CROATIA SCENE SETTER FOR AMBASSADOR NULAND AND THE

UNCLAS ZAGREB 000281

SIPDIS

SENSITIVE
SIPDIS

USNATO PLEASE PASS TO AMBASSADOR NULAND
DEPARTMENT FOR EUR/SCE, EUR/RPM
DEFENSE FOR OSD/ISP/NATO POLICY


E.O. 12958: N/A
TAGS: PREL OREP PGOV MARR HR
SUBJECT: CROATIA SCENE SETTER FOR AMBASSADOR NULAND AND THE
NATO ROAD SHOW


1. SUMMARY: The last few months have brought a string of
good news for Croatia and the government of Prime Minister
Ivo Sanader. With EU accession negotiations opened on
October 4 and fugitive general Ante Gotovina arrested in
Spain on December 7, Croatia has now cleared major
political obstacles in its path to Euro-Atlantic
integration. What remains are the more difficult agendas
of defense and economic reform. As a candidate for NATO
membership, Croatia continues to make progress in defense
reform and demonstrate that it will be a net contributor to
the Alliance's new missions. Without traditional U.S.
bilateral military assistance due to ASPA restrictions, our
bilateral military exchanges focus on improving NATO
interoperability for the Croatian Armed Forces (CAF). On
the economic front, Croatia has made steady, albeit uneven
progress in enacting the reforms necessary for it to keep
pace with its more advanced northern neighbors. Our goal
is to help quicken the pace of reform and make Croatia a
source of stability and economic prosperity in the region.
END SUMMARY.

THE NEW FACE OF THE NATIONALIST PARTY
--------------


2. PM Ivo Sanader's Croatian Democratic Union (HDZ) party
was elected in November 2003 on a platform promising to
bring Croatia into the EU and NATO. The HDZ has proven it
is no longer cut from the same cloth as the nationalist HDZ
of the late president Franjo Tudjman in the 1990s. PM
Sanader made important gestures immediately after taking
office -- visiting the Serb Community on Orthodox
Christmas, reaching out to the Muslim minority, and signing
coalition agreements with the Serb parliamentary grouping -
- which were almost unthinkable just months before. In
addition, he has made great strides in normalizing
relations with Serbia and Montenegro and Bosnia and
Herzegovina, including high-level visits, visa-free travel
and free trade agreements.


3. The opening of EU accession negotiations on October 4,
2005 was a major victory for the Sanader government.
Croatia cleared a further hurdle on December 7, when
fugitive general Ante Gotovina was arrested in Spain and
transferred to the ICTY in The Hague to stand trial for
charges of war crimes committed in the aftermath of
Croatia's Operation Storm, which liberated the rebel-Serb-
occupied Krajina region in 1995. The Gotovina arrest,
applauded by the U.S. and the international community, was
not popular domestically, as many Croats consider Gotovina
a hero of their war of independence; to its credit,
however, and at some potential political cost, the HDZ
worked to keep the few protests which did occur after the
arrest focused on "support for Gotovina" rather than
venting anger at the international community or the ICTY.

EURO-ATLANTIC INTEGRATION: NOT IF, BUT WHEN
--------------


4. With Gotovina in the Hague, the GOC is focused on
promoting its goal of NATO membership to the general
public. There is a general consensus among the political
elite that Croatia belongs in NATO, but the GOC
acknowledges that it must generate similar levels of
support among the general public, and is implementing its
PR strategy.


5. The MOD and General Staff are committed to increasing
participation in NATO Peacekeeping Operations, and are
planning for and funding operations through 2015. Over the
summer, the parliament approved tripling to 150 Croatia's
troop (currently primarily Military Police) contribution to
NATO's ISAF mission in Afghanistan. A Croatian MP platoon
is currently in its seventh rotation in Kabul and the first
increase in ISAF contributions will be a seven man Military
Liaison and Observation Team to deploy with the Lithuanian
PRT in Chagcharan. Currently, Croatia also has 31 persons
deployed on 10 UN peace support operations, including Major
General Dragutin Repinc, who assumed command on December 29
of the UNMOGIP operation in Kashmir.


