SCENESETTER FOR CODEL BEAN'S VISIT TO BELGRADE

UNCLAS SECTION 01 OF 02 BELGRADE 000989

SIPDIS

SIPDIS

FROM THE AMBASSADOR FOR H FOR CODEL BEAN AND EUR/SCE

E.O.12958: N/A
TAGS: PGOV PREL PHUM PBTS KPAO SR MW YI
SUBJECT: SCENESETTER FOR CODEL BEAN'S VISIT TO BELGRADE


1. Representative Bean,

Your delegation is visiting Serbia at a time when local leaders are
confident about the success so far of Serbia's policies on Kosovo
and progress in integration with the European Union. In reality,
the current Kosovo status delay is no more sustainable than the
status quo in Kosovo itself and the government here is doing little
to prepare for inevitable independence. Despite its sharp, single
minded rhetoric over Kosovo, Serbia's government faces even more
difficult choices in the near future if the country is to close out
finally the Milosevic era and achieve full integration with Europe
and continued partnership with the United States. There is a dire
need for creating better living conditions for Serbians, for more
economic and democratic reform, full ICTY cooperation, and signature
of a Stability and Association Agreement with the EU.

Economic Situation
--------------


2. Serbia's economic outlook has improved significantly over the
past years; first-quarter growth accelerated to 8.7 percent this
year, from 6.5 percent for 2006. The National Bank's movement
toward inflation targeting has been successful in holding inflation
to 5 percent in the year ending in May, while the dinar, Serbia's
currency, has appreciated in value. However, many analysts worry
now that expansionary fiscal policy, with a projected 2007 budget
deficit of roughly 3 percent of GDP by IMF standards, is causing the
economy to overheat, with rapid import growth leading to an increase
of 35.4 percent in the trade deficit over the first five months of

2007. Standard and Poor's just downgraded Serbia's outlook from
positive to stable based on fiscal relaxation.


3. Revitalization of Serbia's real sector is generally considered
the answer both to the increasing current account deficit and high
unemployment. Joblessness stands at roughly 21 percent.
Privatization so far has yielded good results, with exports up 39.8
percent the first five months of the year. However, the reluctance
of the previous government to bankrupt unsaleable companies means
that the hard work is still ahead; some 1,200-1,300 socially-owned
companies still await privatization or bankruptcy. In addition,
the Government has plans to privatize, or partly privatize, major
state-owned enterprises such as copper mine RTB Bor, state airline
JAT and petroleum company NIS. Deputy Prime Minister Djelic
recently said that the Kostunica government will not privatize
Telekom SRBIJA nor power company EPS during its mandate. Greenfield
foreign direct investment (FDI) is critical to generate jobs;
measures to attract FDI include tax incentives, direct subsidies on
a per-job basis and projected construction of industrial parks.


4. Serbia has benefited by generous donor assistance since the fall
of Milosevic in October, 2000, including USD 617.49 million in SEED
funding. SEED funding of USD 60 million for 2007 has been allocated
primarily (80 percent) to economic development activities and job
creation. A three-year Extended Arrangement with the International
Monetary Fund ended in February, 2006, with total disbursements of
USD 937 million dollars; completion of the IMF agreement also
released the final installment of Paris Club debt relief, by which
about two-thirds of Serbia's official debt was written off. The
World Bank continues to be active in Serbia; on June 20, it approved
USD 192.5 million in additional lending, with projects for
redevelopment around an impoverished area of Eastern Serbia,
agricultural development, irrigation, road repair and energy
efficiency. The EU has provided EUR 2.56 billion (to Serbia,
Montenegro and Kosovo) since 2000; another EUR 572.4 million for
Serbia over 20007-2009 is projected as part of the EU's
pre-accession assistance.


Political Landscape
--------------


5. Serbia's January 2007 parliamentary elections returned a majority
to democratic parties but also saw the ultra-nationalist Serbian
Radical Party (SRS) make the strongest individual showing (81 of 250
seats). Democratic bloc winners included Boris Tadic's Democratic
Party (DS - 64 seats),Vojislav Kostunica's Democratic Party of
Serbia (DSS - 47 seats),and Mladjan Dinkic's G-17+ (19 seats).
Turnout for the elections itself was unexpectedly high, and led to
some surprise parties gaining seats. Notably, the Socalist Party
(SPS) formerly headed by Slobodan Milosevic managed to earn enough
votes to cross the threshold and remain in parliament, as did a
reformist coalition of small parties led by the Liberal Democratic
Party. Four different minority groups also gained seats -
Hungarians, Bosniaks, Roma, and - for the first time in over a
decade - Albanians from Southern Serbia.


