Bank
is providing assistance in this area.

Intellectual Property Rights

The acquisition and disposition of intellectual property
rights are protected by laws at the Union level. It is the
responsibility of the two member states (republics) to
implement and enforce these laws. The legal regime for IPR
protection has improved substantially in recent years as
SAM has revised laws to meet WTO TRIPs standards. In
practice, however, enforcement is weak and actual
protection, insufficient. Sale of pirated optical media
(DVDs, CDs, software) as well as counterfeit trademarked
goods, particularly sneakers and clothing, is fairly
widespread. Enforcement is slowly improving as customs,
police and judicial authorities obtain the necessary tools,
but institutional capacity is still limited. Strengthening
IPR protection will continue to be a challenge.

Intellectual property rights are covered by a series of six
union laws that are enforced by the republic governments.
The Law on Copyright and Related Rights, the Law on
Patents, the Law on Trademarks, the Law on Legal Protection
of Designs, and the Law on Protection of Integrated Circuit
Topographies were passed in June and December 2004, and are
fully WTO-TRIPs compliant. A new Law on Geographical
Indications that is WTO-TRIPs compliant will replace the
1995 law and should be adopted in early 2006.

Enforcement
--------------

Complaints of IPR infringement must be brought before the
relevant republic commercial or district courts (depending
on the legal status of parties involved). Procedures for
enforcement of intellectual property rights are governed in
both Serbia and Montenegro by their respective Laws on
Civil Procedures (recently enacted),based on the
substantive Union-level laws for each area of intellectual
property.

Laws on Civil Procedures meet the procedural requirements
of TRIPS Article 42 (written notification regarding a
dispute and protections for evidence and the rights of the
parties involved). With respect to providing evidence that
is under the control of the opposing party (referenced in
TRIPS Article 43),the laws allow the Court to compel
production of documents or things within a given time
limit. The laws regulating specific areas of intellectual
property rights (Law on Copyright and Related Rights,
Patent Law, Trade Mark Law, Law on Legal Protection of
Designs, Law on Geographical Indications and Law on
Protection of Topographies of Integrated Circuits),provide
specific legal remedies to rights holders.

Criminal sanctions, including in some cases imprisonment,
may be imposed in cases where IPR infringement is found. In
April, 2003, Serbia amended its Penal Code to improve
enforcement efforts, instituting stiffer penalties,
including prison sentences, for piracy. In June 2003, a
subsequent amendment to the Criminal Code was adopted
enabling the police to seize or destroy pirated goods and
production equipment and materials. However, in practice,
courts have typically imposed only weak penalties.

The new Penal Code for Serbia, adopted by the Parliament in
September, 2005, has a specific chapter on criminal
offences committed by infringement of IP Laws; it provides
adequate penalties for the infringement. It also provides
for ex officio prosecution without the filing of a private
complaint of a rights holder. A new draft Law on the
Enforcement of Intellectual Property Rights (adoption by
the Serbian Parliament is expected by March 2006) will make
legal entities, such as corporations, culpable for IPR
violations and provide for fines up to three million dinars
(approximately EUR 35,000). It also will provide ex officio
authority for inspectors in areas such as trade, medicines
and medical supplies, and electronic media and
broadcasting, among others.

Montenegro made progress in 2005 in strengthening its
legislative framework. In July 2005, the Montenegrin
Parliament passed a law similar to Serbias law on the
enforcement of intellectual property rights that entered
into force January 1, 2006. The law provides for fines for
legal entities of up to EUR 30,000 for selling pirated
and/or counterfeited goods. It also provides ex officio
authority for market inspectors in the areas mentioned
above. In April 2005, the Montenegrin Parliament adopted
the Regulation on (TRIPs) Border Measures that provides
powers to the customs authorities to suspend customs
procedure and seize pirated and counterfeit goods.

In early 2006, Montenegro's Parliament is expected to amend
the Penal Code to include criminal offences with respect to
infringement of all IP rights, ex officio prosecution and
stricter criminal penalties. A new Law on Optical Disks
also should be approved in both Serbia and Montenegro,
which will regulate the production of optical disks,
require the registration of the business activity of
reproducing optical disks for commercial purposes, provide
for surveillance of optical disk imports and exports and
imports and exports of polycarbonates (the material used in
production of optical disks) and production equipment for
the production of optical disks.

International Agreements
--------------

The following conventions and agreements in the field of
intellectual property are binding on SAM and thus on the
Republics:

- Convention Establishing of the World Intellectual
Property Organization (1967) (member since October 1,
1973);
- Paris Convention for the Protection of Industrial
Property (1883) (member since February 26, 1921);
- Berne Convention for the Protection of Literary and
Artistic Works (1886) (member since June 17, 1930);
- Madrid Agreement Concerning the International
Registration of Marks (1891) (member since February 26,
1921);
- Protocol relating to the Madrid Agreement Concerning the
International Registration of Marks (member since February
19, 1997);
- Patent Cooperation Treaty (1970) (member since February
1, 1997);
- Hague Agreement Concerning the International Deposit of
Industrial Designs (1925) (member since December 30, 1993);
- Universal Copyright Convention (1952) (member since
1966);
- Nice Agreement Concerning the International
Classification of Goods and Services for the Purposes of
the Registration of Marks (1957) (member since August 30,
1966);
- Locarno Agreement Establishing an International
Classification for Industrial Designs (1968) (member since
October 16, 1973);
- Convention Relating to the Distribution of Program-
Carrying Signals Transmitted by Satellite (1974) (member
since August 25, 1979);
- Budapest Treaty on the International Recognition of the
Deposit of Microorganisms for the Purposes of Patent
Procedure (1977) (member since February 25, 1994);
- Trademark Law Treaty (1994) (member since September 15,
1998);
- Lisbon Agreement for the Protection of Appellations of
Origin and their International Registration (1958) (member
since June 1, 1999);
- Madrid Agreement for the Repression of False or Deceptive
Indications of Source on Goods (1891) (member since May 18,
2000);
- Nairobi Treaty on the Protection of the Olympic Symbol
(1981) (member since March 18, 2000);
- Treaty on Intellectual Property in Respect of Integrated
Circuits (1989) (signed, not ratified);
- International Convention for the Protection of
Performers, Producers of Phonograms and Broadcasting
Organizations (member since December 20, 2002);
- Convention for the Protection of Producers of Phonograms
Against Unauthorized Duplication of their Phonograms
(member since December 20, 2002);
- WIPO Copyright Treaty (member since December 20, 2002);
- WIPO Performances and Phonograms Treaty (member since
December 20, 2002);

WTO Accession
--------------

Serbia and Montenegro, as a successor in rights of the
former FRY, has been in the process of accession to the
World Trade Organization since 2001. Following the example
of the EU's twin track approach, both Serbia and
d
Montenegro withdrew their joint application and submitted
separate applications for WTO accession in December, 2004.

