SERBIA'S FORGOTTEN EAST: DIGGING A DEEPER HOLE

UNCLAS SECTION 01 OF 04 BELGRADE 001430 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EIND ENRG EMIN SR SUBJECT: SERBIA'S FORGOTTEN EAST: DIGGING A DEEPER HOLE REF: 06 BELGRADE 908; 08 BELGRADE 155; 08 BELGRADE 365 SUMMARY -------------- ¶1. (SBU) Bor, located in eastern Serbia's Timok region, is one of the poorest and most polluted cities in Serbia. Its economy is tied to the fortunes of RTB Bor, a bankrupt state-owned copper mining and smelting company. The company (which has expressed interest to purchase newer American equipment and expertise) could be profitable, but only with a private investor willing to reduce a bloated workforce and aggressively modernize equipment and facilities. Despite the government's proposed restructuring plans, political apathy, economic mismanagement and union resistance make a solution to Bor's grave economic and environmental problems unobtainable in the near term, leaving few opportunities for the region's residents. End Summary. RTB BOR IN NUMBERS -------------- ¶2. (SBU) RTB Bor (Rudarsko-topcionarski basen Bor) is a bankrupt state-owned copper mining and smelting company based in Bor, a city of 55,000 located in eastern Serbia (ref A). It has two operating mines, an open pit just outside the city and an underground mine nearby. It also has a smelter and a sulfuric acid refining unit in Bor. The company now has 4700 employees, down from 8,000 in 2004. RTB Bor has been operating at a loss for several years and now has debts totaling over $1.2 billion . According to the company, annual production of copper is currently around 24,000 tons and RTB Bor has over 1.2 billion tons of confirmed ore reserves, representing around 2% of total world copper reserves. At its zenith, the company produced 155,000 tons of ore annually. Currently, the share of metal in ore from these mines averages 0.38% from surface extraction and 0.9 to 1% from underground extraction. Independent geologists told us that this ore was of poorer quality and had a lower metal content than that found in other copper production areas. They also told us that, for comparison, the neighboring Bulgarian copper mine Asarel produces 30,000 tons of copper per year and Poland's mine Legnica 300,000 tons per year. GOVERNMENT PRIVATIZATION PLANS -------------- ¶3. (SBU)) After a failed privatization effort in 2008 (refs B and C),the Serbian government is once again implementing turnaround plans for the company. Branislav Zec, Executive Director of Serbia's Privatization Agency, told us on November 5 that the agency wanted to move the company's debts into a company which it planned to ask a court to declare bankrupt. He said that the agency would then form a new company from the remaining assets and swap existing creditors' debt claims for equity in the new venture. (The Serbian government is RTB Bor's largest creditor, holding just over 90% of the company's total debt.) Zec said that this new venture would then be privatized sometime in the future. While Zec thought the company could become profitable with better management and technology, he was not optimistic about the company's chances. He said with new technology, the company could more efficiently separate copper from ore and would be profitable even with a copper price between $2,500 to 3,000 per ton. He stressed, however, that the company was saddled with outdated technology and large liabilities and would not be profitable even with a copper price of $9,000 per ton. He said that Serbia received a commodity loan from the Canadian government to build a new copper smelter in Bor and that the GoS issued the company a loan guarantee of $25 million to buy new mining equipment. BELGRADE 00001430 002 OF 004 RTB BOR OFFICIALS OPTIMISTIC ABOUT FUTURE -------------- ¶4. (SBU) Blagoje Spaskovski, the managing director of RTB Bor, was upbeat about the company's future during a November 17 meeting. He told us that in addition to the new smelter financed by the Canadians, the company also planned to build a new sulfuric acid plant and buy new mining equipment. He said that the company should be privatized within the next three to five years. Spaskvoski said that most of the company's aging equipment was from the United States and that he would "welcome the opportunity to buy more equipment from American companies," without providing specifics of what was needed and what funds were available. He confidently predicted that the company would be profitable by next year and that it would triple its annual copper production to 75,000 tons within three years. NEW ORE DISCOVERED IN BOR -------------- ¶5. (SBU) Spaskovski told us that RTB Bor had found a small amount of very rich ore with a high copper content (7.3% and 3%) (Note: This discovery is the probable source of his confident predictions of future success for RTB Bor. End Note). Dejan Kozelj, Chief Geologist at South Danube Metals (a local company 100% owned by Freeport McMoran of Phoenix, Arizona),said that the new discovery in Bor was very small (around 10,000 tons of ore) and was "like a liter of water in the Danube" but that it showed Bor's potential for a much larger amount of high-quality reserves. Kozelj said in confidence that Freeport had shown interest in Bor but was waiting for further