This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BELGRADE 000401 
 
SIPDIS 
 
SENSITIVE 
 
OC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ECPS ENRG EINV KIPR SR MW
SUBJECT: FINANCE MINISTER ON INVESTMENT ISSUES 
 
 
¶1. (SBU) SUMMARY: Ambassador Polt met with Finance Minister 
Mladjan Dinkic on March 7 to raise several issues involving 
U.S. investors and economic policy.  Dinkic pledged to be 
helpful in resolving issues related to U.S. Steel and the gas 
shortages that are affecting production at the company.  He 
agreed to meet with Philip Morris to discuss regulatory 
issues that have eroded the company's prospects in Serbia, 
but noted that the company had been consulted on many of 
these changes.  The finance minister said he was an advocate 
of strengthened IPR protection and would consider instructing 
tax inspectors to look for pirated software.  When Ambassador 
Polt raised GOS intentions with regard to state-owned Dunav 
Insurance, Dinkic revealed that the GOS planned to permit the 
EBRD to take a 25-30 percent stake through a capital 
increase, before an IPO or other form of privatization over 
the medium term. end summary. 
 
¶2.  (SBU)Ambassador Polt met with Finance Minister Dinkic on 
March 7 at the Ministry of Finance.  The Ambassador was 
accompanied by econ chief, while Dinkic was joined by Sonja 
Mihajlovic-Milanovic, energy adviser to Deputy Prime Minister 
Labus, and three staffers.  Embassy had requested the 
appointment to raise several issues, including problems 
encountered by U.S. Steel and Philip Morris. (Note: 
Ambassador actually met with Dinkic twice; the second 
meeting, reported septel, including Mara Harty, assistant 
secretary for consular affairs.) 
 
SIPDIS 
 
¶3.  (SBU)Ambassador began the discussion of investment issues 
by commenting on recent press reports indicating that the GOS 
team had worked out a deal with Austrian investors that would 
protected their interest in cellular operator Mobtel.  Dinkic 
confirmed that the Austrians should realize at least 18 
percent of an estimated USD 700 million in proceeds from a 
tender for Mobtel assets, its customer network and the 
license.  However, Mobtel itself, as a legal entity, would be 
liquidated, Dinkic said.   This guaranteed the Austrians a 
minimum of USD 126 million, to cover the USD 100 million they 
claim to have paid Bogoljub Karic and a USD 30 million 
Ericsson claim for which they will take responsibility.  If 
the sale price goes higher, the Austrians will gain, Dinkic 
said.  All legal claims would be dropped, and if Karic is not 
satisfied, he can take court action against the Austrians, 
the finance minister added.  To ensure a good price in the 
tender, the GOS will guarantee the buyer that it will not 
sell a third cellular license during the next 2 years at a 
price lower that the price the Mobtel license brings at 
tender, an estimated USD 300 million. 
 
 
¶4.  (SBU) Two U.S. investors, U.S. Steel and Philip Morris, 
recently had sought Embassy assistance, Ambassador Polt said. 
Interruptions in gas supplies caused by the dispute between 
Russia and Ukraine, as well as cold weather, had disrupted 
U.S. Steel's production in January and February and cost the 
company a considerable amount of money.  However, last week, 
on March 1-2, Srbijagas again had reduced gas to U.S. Steel. 
The Embassy had had learned that this apparently occurred 
because fertilizer producer Azotera Pancevo had started up 
its highly energy-intensive production process.  In this 
case, the disruption was not a development that affected all 
players, but rather, it was a non-market based decision by 
Srbijagas.  U.S. Steel now was deeply concerned about whether 
Srbijagas could guarantee a reliable supply of energy, the 
Ambassador said. 
 
¶5.  (SBU) Dinkic said it would be helpful if U.S. Steel 
signed a long term contract with Srbijagas and thereby 
provided a clearer projection of its energy needs.  U.S. 
Steel is Serbia's largest exporter, and it was important to 
meet its needs, the minister added.  Long term, the answer is 
underground storage.  Dinkic said he would talk with 
Srbijagas Executive Director Tomic about a three-year 
contract for U.S. Steel.  The Ambassador replied that he 
understood that U.S. Steel was prepared to sign such a 
contract, but it must provide for peak usage, a fact of life 
for this sort of industrial operation.  (Note:  U.S. Steel 
has said that it had in the past requested a long-term supply 
contract, but the Srbijagas had been unwilling.) 
 