At the February 15, 2005 meeting, the General Council
accepted separate membership applications from the
Republics of Serbia and Montenegro and agreed to establish
independent working parties to continue the accession
process. The first independent meetings of the countries'
working parties were held in October, 2005.

The U.S. Government, through USAID, has been providing
technical assistance to Serbia and Montenegro on
preparation for the WTO accession process.

--------------
A.8. Transparency of Regulatory System
--------------

Commercial Code & Contract Law
--------------

The former Federal Law on Contracts and Torts (1978)
embodies contract law in Serbia and Montenegro. No laws
have been passed in either Serbia or Montenegro that
replace or amend this law because, on the whole, experts
view the law as essentially sound. Still, some problems
have been noted. In contract disputes, the law provides
judges with the discretion to reduce damages. This law, for
instance, also addressed secured transactions; new secured
transactions laws have been enacted in both republics that
correct weaknesses in the 1978 law. Additionally, in May
2003, the Republic of Serbia adopted a new Law on Financial
Leasing, which has provided the framework for significant
development of leasing arrangements and contracts. The law
establishes a public register in the form of an integrated
electronic database that documents leasing contracts.

The permitting processes that control both the acquisition
of land (rights of use, in municipalities) in Serbia and
subsequent decisions related to use of such land generally
are considered a significant barrier to foreign investors.

Bankruptcy Law
--------------

For the most part, bankruptcy legislation has never been
enforced in Serbia and Montenegro, and the courts have
little or no experience in adjudicating bankruptcy cases.
Bankruptcy was always equated with liquidation and
consequently avoided. During previous governments,
socially-owned companies were not permitted to fail. That
situation is changing. The faltering economy has left many
insolvent companies. The governments are moving to overhaul
legislation and practices so that these companies can be
restructured or liquidated. New bankruptcy practices should
also spur companies to pay more attention to sound
financial practice to avoid insolvency.

The former Federal Bankruptcy Law regulated bankruptcy
actions in Serbia. This law was deficient in many respects;
most notably it provided excessive protections for debtors.
Another feature is the lack of a reorganization clause
(e.g., U.S. Chapter 11). The law was rarely applied.
In July 2004, the Serbian parliament adopted a new
bankruptcy law that incorporates international concepts and
practices. USAID and the World Bank assisted in drafting
the law. The government will also receive international
assistance in training trustees and judges and the
establishment of an agency to regulate bankruptcy trustees.

Serbia's new law contains modern provisions similar to
those that have been adopted by other countries seeking to
modernize their bankruptcy systems. It provides enhanced
creditor involvement; improved debtor eligibility criteria
to filter inappropriate petitions; an improved claim
resolution procedure and penalties for submitting false
documents and claims. It also expands the role of private
bankruptcy trustee-administrators. The new law provides
greater flexibility in developing a plan of reorganization,
but also requires adherence to strict deadlines and the
affirmative vote of creditors for acceptance. The new law
also features international bankruptcy provisions,
incorporating the UNCITRAL Model Law on Cross-border
Insolvency.

Montenegros Law on Business Organization Insolvency
(February 2002) provides the regulatory framework for the
bankruptcy process. Insolvency exists and bankruptcy may be
initiated if various conditions are met: an entity has
stopped payments for 30 days; the debt exceeds a
statutorily defined amount; the debt is not contingent;
and, the debtor has an established pattern of non-payment.

The Commercial Court has exclusive jurisdiction over
bankruptcy matters. A written petition must be submitted.
The court decides on acceptance of the petition, acceptance
of the petition, selects an administrator (trustee),
reviews creditor complaints, approves the settlement for
creditors, and decides on the closing of proceedings. The
bankruptcy judge supervises the administrator. The trustee
represents the debtor, managing assets subject to the
bankruptcy and preparing requisite information for the
bankruptcy proceedings.

The creditors committee consists of up to nine unsecured
d
or partially-secured creditors. The committee is convened
to protect the interests of all creditors during the
proceedings, to oversee the administrators work and to
report to the creditors on the proceedings. Creditors must
declare all claims by a fixed deadline. The law establishes
the priority of creditor claims, assigning higher priority
to taxes and other revenues of both the central and local
governments.

Chapter VIII of the Law addresses reorganization, an
alternative to liquidation whereby attempts are made to
maximize asset recovery and provide for fair and equitable
distribution among all creditors. Article 66 lists various
methods of reorganization. Either the trustee or debtor may
file a reorganization plan.

In 2005, two new agencies were created to foster
implementation of the new bankruptcy law in Serbia: the
Bankruptcy Unit within the Privatization Agency, which acts
as the bankruptcy administrator for all majority state or
socially-owned companies in bankruptcy proceedings; and the
Bankruptcy Licensing Agency, which exercises regulatory
power over bankruptcy administrators, including the conduct
of professional examinations and the issuance of licenses
to practice. Two licensing examinations, containing both
written and oral components, were conducted in 2005,
and more than 180 administrators are now licensed to
practice in Serbia.

Alternative Dispute Resolution (ADR) - Mediation Law
-------------- --------------

A new Law on Mediation was adopted February 24, 2005 and
came into force on May 26, 2005. This Law introduced
mediation as a new practice in the Serbian legal system. It
presents a mechanism for alternative dispute resolution,
and it is expected that its implementation will decrease
the backlog of court cases. According to this Law,
mediation is voluntary, and may be initiated prior to or
during a proceeding before the court or other body.

Law on Competition/Anti-Monopoly
--------------

Serbia's Parliament approved a new competition law on
September 16, 2005. The law contains a pre-merger
notification turnover threshold of alternatively 10 million
Euros in Serbia or 50 million Euros worldwide. This low
threshold likely will be problematic for foreign investors.
Most foreign companies buying even a small company in
Serbia will be forced to obtain approval from the Antitrust
Commission prior to the purchase, which can take as long as
four months. Another problem is the penalty provision,
which permits low-level courts to impose severe penalties
(up to 10 percent of total worldwide turnover). In
addition, the deadline for the nomination of Commission
members already passed, without Government action. It also
is unclear how this law and the existing takeover rules
will interact.

The Montenegrin Parliament also has adopted a competition
law, which went into force January 1, 2006. This law is
regarded as an improvement to the investment climate in
Montenegro.

