KOSOVO'S FINAL STATUS BURDENS ECONOMIC TIES

UNCLAS BELGRADE 000266

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ENRG ECON SR YI
SUBJECT: KOSOVO'S FINAL STATUS BURDENS ECONOMIC TIES



1. (U) This is a joint cable from USOP and Embassy Belgrade.

SUMMARY
--------------

2. (SBU) Belgrade econ chief and Pristina econ officer made the
rounds of UNMIK and PISG economic agencies to identify some of the
economic issues that are factors in current and future relations
between Kosovo and Serbia. Trade is a bright spot, with imports
from Serbia up some one-third in 2006, although some issues still
have not been resolved. The payments system appears to be gradually
improving, in part because of Belgrade-based Komercijalna Banka's
decision to obtain a license from the Central Banking Authority of
Kosovo. Power transmission appears to be a bit smoother, according
to Kosovo Energy Company (KEK) officials, but the relationship still
is troubled by sovereignty-linked disputes over payments. Telecom
remains a sore point, with Kosovo's telecom regulator determined to
drive out Telekom Srbija's substantial cellular business, while the
Government of Serbia sticks to a hardline on other telecom issues.
Key privatizations that could benefit Kosovo Serbs appear to be
frozen by political uncertainty. END SUMMARY.

THAW IN TRADE RELATIONS
--------------


3. (SBU) Peter Walker, UNMIK Customs director, welcomed econ
officers on February 7. He described a gradual thaw in trade
relations over the last five years, culminating in Serbia's lifting
of its transit tax on third-country goods in 2005. (In addition,
Serbia permits VAT refunds on goods transported to Kosovo, as is
common practice on exports.) The easing of restrictions resulted
in a big increase of Serbia-origin exports to Kosovo in 2006, from
about EUR 130 million to EUR 189 million. Some 25-30 percent of
Kosovo's exports enter from Serbia, he said. (Note: Serbia's trade
data is considerably different, showing exports of USD 528 million
in 2006; the issue is further complicated by the fact that 2005 data
included Montenegro.)


4. (SBU) The thaw was not without its problems, Walker noted. The
shift of trade to Serbian border points in 2005 and 2006 had
resulted in initial revenue losses estimated at some EUR 20 million.
Customs staff in the north is mostly Serbian, and UNMIK suspects
that corruption, at least partly driven by organized crime, had
undermined staff performance. Additional security measures had been
employed, and losses have declined, he added.


5. (SBU) Further easing of trade could be accomplished through
administrative and logistical improvements, Walker said. For
instance, seasonal backups can last hours at Gate 3, north of
Podujevo, because of the heavy flow of summer returnees mixed with
commercial traffic on a two-lane road. A simple by-pass, combined
with an UNMIK agreement to accept Serbian documentation cleared at a
checkpoint inside Serbia, could facilitate trade, he said. He noted
that Serbian fuel exports should be booming, based on the increase
of a Macedonian fuel excise tax at the beginning of 2007.

PAYMENTS SYSTEM NORMALIZES
--------------


6. (U) The increase in trade may be driven in part by an easing of
payments. Komercijalna Banka, a Belgrade bank controlled by state
shareholders, has obtained a provisional license from the Central
Banking Authority of Kosovo and now operates nine offices in Kosovo.
(These are located largely, but not exclusively, in Serbian
enclaves.) Econoffs met with Kosta Sandic, a Komercijalna manager
from Belgrade, and two local managers at the bank's Mitrovica branch
on February 8.


7. (SBU) Sandic said that Komercijalna's business in Kosovo is
largely driven by trade. National Bank of Serbia regulations permit
Komercijalna to do business in Kosovo either in dinar or euro, at a
competitive rate fixed in Belgrade. (Komercijalna obtains cash from
the National Bank of Serbia branch in Leposavic.) Many Albanian
traders from Southern Serbia use Komercijalna Banka, he said, and
management expects such activity to increase. Another source of
growth may come from UNMIK payments to Serb property owners;
Komercijalna has been approached by the UN Habitat agency about
handling the payments work. However, the bank closely controls
lending in Kosovo, since real property pledged as collateral has
proved not to be sellable, he said.


8. (SBU) Komercijalna is not the only bank serving Kosovo Serbs.
Jugobanka Kosovska Mitrovica and Kosovkso Metohiska Banka, based in
Zvecan, also serve the enclaves. But Sandic observed that the two
banks are not making money and might face difficulty in meeting the
requirements of the Central Banking Authority of Kosovo.
(Supervision officials at the National Bank of Serbia told us that
they supervise these banks only through off-site supervision, since
on-site visits are not practical.) However, Komercijalna intends to
expand as political conditions improve; Sandic said that the bank
has hired Kosovar staff and made a commitment to use mixed-ethnicity
branch teams.

