TWO YEARS IN POWER: RESILIENCE AND STABILITY OF

C O N F I D E N T I A L SECTION 01 OF 05 ZAGREB 000001

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SCE

E.O. 12958: DECL: 12/30/2015
TAGS: PGOV PREL KAWC KCRM PHUM PREF HR
SUBJECT: TWO YEARS IN POWER: RESILIENCE AND STABILITY OF
SANADER GOVERNMENT

REF: A. A) ZAGREB 1939 AND PREVIOUS

B. B) ZAGREB 1940

C. C) ZAGREB 1844

D. D) ZAGREB 1254

E. E) ZAGREB 834

F. F) ZAGREB 827

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


1. (SBU) SUMMARY AND COMMENT: During his second year in
office, PM Ivo Sanader led his Croatian Democratic Union
(HDZ) through domestic difficulties and over critical
Euro-Atlantic integration hurdles. At the same time, he
sustained a government coalition whose unquestionable
stability defies the conventions of public opinion polls and
parliamentary seat counts. His government continues to be a
strong force for regional stability and has made steady
progress in addressing such critical issues as refugee
returns and trafficking in persons. Sanader again added to
the international credibility of the HDZ this year while
sidelining or eliminating extremist voices within the party.



2. (SBU) Sanader's trouble spot remained much the same as
during his first year in office: he is most successful
internationally while the public believes his government
should focus domestically. With the opening of EU
negotiations in October, Sanader is now able to do just that
- relax his international agenda and concentrate on the
troubled Croatian economy. He can already point to success
in resolving the nation's debt to its pensioners, a legacy of
Croatia's war budget that no previous government has been
willing or able to tackle. Sanader also got as much
political mileage as he could from the summer opening of the
Zagreb-Split highway, something of tremendous symbolic
significance, but he will need to seriously address
unemployment and budget-draining state enterprises in the
coming to year to gain public confidence in the GoC's
domestic program.


3. (U) The following assessment of GoC accomplishments is
organized according to Post's 2005 MPP goals. END SUMMARY
AND COMMENT.

TIES WITH ALLIES & FRIENDS: ACCESSION PROGRESSION
-------------- --------------


4. (SBU) During the year, PM Sanader continued to focus the
majority of his energy on courting European Union officials
with an eye on integration. After a six-month delay, Sanader
secured the opening of Croatia's EU membership negotiations
when his government provided key intelligence on the
whereabouts of International Criminal Tribunal for the former
Yugoslavia (ICTY) indictee Ante Gotovina, satisfying the EU's
requirement for full cooperation with the Tribunal (ref A).
Gotovina's subsequent arrest by Spanish authorities removed
the last significant political barrier to Croatia's future in
both the EU and NATO while adding another layer to Sanader's
challenge in building domestic public support for his
integration goals.


5. (SBU) The ultimate success of Sanader's Action Plan to
locate Gotovina demonstrated a new level of maturity within
the GoC, requiring interagency coordination and information
control not previously seen in Zagreb. The upcoming months
of EU membership negotiations will show whether Sanader's
government is ready for this type of technical coordination
on a wider scale.

TIES WITH ALLIES (cont'd): A NEW FOCUS ON U.S. RELATIONS
-------------- --------------


6. (C) With the EU nut cracked, the Sanader government has
launched a concerted effort to strengthen relations with the
U.S. The MFA regularly consults with the Embassy on this
strategy and has intensified efforts to attract high- level
Administration and Congressional visits. Hopeful of U.S.
support for Croatia's NATO candidacy, the GoC warmly welcomed
this month's favorable Congressional resolutions while trying
to keep public expectations about a near-term membership
invitation realistic.


7. (C) Recent overtures to the Embassy related to Article 98
indicate the GoC is serious about finding a solution to this
key issue. President Stjepan Mesic has flatly told the
Ambassador in the past that an Article 98 agreement was
politically unfeasible while Croatia was expected to send its
citizens to The Hague. Now that Croatia's last fugitive has
been apprehended, public opposition to Article 98 may slowly

ZAGREB 00000001 002 OF 005


begin to soften and open some maneuvering space.


