NEW SERBIAN FINANCE MINISTER PROMISES RESPONSIBLE

UNCLAS BELGRADE 000810 SIPDIS SENSITIVE SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: EFIN ECON EINV KIDE SR SUBJECT: NEW SERBIAN FINANCE MINISTER PROMISES RESPONSIBLE POLICIES Ref: a) Belgrade 774 b) Belgrade 630 SUMMARY -------------- ¶1. (SBU) The Ambassador met with new Finance Minister Mirko Cvetkovic for the first time on June 5 to discuss the economic agenda for the new government. Cvetkovic said that he aims to uphold the Ministry's role in safeguarding a stable macroeconomic environment, including a return to conventional accounting for National Investment Plan expenditures. He spoke in favor of engagement with the IMF but did not explicitly call for a precautionary arrangement. On financial market issues, Cvetkovic said Serbia would do better to restrict issuance of greenfield banking licenses to encourage acquisition of remaining small and state-owned banks, which will be hard-pressed to survive in a competitive environment. Approval of three new laws, including one on restitution, is necessary to resolve ownership issues, but Cvetkovic also admitted that the draft restitution law needs more work. End summary. ¶2. (SBU) The Ambassador met with new Finance Minister Mirko Cvetkovic in a June 4 courtesy call. Cvetkovic was joined by assistant minister Gordana Lazarevic and two staff members, while econ chief accompanied Ambassador. Cvetkovic, a privatization expert, expressed surprise to find himself finance minister, especially as he is not a member of the Democratic party, which put him in the position. Referring to his broad experience working both as deputy minister of privatization and as a consultant for the World Bank, he said he would continue to work for a better life for Serbs. As minister, he would pursue this goal by promoting macroeconomic stability, EU accession, and creation of a more favorable environment for entrepreneurs. ¶3. (SBU) Ambassador Polt asked whether his agenda would include an IMF agreement. Cvetkovic appeared to favor some sort of arrangement: "I believe the IMF is essential to increasing the rating of the country," he stated, adding that monitoring and support were necessary, but not a loan. He said that Serbia would be grateful for U.S. help in persuading the Fund to re-engage. ¶4. (SBU) Cvetkovic said that ongoing budget talks are a major headache, as the Ministry prepares a revised budget that will cover the second half of 2007 and finally move Serbia away from provisional financing. The budget will be ready by June 14, leaving Parliament two weeks to review and approve. The only insight he offered into the shape of the new budget was a firm statement that National Investment Plan expenditures will move on-budget, turning away from the unconventional accounting introduced by former Finance Minister Dinkic in the run-up to elections in late 2006. ¶5. (SBU) The Ambassador said that he appreciated the pressures on the Ministry, relating that Defense Minister Sutanovac already had raised tight defense finances and was looking for new ways to raise money to support the military. The issue arose in discussions of work the Ministry of Defense is performing to prepare the new U.S. Embassy site. Cvetkovic said he was not aware of new Ministry of Defense requests but agreed that providing each ministry with a stable source of financing was important for planning purposes. ¶6. (SBU) The next order of business after the budget will be new laws necessary to clarify property rights, Cvetkovic said. The new Constitution and the expiration of the deadline for selling off all socially-owned property mean that that a new structure of state-owned property must be introduced, one that permits local governments to own property. A second law will set the rules for private property, and the final piece of the package will be the new restitution law. Despite work on a draft law under former Minister Parivodic, further international help might be necessary to reach an acceptable draft law, the minister added. ¶7. (SBU) The Ambassador passed Cvetkovic a set of Embassy comments on the draft restitution law (see reftel),prepared in consultation with groups representing restitution claimants. Some of the claimants are U.S. citizens, the Ambassador noted, and the Embassy stands ready to assist with further development of the law. ¶8. (SBU) The Ambassador noted that Cvetkovic is a privatization expert and requested his views on how the new coalition would proceed. Cvetkovic noted that formally, the Finance Ministry has two roles: leadership in privatization of financial institutions and the role of representing state creditors in bankruptcy proceedings. With regard to state- owned banks, Cvetkovic said that he would prefer to maintain the moratorium on new greenfield banking licenses to promote sale of remaining small banks, which otherwise will wither under competition with private banks. ¶9. (SBU) Turning to socially owned enterprises, the minister noted that some 1,000 till remain to be sold off, but he discounted the economic impact, observing that many of them are small with insignificant payrolls. The World Bank is drafting a strategy for completing this process, and their ideas are sound, he added. However, he said that bankruptcy is still a problem, with private creditors lacking confidence in the system, in part due to continuing problems with the courts. Here, donors could be especially helpful, he added. With regard to large state-owned enterprises, such as Telekom Srbija, Cvetkovic noted only that the coalition has yet to come up with a policy. ¶10. (SBU) The Ambassador asked about recent assertions by government officials about "special" opportunities for Russian investment in Serbia: was there in fact a feeling that Serbia owed Russia based on Kosovo policy? Cvetkovic said that he would argue that no pre-emptive rights should be awarded to any potential purchasers, whether for oil company NIS or state airline JAT. Lukoil bought Beopetrol when he was director of the privatization agency only because it made a better offer, the minister added. ¶11. (SBU) Kosovo debt also brings politics into the Minister's portfolio, the Ambassador noted, adding that U.S. policy is to seek some solution to this issue. But would Serbia be willing to agree to a debt deal, or would it continue to service the debt for political reasons, he asked. Cvetkovic sidestepped the question, noting that his personal views on this issue may vary from the GOS position. Gordana Lazarevic, assistant minister for donor issues, stepped in and said that Serbia would continue to service absent some agreement to the contrary. ¶12. (SBU) Cvetkovic said that he had received the Ambassador's letter on the investment dispute involving the Putnik travel agency purchased by U.S. investor Uniworld Holding. Cvetkovic said that, if the arbitration decision ruling that Uniworld's privatization agreement had been terminated by the GOS without due cause is in fact final, the GOS should pay. He would consult with Economy Minister Dinkic, who is responsible for privatization, but he would push to pay Uniworld owner Srba Ilic to avoid sending a negative signal to foreign investors. On a second dispute still pending, concerning the cancellation of Uniworld's purchase of travel agency Srbijaturist, Cvetkovic said that he favors permitting the arbitration to take its course. ¶13. (SBU) Comment. Cvetkovic is an experienced player, having participated in many World Bank agreements and IMF negotiations. He was careful to retain maximum flexibility in his statements regarding pending policy issues. While he expressed a desire to complete an IMF agreement, the new minister also was not specific in seeking a precautionary agreement, instead referring to monitoring. (Note: in his first press conference on June 6, Economy Minister Mladjan Dinkic also straddled the fence, telling reporters that "I have nothing against an IMF agreement," but adding that it would be the Government's decision.) We continue to believe that the coalition simply will not be willing to deliver the sort of fiscal adjustment that the IMF has in mind. Indeed, Deputy Prime Minister Djelic said on June 5 that the 2007 deficit target will be 1.5 percent of GDP, or about 4 percentage points less than recommended by the Fund's April mission. However, given the potential benefit of such an agreement for economic progress in Serbia, we urge Washington agencies to engage with the Fund to determine whether flexibility is possible. End comment. POLT