FINANCE MINISTER ON INVESTMENT ISSUES

UNCLAS SECTION 01 OF 02 BELGRADE 000401

SIPDIS

SENSITIVE

OC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: EFIN ECON ECPS ENRG EINV KIPR SR MW
SUBJECT: FINANCE MINISTER ON INVESTMENT ISSUES



1. (SBU) SUMMARY: Ambassador Polt met with Finance Minister
Mladjan Dinkic on March 7 to raise several issues involving
U.S. investors and economic policy. Dinkic pledged to be
helpful in resolving issues related to U.S. Steel and the gas
shortages that are affecting production at the company. He
agreed to meet with Philip Morris to discuss regulatory
issues that have eroded the company's prospects in Serbia,
but noted that the company had been consulted on many of
these changes. The finance minister said he was an advocate
of strengthened IPR protection and would consider instructing
tax inspectors to look for pirated software. When Ambassador
Polt raised GOS intentions with regard to state-owned Dunav
Insurance, Dinkic revealed that the GOS planned to permit the
EBRD to take a 25-30 percent stake through a capital
increase, before an IPO or other form of privatization over
the medium term. end summary.


2. (SBU)Ambassador Polt met with Finance Minister Dinkic on
March 7 at the Ministry of Finance. The Ambassador was
accompanied by econ chief, while Dinkic was joined by Sonja
Mihajlovic-Milanovic, energy adviser to Deputy Prime Minister
Labus, and three staffers. Embassy had requested the
appointment to raise several issues, including problems
encountered by U.S. Steel and Philip Morris. (Note:
Ambassador actually met with Dinkic twice; the second
meeting, reported septel, including Mara Harty, assistant
secretary for consular affairs.)

SIPDIS


3. (SBU)Ambassador began the discussion of investment issues
by commenting on recent press reports indicating that the GOS
team had worked out a deal with Austrian investors that would
protected their interest in cellular operator Mobtel. Dinkic
confirmed that the Austrians should realize at least 18
percent of an estimated USD 700 million in proceeds from a
tender for Mobtel assets, its customer network and the
license. However, Mobtel itself, as a legal entity, would be
liquidated, Dinkic said. This guaranteed the Austrians a
minimum of USD 126 million, to cover the USD 100 million they
claim to have paid Bogoljub Karic and a USD 30 million
Ericsson claim for which they will take responsibility. If
the sale price goes higher, the Austrians will gain, Dinkic
said. All legal claims would be dropped, and if Karic is not
satisfied, he can take court action against the Austrians,
the finance minister added. To ensure a good price in the
tender, the GOS will guarantee the buyer that it will not
sell a third cellular license during the next 2 years at a
price lower that the price the Mobtel license brings at
tender, an estimated USD 300 million.



4. (SBU) Two U.S. investors, U.S. Steel and Philip Morris,
recently had sought Embassy assistance, Ambassador Polt said.
Interruptions in gas supplies caused by the dispute between
Russia and Ukraine, as well as cold weather, had disrupted
U.S. Steel's production in January and February and cost the
company a considerable amount of money. However, last week,
on March 1-2, Srbijagas again had reduced gas to U.S. Steel.
The Embassy had had learned that this apparently occurred
because fertilizer producer Azotera Pancevo had started up
its highly energy-intensive production process. In this
case, the disruption was not a development that affected all
players, but rather, it was a non-market based decision by
Srbijagas. U.S. Steel now was deeply concerned about whether
Srbijagas could guarantee a reliable supply of energy, the
Ambassador said.


5. (SBU) Dinkic said it would be helpful if U.S. Steel
signed a long term contract with Srbijagas and thereby
provided a clearer projection of its energy needs. U.S.
Steel is Serbia's largest exporter, and it was important to
meet its needs, the minister added. Long term, the answer is
underground storage. Dinkic said he would talk with
Srbijagas Executive Director Tomic about a three-year
contract for U.S. Steel. The Ambassador replied that he
understood that U.S. Steel was prepared to sign such a
contract, but it must provide for peak usage, a fact of life
for this sort of industrial operation. (Note: U.S. Steel
has said that it had in the past requested a long-term supply
contract, but the Srbijagas had been unwilling.)


