2007-12-28 09:08:00
Embassy Belgrade
Cable title:  


pdf how-to read a cable

DE RUEHBW #1736/01 3620908
R 280908Z DEC 07




E.O. 12958: N/A







E.O. 12958: N/A



1. Serbia is the only country in Europe without a restitution law.
A restitution law is a prerequisite for EU membership, but more
importantly, it is vital to attracting badly needed foreign direct
investment, establishing the right to private property, and
revitalizing Serbia's market economy. The GOS finally decided to
rectify a six-decade old injustice by drafting a law on restitution
and soliciting feedback on it through public working consultations.
However, the working consultations raised a number of questions
which indicate the law will not be adopted in the near future and
its implementation will be difficult. End Summary.


2. On May 10 2007, the outgoing caretaker Serbian government "gave
support" to a draft law on restitution (reftel),leaving the
incoming government to approve it and send it to Parliament for
adoption. The law was drafted by Milan Parivodic, current Advisor
for Legal Issues to Prime Minister Kostunica and former Minister for
International Economic Relations. Parivodic wrote the law with the
assistance of recommendations from the Austrian, German and Swiss
governments as part of a technical assistance program funded by the
three countries at Serbia's request. The new Serbian administration
made few changes to the original draft.

3. From October through December 2007, the Ministry of Finance
organized five working consultations on the current draft law. The
purpose of these consultations was to solicit feedback on the draft
from legal and economic experts, restitution claimants, claimants'
rights associations and from government institutions that will
implement and enforce the law. A Ministerial Working Group, with
representatives from various ministries, pledged to consider
feedback from the working consultations in formulating the final
draft, which later will be released for further public debate.

4. Slobodan Ilic, State Secretary at the Ministry of Finance, said
that once the law is approved by the government, but prior to
Parliament adoption, it will be sent to experts in the Council of

Europe to ensure it adheres to EU norms. Deputy Prime Minster
Bozidar Djelic said that the GOS would send a set of related laws on
property issues, including the law on restitution, urban
construction land, and private and public property, to Parliament by
the end of February 2008. However, this may not be realistic as
these laws are still in the drafting stage and have not been
approved by the government. Slobodan Ilic said at the first round
table in October that the law on restitution would most likely be
adopted by the end of February 2008. At the last round table on
December 25, however, Ilic revised his expectation saying that the
final draft law should be ready for government approval by the end
of February 2008, but he did not want to predict when it would be
adopted by the Parliament.


5. According to the draft, the law "shall regulate the conditions,
the mode and the procedure of restoring property (restitution) in
the territory of Serbia, which was seized after January 1, 1945," by
the Tito communist regime "as well as property that was confiscated
on the basis of racist regulations and acts of [German] occupation
authorities after April 6, 1941" to their former owners. (Note:
Though not explicit, the inclusion of properties seized after April
6, 1941 into the restitution draft is to address claims of the
Serbian Jewish community. End Note.) In addition, the law "shall
also regulate the restitution or privatization of city building

6. In general, the draft law calls for immediate restitution in
kind (return of the original property to its original owner) when
possible. If not possible, claimants would receive cash, capped at
$14,300 per person, and bond compensation. The bond compensation
would be a 20-year bond that would begin payout two years after the
law is adopted. The bonds will bear a 4.5 percent annual interest
rate and mature in 2028. The bond would be capped at $1.43 million
per claimant and $1.43 million per property. The government has
stated that its total cash and bond payout will not exceed $5.7
billion. Parivodic said though $5.7 billion will be set aside for
claims, he expects $3.6 billion will be sufficient. The IMF office
in Belgrade has expressed concern about the cost of financing these

-------------- -

7. Parivodic presented the draft law as a "reflection of the
reality in Serbia and the result of hard compromises and political
pragmatism" which is not a "fine-tuning of justice, but a rough

approximation of justice." He admitted that he is not satisfied
with some aspects of the law, but believes the law will allow for
the introduction of market economy principles in Serbia's real
estate sector. In drafting the law, he said he focused on the
principles of efficiency and macroeconomic stability and that
sometimes these principles outweighed the principle of justice for
original landowners. He also considered the good-faith-acquirer
principle in which the person, who purchased property in conformity
with the laws existing after nationalization, remains the owner of
that property.

8. Under the current draft law, when immediate in-kind restitution
is not possible, the disputed land would be returned to its original
owner. The original landowner and those currently using the land
would then enter into a landlord-tenant lease agreement. Parivodic
believes a leasing relationship is a "logical continuity" of "right
of use," and as such allows parties to reach an agreement without
government intervention to set prices. State intervention, if
necessary where agreements could not be reached, would be limited to
10 years, after which market mechanisms would take over.

9. The "right of use" describes the type of urban construction land
ownership instituted during communism in the former Yugoslavia. It
entitles building owners to use land for as long as they own the
building or a maximum of 99 years. This right is acquired,
transferred and terminated automatically with acquisition, transfer
or termination of ownership of the building. During the communist
era, tenants were only occupants of apartments, and never apartment
owners. However, during the 90's, after the first democratic
demonstrations against Milosevic's regime, Milosevic allowed tenants
to buy their apartments, and become permanent owners, at the very
low price of 100 Deutsch Marks (Germany currency was used because of
Serbian hyper-inflation) in a bid to gain votes. However, this
scheme only complicated the situation further, creating owners of
apartments who are not the owners of the land under that apartment.


10. The principles underlying the provisions of the draft law were
criticized by all participants in the working consultations
including from other government institutions and ministries that
will implement and enforce the law. Claimants say the law is the
"legalization of nationalization," because while it calls for
in-kind restitution, in many cases it would protect those who
acquired property after land was nationalized, leaving original
landowners with bonds. Claimants suggest the proposed law will
require state intervention since it does not include a defined
dispute resolution mechanism for those cases in which a claimant
cannot reach a lease agreement with land occupants.