On May 23, 2005 the Parliament of Serbia established an
Energy Regulatory Agency by appointing the first members of
the Council. The Agency Council consists of the president
and four members nominated by the GoS and appointed by the
Parliament. The Council is accountable only to the
Parliament for the Agency's work. This Agency will have
authority over the electricity, gas, oil and heating energy
sectors. Its main tasks are approval of pricing,
development of a model for determining allowable business
costs for energy sector entities, issuance of operating
licenses for energy companies and for construction in the
energy sector, and monitoring of public tenders. The energy
law prescribes that in those energy sectors where prices
are affected by the monopoly positions of some
participants, business costs will be set at levels approved
by the Agency. In those areas deemed to function
competitively, the market will determine prices.

The Regulatory Agency for Telecommunications was formed
according to the Serbian Telecommunications Law adopted in
April 2003. Serbias Parliament elected the President and
the members of the Agency's Management Board in May 2005.
The agencys mission is to raise the efficiency of existing
providers, introduce new and improve old services to
modernize the telecom infrastructure, and create conditions
for the sectors further development.

The regulatory function of the Agency is to set rules for
participants on the open market. Issuance of licenses is
one of the main competencies of the Agency. The license
gives the individuals or legal entities the right to
operate on the telecommunication market. Other competencies
of the Agency are interconnection or mutual connection of
networks of the different operators; responsibility for
overall network service, its maintenance and financing; and
line leasing, which means that the public operator with
th
dominant market share has the obligation to offer its lines
for leasing under certain conditions. In those
telecommunications sectors where prices are affected by the
monopoly positions of certain participants, prices will be
set at levels approved by the Agency. In those areas
deemed to function competitively, the market will determine
prices.

In addition to its regulatory function, the Agency has
controlling and monitoring functions. It is responsible for
implementing relevant laws and has the authority to issue
penalties according to the law.

Taxation
--------------

Republic of Serbia

The Ministry of Finance has implemented three phases of
reform to modernize Serbias tax system in an attempt to
simplify taxation and increase revenues. The components of
the Serbian tax system are: Value Added Tax (VAT),personal
income tax, corporate profit tax, excise duties, property
taxes, payroll tax and taxes on use of goods and on
permission to use goods.


The standard VAT rate on most goods and services is 18
percent, with a limited list of staple foods, medicines and
other products assessed a lower 8 percent rate.
Humanitarian aid, grants, and orthopedic equipment for
persons with disabilities are exempted from VAT, while
traditional religious organizations are entitled to VAT
refunds.
The applicable personal income tax rate is 14 percent for
salaries and 10 percent for net income from self-
employment. Other personal income is primarily taxed at a
rate of 20 percent, although deductions are allowed for
some types of income. The taxable base is equal to gross
income without deductions for income taxes and social
contributions. Foreign residents are subject to an
additional tax at the rate of 10 percent if their income
from salary exceeds 10 times the average annual salary in
Serbia. (Serbian residents are subject to an additional
tax at the rate of 10 percent if their total income exceeds
four times the average annual salary in Serbia.)

In 2004, the government lowered the corporate profit tax
rate from 14 percent to 10 percent, making it one of the
lowest in all of Europe. Tax credits and holidays of up to
10 years are available for investment in fixed assets and
employment of new workers, particularly in underdeveloped
regions. Serbia introduced a VAT on January 1, 2005.

Excise taxes are levied on luxury goods and other
products such as oil derivatives, beverages (alcoholic,
soft drinks),cigarettes, coffee, salt and ethanol
alcohol. Excise taxes are flat rates based on the volume
of the product and are in addition to VAT. In July 2003,
the Parliament adopted amendments to excise taxes, which
will strive to bring Serbia in line with EU and WTO
requirements after a transition period.

For all taxpayers, the property tax rate is set at the rate
of 0.4 percent of the taxable base, but the base varies
with the type of taxpayer. Businesses pay on all assets,
including machinery and other non-real estate property,
,
whereas inviduals pay only on the market value of their
real estate holdings. A 5 percent tax rate is applied to
the transfer of ownership rights of real estate and other
taxable property, except for the transfer of rights over
agricultural and forest land and used motor vehicles, for
which the rate is set at 2.5 percent. A tax rate of 0.3
percent is imposed on the transfer of securities and shares
in legal entities.

Profit tax is not withheld on dividend payments between
Serbian entities. For non-residents tax is withheld as
follows:

- Income tax is calculated and withheld on salaries at the
rate of 14 percent and on certain other income (dividends,
royalties, interest, capital gains, lease payments) at the
rate of 20 percent.
- The provisions of applicable double tax treaties
regarding withholding will apply.

Republic of Montenegro

Montenegros Profit Tax is proportionate and amounts to 9
percent. Foreign investors cannot obtain an exemption from
the corporate profit tax, since the principle of national
treatment was adopted. Turnover taxes are excise taxes and
are determined as fixed Euro amounts or percentages in
complicated ways for various products (alcohol and alcohol
beverages, tobacco products and mineral oils, mineral oil
derivatives and their substitutes.). A Value-Added Tax
(VAT) on products and services, implemented in April 2003,
is assessed at 17 percent. Amendments to the VAT law
reduced the tax rate from 17 percent to 7 for accommodation
services (hotels and pensions) in tourism, additional
taxation of medicines that are not on the authorized list
of the Health Fund, communal services, transport services
and authorial services, etc. Reducing the tax rate in
tourism should improve competitiveness and promote economic
development

Montenegros progressive personal income tax ranges up to
23 percent. The aim of the Government of Montenegro is to
institute a single, low proportional rate. The real estate
tax rate is proportional, ranging from 0.08 percent to 0.80
percent of the property's market value. Local self-
government units can determine real estate tax rates
according to types of real estate. A local self-government
unit can increase the tax rate for agricultural land not
cultivated to 50 percent in relation to the tax rate for
cultivated agricultural land. The international community
is providing assistance to improve the capabilities of the
tax administration.

-------------- --------------
A.9. Efficient Capital Markets and Portfolio Investment
-------------- --------------

Capital Markets
--------------
Serbia has been successful in establishing a capital
markets infrastructure, but, as yet, neither the equity nor
bond markets serve as a source of long-term capital for
enterprises. Capital markets are typically vehicles whereby
various entities, both public and private, raise long-term
capital to finance activities and/or investments. The
companies normally supplying funds to the markets are
insurance companies, pension funds, banks and private
investors. In Serbia and Montenegro, the capital markets
suffer from a lack of fixed-income instruments - the only
bonds are issued either by the central government or the
central bank. The equity market in Belgrade is quite
lively, but the main activity is takeovers of existing
publicly traded companies. Sources of long-term capital are
only now developing, with the recent introduction of
voluntary pension funds. The insurance sector is still
dominated by state-owned insurers that are being
restructured for privatization, and the companies are not
yet a source of long-term financing for the capital
markets. The United States, European Union, World Bank and
other donors are providing assistance in several areas to
develop the necessary legal and institutional framework to
enhance the role of local capital markets.