6. Croatia has an ambitious military reform program in
place to make the armed forces "NATO-ready" by 2007 a
difficult task under the best circumstances. The
government signed off in mid 2005 on the Strategic Defense
Review (SDR),which bases future defense planning on the

assumption that Croatia has no serious threats to its
territorial integrity and will be a full partner in
collective defense through NATO. The Long Term Development
Plan for the Croatian Armed Forces, currently in semi-final
draft form, attempts to bridge the gap between the defense
reform vision of the SDR and the likely fiscal shortfalls
over the next three-five years. Defense spending is
currently just short of the Prague Capabilities Commitment
level of 2 percent of GDP, although obligatory pension
payments to war veterans and a personnel-heavy defense
budget leave only minimal resources for much-needed
equipment procurement. U.S. firms, including Lockheed-
Martin, ITT and Motorola are supplying equipment to the
Croatian military and General Dynamics is currently bidding
on contracts for the major, upcoming purchase of armored
personnel carriers. We support Croatia's NATO ambitions,
but have been very clear in our message that defense reform
is an essential pre-condition for Croatia to demonstrate
that it will become a net contributor to security through
NATO operations.

MAKING MOST OF MILITARY TO MILILTARY ENGAGEMENT
-------------- --


7. As Croatia has not signed an Article 98 agreement,
International Military Education and Training (IMET) and
Foreign Military Financing (FMF) programs were suspended in
June 2003. Prior to the suspension, the U.S. provided $4.2
million in IMET grants, which allowed over 350 Croatian
civilian and military personnel to attend training in the
U.S. and an additionally 300 MOD personnel to receive
training from Mobile Education Teams in Croatia. Many of
Croatia's IMET graduates now hold key positions of
prominence within the Croatian Defense Ministry and Joint
Staff. The MoD still considers IMET one of the most
important tools for the transition of its armed forces to a
modern, NATO-ready force, and is spending some of its
limited training funds to send two senior general staff
officers to English language training in the U.S. that
would otherwise have been IMET supported.


8. Prior to FMF suspension, Croatia used FMF grants
totaling $18.4 million to purchase equipment for force
modernization and NATO interoperability. These purchases
included the acquisition of VHF and NTDR digital radios,
Night Vision Devices, and MILES training simulations
equipment. The Croatian Air Force also used FMF grants to
upgrade two Mi-8 helicopters with NATO-compatible radios
and identification systems.


9. Bilateral Activities: The USEUCOM-sponsored Joint
Contact Team Program, an essential element of bilateral
military engagement, has sponsored over five hundred
bilateral familiarization events with the Croatian Armed
Forces since 1996. Since the suspension of IMET and FMF,
JCTP programs have been increasingly focused on improving
the Croatian Armed Forces' NATO interoperability. In FY 05,
the JCTP Program conducted twenty-one events that covered a
wide array of military activities to help focus the
professional development and effective transition of the
Croatian Armed Forces.


10. Another vital aspect of US engagement has been the
Minnesota National Guard's collaboration with the Croatian
Armed Forces under the State Partnership Program. Since
1997, the Minnesota National Guard, in conjunction with the
USEUCOM JCTP program, has participated in more than 80
bilateral exchanges in a variety of fields to include
infantry operations, pilot exchanges, and instruction on
the challenges of recruitment. This state partnership
continues to grow both in scope and quality. Six state-
partnership events were conducted in 2005 culminating in a
very successful platoon exchange in July, in which a
composite Croatian Platoon deployed to Minnesota and
trained alongside the National Guard unit in final
preparation for deployment to Iraq. The training included
land navigation, light infantry operations, Peace keeping
and operations in urban terrain. Reciprocal platoon
exchanges are programmed for FY 06 and FY 07, building to a
proposed infantry company exchange in FY 08.


11. The Marshall Center is also increasingly valued as an
engagement tool that allows Croatian MOD personnel, and the
Ministries of the Interior and Foreign Affairs to interface
with US military officers and regional counterparts in


residency programs and regional conferences. Since 1995,
the Marshall Center has hosted 135 Croatian participants in
its residency programs in Advanced Security Studies,
Terrorism and Security Studies, and the Senior Executive
Seminars. Among others, the current Croatian Ambassador to
NATO and the head of the Counter Intelligence Agency (POA)
are Marshall Center graduates.

