BOSNIA - EUROPEANS IGNORE DANGER FROM DODIK ON

C O N F I D E N T I A L SECTION 01 OF 02 SARAJEVO 000614 SIPDIS DEPARTMENT FOR EUR(JONES),EUR/SCE(FOOKS/MCGUIRE); NSC FOR HELGERSON E.O. 12958: DECL: 01/01/2015 TAGS: EAID ENRG PINR PREL PGOV EU BK SUBJECT: BOSNIA - EUROPEANS IGNORE DANGER FROM DODIK ON TRANSCO REF: A. SARAJEVO 251 ¶B. SARAJEVO 147 ¶C. 08 SARAJEVO 1722 ¶D. 08 SARAJEVO 1623 ¶E. 08 SARAJEVO 1498 ¶F. 08 SARAJEVO 1459 ¶G. 08 SARAJEVO 1309 Classified By: Ambassador Charles English. Reasons 1.4(b) and (d). ¶1. (U) This is an action request. See paragraph seven below. ¶2. (C) SUMMARY: The issue of the Republika Srpska (RS)-led break down of Transco, the state-run electricity transmission company is coming to a critical point. All good faith offers by the international community to provide technical assistance and by the Federation to negotiate have been summarily turned aside by the RS. The company is on a path to certain failure that is now clearly the strategy of the RS and RS Premier Dodik in his quest to undo state-level competencies. As Transco was a pre-condition to the Stabilization and Association Agreement, European firmness and leadership on this issue is crucial. END SUMMARY ¶3. (SBU) Transco, the state-run electricity transmission company, was created when the assets of the three ethnically-based electricity generation and distribution were merged in 2003. Its creation involved a formal transfer of competencies from the entities to the state and was required for Bosnian to sign its Stabilization and Association Agreement (SAA) with the EU. In August 2008, Republika Srpska PM Milorad Dodik, citing management problems, threatened to unilaterally withdraw the RS from Transco (Ref F and G). Dodik reversed course (Ref E) and committed to seeking negotiated solutions to his concerns only after the international community applied considerable pressure. Since that time, Dodik has rejected a U.S.-EU proposal designed to improve Transco's management (Ref D) and refused to negotiate with Federation counterparts in good faith. In our judgment, it appears increasingly likely that Transco will become another victim of Dodik's attempts to undermine the state and roll back previous reforms. ¶4. (SBU) Dodik last met his Federation counterpart, Nezdad Brankovic, on this issue in December 2008, but made no progress in their discussions. In February the RS Minister of Energy Slobodan Puhalac submitted a sharply worded reply to EU officials regarding the EU's offer to conduct a management review of Transco, claiming, among other things, that Transco was "imposed on the RS" and that "nobody should or can accept it" (Ref A). The company is now nearing the point of failure. Currently: -- RS Management Board Members continue to refuse to attend board meetings. -- The mandates for three executive directors have expired, and no new appointments have been made. -- Investments and purchases above the local currency equivalent of $6666 (10,000 km) have stopped. -- Technical staff from the RS Ministry of Energy refuse to negotiate in good faith with Federation counterparts, in spite of Federation agreements and concessions on a majority of points from Dodik's February 2008 proposal to reform the company (Ref G). ¶5. (C) We remain prepared to engage on Transco, but our ability to beat back Dodik's challenge to Transco requires clear and firm leadership from the EU. The Ambassador intends to meet with EU Ambassador and HighRep/EU Special Representative (EUSR) Inzko in late May to encourage a coordinated effort to put Transco back on track. OHR/EUSR staff are fully supportive of this approach, but our exchanges with working-level and technical experts from the EU suggest they do not fully appreciate that the EU's essentially passive approach to the problem is not working. (Note: Earlier this year, European Energy Commissioner Andris Piebalgs indicated a willingness to press hard for the resolution of Transco issues, but this did not translate into EU activism on the ground or, as near we can tell, in Brussels. End Note) We are not optimistic that bilateral pressure from Sarajevo alone will be sufficient to energize the EU, however; and we would urge our colleagues in Brussels SARAJEVO 00000614 002 OF 002 and Washington to underscore the importance of the issue with their EU and European Member State counterparts. Comment -------------- ¶6. (C) On one level Transco is a mind-numbingly technical issue. It is easy to get lost in the details, and as a consequence, it is difficult to persuade senior European officials to engage on them. On another level, the fate of Transco has important implications for the Bosnian state and our Trans-Atlantic strategy for ensuring Bosnia's future security and stability (i.e., securing its membership in NATO and the EU). If Transco is allowed to collapse and the RS to walk away from it, Dodik will have successfully challenged a formal competency transfer and reversed a reform required for the SAA. (He will have also helped prepare for possible RS succession by creating an independent RS transmission company to manage distribution of electricity in the RS - a classic element in taking control of a country.) The EU's credibility, already low as a consequence of its police reform debacle, will sink even lower. Dodik would be encouraged to challenge other state-building reforms required by the SAA, but that are unpopular in the RS, many of which are contained in his list of 68 "competency transfers" he and his allies imply were illegally taken from the RS. Dodik would have an additional reason to dismiss EU claims that SAA requirements and acquis benchmarks required this or that reform or compromise from the RS. At stake for the EU is its ability to lay down realistic and well-argued benchmarks and to apply them in a resolute and consistent fashion; yet it is not clear to us that the EU understands this. After all, as one EU official here put it to us, "We want to preserve the state company, but it would be okay if it split into three." Action Request -------------- ¶7. (SBU) With these concerns in mind, we would urge our colleagues in Brussels to engage senior EU officials on Transco and underscore the importance of taking a far more proactive and robust approach to resolving it in a manner that preserves both the letter and spirit of the previous competency transfer and SAA requirement. We would also recommend that Washington raise the issue with EU officials and urge our Embassies in EU Member States to raise our concerns and willingness to work with the EU to address them. Some suggested points follow: -- The creation of Transco was one of the preconditions to signing the Stabilization Association Agreement with the European Union. A single transmission company is also linked to a number of international treaties that BiH has signed. -- Transco is currently under threat of dissolution. It is becoming yet another victim in a growing pattern of actions in which Prime Minister Dodik undermines state-level competencies and promotes the creation of parallel competencies at the entity level, thus creating the conditions for a separate state. -- The international community has spent over $1 billion to reconstruct the energy sector and institute reforms that will open the BiH's electricity market and help it to realize its potential as an energy exporter. Creation of Transco and the state-level Independent System Operator were preconditions for the signing of the SAA. -- The dissolution of Transco along entity lines will reduce the efficiency of BiH as an energy exporter and put a dent in efforts to improve transparency and accountability in a sector that most observers agree is plagued by extensive corruption. -- Backtracking on our advocacy of a single transmission company managed at the state-level will almost certainly be taken by Dodik as a willingness to cede ground on other issues as well and would contribute to a steady chipping away of our ability to stabilize BiH and facilitate EU accession. ENGLISH