Republic of Serbia
--------------

In 1989, the Yugoslav Capital Market was formed in
accordance with the Capital and Money Market Law and was
renamed the Belgrade Stock Exchange (BSE) in 1992. BSE
operations are defined in the 1994 Act on the Exchange,
Exchange Operation and Exchange Intermediaries. The BSE has
48 shareholders (30 banks, seven broker and dealer
companies, seven companies, two insurance companies, the
State Union Republic of Serbia and Montenegro and the
Republic of Serbia) and 74 members (64 brokers and 10
banks). The BSE is governed by its Assembly, the Board of
Directors, a Director and the Supervising Board.

Short-term securities traded on the BSE include securities
issued by the National Bank of Serbia (central bank),
Serbian Ministry of Finance short-term treasury bonds,
company and bank bonds, bankers' acceptances, company
commercial paper and CDs. In 2005, there were 166,700 total
transactions executed through the BSE at a value of CSD
48.6 billion or EUR 570 million, an increase of nearly 2
percent and 20 percent over the previous year,
respectively. The average daily trade volume was
approximately CSD 190 million or EUR 2.5 million. Most of
the 2005 trade volume, 81 percent, was in equities; bonds
accounted for 19 percent. The Belgrade stock market index -
BELEXfm - increased by 451.54 index points, or 39.5
percent, during the year. During 2005, foreign investors
accounted for 42.58 percent on average of the Belgrade
stock market's total volume, with 51.18 percent in equity
volume and 15.8 percent in fixed-income. The BSE has been
utilized by the Serbian government for privatization
auctions and the sale of shares from the Privatization
Share Fund.

The 1995 Union Securities Act provides the regulatory
framework for the capital market and 1995 government decree
established the Federal Commission for Securities and
Financial Markets. In November 2002, the former Federal
Assembly enacted a new Law on Securities, which was
implemented in October 2003. The law seeks to improve upon
previous legislative shortcomings (disclosure requirements,
distinction between private placements and public
offerings, minority shareholder rights, ownership
disclosure, accounting/auditing standards, minimum entry
standards for market intermediaries, etc.). The new law
draws upon standards of the International Organization of
Securities Commissions (IOSCO),the OECD Principles of
Corporate Governance and the EU Directives on Stock
Exchanges. There are still some remaining issues related to
the law: open and closed corporate entities; obligatory
trade of securities on the BSE; mutually affiliated
companies, takeover provisions, and supervision.

All registration of securities and clearing of trades is
handled through the Central Securities Depository and
Clearing House, a joint-stock company organized in December
2003. The Depository, which is owned by its members and
government institutions, is the sole register for all
securities issued in Serbia, whether bonds or equities. The
Depository also acts as the clearing mechanism for all
trades involving its registered securities, with clearing
actually carried out through some 100 members, mostly
brokers, dealers and banks. Efficient functioning of the
Central Securities Depository and Clearing House provides
for a safe financial environment for all investors; for
instance, one key function of the depositary is temporary
custody of shares tendered pursuant to takeover bids.
During 2005, securities valued at more than EUR 10 billion
were entered into the registry, while the value of cleared
transactions reached EUR 3 billion. Among the transactions
were some 50 takeovers with a total value of EUR 568
million.

Takeovers on the Belgrade Stock Exchange have become a more
and more important method of acquisition. Current law
foresees two procedures: In the first, an investor may
quietly amass a stake of up to 25 percent of a company, but
then must formally launch a takeover with notification to
the Serbian Securities and Exchange Commission (SEC). Or,
the would-be purchaser may simply initiate the notification
without any holding in the target company. The SEC then
approves publication of the public offer and mailing of a
solicitation to all holders of record. This tender remains
open 21 days; rival suitors may launch counter-offers
within the first 14 days of this period, which then may
trigger an extension of the period. No further bids are
permitted in the last seven days of the period, after which
sell orders are tallied, and a winner declared. However,
this timetable conflicts with the timetable set out in the
new competition law, which permits the Commission for the
Protection of Competition four months to decide on a
takeover.
Takeovers have not been without controversy. In 2005, a
Slovenian company attempted a takeover of retail chain C-
Market, the shares of which had not been fully registered.
After the takeover bid was launched, employee shareholders
obtained a court injunction blocking the takeover. When the
would-be acquirer was unable to overturn the court's
injunction, it withdrew its offer. The company was
subsequently taken over by interests connected to C-Market
management.
Other sectors of the financial markets, specifically,
insurance and voluntary pension funds, are consolidated
with bank supervision under the National Bank of Serbia in
order to facilitate more effective supervision and
development of the capital market.

Banking law
--------------
On November 11, 2005 the Serbian parliament adopted a new
banking law, reaffirming the role of the National Bank of
Serbia in supervising much of the financial sector. The law
requires that a buyer of more than 5 percent of a banks
capital seek approval from the central bank, and sets the
required initial capital for a bank at EUR 10 million. The
new law stipulates that banks are no longer to be run by a
general manager but rather by a two-member executive board;
introduces more responsibilities for auditors, and calls
for setting up a risk management unit within every bank.

By the end of September 2005, there were 40 commercial
banks and one savings bank, whose assets totaled CSD 672
billion (USD 9.46 billion). Raiffeisenbank (14%),Delta
Banka/Banca Intesa (11%),and Komercialjna Banka (10%) are
the three largest banks by total bank assets in Serbia.

Amendments on Law on Financial Leasing
--------------
Amendments to the Law on Financial Leasing were adopted on
July 15, 2005. They authorize the National Bank of Serbia
to supervise leasing companies and establish financial
leasing controls. A registry in the Agency for Registration
of Business Entities keeps a record of all leasing
contracts.

Republic of Montenegro
--------------
The capital market in Montenegro was established largely
for facilitating the mass voucher privatization program.
Three components that comprise the formal institutions of
the capital market:

1. Central Depository Agency (CDA): Pursuant to the
Securities Law, all securities must be issued in
dematerialized form (there are no bearer shares).
Registration and transfer of these shares is executed
through the CDA.
2. Stock Exchanges and Brokers: There are two exchanges:
Montenegro Stock Exchange and NEX Montenegro. Ten brokers
and one dealer operate on the Montenegrin stock exchanges.
3. The Securities Commission of the Republic of Montenegro
(SCMN): Provides regulatory oversight of the exchanges and
industry activities.

Three types of securities are traded: shares of companies,
shares of privatization -investment funds and old currency
saving bonds.