11. The most disputed topic, however, is the restitution of urban
construction land. At the working consultations, Professor Dragor
Hiber and other experts from the think tank Center for Liberal
Democratic Studies (CLDS) advocated the privatization of urban
construction land and the application of the Roman principle
"superficies solo cedit," which entitles the landowner to what lies
above that land parcel (i.e. buildings). According to Hiber, this
standard has been applied in restitution cases in the rest of
Eastern Europe. However, to resolve the problem created under
Milosevic of separate owners of the building and land, Professor
Hiber advocated giving the land to the building owner and not the
original landowner. Instead, the original landowner would receive
financial compensation. A representative from the Austrian
Development Agency, who advised the Serbian government on the draft,
complained that the current draft does not follow the true principle
"superficies solo cedit" and parts of the draft do not adhere to
international standards.

12. Parivodic explained that "superficies solo cedit" is ideal, but
it could not be implemented in every case because of "Serbia's
chaotic situation after communism and Milosevic." According to
Parivodic, the draft law will naturally follow the "superficies solo
cedit" principle in 80 percent of the cases which will cost the
government less because it will not have to compensate original
landowners. Parivodic mentioned that, according to the Austrians,
the value of the land for restitution is estimated between $20 and
25 billion.


13. In the working consultations, many claimants' rights
associations voiced their opposition to bond compensation and
financial limits. They said they would accept only in-kind
restitution or property of equal value. Amcit Bogdan Veljkovic from
the Restitution Network said that Serbia's S&P BB- bond credit
rating should carry a 20 percent annual interest rate instead of 4.5
percent, otherwise owners would have to sell their bonds at a
significant discount and would receive only 10 percent of their real
value. Veljkovic also opposed the individual and property
compensation caps. He was supported by the Serbian League
representatives Amcit George Ilic and Branislav Trajkovic, The
League for the Protection of Private Property representative
Slavenko Grgurevic, and by The Association of Jewish Municipalities
in Serbia. Both organizations support the idea of a Restitution
Fund in which the government would give claimants parcels of
premium, newly developed commercial and residential real estate.


14. There were many complaints from experts, as well as from
government representatives, on the section of the draft that states
"disposal of seized property after June 8, 2005, when the Law on
Seized Property Reporting and Recording was enacted shall be
considered as "mala fide" on the part of the buyer and the seller,
so that they shall be liable for losses sustained." This means that
property acquired and sold before June 2005 (i.e. nationalized
property during communism and cheaply sold property during the
Milosevic period) should be considered as good faith disposal.
However, property sold on the open market through the privatization
process after June 2005 should be considered mala fide disposal. In
the mala fide disposal, either the government or the new buyer will
be responsible for compensating the original landowner. It is
unclear as to who would make this determination. Rajna Andric,
Director of the Deposit Insurance Agency, and Luka Andric, State
Secretary for Privatization at the Ministry for Economy and Regional

Development said that the law would be retroactive to include
bankruptcy and privatization cases. Such cases would be revisited
to determine whether the buyer or the state will return or
compensate the original landowners. Djordje Vukotic from the
Secretariat of the Council for Regulatory Reform argued that the

Serbia's mala fide clauses in bankruptcy and privatization cases
would not hold up in the European Court of Human Rights in

15. Parivodic explained that any sale after June 8, 2005, should be
considered as mala fide on the part of the buyer and the seller
because the Law on Seized Property Reporting gave legal assurance
that a restitution law would be adopted in the future. He also
expressed disappointment that the government did not adopt a law
that prohibited selling seized property. He added that there were
two phases of privatization and two solutions for restitution.
According to the 2001 Privatization Law, the government assumes the
responsibility for compensating original landowners for property
sold through the privatization process because the law explicitly
mandates that 5 percent of privatization revenues be set aside for
restitution claims. In addition, since 2004, privatization sales
contracts stipulate that the buyer accepted responsibility for and
risk of future restitution claims. (Note: Privatization of
nationalized property in Serbia is ongoing as no court can
technically ban the sale of nationalized property since no law on
restitution exists at this time. The privatization of socially-owned
property is expected to conclude by the end of 2008. End Note.)

16. The Serbian government would like to move forward with
restitution, but there is no consensus on the right approach. There
is division, not only between political parties, but within parties
as well. Dusan Rakitic, Harvard Club and Democratic Party (DS)
member, told econoff on November 23, that his party is divided on
the issue. There are members of DS, together with Rakitic, who
support Parivodic's restitution in-kind concept, but there are
others, like Professor Dragor Hiber, who support financially
compensating original landowners. The latter is in line with the
recently released proposed draft law on property rights, which Hiber
helped author.


17. Restitution is necessary for political and economic
democratization in Serbia. Clear title and land ownership is a key
factor in attracting additional foreign investment and to economic
growth. The Ministry of Finance's effort to solicit stakeholder
input was important in clarifying the concerns of different parties
and increasing public participation. It is now up to the government
to weigh the different interests and send a draft law to parliament.
The type of restitution law that emerges could result in a shift in
economic, and perhaps, political power in the future. If
restitution in-kind is adopted, valuable land would return to the
former middle and upper classes of pre-communist Serbia who could
bolster their economic and political influence. If land is given to
those who own buildings on the land, and not the original
landowners, then tycoons, friends of the Milosevic regime, and those
who bought apartments for 100 Deutsch Marks as a part of Milosevic's
election strategy, would benefit most from the law. Given the
interests at stake and divisions about the best solution; it is
unlikely the government will pass a law before local elections,
which are now expected in May 2008. End Comment.