analyses before pursuing any investment there. UNIONS AGAINST PRIVATIZATION -------------- ¶6. (SBU) Failed privatizations and economic uncertainty have caused many RTB Bor employees to fear for their jobs and oppose any new efforts at privatizing the company. Representatives of the local miner's unions voiced their opinions about RTB Bor's future to us on November 17. Dragan Aleksic, President of Bor's branch of the Confederation of the Autonomous Trade Unions of Serbia Dragan Jankucic from Nezavisnost said that RTB Bor represented the "life of the region and Bor." Aleksic said the unions were not against privatization if new owners respected existing working conditions, contracts and would maintain current staffing levels. Aleksic also attacked the national privatization agency and their work on Bor to date, saying that agency "had no experience with privatizations." BOR PRIVATIZATION PLANS LACKING GOOD MUNICIPAL PARTNER -------------- -------------- ¶7. (SBU) The city of Bor is controlled by the Serbian Radical Party (SRS),and its mayor, Branislav Rankic, have no discernible strategy for local economic development. As a direct result of the city's bungled economic management, development in Bor is led by local NGOs and a handful of successfully privatized companies. Representatives from local companies and Bor's Community BELGRADE 00001430 003 OF 004 Development Association told us on November 17 that they were focused on developing tourism and small and medium enterprises in the area, but that they received no support from local government. Other NGOs in the region confirmed that budding efforts at regional economic development included all other regional cities except Bor. Mirjana Djordjevic, managing director of Eurofoil, a successful recycling and packaging company privatized partially by American and local investors in 2006, also expressed dissatisfaction with the lack of support from local government on November 18. She said local officials were unresponsive when she asked for their help in establishing a local plastic recycling center to supply the company with raw materials, stating that the "private sector is not appreciated here." POLLUTION AND ENVIRONMENTAL CONCERNS -------------- ¶8. (SBU) While essential to the local economy, Bor's mines have caused significant air pollution and damage to local groundwater and soil. The World Bank has funded a $ 41 million project led by the Serbian Ministry for Environment and Special Planning and implemented by local authorities to mitigate environmental damage from the mines and help social-economic recovery. Vidojko Simonovic, WB Project Director in Bor, told us on November 17 that this project was slated to begin next year and focused on cleaning up contaminated water and soil around the mine. However, RTB Bor and its unions would like to secure support both from the Serbian government and the World Bank to reallocate these funds. RTB Managing Director Spaskovski and Union representatives both told us that while they were not opposed to the original objectives of the WB clean-up project, they favored using WB funds to fill in the old open mine pit near downtown Bor, which was in danger of collapsing. (On our visit to the pit, houses, the mine's smelter, and a road were all located within 200 meters of the edge of the 400 meter deep hole). Jankucic told us that air near the pit contained particulate pollutants such as arsenic and mercury at concentrations over 150 times the allowed levels. He also said that contaminated waste water from the mines and this pit containing heavy metals were discharged directly into surrounding rivers and streams. LARGEST CITY IN REGION PINNING ECONOMIC HOPES ON SOUTHSTREAM -------------- -------------- ¶9. (SBU) Just 20 kilometers southeast of Bor, the region's largest city, Zajecar, (population 60,000),is pinning its hopes on new energy investments. Srecko Nikolic, the Deputy Mayor and his economic team told us on November 18 that while Zajecar was focusing some of its efforts on developing its tourist and agribusiness infrastructure, it had based much of its planning on the assumption that the South-Stream gas pipeline to be developed by Russia's Gazprom would pass near the city. He said that this would spur further economic development and that the city was planning a major investment in its infrastructure in anticipation of this. Nikolic told us that the Russian Ambassador to Serbia had recently visited Zajecar and assured him that the pipeline would enter Serbia near the city. COMMENT -------------- ¶10. (SBU) Bor and the surrounding region face major economic and environmental challenges, including moving away from near total dependence on the copper mine and cleaning up the severe pollution that continues to degrade the quality of life for Bor's citizens. While RTB Bor could become profitable if privatized and operated efficiently, the process to date has been mismanaged and has BELGRADE 00001430 004 OF 004 received little support from the local community. Local political apathy, along with signs of stiff union resistance to any privatization plans for RTB Bor paint a bleak picture of Bor's economic future. An old saying states that when you find yourself deep in a hole, stop digging. Bor hasn't even begun to put down its shovel. End Comment. PEDERSON