By the end of September 2005, there were 10 commercial
banks, whose assets totaled EUR 595 million (USD 715
million). Crnogorska Komercialjna Banka (38%),NLB
Montenegro Banka (13%),and Podgoricka Banka (12%) are the
three largest banks per percentage of total bank assets in
Montenegro.

Index values give a good picture of the situation on the
Montenegrin Stock exchanges. High index growth rates
demonstrate that the Montenegrin capital market is
developing. The total volume of trade on both Montenegrin
stock exchanges in the first eight months of 2005 was over
EUR114.6 million, more then twice the total volume in 2004.
The number of transactions is growing. In the first eight
months of 2005, transactions totaled 66,770.

--------------
A.10. Political Violence
--------------

Since October 2000, Serbia and Montenegro has been led by
democratically-elected governments that are implementing
new policies contributing to stabilization of the region.
The union and two republic governments, along with the
majority of the public, support integration into the
European Union and the reforms necessary to achieve this
goal.

The assassination of Serbias Prime Minister in the spring
of 2003 by a criminal group threatened to be a setback for
not only Serbia but the entire country. The government
exercised responsible crisis management and launched a
crackdown on organized crime, resulting in the solving of
previous political murders perpetrated by the former
Milosevic regime; the disbanding of a Milosevic
paramilitary group; and, the removing of corrupt judges,
prosecutors and other officials.

In March 2004, violence in the U.N.-administered province
of Kosovo, largely directed by the majority ethnic Albanian
population directed against minority ethnic Serbs
heightened tension within Serbia. Mosques were damaged in
Belgrade and Nis. However, the Serbian government responded
constructively and worked with the international community
to calm the situation. The Serbian government also publicly
condemned the damage to the mosques and is providing
assistance for their repair. Serbia continues to work
within the international framework on Kosovos future
status.


There is no sustained anti-American sentiment in the
general public despite U.S. involvement in the NATO
intervention against Yugoslavia (Serbia and Montenegro) in
1999. Bilateral relations have normalized since the ouster
of Milosevic, and Serbia and Montenegro and the United
States share many policy goals and cooperate productively
in many areas. There is broad support for a strengthening
of ties with the United States, especially in the
economic/commercial sphere. There is, however, a pervasive
skepticism among the general population over U.S. foreign
policy in Serbia and Montenegro as well as globally. There
remain serious tensions and deep suspicion within the
Government and public related to the strong USG focus on
Serbia and Montenegro's as yet unfulfilled obligation to
turn over for trial those indicted by the UN International
Criminal Tribunal for the former Yugoslavia (ICTY) for war
crimes during the conflicts of the 1990s in Croatia, Bosnia
and Kosovo. There have been no incidents involving
politically motivated damage to American projects and/or
installations in Serbia and Montenegro.

--------------
A.11.a. Corruption
--------------

Corruption is a critical problem in Serbia and Montenegro.
It ranges from the petty expectation that bribes are to be
paid at any and all stages of a business transaction to
money laundering and attempts to siphon-off assets by
previously politically-connected tycoons and organized
crime groups. The imposition of international sanctions
from the early 1990s until 2001 had the unfortunate effect
of stimulating illicit trade/smuggling and a burgeoning
black market in both republics. The Milosevic regime
effectively used this situation by actively facilitating
and exploiting this illegal economic activity. By the
latter half of the 1990s, the former Yugoslavia developed a
reputation for being a lawless state at the center of
international criminal rings in drugs, auto theft,
,
cigarette/arms smuggling, human trafficking, etc.

There is now increased acknowledgement of pervasive
corruption. Increased independence and assertiveness of the
media since the ouster of Milosevic have heightened
scrutiny over the transparency of government and business
dealings as well as public pressure to combat corrupt
practices. In early 2003, the assassination of the Serbian
Prime Minister galvanized the new government to launch a
crackdown on organized crime and begin a more thorough
house-cleaning of the judiciary, security services,
military, etc. Nonetheless, after some initial positive
steps, many perceive that most of this momentum has been
lost under the current government, elected in December
2003. The widely-perceived high level of corruption in the
government and its sporadic, and sometimes politically-
motivated, efforts to combat this problem raise questions
with regard to the near-term prospects for significant
progress. Additionally, the deeply rooted practice of
f
favoring certain parties based on "veze," or connections,
in lieu of more transparent practices, will require
significant time and resources to change.

In the 2005 Corruption Perception Index survey compiled by
Transparency International (TI),an international watchdog
organization for corruption, Serbia and Montenegro received
an index score of 2.8 out of 10 (ten being "highly clean"),
reflecting a slight increase from the rating of 2.7 in
2004.

Both republic governments face the challenge of
rehabilitating how business is performed and legitimizing
much of the informal economy through the creation of a
transparent legal and regulatory framework. During the past
couple of years, there have been important steps in
creating the foundations to fight crime and corruption.
Since 2002, Serbia and Montenegro has been an active
participant in the Stability Pact Anti-Corruption
Initiative, adopting guidelines recommended within the
Pact. Additionally, the republic governments joined other
r
regional finance ministers in an initiative to combat
cross-border cigarette smuggling.

Serbia and Montenegro is a signatory to the Council of
Europe Civil Law Convention on Corruption and has ratified
the Council of Europe Criminal Law Convention on
Corruption, the United Nations Convention against
Transnational Organized Crime and the United Nations
Convention against Corruption. It is also a member of
GRECO (the Group of States against Corruption),a peer
monitoring organization that allows members to assess anti-
corruption efforts on a continuing bases.

In Serbia and Montenegro, both giving and receiving bribes
are crimes which carry prison sentences up to five and 12
years respectively. Bribes by local companies to foreign
officials are also considered criminal acts punishable by
law.

Republic of Serbia
--------------
Corruption in business and other aspects of life is
generally regarded as a critical problem in Serbia. In
December 2001, the Serbian government announced a National
Anti-Corruption Strategy focusing on: institutional
development; public administration reform; economic
reforms; civic participation; and promotion of a political
environment conducive to fighting corruption. The
government subsequently formed the Anti-Corruption Council
(an advisory committee of prominent experts with little
authority) to steer the efforts of the Serbian government.
In the past couple of years, the government has passed key
legislation to develop an anti-corruption legal framework.
Twenty-one anti-corruption teams were made operational in
26 municipalities with hotlines; the teams include a local
police officer, a state prosecutor and a state security
officer. Following the assassination of Serbias Prime
Minister and corruption scandals that rocked the previous
government, the governments efforts to combat organized
crime and corruption intensified. In March 2004, the new
government immediately pushed through a new Law on Conflict
t
of Interest to eliminate questionable activities of
government officials in response to rising public
sentiments over perceived corruption by government
officials. However, although there have been a smattering
of investigations and arrests of public officials, there
are serious questions about the government's commitment to
make these measures effective by sustained implementation.
Moreover, many observers claim that the vast majority of
corruption investigations launched by authorities have been
motivated by political considerations.