ENERGY: PROGRESS ON AGAIN, OFF AGAIN
--------------


9. (SBU) Econoffs met with a variety of energy sector interlocutors
in Kosovo. Kosovo Energy Company (KEK) officials said that power
availability has been better this year, for which they also credit
their decision to contract with energy traders for delivery at
Kosovo's borders. However, officials at the PISG Ministry of Energy
and Mining complain of Serbia's continuing failure to recognize its
Transmission System Operator as a separate entity and remit revenues
based on transit of power through Kosovo to third parties. And they
expressed unwillingness to consider the sort of independent power
distributor that Serb officials seek for the enclaves.


10. (SBU) Pranvera Dobruna, KEK managing director, described an
uncertain outlook for cooperation with Serbia. Serbian enclaves
still do not pay for power, but she said that local Serbian
electricity company representatives had responded to appeals to
conserve power in the enclaves over the holidays. And power
availability to consumers had been better this year, she said, in
part because of milder weather but also because of such cooperation.
One result was better power availability in the enclaves. (This was
confirmed by Serbian power company officials in north Mitrovica.)


11. (SBU) Regarding the GOS offer (through the Coordination Center
for Kosovo, CCK) of a power donation of 50 gigawatt-hours per month,
Dobruna said that the proposal simply was not feasible. Switching
on service areas below the 10-kilovolt feeders on a 24-hour basis
would require 130 gigawatt-hours, leaving KEK to pay for the other
80 not covered by the Serb donation. Regarding the Serb proposal to
switch power on at smaller substations below the 10-kv level,
Dobruna said that this would require that KEK crews drive around
constantly, turning power on and off every three hours at the
smaller service areas not included in the Serb offer, a prospect
that simply was not practical.


12. (SBU) Handing econoffs an e-mail correspondence with Serb power
officials, Dobruna complained sharply about a January 29 incident in
which KEK's request for an emergency power transfer through the
Serbian transmission network was allegedly rejected by Serbian
transmission authorities because only state power utilities can
deliver emergency power. (The transfer had been contracted through a
trader, the Energy Financing Team.) She said that the Serbs had
delivered emergency power on previous occasions. Dobruna said that
non-emergency deliveries had been more regular this year because KEK
had adopted the policy of requiring that power traders deliver
directly to Kosovo's borders, shifting responsibility for arranging
transmission through Serbia (or a third country) directly to the
seller.


13. (SBU) The KEK director also expressed exasperation with
Serbia's policy of non-recognition of Kosovo's Transmission System
Operator (TSO). In practice, this means that Serbia is not
compensating Kosovo for transfers of power through its territory,
but instead is retaining the revenue with the argument that it still
owns the transmission system. This revenue loss may amount to EUR 5
million by now, she said.


14. (SBU) Merita Kostari, head of the legal department at the UNMIK
Energy Regulatory Office, said that Kosovo would file a complaint on
this issue. Kosovo's TSO is now a fully recognized member of the
Southeast Europe Transmission System Operators Association, but
Serbia has blocked its admission to the cross-border trading
mechanism that allocates capacity and revenues. Kosovo would raise
this issue in February at the next regional TSO meeting in Athens,
she said.


15. (SBU) Econoffs raised the issue of licensing a separate power
distributor to operate in Serbian enclaves. Kostari said that,
under Kosovo's energy law, only the PISG could nominate such a
distributor; it could not apply independently.


16. (SBU) Agron Dida, deputy Minister of Energy and Mining,
expressed similar frustration with Serbia's approach on cross-border
transfers. Serbia had paid such compensation to Kosovo until 2004,
then had stopped, raising over and over their contention that system
assets belong to Serbia. In January 2006, when Kosovo sought more
power to cope with demand related to the funeral of Ibrahim Rugova,
the Serbs had stopped a Bulgarian offer to provide power but then
offered to sell the power to KEK at a much higher price.


17. (SBU) The Ministry had requested that UNMIK not accept Serbia's
offer to donate power, Dida said, as it would mean "anarchy." The
Serbs still see Kosovo's system as part of their system, and they
instruct Serbs not to sign contracts with KEK because they do not
want to recognize the rule of law in Kosovo. When econoff raised
the issue of creating a separate distributor to facilitate payment
by Serbs, one of Dida's assistants insisted that the Serbs could
function only as a supplier, to collect payments, but not as a
distributor with independent control of a sub-network.

TELECOMS A BATTLEGROUND
--------------


18. (SBU) Anton Berisha, chairman of Kosovo's Telecommunications
Regulatory Authority (TRA),describes a situation in which the
Kosovar and Serbian systems have been largely de-linked. Although
fixed line calls to Kosovo still use Serbia's country code and, to
some extent, transit Serbian infrastructure, Telekom Srbija has
completely ended its reliance on Kosovo's fixed line network,
instead using radio relay for fixed line service to the enclaves.
Berisha said that once the TRA had dismantled a Telekom Serbija
cellular tower, only to find it had disrupted fixed line service to
an enclave, as well. With regard to frequency spectrum, Telekom
Serbija simply uses what it wants without permission, he said.
Serbia is still blocking Kosovo's request to obtain a country code
from the International Telecommunications Union.