8. (SBU) Most recently, the GoC has indicated willingness to
pursue a bilateral agreement necessary to allow certain U.S.
citizens access to Croatia's law on restitution of property
seized by the Yugoslav government. Despite opposition and
media attacks over a similar agreement with Austria, the GoC
remains committed to resolving this longstanding issue.


9. (U) Sanader continues to seek ways to support U.S. efforts
in Iraq while avoiding an actual troop presence. His
government has been quick with statements in support of Iraqi
elections and welcoming the new government. In mid-2005, the
GoC sent three police instructors to the Jordan International
Police Training Center. The GoC also approved a tripling of
Croatian forces in Afghanistan, from 50 to 150, and
contributed troops to a joint Adriatic Charter (A-3: Croatia,
Albania, Macedonia) medical unit in Kabul.

REGIONAL CONFLICTS: NORMALIZATION TAKES HOLD
--------------


10. (SBU) The most dramatic thing about Croatia's relations
with its neighbors during the year was the absence of
anything dramatic. With the exception of small bursts of
outdated rhetoric around a May Chetnik rally in Serbia (ref
E) and the tenth anniversary of Croatia's Operation Storm in
August, the GoC has maintained normal relations with the
government of Serbia and Montenegro (SaM). Sanader hosted
SaM PM Vojislav Kostunica in November (returning Sanader's
November 2004 visit to Belgrade),and several ministries
exchanged visits throughout the year. While refugees and
missing persons remain thorny issues, Zagreb now appears to
understand that relations with Belgrade are key to achieving
their mutual of goal of regional stability.


11. (SBU) The GoC has continued constructive engagement with
the government of Bosnia and Herzegovina (BiH) while
supporting the Bosnian-Croat community on such issues as dual
citizenship, veterans' benefits, and equal rights.
Bosnian-Croats' voting rights in Croatia's national elections
came under domestic political debate following what many saw
as their undue influence in the January presidential election
but remain unchanged.


12. (SBU) Longstanding bilateral issues with Slovenia
continued to rankle politically but inched toward resolution.
The dispute surrounding the maritime border appears
increasingly likely to be headed for international
arbitration, while a European Court of Human Rights ruling in
favor of Croatian claimants in a dispute over pre-war
deposits in Slovenia's Ljubljanska Banka has set some
restitution claims in motion.

REGIONAL CONFLICTS (cont'd): CLOSING THE REFUGEE FILE?
-------------- --------------


13. (U) The GoC proactively worked on refugee returns with
the aim of resolving all open issues by the end of 2006 per a
January trilateral agreement with SaM and BiH. In July,
Croatia presented its refugee return "road map" to the
international community with detailed benchmarks through

2006. Of the approximately 9,000 houses rebuilt this year,
more than 70 percent were for ethnic Serbs. Repossession of
houses by Serbs is almost complete, with only 55 cases
remaining, and the Croatian Electricity Company (HEP) began
electrification of 50 primarily Serb villages.


14. (U) The GoC has fallen short, however, in some areas,
including addressing problems surrounding repossessed
properties either devastated or modified by the temporary
occupants. Of some 9,000 requests to provide homes for
former residents of socialized housing, only a few dozen were
resolved by year's end. Human rights NGOs and
representatives of the Serb minority complained of a rise in
violent incidents against ethnic Serbs, particularly in the
Dalmatian hinterlands. Police have identified perpetrators
in only about one-third of the 50 incidents investigated in

2005.

ECONOMIC GROWTH: UNEVEN PROGRESS
--------------


15. (SBU) To judge the Government's economic accomplishments
by words and not deeds, one would be justified in concluding
that Croatia is finally ready to make the difficult choices
necessary to encourage greater economic growth.
Unfortunately, however, the Government's rhetoric has not
always been matched by the fortitude to take on established

ZAGREB 00000001 003 OF 005


interests or recalcitrant local officials. As a result, the
HDZ's economic achievements after two years in office are
decidedly mixed. Progress in some areas, such as
streamlining bureaucracy and reining in chronic deficits has
been offset by stagnation elsewhere, most notably in the
failure to privatize or liquidate loss-making state
industries and reform the public sector, which accounts for
an inordinately large percentage of GDP.