Republic of Montenegro
--------------
In 2001, the Government of Montenegro established an Anti-
Corruption Agency responsible for preparing anti-corruption
legislation, improving the transparency of financial and
business operations, coordinating activities with NGOs, and
promoting awareness in combating corruption. While solid
progress has been achieved over the past year through
passage of important legislation on public procurement, the
treasury and budget system, and courts, implementation of
these laws is now the key.

A.11.b. Bilateral Investment Agreements
--------------
Serbia and Montenegro has 41 investment protection
treaties/agreements in force with the following countries:
Albania, Austria, Belarus, Belgium and Luxemburg, Bosnia
and Herzegovina, Bulgaria, Russia, China, Cyprus, Croatia,
Cuba, Czech Republic, Egypt, Finland, FYR Macedonia,
France, Germany, Ghana, Greece, Guinea, Hungary, Holland,
India, Iran, Israel, Italy, Kuwait, Libya, Lithuania,
Nigeria, Poland, Romania, Slovakia, Slovenia, Spain,
Sweden, Switzerland, Turkey, UK, Ukraine, Zimbabwe.

Several BITs initiated in 2005 are expected to be signed in
2006, with the following countries: Denmark, Ethiopia,
Jordan, Pakistan, Qatar, Tunis and South-African Republic.

The United States does not have a Bilateral Investment
Treaty (BIT) with Serbia and Montenegro. It is possible
that, given the presence of U.S. investors, Serbia and
Montenegro could be a BIT candidate in the near future.

Serbia and Montenegro is in the center of the Southeast
Europe Free Trade Area, which was ratified and fully
functional as of 2004. It includes the following countries:
Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Serbia
and Montenegro, Macedonia, Moldova and Romania. The
agreement liberalizes at least 90 percent of mutual trade
by the end of 2008. In addition, a free trade agreement
with Russia is fully in force, offering access to a market
of 150 million people. In 2000, the European Commission
introduced Autonomous Trade Measures for Serbia and
Montenegro. These measures permit exports to the EU without
customs and quantities restrictions for almost all products
originating from Serbia and Montenegro. In addition, trade
with Kosovo, which is under UN administration, proceeds
duty free, although goods are assessed relevant taxes.

Under the Law on Free Zones, it is possible to establish a
free zone only if 30 percent of goods produced or services
supplied annually in the zone are intended for export.
Furthermore, the government has the authority to cancel the
operating license for the zone if the value of goods and
services exported from the zone is less than 50 percent of
the total value of production (goods and services) in the
zone in three consecutive years.

These provisions are contrary to Article 3 of the WTO
Agreement on Subsidies and Countervailing Measures, which
expressly prohibits subsidies contingent on export
performance. According to available information, the new
Law on Free Zones, which likely will be enacted later in
2006, will not contain such provisions. Both Serbia and
Montenegro are negotiating WTO accession.

Following the Belgrade Agreement of 2002, Montenegro and
Serbia agreed on an action plan to bring the two economic
systems together as they move jointly toward EU accession.
In practice, however, the harmonization of tariffs and
d
trade policy proved difficult. As a result, the EU proposed
a two-track approach to EU accession in October 2004. The
twin-track approach allows the EU to deal with Serbia and
Montenegro separately on issues relating to trade, customs
and economic and sectoral policies, while seeking to reach
an agreement with the union on international political
obligations and human rights.
All customs rates, previously determined by federal
legislation, are now set separately either by Serbian or
Montenegrin authorities. The trade reform has significantly
simplified both republics' trade regime by substantially
reducing and simplifying licenses, quotas, tariff rates and
structure. Both republics' customs tariffs are in
compliance with EU tariff nomenclature. There are no
tariffs for most of the products that are imported from
countries in the region. There are also no tariff rates for
products originating in Serbia and imported into
Montenegro, and there are no export duties in either
republics.



A.11.c. OPIC and Other Investment Insurance Programs
-------------- --------------
Serbia and Montenegro signed a Bilateral Agreement with the
U.S. Overseas Private Investment Corporation (OPIC) in July
2001 and became eligible for OPIC programs in November 2001
with ratification of the Agreement by the SAM Assembly.
OPIC's activities include: (1) insurance for investors
against political risk, expropriation of assets, damages
due to political violence and currency convertibility; (2)
insurance coverage for certain contracting, exporting,
licensing and leasing transactions.

OPIC also supports a USD 90 million regional equity
investment fund for Southeastern Europe managed by
Bedminster Capital Management, and it provided USD 30
million in term financing to ProCredit Holding to expand
microfinance lending in Serbia and 18 other countries. To
date, the Southeast Europe Equity Fund II has invested in
Serbia, among other countries. For more information see:
http://www.opic.gov.

Serbia and Montenegro became a member of the Multilateral
Investment Guarantee Agency (MIGA) -- a World Bank
affiliate in April 2002. MIGA also provides political
risk insurance for investors.

In the event that OPIC should pay an inconvertibility claim
under its political risk coverage, the local currency
accepted by OPIC in any subsequent recovery would be made
available to the Embassy on a priority basis for U.S.
Government expenses. The estimated annual value of local
currency used by the Embassy is approximately USD 7
million.

A.11.d. Labor
--------------
Serbias total labor force is comprised of approximately
2.93 million people, of which around 890,000 are unemployed
(Note: this translates to an official unemployment rate
reaching nearly 28 percent. However, a separate measure of
unemployment compiled by the Statistical Office, which
follows ILO methodology, estimates the actual rate of
unemployment rate closer to 19 percent.) The major
r
employment generating sectors are: manufacturing (480,000),
trade (200,000),health and social work (164,000),
education (130,000),transport/communications (119,000),
construction (88,000),and agriculture, forestry and water
industry (70,000). There are an estimated 1.2 million
people employed by state-owned or socially-owned
enterprises. (Socially owned means much of the voting
interest is held by workers.) While illiteracy is low (7
percent),Ministry of Education statistics indicate that
48.4 percent of the population has completed primary
school; 32 percent have completed secondary school; and
only 5.5 percent have a university education.

