RUSSIANS ARE COMING TO MONTENEGRO - BUT SO ARE OTHERS

UNCLAS SECTION 01 OF 03 PODGORICA 000024

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ECON EINV MW RS
SUBJECT: RUSSIANS ARE COMING TO MONTENEGRO - BUT SO ARE OTHERS

REF: A. A: 05 BELGRADE 2277


B. B: 05 BELGRADE 1741

C. C: 05 BELGRADE 718

PODGORICA 00000024 001.3 OF 003


SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE ACCORDINGLY.




1. (SBU) SUMMARY: THE RUSSIAN PRESENCE ON MONTENEGRO IS
VISIBLE, YET OFTEN OVERSTATED BY MONTENEGRINS AND OUTSIDERS
ALIKE. SINCE 1999, REPORTED RUSSIAN FOREIGN DIRECT INVESTMENT
(FDI) HAS AMOUNTED TO EUROS 135 MILLION, OUT OF A TOTAL OF
NEARLY EUROS 1 BILLION. THROUGH THE END OF 2006, THE ONLY LARGE
FDI FROM RUSSIA WAS KAP. RUSSIA HAS HAD LITTLE EFFECT ON
MONTENEGROS BROADER POLICY DIRECTION, WITH APPEALS FOR SLAVIC
SOLIDARITY FROM SERVING RUSSIAN MINISTERS AND THE CONSUL GENERAL
EQUALLY REBUFFED, AS PODGORICA PURSUES PFP, NATO, WTO AND THE
EU. END SUMMARY.



RUSSIAN SHARE OF FOREIGN DIRECT INVESTMENT

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2. (U) FROM JANUARY 2001 THROUGH NOVEMBER 2006, FOREIGN DIRECT
INVESTMENT (FDI) IN MONTENEGRO TOTALED EUROS 995 MILLION. (FDI
PRIOR TO 2001 WAS ESSENTIALLY NON-EXISTENT, DUE TO CONFLICT AND
SANCTIONS.) RUSSIAN FDI AMOUNTED TO EUROS 135 MILLION, 13.5
PERCENT OF THE TOTAL. THIS IS VASTLY LOWER THAN THE REPORTED
ESTIMATE OF RUSSIAN PM PUTIN WHO CLAIMED EUROS 2 BILLION OF
RUSSIAN INVESTMENT IN MONTENEGRO (AS REPORTED IN U.S. MEDIA IN
LATE 2006). BEFORE REAL ESTATE SALES (INCLUDED IN GOM FDI
STATISTICS) TOOK OFF IN 2006, RUSSIAN INVESTMENT WAS SEVEN
PERCENT OF THE TOTAL FDI, AND PRIMARILY ATTRIBUTABLE TO RUSAL'S
PURCHASE OF KOMBINAT ALUMINA PODGORICA (KAP - ALUMINUM FACTORY)
AND THE RELATED BAUXITE MINES NEAR NIKSIC. (REF A) MIDLANDS
INDUSTRY, A UK-BASED BUT RUSSIAN-OWNED FIRM, WALKED AWAY FROM
ITS 2004 ACQUISITION OF THE NIKSIC STEEL WORKS IN LATE 2005. IT
HAD PAID THE NOMINAL SUM OF 1000 EUROS FOR THE PLANT BUT PROVED
UNWILLING TO MAKE THE INVESTMENTS CALLED FOR BY THE CONTRACT.



RUSSIANS, BRITISH, EVEN SWISS (SORT OF) IN LAND RUSH

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3. (U) THE PAST YEAR SAW SALES OF MONTENEGRIN REAL ESTATE,
PARTICULARLY ALONG THE WATERFRONT, EXPLODE TO FOREIGNERS: EUROS
278.4 MILLION IN THE FIRST ELEVEN MONTHS, COMPARED TO EUROS 42.5
MILLION IN 2005, ACCORDING TO CENTRAL BANK OF MONTENEGRO (CBCG)
STATISTICS. IN 2006, RUSSIANS BOUGHT PROPERTY WORTH EUROS 51.8
MILLION, AND IN 2005 THEY SPENT EUROS 12.3 MILLION; OVERALL, 19
PERCENT OF THE TOTAL FOR BOTH YEARS. IN 2005 AND 2006, THE
BRITISH BOUGHT LAND VALUED AT EUROS 55.8 FOR 17.4 PERCENT OF ALL
FOREIGN SALES. QUIETLY, "SWISS" MONEY BOUGHT REAL ESTATE
VALUING EUROS 56.8 IN THE SAME PERIOD, OR 17.6 PERCENT. U.S.
PURCHASERS SPENT EUROS 1.4 MILLION IN 2005 AND 15.7 MILLION IN
2006 (5.3 PERCENT). (NOTES: BASED ON DISCUSSION WITH LOCAL
OFFICIALS, MOST OF THE "SWISS" BUYERS ARE PROBABLY KOSOVAR
EMIGRES. STATISTICS DO NOT DISTINGUISH BETWEEN SALES OF
COMMERCIAL AND INDIVIDUAL REAL PROPERTY. END NOTE.)