16. (SBU) After years of false starts and broken promises,
the last year has seen progress in efforts to improve
Croatia's investment climate. A government project to reduce
the time necessary to register a business, called the One
Stop Shop, is up and running. Although not a single stop,
the project has apparently reduced the time necessary to
register a new limited liability company to just 5 days,
efficiency unthinkable in Croatia just a few years ago.
Similar efforts to digitize land records and make them
available on line are starting to reduce previously
interminable back logs in the issuance of property deeds,
reducing opportunities for graft in the process. An
investment promotion agency is also operational for the first
time after several false starts.


17. (SBU) In the area of monetary policy, the Sanader
government's stewardship of the economy has been relatively
steady, with a strongly independent central bank able to stay
above the political fray. As a result, inflation has
remained relatively low (although 2005 figures are likely to
be higher following the rise in energy prices) and the
exchange rate steady. On the fiscal side, Croatia's
"precautionary" Stand-By Arrangement with the IMF has forced
the Government to begin to rein in its deficit, expected to
be 4.2 percent of GDP in 2005 and targeted at 3.3 percent
in 2006.

ECONOMIC GROWTH (cont'd): THE MORE THINGS CHANGE . . .
-------------- --------------


18. (SBU) To hear the Government trumpet its economic
successes, one would believe that EU accession negotiations,
E-government, rising tourism receipts and the IMF's seal of
approval are all that Croatia needs to catch up with its more
advanced northern neighbors. Unfortunately, there is another
reality that this government has been reluctant to confront
head on. Government subsidies to loss-making industries and
agriculture continue to suck up approximately 3 percent of
the country's $32 billion GDP. The last year has seen
virtually no progress in the privatization or resolution of
the state's still large portfolio of loss-making assets,
including shipyards and metal works. In fact, the Government
backed out of two privatization deals in the face of
vociferous opposition from local politicians and labor
unions, removing the head of the privatization office in the
process. The state sector in general remains bloated as
well, with entitlements and healthcare costs all running
above the EU average. As a percentage of GDP, the Croatian
state's share is approximately 40 percent, high even by
European standards.


19. (SBU) Where reform has also been slow to come is in
changing the way of doing business to a system where
resources are allocated on the basis of economic merit rather
than political or personal relationships. This Government
came to office promising accountability and efficiency, but
has little to show for it so far. Many public tenders are
carried out under less than transparent circumstances (if
they are carried out at all),providing endless fodder for
the scandal-hungry press and sending the message to potential
foreign investors that business is not conducted on a level
playing field in Croatia. Until the Government addresses
these problems, Croatia will continue to grow at a slower
rate than is necessary if it is to boost living standards and
reduce a stubbornly high unemployment rate.

RULE OF LAW: THE SLOW PACE OF REFORM
--------------


20. (SBU) The GoC continued to make steady progress in the
professionalization of its police force, gradually improving
investigations and building public confidence. Sanader
reinforced this with key leadership changes, including
appointment of the progressive and energetic Minister of
Interior Ivica Kirin in mid-2005. Under U.S. and EU
mentorship, Croatian police formed their first-ever
police-prosecutor task force to tackle an organized crime
group involved in drug smuggling. Justice Minister Vesna
Skare Ozbolt pursued aggressive judicial reforms during the
year, making significant progress in eliminating case

ZAGREB 00000001 004 OF 005


backlogs, but judicial discipline remains a chronic problem
outside of major urban courts.


21. (SBU) Croatian police and prosecutors made their first
serious witness protection efforts in 2005 thanks to
USG-funded training and other international assistance.
While initially marred by excessive media exposure, Croatia's
fledgling witness protection program is maturing rapidly and
will prove critical to the prosecution of organized crime and
war crimes.


