ON EVE OF ELECTIONS SERBIA AND FIAT SIGN LUCRATIVE MOU

UNCLAS SECTION 01 OF 02 BELGRADE 000460 SENSITIVE SIPDIS USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH E.O. 12958: N/A TAGS: EINV EIND ELTN SR MW SUBJECT: ON EVE OF ELECTIONS SERBIA AND FIAT SIGN LUCRATIVE MOU SUMMARY -------------- ¶1. The GOS and Fiat signed a memorandum of understanding on April 30 in which Fiat would acquire 70% ownership and invest $1.1 billion in Kragujevac-based Zastava Autombili while the GOS would retain 30% ownership, invest $160 million and provide investment incentives to Fiat. The deal is seen as a win-win for both Fiat and the current government led by Europe-leaning President Tadic and a positive benefit from Serbia having signed the controversial SAA with the EU. This deal is particularly significant as it will provide jobs in the heavily Radical-leaning region of Kragujevac. END SUMMARY. THE DEAL -------------- ¶2. On April 30, the GOS and Italian automotive firm Fiat signed a memorandum of understanding in which Fiat would acquire 70% of state-owned Zastava Automobili and invest $1.1 million in the Kragujevac factory to produce two new car models. In return, GOS would invest $160 million and retain 30% of the company. The government upped its ante on May 6 when the mayor of Kragujevac signed a memorandum of cooperation with Fiat agreeing to exempt Fiat from municipal taxes and fees over the next 10 years and provide free land if Fiat decided to expand Zastava's facilities. Economy and Regional Development Minister Mladjan Dinkic said the GOS and Fiat would sign a binding contract on the joint investment by the end of June 2008. The media also reported that the government signed a protocol with Zastava's workers' unions that would ensure no layoffs over the next five years and offer severance payments to workers who voluntarily quit. The protocol is to be included in the future contract with Fiat. MUTUALLY BENEFICIAL -------------- ¶3. Jasna Matic, State Secretary in the Ministry of Economy and Regional Development, told econoff on April 29 that the deal was win-win for both Fiat and the GOS. Fiat wanted and needed to expand to meet growing demand. Its sales increased 25% in the last 3 years and are expected to rise further as high oil prices drive increased demand for smaller, fuel efficient cars. The company has found it difficult to attract industrial workers in Europe where many prefer to work in the service sector rather than in heavy industry. Kragujevac, by contrast, has many skilled and unemployed auto workers. ¶4. For Serbia, according to Matic, the Fiat deal was a godsend. The GOS spends $1.6 million monthly in programs to support laid-off workers and has given an additional $1.8 million this year in subsidies to keep Zastava artificially alive. Fiat was not Zastava's only suitor; Volkswagen (VW) also expressed interest. Matic said VW was more interested in a green-field investment in Kragujevac. However, when VW representatives asked local authorities about acquiring a large swath of land for development, they were told buying land would be a problem due to landownership disputes and claims. AND THEN THE POLITICS -------------- ¶5. Minister Dinkic publicly linked the recent signing of the EU Stabilization and Association Agreement (SAA) with the Fiat deal saying Fiat came as soon as it heard Serbia had signed the SAA. Kragujevac has long been a contested political region and the election prospects for the Democratic Party coalition jumped with the MOU signing. BELGRADE 00000460 002 OF 002 COMMENT -------------- ¶6. Even though Zastava was not offered in a tender as originally planned, the GOS-Fiat joint venture is an excellent opportunity for Serbia. The deal promises to help the economically devastated municipality of Kragujevac and alleviate Zastava's burden on the GOS' coffers. More importantly, the deal is a tangible benefit that western-oriented parties have pointed to in the last days of the election campaign following Serbia's signing of the SAA and as a positive signal to international investors. END COMMENT. MUNTER