THE WAR IS OVER, BUT THE SCARS REMAIN
--------------


12. Among the more important accomplishments of PM
Sanader's government are advances in addressing the legacy
of the 1991-95 war. In addition to cooperation with the
ICTY and sounder adjudication of war crimes, the HDZ
government has made significant progress on refugee returns
based on its December 2003 coalition agreement with ethnic
Serb parliamentarians. International observers such as the
OSCE and UNHCR have praised the government's pace of
reconstruction of war-damaged housing and return of refugee
property, although ethnic discrimination and resistance to
change at the local level are persistent challenges.


13. Of the estimated 350,000 people, mostly ethnic Serbs,
who were displaced during the war, about 134,000 have
returned. This leaves approximately 215,000 refugees and
internally-displaced persons derived from the 1991-1995 war
most of these ethnic Serbs now living in Serbia and
Montenegro and Bosnia and Herzegovina. The UNHCR re-
registration project of March 2005 clarified the number of
true refugees, concluding that the majority have settled in
place and do not plan to return. An OSCE/USAID survey
indicated that from five to twenty percent of refugees
would return if guaranteed employment and housing.


14. As suggested by the OSCE, UNHCR, and the European
Commission, the Government has created a "road map" with
the goal of closing the refugee file in 2006. Elements of
this include specific benchmarks such as the resolution of
refugee housing, equal access to information and government
services, and information on war crimes indictments.

ECONOMY: BETTER THAN NEIGHBORS, BUT ROOM FOR IMPROVEMENT
-------------- --------------


15. Croatia's economy is the most developed of the former
Yugoslavia, with the exception of Slovenia. Per capita GDP
is approximately $7,800, more than twice that of
neighboring Serbia and Montenegro and roughly equal to
Slovakia. Over the last six years, Croatia has enjoyed
general macroeconomic stability characterized by low
inflation and modest economic growth of approximately 4
percent annually. This growth, however, has been jobless,
with the official unemployment rate remaining stubbornly
high at approximately 18 percent.


16. The state still plays an overly large role in Croatia's
economy. Although there has been progress in shedding some
of the state's large portfolio of assets, notably banks,
hotels and large agricultural combines, the government
continues to be saddled with loss-making industrial
companies whose subsidies drain approximately 3 percent of
GDP annually. As a percentage of GDP, the state's role in
the economy is far above the EU average at nearly 40
percent. With one pensioner for every 1.4 persons
employed, above-average healthcare costs and out of control
entitlement programs, the government faces many necessary,
but politically unpopular decisions if it is to reduce
chronic deficits and liberalize the country's economy.


17. Croatia missed out on the initial rush of foreign
investment in Central and Eastern Europe following the fall
of the Berlin Wall, largely because of the war in the
former Yugoslavia, but also because of its slowness to make
the difficult but necessary decisions to reform its
economy. Foremost among the factors inhibiting greater
investment is an inefficient judicial system that can take
years to resolve even the most basic commercial disputes
and a stubbornly Byzantine bureaucracy. There has been
some improvement in this last area, with the government's
creation of a "one-stop shop" for business registration and
a trade and investment promotion agency to assist
prospective foreign investors, but much more remains to be
done.

18. Croatia is also saddled by large budget and trade
deficits. Although the former has been reduced in recent
years partially as a result of an IMF program, the latter
has continued to balloon. Foreign debt, particularly in the
private sector, has soared as well, now totaling over 80
percent of GDP. The fact that most of this debt is
"euroized" limits Croatia's ability to let its currency
depreciate, a large factor in its uncompetitive exports.


19. Croatia's political elite is fully cognizant of the
need to further reform the economy and has made some recent
progress in that direction, but much remains to be done to
create the conditions to compete successfully in today's
global economy. The beginning of EU accession negotiations
has added new urgency to this fact.

FRANK