¶6.  (SBU) The Ambassador reiterated our concern over the 
March reduction, which occurred because Srbijagas elected to 
provide gas to the fertilizer company and cut back others. 
Dinkic said he would check with Tomic on this point; in his 
opinion, the finance minister said, any cutbacks should be 
applied proportionally to all and not fall more heavily on 
one customer.  But he emphasized the GOS is committed to 
carrying out the gas storage project quickly, with the tender 
to begin within 50 days.  Ambassador Polt stressed that 
completion by next winter is critical.  Sonja Mihajlovic- 
Milanovic added that Serbia must complete phase one of the 
project on time. Dinkic said that the GOS is aware that 
better infrastructure is needed to support economic growth. 
The GOS had decided how to proceed, and the upcoming tender 
would select the best strategic partner for this project. 
 
 
¶7.  (SBU) Philip Morris also had approached the Embassy 
recently, Ambassador Polt said.  Country director Eugenio 
Sidoli presented a comprehensive analysis of the company's 
experience since acquisition of the cigarette factory in Nis, 
detailing how events, including some regulatory changes, had 
progressively undermined profitability.  Philip Morris was 
seeking an accommodation with the GOS to turn this trend 
around.  Dinkic expressed surprise, explaining that he was 
aware of only two issues -- a small per pack surcharge for 
health purposes to which the tobacco companies had agreed, 
and a decision by Montenegro to add its own excise tax to 
cigarettes, which was beyond Serbia's control.  The latter 
issue could be resolved by the outcome of Montenegro's 
independence referendum, the minister added.  Dinkic agreed 
to meet with Sidoli to review Philip Morris's concerns. 
 
¶8. (SBU) Ambassador Polt then raised the need for stronger 
protection of intellectual property rights (IPR).  The 
Embassy had been successful so far in convincing Washington 
of Serbia and Montenegro's (SaM) commitment to improving IPR 
protection, thereby helping the country to avoid the censure 
of the Special 301 watch list.  But the review process has 
begun again, with U.S. industry seeking to put SaM on the 
watch list, the Ambassador explained.  GOS action on further 
steps to strengthen IPR protection would help keep SaM off 
the list, and one of these steps involved the tax police, 
which operate under the Ministry of Finance.  Tax inspectors 
are not verifying whether software used by firms is 
legitimate, the Ambassador said. U.S. software companies have 
asked the Tax Administration to order inspectors to check on 
this and report violations to the appropriate authorities. 
The Embassy is aware of the considerable progress already 
made on IPR, Ambassador Polt said, but we need GOS focus on a 
few specific areas to be able to assure Washington that the 
GOS was doing all it could to improve IPR protection. 
 
¶9.  (SBU) Dinkic expressed surprise, saying that he had asked 
all ministries to work on IPR protection but was unaware of a 
specific area in which tax police were not being helpful. 
The Minister recommended that Embassy representatives meet 
with Deputy Finance Minister Vesna Arsic, along with the Tax 
Administration officials, to review the matter. Sometimes tax 
authorities resist new approaches, Dinkic said, but it might 
be possible to work this out without a change in the law. 
Econ chief added that those who buy pirated software are 
paying far less than they would for authorized products, and 
this represents a loss of VAT revenue to the Ministry. 
 
¶10.  (SBU) The discussion turned to economic policy as 
Ambassador Polt queried Dinkic on GOS plans for Dunav 
Insurance, a state-owned company and Serbia's largest 
insurer.  Privatization would be the best step, especially 
with Dunav's exposure to foreign exchange risk through its 
program of insuring retail bank loans, the Ambassador said, 
but there had been press reports that the GOS opposed 
privatization.  Dinkic replied that the GOS would follow the 
same approach with Dunav as it has with Komercialna Banka, 
bringing in the EBRD as a major investor to help in the 
restructuring of Dunav. A smaller state-owned insurer, DDOR, 
could be privatized right away, but Dunav needed work, 
including more unbundling of non-core operations.  This also 
could enhance the value of the company, Dinkic said. 
Privatization, perhaps through an IPO, would come later. But 
he agreed with the Ambassador that Dunav needs work. 
 
¶11.  Comment.  Dinkic clearly was trying to be helpful on a 
variety of issues.  Embassy will follow up with Finance 
Ministry and with other GOS interlocutors regarding specific 
steps on IPR protection.  We are seeking GOS agreement to an 
IPR action plan that includes measures aimed at various 
shortcomings that affect the position of U.S. companies in 
the SaM market. End Comment. 
 
Polt