Labor costs are relatively low in Serbia and Montenegro.
In Serbia, the minimum wage (monthly) for the period July-
December 2005 is set at around CSD 7,400 (equivalent to
about USD 100). The average salary in December 2005 in
Serbia amounted to CSD 22,079, or approximately EUR 260.
The average salary in 2005, compared to the average salary
in 2004 is higher by 23.64 percent in nominal terms, and
6.40 percent in real terms. However, these are net
salaries; actual costs to employers, gross salaries, also
include personal income, social security and other
contributions that can amount to 100-120 percent of the net
salary. Calculation, deduction, and payment are the
responsibilities of the employer. The payroll contribution
for pension and disability insurance is 22 percent (11
percent paid by the employer and 11 percent by the
employee); for health insurance, 6.15 percent (3.075
percent is paid by the employer and 3.075 percent by the
employee),and for unemployment insurance, 1.5 percent
(0.75 percent is paid by the employer and 0.75 percent by
the employee). In effect, the employer pays these costs.

In Montenegro, labor costs are slightly higher but still
relatively inexpensive. The total workforce is estimated to
be 225,000 with an unemployment rate of roughly 19 percent
at the end of 2005. The latest data shows that employment
in private companies has increased, and total employment in
the social sector (including socially and state-owned
companies) has decreased. Major sectors generating
employment in Montenegro are: tourism, port/shipping and
manufacturing (aluminum, etc).

Serbias Law on Labor Relations (amended in December 2001)
and Montenegros Labor Law (adopted in 2003) regulate
employee and employer relations through employment
contracts. Previous labor legislation provided overly
generous benefits to workers. For example, excessive
severance packages (two years) were required for employees
that were terminated. More frustrating for employers was
that former laws essentially prevented terminations for
non-performance. The World Bank, in particular, worked
closely with the republic governments to seek major
amendments to these laws. As a result, both laws improved
companies ability to remove non-performing workers without
entailing excessive severance costs. Costly maternity
nity
benefits were reduced and brought in line with European
norms. Both republic laws permitted collective bargaining.
The laws reaffirm employees' right to strike but also set
out obligatory procedures for organizing a work stoppage.

However, a new Serbian Labor Law adopted in March 2005 and
amended in July 2005 was viewed by many in the foreign
investment community as a step back towards labor market
inflexibility, which poses an obstacle to investment and
the shift of employment from the gray to the formal
economy. Foreign investors believe that the implementation
of this law is greatly increasing labor costs, and that
many of its provisions represent a great burden for the
employer. For example, amendments to the new law double the
severance payment for redundant workers. Given the concerns
of foreign investors, the government of Serbia is
considering amendments to the Labor Law in 2006.

Montenegro has amended its labor law to eliminate labor
market rigidities and permit direct negotiations between
employees and employer. Labor relations are governed by
national, sector and company collective bargaining
agreements. There are concerns that the reforms envisioned
in the law could be circumvented through the
sector/company-specific agreements.

A.11.e. Foreign-Trade Zones/Free Ports
--------------
Serbias current Law on Free Trade Zones, the former
Yugoslav law promulgated in 1998, permits the establishment
of free-trade zones which provide customs duties benefits
to companies operating out of these zones. There are
currently 14 designated free-trade zones in Serbia:
Belgrade, Smederevo, Kovin, Novi Sad, Sabac, Subotica,
Sremska Mitrovica, Senta, Prahovo, Sombor, Lapovo, Vladicin
Han, Backa Palanka and Pirot. However, only five of them
are functioning at present: Belgrade, Novi Sad, Subotica,
Sabac and Pirot. Free trade zones in Pirot and Subotica
have been the most successful. Imports into the zones and
exports from the zones are not subject to quotas, permits,
licenses, or other foreign trade restrictions. Fixed
assets, machines, and construction materials can be
imported duty-free. Goods that are imported from the zones
into the domestic market are subject to standard customs
procedures; however, if the goods are produced from at
least 50 percent domestic components, they are considered
to be domestic goods. Moreover, the profit from
investments over EUR 8 million is tax-free for 10 years.

A new Law on Foreign Trade Zones is being drafted as of
early 2006. The new law will require shutdown of non-active
free trade zones, while active and newly-formed ones will
be required to submit their reports at the end of each
fiscal year to the future Directorate for Free Trade Zones.
This Directorate would be authorized to issue or cancel
licenses to operate the free trade zones. In addition, the
new law would allow the establishment of the free trade
zones within business parks.
In June 2004, Montenegro passed its own Free Trade Zone
Law. There is currently only one free trade zone: Port of
Bar. The Free Zone offers to businesses benefits and
exemptions from customs duties, taxes, and other duties.

A.11.f. Foreign Direct Investment Statistics
--------------
The source of data on FDI flows into Serbia is the National
Bank of Serbia and Customs Administration; however, there
are technical problems with reconciling this data. The NBS
takes into account only cash, mainly balance of payments
transactions, while Customs records imports of equipment.
The Serbian Investment and Export Promotion Agency tries to
combine these two sources and calculate accurate FDI data,
but only from 2004.

A second issue with the FDI data arises with regard to the
country of origin. Cash-based data recorded by the central
bank reflects the last financial center from which the
transfer to Serbia was made, but many companies use
offshore banks or subsidiaries. For instance, much of the
U.S. investment actually is recorded as originating from
the Netherlands. However, Embassy calculations show that
total US FDI from 2000 till 2005 in Serbia is USD 1.3
billion, which means that the U.S., overall, has been the
largest investor into Serbia.

Total FDI for the period 2000-05 is about USD 4.5 billion.
Assuming estimated Serbian GDP for 2005 of around USD 25
billion, the cumulative stock of FDI, as a percentage of
GDP, is more than 17 percent for the period of 2002-05 and
more than 18 percent if we include 2000 and 2001. The
inflow of FDI for 2005, as a percentage of GDP, reached 6
percent; looking back to 2001, inflows ranged from 3-6
percent of GDP in the observed period.

Foreign Direct Investment in the Republic of Serbia
(by country, in thousands of USD)

Country Total (annual): Total

2002200320042005Cumulative
-------------- --------------
Totals: 475K 1,360K 950K 1,500K 4,285K
4,285K
Netherl2,248598,963102,30191,028794,540
Germany82,80175,70897,897199,702456,108
Austria33,87693,747142,767138,245408,635
Greece12,49662,26851,351237,527363,642
Sloveni9,56129,03613,539173,734225,870
France87,4897,85823,88133,997153,225
Cyprus41,71731,58114,52663,787151,611
UK6,61820,63163,90549,957141,111
Italy7,55321,32535,88634,09798,861
Switzer2,91312,55925,11852,50393,093
USA18,09915,06815,86625,57574,608
Croatia5,24334,4467,51716,06863,274
Hungary1,1674,22417,27927,23249,902
Latvia3515,33015,286 30,651
Russia2,5563,359 14,41120,326
Belgium3441,9253,12512,39417,788
Israel2602072,50414,50317,474
Denmark7,8184,6131,04013,471
Bulgari13312911,8831,06413,209
Sweden312948,4583,58612,369
Luxembu3,6194,1082,427 10,154
Bos/Her2,9515,056 2,12110,128
Czech 2651,0042,1248474,240
Canada1113591,6991,5573,726
Japan 31,2891691,461