6. (SBU) The Ambassador reiterated our concern over the
March reduction, which occurred because Srbijagas elected to
provide gas to the fertilizer company and cut back others.
Dinkic said he would check with Tomic on this point; in his
opinion, the finance minister said, any cutbacks should be
applied proportionally to all and not fall more heavily on
one customer. But he emphasized the GOS is committed to
carrying out the gas storage project quickly, with the tender
to begin within 50 days. Ambassador Polt stressed that
completion by next winter is critical. Sonja Mihajlovic-
Milanovic added that Serbia must complete phase one of the
project on time. Dinkic said that the GOS is aware that
better infrastructure is needed to support economic growth.
The GOS had decided how to proceed, and the upcoming tender
would select the best strategic partner for this project.



7. (SBU) Philip Morris also had approached the Embassy
recently, Ambassador Polt said. Country director Eugenio
Sidoli presented a comprehensive analysis of the company's
experience since acquisition of the cigarette factory in Nis,
detailing how events, including some regulatory changes, had
progressively undermined profitability. Philip Morris was
seeking an accommodation with the GOS to turn this trend
around. Dinkic expressed surprise, explaining that he was
aware of only two issues -- a small per pack surcharge for
health purposes to which the tobacco companies had agreed,
and a decision by Montenegro to add its own excise tax to
cigarettes, which was beyond Serbia's control. The latter
issue could be resolved by the outcome of Montenegro's
independence referendum, the minister added. Dinkic agreed
to meet with Sidoli to review Philip Morris's concerns.


8. (SBU) Ambassador Polt then raised the need for stronger
protection of intellectual property rights (IPR). The
Embassy had been successful so far in convincing Washington
of Serbia and Montenegro's (SaM) commitment to improving IPR
protection, thereby helping the country to avoid the censure
of the Special 301 watch list. But the review process has
begun again, with U.S. industry seeking to put SaM on the
watch list, the Ambassador explained. GOS action on further
steps to strengthen IPR protection would help keep SaM off
the list, and one of these steps involved the tax police,
which operate under the Ministry of Finance. Tax inspectors
are not verifying whether software used by firms is
legitimate, the Ambassador said. U.S. software companies have
asked the Tax Administration to order inspectors to check on
this and report violations to the appropriate authorities.
The Embassy is aware of the considerable progress already
made on IPR, Ambassador Polt said, but we need GOS focus on a
few specific areas to be able to assure Washington that the
GOS was doing all it could to improve IPR protection.


9. (SBU) Dinkic expressed surprise, saying that he had asked
all ministries to work on IPR protection but was unaware of a
specific area in which tax police were not being helpful.
The Minister recommended that Embassy representatives meet
with Deputy Finance Minister Vesna Arsic, along with the Tax
Administration officials, to review the matter. Sometimes tax
authorities resist new approaches, Dinkic said, but it might
be possible to work this out without a change in the law.
Econ chief added that those who buy pirated software are
paying far less than they would for authorized products, and
this represents a loss of VAT revenue to the Ministry.


10. (SBU) The discussion turned to economic policy as
Ambassador Polt queried Dinkic on GOS plans for Dunav
Insurance, a state-owned company and Serbia's largest
insurer. Privatization would be the best step, especially
with Dunav's exposure to foreign exchange risk through its
program of insuring retail bank loans, the Ambassador said,
but there had been press reports that the GOS opposed
privatization. Dinkic replied that the GOS would follow the
same approach with Dunav as it has with Komercialna Banka,
bringing in the EBRD as a major investor to help in the
restructuring of Dunav. A smaller state-owned insurer, DDOR,
could be privatized right away, but Dunav needed work,
including more unbundling of non-core operations. This also
could enhance the value of the company, Dinkic said.
Privatization, perhaps through an IPO, would come later. But
he agreed with the Ambassador that Dunav needs work.


11. Comment. Dinkic clearly was trying to be helpful on a
variety of issues. Embassy will follow up with Finance
Ministry and with other GOS interlocutors regarding specific
steps on IPR protection. We are seeking GOS agreement to an
IPR action plan that includes measures aimed at various
shortcomings that affect the position of U.S. companies in
the SaM market. End Comment.

Polt