22. (SBU) In addition to the Gotovina hunt, the Sanader
government achieved increased success in domestic war crimes
prosecutions, though ethnic bias remains a problem. Several
ongoing cases involve retrials of Croatian defendants
improperly acquitted in the past, and the quality of court
proceedings has increased markedly from the initial trials.
In recognition of this improved atmosphere, the ICTY
completed transfer of the case against Rahim Ademi and Mirko
Norac to the Croatian judiciary in October.


23. (SBU) Croatia showed significant improvement in the fight
against trafficking in persons and was removed from the
Department's Tier Two watch list in 2005. The GoC undertook
serious prevention and public awareness campaigns. Anti-TIP
training to police, prosecutors and judges began to pay off,
as Croatia convicted one trafficker during the year and has
prosecutions now pending against 13 suspected traffickers.


DEMOCRACY - POLITICAL STABILITY DESPITE THE NUMBERS
-------------- --------------


24. (SBU) While the HDZ's poll numbers have dropped during
the year (mostly in a likely temporary surge in the
popularity of the far-right Croatian Party of Rights - HSP -
ref C),Sanader's governing coalition remains solid. The
PM's parliamentary majority may be slim on paper, but he has
a growing number of informal allies he can call on as needed,
as he did when passing the GoC's most recent budget in
November by a three-to-one margin. Early parliamentary
elections remain highly unlikely in the near term.
Emboldened by rising poll numbers, the opposition Social
Democratic Party (SDP) has stepped up its rhetoric slightly,
calling for early elections by the end of 2006, but it
continues to lack the votes in parliament to launch a
credible no-confidence campaign.


25. (U) The GoC oversaw two successful elections in 2005 -
presidential in January and local in May. Both were deemed
free and fair, though the local elections highlighted the
need for two practical reforms: introduction of the direct
election of mayors/county prefects and the establishment of a
permanent state electoral commission. The GoC has introduced
legislation on both reforms to Parliament.


26. (SBU) The local elections also demonstrated the
resilience of the HDZ, making the most of post-electoral
coalitions after lackluster electoral results. Some
negotiations, however, led to tensions with national
coalition partners in the Independent Democratic Serbian
Party, whose officials were shut out of the HDZ's local
coalitions in Knin and Vukovar.

DEMOCRACY (cont'd) - MANAGING THE NATIONALIST RIGHT
-------------- --------------


27. (SBU) Following the Gotovina arrest, Sanader demonstrated
his firm grip on rhetoric within the party. Protests in
support of Gotovina remained peaceful and controlled under
Sanader's influence (ref B),and those who pushed for more
radical and nationalist demonstrations were unable to muster
support. In the meantime, the GoC is delicately shifting its
focus from the Gotovina manhunt to the Gotovina defense,
where it will play a role countering elements of the ICTY
indictment citing a "joint criminal enterprise" involving
members of the then Croatian government.


28. (SBU) Sanader continued his housecleaning of the HDZ
during the year, isolating or eliminating the party's extreme
nationalists. Most notably, he expelled Eastern Slavonian
strongman Branimir Glavas from the HDZ early in the year.
While Glavas mounted an impressive local election comeback in
Osijek and the surrounding county in May, routing the HDZ
with his independent list of loyalists (ref F),his national
influence has withered. An aggressive police investigation
into war crimes committed in Osijek in 1991 has implicated
Glavas and forced him to concentrate his energies locally
(ref D).

ZAGREB 00000001 005 OF 005




29. (SBU) Andrija Hebrang, former Deputy Prime Minister and
Minister of Health and Social Welfare, left the cabinet for
health reasons in the spring but has remained active within
the party and Parliament. With less responsibility, Hebrang
has re-emerged as the loudest voice from the HDZ's far right,
though some suspect with Sanader's silent approval. Hebrang
and his attacks on critics of Croatia's past leadership are
useful to Sanader, placating opponents of party reforms and
keeping the HDZ's right wing from being lost to the HSP.
While Hebrang shows the party's traditional conservative base
that the HDZ has not forgotten them, Sanader can go about the
important business of tackling Croatia's difficult economic
problems and educating the public on the benefits of
integration and EU and NATO membership.
FRANK