19. (SBU) Fixed line service works without problems, Berisha said,
although he asserted that he was not familiar with any arrangements
under which long-distance revenues are shared with Telekom Srbija.
But he left no doubt that the TRA is determined to push out the
cellular operators from Serbia, Telenor and Telekom Srbija's MTS
service. Telenor chose not to participate in Kosovo's tender for a
second mobile operator, he said, and it must leave the Kosovo
market. Such frequency use is unlicensed, he argued. Kosovo's
state-run telecom, PTK, has filed a lawsuit in Kosovo's courts
against Telenor, seeking to end the company's operation in Kosovo.
Berisha said TRA would respect UNMIK's order not to dismantle
cellular towers in enclaves, but said that Telekom Srbija had
reacted to TRA's dismantling of towers outside enclaves by locating
towers on property of the Serbian Orthodox Church.


20. (SBU) Ilija Ivanovic, Telekom Srbija's manager for Kosovo (based
in Kosovska Mitrovica, the northern half of Mitrovica),confirmed
that TRA had dismantled 15 of the company's cellular towers about 10
weeks previously, damaging equipment and shrinking the company's
coverage over Kosovo. He did not deny that Telekom is using church
property but insisted that it does so for technical reasons.
However, he said Telekom's celluar service still has 300,000
customers in Kosovo, most of them Kosovars who use it because it is
better and cheaper than the single TRA-licensed operator.


21. (SBU) However, Ivanovic claimed the TRA, backed by Kosovo
Police Service (KPS) units, tried to take down two towers in Zvecan
and Trpca, but were prevented from doing so by Serbs, who then
mounted a 24-hour watch on the sites, he said. In addition, the PTK
had carried out work adjacent to a fixed line cable installed by
Telekom, without actually seeking to dismantle Telekom's cable. He
described a situation in which Telekom crews work throughout Kosovo
at their own risk, at times prevented from carrying out their work
by Kosovo authorities. Telekom had requested that UNMIK cease
efforts to undermine its system, Ivanovic said, but had not
responded to UNMIK's suggestion that it bid for a license: why bid
for a license when Telekom has one valid for all of Kosovo? (Note:
PTT Representative for Kosovo Randjel Nojkic told USOP that no
telecom equipment north of the Ibar River has ever been dismantled.
End note.)


22. (SBU) Andreas Wittkowsky, deputy head of UNMIK's Pillar IV,
said that Telekom Srbija had exploited a gentlemen's agreement
allowing them to sell SIM cards in Kosovo to expand their operation
for commercial reasons, not to serve minorities. And its fixed line
network operates in Kosovo in violation of UN Resolution 1244. But
UNMIK has prevented disruption to Telekom services in the enclaves
for political reasons, he said.


23. (SBU) The pushing and shoving over links between Kosovo and
Serbia continues in a number of areas, Wittkowsky said. Serbia
recently had changed its policy on bus transit to require that
operators use Serbian-registered buses. Previously, Kosovar
operators had been permitted to use buses registered in third
countries and pay a small fine, but Serbia suddenly began to force
passengers to disembark at the border and continue on
Serbian-registered buses, at a much higher cost. Serbia still is
blocking UNMIK's request for membership in the International Railway
Union. Serbian state airline JAT recently filed an application
requesting permission to fly to Pristina, Wittkowsky said, but PISG
authorities argued against granting permission without a deal to
unblock use of Serbian airspace for Pristina flights.

Privatization: Future On Hold
--------------


24. (SBU) Privatization in Serb enclaves has been informally put on
hold pending greater political clarity, Ahmet Shala, deputy director
of the Kosovo Trust Agency (KTA),told econoffs. Sale documents for
the Brezovica ski center had been prepared, but the sale was delayed
at the behest of UN authorities in New York, he said. KTA had
consulted extensively with Serbs in the Strpce enclave, including
the ski center's general manager, and agreed to include their
conditions on to employment and investment issues. But starting the
tender required a political decision, he noted.


25. (SBU) With regard to the Trepca lead mining complex, the
outlook is even more complicated because of the geography of the
complex and because of conflicting views within the PISG, Shala
said. Two mines are practically on the border with Serbia, the
concentrator mill is in the enclave town of Leposavic, while other
facilities are in Albanian areas. Production recently has restarted
with some EUR 60 million in public subsidies, and the PISG is
seeking to appoint an administrator for property. The new advisory
board includes Kosovo Serbs, he noted. But there is no political
consensus even within the PISG, Shala said, with the prime
minister's key adviser skeptical about privatization.


26. (SBU) Comment. This series of meetings in Pristina and north
Mitrovica illustrated clearly that much of Kosovo's economic future
is tied up in disputes with Serbs and with the Belgrade government.
In many areas, the elements of a quid pro quo are apparent, but
there is little political will at this point to negotiate. The
outlook for major investments, whether it is in development of the
lead mines at Trepca, the ski center at Brezovica, or in the energy
tender, will be influenced by the course of status talks and the
temperature of the relationship between Pristina and Belgrade. End
Comment.


27. (U) USOP is grateful to Embassy Belgrade and to econ chief Mark
Bocchetti.

MOORE