6. Coalition negotiations were launched in earnest in early
February, 2007, and culminated in a last-minute deal between the DS

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and DSS following the latter's brinksmanship tactic of unanimously
endorsing Radical leader Tomislav Nikolic for the post of Speaker of
Parliament. The resulting coalition agreement leaves DS with a
majority of cabinet seats (13 of 25) including Foreign Affairs,
Finance, Justice, and Defense, but cedes to DSS the post of Prime
Minister, the Interior Ministry, and the state security service
(BIA). The agreement also resulted in the formation of a new
Ministry for Kosovo headed by the DSS which has quickly established
procedures to control all aspects of the government's Kosovo policy
- often at the expense of other ministries.


7. Today, two months into the new coalition, the main parties appear
to have struck a balance in their areas of responsibility -- the DSS
is handling Kosovo and the DS is handling ICTY and the defense
sector. Both sides at the same time are pushing on EU accession and
project hard line public rejection of Kosovo independence. SAA
talks were suspended in May 2006 due to lack of ICTY cooperation,
and were resumed in June 2007 acknowledging that the new government
had met some of its commitments. Two of the final six war crimes
indictees -- Tolimir and Djordjevic -- were arrested in June 2007
(in Bosnia and Montenegro, respectively) and sent to The Hague
during the first weeks of new government's tenure. However, the
European Commission insists that it will not sign the SAA agreement
without increased cooperation with the Hague Tribunal, i.e., capture
of Bosnian Serb fugitives Radovan Mladic and Radovan Karadzic.


8. The two opposition blocs, meanwhile, have competing aims. The
hardline nationalist Radical and Socialist parties snipe at the
government and join in maintaining an increasingly rigid Kosovo
policy, but have otherwise been remarkably silent about the new
government and its performance. The uproar over the recent ICTY
arrests was far more muted than expected. The democratic opposition
of the Liberal Democrats, however, has focused its attacks on what
it considers a backward-looking Kosovo policy and inadequate
attention paid to the Serbian people's every day concerns.


Kosovo: The View from Belgrade
--------------


9. In his visit to the region in June, the President made clear
USG's policy that Kosovo will be independent following over 15
months of UNSC-sanctioned negotiations. Shortly thereafter, French
President Sarkozy also noted that independence for Kosovo was
inevitable. As of July 2007, the UNSC has not reached an agreement
on the Ahtisaari plan, or any other resolution to supersede UNSCR
1244, and Kosovo still technically remains in Serbia. Assistant
Secretary of State Fried announced in mid-July that the USG will

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support a new round of talks between the leaders in Belgrade and
Pristina, while keeping in mind the positions clearly stated by the
President and his French counterpart.


10. The Government of Serbia, which had agreed with the concept and
structure of the UN-led talks, failed to fully engage and in fact,
relentlessly attacked both the process and mediator (Martti
Ahtisaari). The GOVERNMENT OF SERBIA has since rejected Ahtisaari's
proposal and any UNSC draft based upon it; Belgrade insists on
starting over completely with a new round of talks that exclude the
option of Kosovo independence and without a defined end.


11. PM Kostunica believes unity among EU members and the USG to
implement the Ahtisaari Plan as quickly as possible has been
dissolved. Kostunica depends on Russian support to keep the Plan
from being approved by the UNSC. Serbia's new Kosovo Ministry --
headed by the Prime Minister's close advisor Slobodan Samardzic --
aims to coordinate the various ministries' with relevant issues
(Defense, Foreign Affairs, Interior) on Kosovo and also manage any
engagement with the international community. DS officials including
President Tadic, Foreign Minister Jeremic and others do not differ
from the PM's comments on Kosovo. All Serbian leaders categorically
reject Kosovo independence and the Ahtisaari plan, and believe their
EU accession will not be slowed by a lack of resolution on the
Kosovo status issue. Rhetoric against the U.S. position on Kosovo
has continued to escalate in recent weeks, calling our position
cowardly and illegal, and our assertions of friendship with the
Serbian people an insult to common sense. The government leadership
has threatened serious consequences for relations between Serbia and
any country that recognizes an independent Kosovo.


12. We look forward to receiving you and your delegation in Belgrade
during this challenging time.

POLT