RUSSIAN OLIGARCH BUYS HEAVY INDUSTRIAL PLANT

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4. (SBU) RUSAL, NOW THE WORLD'S LARGEST ALUMINUM PRODUCER HEADED
RUSSIAN OLEG DERIPASKA, PURCHASED THE KOMBINAT ALUMINA PODGORICA
(KAP - ALUMINUM FACTORY) AND THE RELATED BAUXITE MINES NEAR
NIKSIC IN LATE 2005, PAYING EUROS 48.5 MILLION KAP, AND EUROS 9
MILLION FOR THE MINES. THE PRIVATIZATION AND SALE OF KAP, WHOSE
REVENUES AT THE TIME EQUALED 12 PERCENT OF MONTENEGRO'S GDP, WAS
STEEPED IN CONTROVERSY (REF A). KAP'S SHARE OF GDP IS
RELATIVELY STEADY, AT 14 PERCENT IN 2006, RESULTING FROM STRONG
GLOBAL AND LOCAL PRICES FOR ALUMINUM. DATA ON KAPS PRODUCTION
AND REVENUE FOR 2006 IS NOT YET PUBLICLY AVAILABLE, AND THE NEW
OWNERS HAVE DISCONTINUED PROVIDING INFORMATION TO THE GENERAL
PUBLIC ABOUT THEIR OPERATIONS. INFORMATION PROVIDED TO POST IN
FEBRUARY 2007 IS THAT KAP PRODUCED 121,322 TONNES OF ALUMINUM IN
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2006, AND HAD REVENUES OF USD 325,176,688 ON SALES OF 121,410
TONNES OF ALUMINUM. IN 2004 KAP REALIZED EUROS 200 MILLION IN
REVENUE ON SALES OF 120,000 TONNES.



RUSSIAN INVESTMENT IN TOURISM

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5. (U) WHILE RUSSIANS ARE NOT MAJOR INVESTORS IN MONTENEGROS
TOURISM SECTOR, THEIR HOLDINGS ARE PROMINENT. THE HOTEL
SPLENDID IN BECICI (NEAR BUDVA) UNDERWENT MASSIVE RECONSTRUCTION
AFTER IT WAS ACQUIRED FROM THE GOVERNMENT FOR EUROS 2.4 MILLION
IN LATE 2003 TO A GROUP OF RUSSIAN AND MONTENEGRIN INVESTORS:
MONTENEGRO STARS GROUP. MONTENEGRO STARS OWNS THREE HOTELS NEAR
BUDVA (THE OTHERS BEING HOTEL MONTENEGRO AND HOTEL BLUE STAR),
BUT IT IS THE SPLENDID THAT IS THE 800-POUND GORILLA ON THE
BEACH, AND WHICH WAS SUBJECTED TO A BOMBING CAMPAIGN BY
ORGANIZED CRIME ELEMENTS SEEKING TO EXTORT MONEY DURING ITS
RECONSTRUCTION. (CF. U.S. MEDIA DECEMBER 2006) THE CHIEF OF THE
MONTENEGRIN POLICE WAS ASSASSINATED IN AUGUST 2005 WHILE
INVESTIGATING THE BOMBINGS AND OTHER ALLEGEDLY RELATED CRIMES
(REF B). IN THE PAST MONTH, LOCAL MEDIA HAS REPORTED THAT THE
RUSSIAN COMPANY "VAS INVEST MONTENEGRO" PAID EUROS 25 MILLION
FOR 13 HECTARES OF "WASTELAND" SOUTH OF BUDVA, WITH THE GOAL OF
BUILDING A HOTEL AND TOURIST VILLAS. THERE ARE NO OTHER MAJOR
TOURISM INVESTMENTS FROM RUSSIA IN MONTENEGRO AT PRESENT. (NOTE:
THE RECENT 30-YEAR LEASE OF SVETI STEFAN TO SINGAPORE'S AMAN
RESORTS WILL ENTAIL AMAN PAYING AT LEAST EUROS 2.1 MILLION
ANNUALLY IN RENT, PLUS MAKE EUROS 40 MILLION IN IMPROVEMENTS.
END NOTE.)



