AMBASSADOR MEETS ECONOMY MINISTER

UNCLAS BELGRADE 000914

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: EFIN ECON EINV KIDE KPRV SR
SUBJECT: AMBASSADOR MEETS ECONOMY MINISTER

Ref: Belgrade 882

SUMMARY
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1. (SBU) The Ambassador met with new Minister of Economy
Mladjan Dinkic for the first time on June 20 to review the
economic agenda for the new government. Dinkic, leader of
the G17 party, said that he personally favors a partition of
Kosovo but said that preserving momentum on Euro-Atlantic
relations and ties between Serbia and the U.S. is necessary.
He pledged that Russian economic interests would not be
awarded special treatment in Serbia, notwithstanding Russian
support on Kosovo. Bankruptcy will be used for companies
that cannot be sold by other means, and he said that a
decision already had been made to move some 200 enterprises
into bankruptcy. With regard to relations with the IMF, he
was non-committal, saying there is discussion of a
precautionary, "but no one is pushing." end summary.


2. The Ambassador met with Minister of Economy Mladjan
Dinkic for the first time on June 20. Dinkic leads a
ministry that took on much greater responsibilities based on
the coalition agreement and the subsequent law on ministries.
It obtained foreign trade and export control from the now-
eliminated Ministry of International Economic Relations; it
took employment from the Ministry of Labor and Social
Affairs; it acquired regional development, including
supervision of the quasi-bank Fund for Development, and it
took tourism from the Ministry of Trade (which now handles
only internal trade issues.). Dinkic, whose party captured
just over six percent of the vote and 19 deputy seats to
become the junior partner in the new Kostunica government,
was accompanied by one aide, while econ chief and USAID LES
joined the Ambassador.


3. (SBU) The Ambassador opened the discussion by asking
Dinkic, as leader of one of the three coalition parties, for
his views on likely developments in regard to Kosovo. Serbia
is in a tough position, the Ambassador noted, pursuing a
hardline stance on Kosovo while seeking Euro-Atlantic
integration. We must face the reality that Kosovo will be
independent, the Ambassador said, but find a way to pursue
our bilateral agenda at the same time.


4. (SBU) The situation is not pleasant, Dinkic said. Since
2001 Serbia's relations with the U.S. have improved steadily,
but now a single political issue separates us. His view is
that partition would be best, Dinkic said, but neither party
to the dispute welcomes this stance. The best course would
be for the U.S. to show a bit more flexibility; then it would
be in a position to request, and expect, more flexibility
from President Tadic and Prime Minister Kostunica. It is not
possible to change the view of the Serbian side "100
percent," he warned, but the Kostunica government must try to
solve this issue in some way that permits it to move forward
on integration and maintain good relations with all states.


5. (SBU) The Ambassador noted that the U.S. agrees
wholeheartedly with four of the main goals of the Kostunica
platform; only on the fifth, Kosovo, is there disagreement.
Serbia should not permit its stance on one issue to defeat
progress on the other four. It is unlikely that we will
agree on Kosovo, the Ambassador said, but we must move
forward nonetheless. Dinkic agreed that this is the only
option.


6. (SBU) The Ambassador noted that Dinkic is in large measure
the architect of Serbia's economic recovery, an area on which
we can and do work together. But one issue on the economic
side is troubling: the push by Russian companies for economic
gains. Dinkic replied that Russian companies would be
treated like any others, which includes the requirement for
tenders in any privatization. Only in natural gas does
Russia have a special position, he said, and that is a
function of its monopoly position as supplier.


7. (SBU) Dinkic said that Prime Minister Kostunica had asked
that Trade Minister Bubalo be the Serbian chair of a joint
Serbian-Russian commission on economic relations, although
normally the economy minister would chair. He had agreed.
Econ chief asked about recent Russian interest in a cargo
terminal joint venture at Belgrade airport. Dinkic replied
that he had learned of such interest and had discussed it
with President Tadic. Both agreed that any such deal must be
handled transparently, and it would require a decision by the
entire government. The document signed by the airport's
board chair had no legal force, he added.


8. (SBU) The Ambassador turned to the impending privatization
of state-owned oil company Naftna Industrija Srbije. He
noted that the economy minister had publicly advocated
selling a majority stake, but it is not clear whether that
will be the coalition policy. Dinkic replied that the
coalition, when formed, had agreed that the minimum would be
the Merril Lynch strategy of immediate sell-off of 25
percent, with management control, to a strategic partner, to
be followed by an increase to 37.5 percent equity via
additional investment. Dinkic said he did favor immediate
sale of majority, but said that Deputy Prime Minister Djelic
did not share this view. We would see what would happen, he
said, adding that the finance minister should join the debate
and make his views clear.


9. (SBU) Dinkic said that other deals will move forward.
Insurer DDOR Novi Sad should be sold by the end of the year.
The next step for state airline JAT is to hire a financial
adviser to help in the search for a strategic partner. JAT's
maintenance subsidiary would be tendered soon, he added, and
it already had attracted interest from other companies. The
Ambassador asked whether Aeroflot could be a serious
contender for JAT. Dinkic replied that it does appear to be
serious about making an offer.


10. (SBU) Turning to assistance issues, the Ambassador
explained that USAID is cooperating with the Agency for
Privatization on bankruptcy for socially-owned companies that
had not found a buyer. The economic minister replied that he
favored completing privatization via bankruptcy when there is
no other option. The Ministry would move to put several
companies in bankruptcy soon, including the Matroz paper
plant. Auctions of such assets would begin in the autumn, he
said. He noted that as central bank governor, he had taken a
tough approach in closing many banks, but the strategy had
paid off in the end.


11. (SBU) The Ambassador brought up one bankruptcy case that
had proved troubling. U.S. company Ocean Atlantic had
attempted to buy property from a bankruptcy auction, but its
bid was turned down by the bankruptcy administrator in what
appeared to be an example of corruption. Dinkic said that he
already had decided to change the director of the Bankruptcy
Supervisory Agency.


12. (SBU) Restitution is an issue where we would like to see
the new government move expeditiously, the Ambassador said.
The Embassy had reviewed the draft approved by the previous
government, but restitution claimants who are U.S. citizens
had raised several issues. The Embassy had put together a
list of suggestions, and he passed a copy to the minister.
But it is important to move sooner rather than later, the
Ambassador added, to avoid any transformation of restitution
into a major political issue. Dinkic replied that the
Ministry of Finance would be working on the law, but offered
to review Embassy suggestions.


13. (SBU) The Ambassador applauded the way in which the
previous government had worked with U.S. investor Philip
Morris to resolve issues raised by the CEFTA agreement. Such
aftercare for established investors is important. The new
government could send a positive signal to the investment
community by quickly coming to terms with U.S. investor
Uniworld, the Ambassador added. An international arbitration
tribunal had recently decided for Uniworld in its dispute
with the Agency for Privatization over the Putnik travel
agency.


14. (SBU) Dinkic said that the Government of Serbia had been
told by its lawyers that further legal avenues for appeal
were available, and it would seek to overturn the arbitration
decision. The U.S. would do the same to protect its legal
interests, he added. But the minister noted that in the
Valeant investment dispute, the Government of Serbia had
eventually settled with the claimant. The Ambassador said
that a quick settlement would be welcome, but added that he
understands GOS determination to exhaust its legal remedies.


15. (SBU) Econ chief asked how the Minister regarded the
outlook for an IMF agreement. Dinkic replied that such an
option was under discussion, but no one in the GOS really is
pushing for such a deal. The overall macroeconomic situation
is promising, and he added that slow budget execution would
offset to some extent the expansionary impact of the 2007
budget proposal.

POLT