Montenegro

056 2,121 10,128
Czech 265 1,004 2,124 847 4,240
Canada 111 359 1,699 1,557 3,726
Japan 3 1,289 169 1,461

Montenegro

A similar issue with data arises with regard to FDI data
for Montenegro. The Central Bank of Montenegro misses much
FDI connected to privatization transactions. And since
Montenegro uses the Euro, inflows are less transparent.
For example, the Central Bank likely will not record
inflows related to the 2005 sale of Telekom Montenegro to
Hungarian Matav, because it occurred via a stock purchase.
The data coming from the Government's Montenegro Investment
Promotion Agency (MIPA) is more complete.
Estimated Montenegrin GDP for 2005 is around USD 2 billion.
The FDI stock as a percentage of GDP is 52.2 percent for
the observed period, although the FDI stock rises to almost
USD 1.5 billion, or roughly 75 percent of GDP, for the
entire period 2000-05. FDI inflow as a percentage of GDP
was almost 19 percent for 2005; annual flows during 2000-05
ranged from 16 to 19 percent.

Foreign Direct Investment in the Republic of Montenegro
(by country, in thousands of USD)

CountryTotal (annual):Total

al

2002200320042005Cumulative
-------------- --------------
Totals:169,839302,386138,525433,7501,044,500
Hungary1,0383,636 5,125.0239,375249,174
Greece16,50996,5909381,750115,788
Luxembu8,77467,0466,6255,37587,819
Sloveni7,97218,75022,00026,25074,971
Russia3,2555,28410,87552,25071,664
Germany22,6428,52314,37511,87557,414
UK30,66013,3526,8754,50055,388
Switzer6,17910,00011,75022,00049,929
Austria2,2264,8295,62521,62534,306
Belgium8,2084,886-2,12515,219
USA1,6042,1592,8756,87513,513
Serbia3,0751,9893,8754,37513,314
Italy3,4911,4208132,6258,349
BIH-1,8759384,3757,188
Croatia2,0767051,3751,5635,718
Netherl1,8491,4208756874,832
Israel1,6511,5341,0004,185
Denmark2,1791,704-3,884
Sweden8218304381,1253,213
Japan-2,898--2,898
France8219664501252,362
Slovaki--450-450
Other44,81151,98942,25023,875162,925



Following are some major FDI transactions of interest:


Slovaki - - 450 - 450
Other 44,811 51,989 42,250 23,875 162,925



Following are some major FDI transactions of interest:

Company: Bank Intesa
Country: Italy
Investment: 90 percent of Delta Banka for USD 399.6 million
- Retail Banking (Serbia)

Investing Company: Alpha Bank
Country: Greece
Investment: 88.64 percent of Jubanka for USD 185 million
- Retail Banking (Serbia)

Investing Company: Credit Agricole
Country: France
Investment: 71 percent of Meridian Banka for USD 96 million
- Retail Banking (Serbia)

Investing Company: Erste Bank
Country: Austria
Investment: 83.3 percent of Novosadska Banka for USD 87.84
million - Retail Banking (Serbia)

Investing Company: EFG Eurobank
Country: Greece
Investment: 52.2 percent of Nacionalna Stedionica - Banka
for USD 49.2 million - Retail Banking (Serbia)

Investing Company: Nova Ljubljanska Banka
Country: Slovenia
Investment: 98.4 percent of Kontinetal Banka for USD 59.4
million - Retail Banking (Serbia)

Investing Company: Findomestic Bank
Country: Italy
Investment: Nova Banka for USD 28.44 million - Retail
Banking (Serbia)

Investing Company: Pireus Bank
Country: Greece
Investment: 88.23 percent of Atlas Banka for USD 32.4
million - Retail Banking (Serbia)
Investing Company: OTP Bank
Country: Hungary
Investment: 89.39 percent of Niska Banka for USD 17.05
million - Retail Banking (Serbia)

Investing Company: Coca Cola Co.
Country: USA
Investment: 100 percent of Vlasinka Vranje for USD 25.8
million - Food Processing Industry (Serbia)

Investing Company: British-American Tobacco (BAT)
Country: UK
Investment: USD 36 million in new factory in Vranje
(Serbia)

Investing Company: Merkator
Country: Slovenia
Investment: USD 27.6 million in a new store in Cacak -
Retail Trade (Serbia)

Investing Company: Merkur
Country: Slovenia
Investment: USD 12 million in the first store in Belgrade -
Retail Trade (Serbia)

Investing Company: METRO Cash&Carry
Country: Germany
Investment: USD 72 million - Gross and Retail Trade
(Serbia)

Investing Company: Worldfin Fund
Country: Luxemburg
Investment: 70 percent of Port Belgrade for USD 48 million
- Transport (Serbia)

Investing Company: Gorenje Group
Country: Slovenia
Investment: USD 48 million in the new factory in Valjevo -
Home Appliances (Serbia)

Investing Company: Agrokor
Country: Croatia
Investment: 60 percent of Dijamant Zrenjnin - Food
Processing Industry (Serbia)

Investing Company: Interbrew
Country: Belgium
Investment: Acquisition of Niksic Brewery for USD 25.2
million (Montenegro)

Investing Company: Societe Generale
Country: France
Investment: Acquisition of 64.45 percent of Podgoricka Bank
for USD 16.8 million (Montenegro)

Investing Company: Hellenic Petroleum
Country: Greece
Investment: Acquisition of the 54.4 percent of Jugopetrol
Kotor petroleum refinery for USD 120 million (Montenegro)

Investing Company: Telenor
Country: Norway
Investment: Acquisition of Promonte mobile operator for USD
108 million (Montenegro)

Investing Company: Matav (with Deutche Telecom)
Country: Hungary
Investment: Acquisition of 51 percent of Telecom
Montenegro for USD 136.8 million (Montenegro)

Investing Company: Rusal
Country: Russia
Investment: Acquisition of aluminum plant for USD 58.2
million (Montenegro)

Investing Company: HIT Nova Gorica
Country: Slovenia
Investment: Acquisition of the Hotel Maestral for USD 48
million (Montenegro)

Investing Company: Beppler & Jacobson
Country: England
Investment: Acquisition of Hotel Bianca for USD 10.8
million (Montenegro)

Investing Company: Njega Tours
Country: Russia
Investment: Acquisition of Hotel AS for USD 18 million
(Montenegro)
Moore