MONTENEGRO-RUSSIA BANKING CONNECTIONS

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6. (U) THERE IS SUBSTANTIAL FOREIGN OWNERSHIP OF MONTENEGRO'S
BANKS, BUT COMING FROM FRANCE (PODGORICKA BANK - 1ST IN SIZE),
SLOVENIA (MONTENEGRO BANKA - WHICH EARLIER ABSORBED EUROMARKET
BANKA - 2ND IN SIZE),THE U.S. (OPPORTUNITY BANK - 3RD IN SIZE),
HUNGARY (CRNOGORSKA KOMERCIJALNA BANKA - CVB - 4TH),AND AUSTRIA
(HYPO-ALPO-ADRIA - 5TH). RUSSIA HAS MADE NO INVESTMENTS IN
MONTENEGRO'S FINANCIAL SECTOR. CONVERSELY, THE SMALLER ATLASMONT
BANKA, DOMESTICALLY OWNED, HAS A REPRESENTATIVE IN MOSCOW.



MONEY LAUNDERING

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7. (U) PM PUTIN'S REPORTED COMMENT THAT RUSSIANS HAVE INVESTED
EUROS 2 BILLION HERE CONTRASTS WITH THE 135 MILLION REPORTED TO
THE CENTRAL BANK OF MONTENEGRO (CBCG). MONTENEGRO, THROUGH ITS
STATE PROSECUTOR FOR ORGANIZED CRIME AND ITS ADMINISTRATION FOR
THE PREVENTION OF MONEY LAUNDERING (FINANCIAL INTELLIGENCE UNIT
- FIU),HAS CRACKED DOWN ON MONEY LAUNDERING, AND RUSSIANS HAVE
BEEN CAUGHT UP IN THEIR NETS. IN DECEMBER, TWO RUSSIANS
(REPORTED AS SERGEJ ILIN, AGE 47, AND JOSIF KARMAH, AGE 45) WERE
ARRESTED ON MONEY LAUNDERING CHARGES AT THE PODGORICA AIRPORT AS
THEY TRIED TO EXIT WITH EUROS 790,000 IN CASH; REPORTEDLY, THEY
HAD BEEN UNSUCCESSFUL IN THEIR EFFORTS TO BUY REAL ESTATE. ON
FEBRUARY 1, THE STATE PROSECUTOR FOR ORGANIZED CRIME ANNOUNCED
THE ARREST OF FOUR RUSSIAN CITIZENS (NFI) FOR ATTEMPTING TO
LAUNDER EUROS 2.5 MILLION DERIVED FROM FOREIGN CRIMINAL
ACTIVITIES THROUGH LOCAL BANK ACCOUNTS OF "STOREFRONT" LOCAL
COMPANIES.



GOR SEEKS INFLUENCE, GETS PRESS ATTENTION

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8. (U) THE GOR WOULD LIKE TO RESTORE ITS INFLUENCE IN
MONTENEGRO; BEFORE 1914, MONTENEGRO'S CLOSEST OFFICIAL TIES WERE
WITH RUSSIA, AND INCLUDED MARRIAGES BETWEEN THE RESPECTIVE ROYAL
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FAMILIES. RECENT COMMENTS AND ACTIONS BY GOR OFFICIALS HAVE DONE
MORE TO IRRITATE MONTENEGRINS THAN BUILD FRIENDSHIPS, HOWEVER.
ON AUGUST 8, AFTER MEETING WITH THEN-PM DJUKANOVIC, RUSSIA'S
MINISTER FOR EXTRAORDINARY SITUATIONS, SERGEY SHOIGU, GAVE AN
INTERVIEW TO THE LEADING LOCAL PAPER. HIS "WARNING" THAT
MONTENEGRO RISKED ITS FRIENDSHIP WITH RUSSIA IF IT CONTINUED TO
PURSUE TIES WITH NATO IRRITATED A BROAD RANGE OF THE MONTENEGRIN
PUBLIC, AND DID NOTHING TO DETER THE GOM FROM SEEKING AND
GAINING MEMBERSHIP IN NATOS PARTNERSHIP FOR PEACE IN DECEMBER.
ACCORDING TO MEDIA REPORTS CONFIRMED BY CONTACTS IN THE GOM, PM
DJUKANOVIC DISCUSSED A DEFENSE RELATIONSHIP WITH PM PUTIN IN
THEIR LATE AUGUST MEETING IN SOCHII, BUT APPARENTLY NOTHING HAS
COME OF THAT TALK, WHILE THE GOM IS IN CLOSE CONSULTATIONS WITH
BOTH NATO AND THE USG ON PLANNING ITS NATIONAL SECURITY AND
DEFENSE POLICIES.




9. (U) OTHER GOR OFFICIALS HAVE SMUDGED RUSSIA'S IMAGE IN
MONTENEGRO AS WELL. IN APRIL 2005 THE FORMER CONSUL GENERAL GAVE
A SCATHING INTERVIEW TO THE LOCAL OPPOSITION PAPER, CRITICIZING
MONTENEGRO'S CLOSE RELATIONSHIP WITH THE USG, WHICH PROMPTED THE
FM TO CONVOKE THE CG (REF C). IN 2006, THE RUSSIAN PRESS ATTACHE
WAS WHISKED OUT OF MONTENEGRO AFTER HIS CAR CRASHED INTO ANOTHER
IN PODGORICA, KILLING THREE MONTENEGRINS; LOCAL MEDIA
HIGHLIGHTED THE STORY, PARTICULARLY REPORTS THAT THE ATTACHE WAS
DRUNK AND SPEEDING. IN HERCEG NOVI, LOCAL MEDIA IN LATE JANUARY
REPORTED PUBLIC ANGER AT THE MAYOR OF MOSCOW, JURIJ LUSKOV, WHO
HAS CLOSED A TIME-HONORED EASEMENT ACROSS PROPERTY HE RECENTLY
PURCHASED THERE, PRECLUDING ACCESS TO THE BEACH. (LUSKOV
PUBLICLY SUPPORTED MONTENEGRIN INDEPENDENCE IN THE RUN-UP TO
LAST MAY'S VOTE.)



NOTE ON SOURCES

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10. (U) STATISTICS IN THIS REPORT COME FROM THE CENTRAL BANK OF
MONTENEGRO AND THE GOM'S MONTENEGRO INVESTMENT PROMOTION AGENCY
(MIPA). FDI IN MONTENEGRIN STATISTICS INCLUDES SALES OF
COMPANIES AND REAL ESTATE, ALTHOUGH REAL ESTATE WAS A SMALL
COMPONENT OF FDI PRIOR TO 2006.



COMMENT

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11. (SBU) THE RUSSIAN PRESENCE IN MONTENEGRO IS NOTICEABLE, BUT
HAS TO DATE NOT RESULTED IN SIGNIFICANT INFLUENCE. NOR IS THE
PRESENCE AS LARGE AS OFTEN REPORTED. CONTRARY TO POPULAR
PERCEPTION, KAP WAS NOT MONTENEGRO'S LARGEST PRIVATIZATION.
PROMONTE (TELECOMMUNICATIONS) WAS PURCHASED BY NORWAY'S TELENOR
FOR EUROS 116 MILLION IN 2004. HUNGARY'S MATAV RT BOUGHT PRO
MONTES COMPETITOR TELEKOM CG IN 2005 FOR EUROS 114 MILLION, AND
HELLENIC PETROLEUM BOUGHT JUGOPETROL AD KOTOR IN 2002 FOR EUROS
100.5 MILLION. OVERALL, SLOVENIA HAS MADE THE LARGEST
INVESTMENTS IN MONTENEGRO; RUSSIA IS SEVENTH.




12. (SBU) STORIES ABOUT MYSTERIOUS RUSSIAN MAFIA OR BUSINESSMEN
(USUALLY SEEN AS THE SAME THING IN LOCAL POPULAR CULTURE) SELL,
AND CONTRIBUTE TO AN EXAGGERATED PERCEPTION OF A LARGE RUSSIAN
PRESENCE. ADDITIONALLY, THE OPPOSITION AND OTHERS ARE KEEN TO
PORTRAY THE GOM AS CORRUPT, AND PORTRAYING GOVERNMENT OFFICIALS
AS TURNING A BLIND EYE TO, OR EVEN BEING IN COLLUSION WITH,
RUSSIAN BUSINESSMEN WHO CAN BE PORTRAYED AS UNIFORMLY CORRUPT
AND CORRUPTING. THE RECENT ARRESTS UNDERSCORE THE POPULAR
PERCEPTION OF A LARGE AND SHADOWY RUSSIAN PRESENCE. POST VIEWS
THE ARRESTS AS A POSITIVE INDICATOR, CONTRIBUTING TO ITS
CONFIDENCE THAT THE GOM'S PRO-WESTERN POLICIES, AND MONTENEGRO'S
COMMITMENT AT ALL LEVELS TO A FREE MARKET ECONOMY, COUPLED WITH
MEDIA REPORTING, COULD SERVE AS A CHECK ON EXCESSIVE RUSSIAN
INFLUENCE IN MONTENEGRO. END COMMENT.
BARNES