VZCZCXYZ0003
PP RUEHWEB

DE RUEHVJ #1096/01 1380554
ZNY CCCCC ZZH
P 180554Z MAY 06
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC PRIORITY 3514
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

C O N F I D E N T I A L SARAJEVO 001096 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/SCE (RIEHL, FOOKS), EUR/ACE (VISOCAN) AND 
EB/IFD/OMA (YOUTH/VOLK) 
TREASURY FOR OFAC (WERNER, LURIE) 
 
E.O. 12958: DECL: 05/16/2016 
TAGS: ECON EFIN PGOV BK
SUBJECT: BOSNIA:  REPUBLIKA SRPSKA PRIME MINISTER RECEPTIVE 
TO ECONOMIC REFORM 
 
REF: SARAJEVO 417 
 
Classified By: AMBASSADOR DOUGLAS L. MCELHANEY FOR REASON 1.5(B). 
 
¶1.  (C)  Summary:  In a wide-ranging discussion on May 15 
(political issues reported septel), the Ambassador thanked 
Republika Srpska (RS) Premier Milorad Dodik for his quick 
action on several USG-sponsored economic priorities, 
including revenue allocation, corporate profit tax 
legislation, and regulatory reform.  The Ambassador praised 
Dodik's aggressive campaign to clean up the RS forestry 
sector and offered U.S. technical assistance to address the 
problems that led Treasury's Office of Foreign Assets Control 
(OFAC) to "designate" RS forestry monopoly Srpske Sume in 
June 2004.  The PM pledged the rapid and transparent sale of 
RS Telekom, by far the largest privatization in BiH's short 
history.  Dodik also agreed to the transfer of banking 
supervision to the state level -- with one condition.  While 
the Prime Minister continues to push some of his more 
populist reforms (reftel), his receptivity to sensible advice 
offers a window for further near-term economic progress.  End 
Summary. 
 
Quick Off the Mark 
------------------ 
 
¶2.  (SBU)  Although he has been in office less than three 
months, RS Prime Minister Milorad Dodik has already 
demonstrated his resolve to pursue economic reform, for which 
the Ambassador expressed U.S. support.  At the Embassy's 
urging, Dodik pushed through a new law on revenue allocation 
that introduces transparent and objective criteria for 
distributing funds to local governments.  The new PM has 
introduced legislation (drafted with USAID assistance) to 
radically streamline and simplify the tax system, the opening 
gambit in Post's strategy to improve the business climate for 
small and medium enterprises (SMEs) in BiH.  Draft corporate 
profit tax legislation has already passed its first reading 
in the RS National Assembly (RSNA) and legislation to 
modernize personal income tax has been introduced.  Dodik has 
also enthusiastically embraced a USAID-sponsored regulatory 
reform initiative by launching the "Guillotine Process", a 
commission he will personally chair to cut the red tape and 
bureaucracy that choke small businesses. 
 
Into the Woods 
-------------- 
 
¶3.  (C)  In recognition of recent progress, the Ambassador 
praised Dodik's incipient campaign to tackle entrenched 
corruption and criminality in the RS forestry sector.  The 
premier drew attention to his recent dismissal of the entire 
supervisory board of Srpske Sume (SS), the entity-owned 
forestry monopoly.  The PM reported that he himself had met 
with the new board and that he had given the incoming team 
marching orders to use the reports written by the RS Supreme 
Auditor and others to root out corruption in the company. 
Dodik claimed the new board has explicit authority to remove 
staff, from the general manager on down, and that if they did 
not accomplish this task he would replace them.  The PM 
posited that, in his view, "only a very small number of 
current Srpske Sume employees should stay there." 
 
¶4.  (C)  The Ambassador noted that the U.S. had not engaged 
in the RS forestry sector since OFAC designated Srpske Sume 
(i.e., included Srpske Sume on the Western Balkans Executive 
Order list, making it illegal for U.S. entities and 
individuals to do business with the company) for its support 
of war criminals.  However, in view of Dodik's show of 
resolve, the Embassy is prepared to offer the RS government 
technical assistance to reform the RS forestry sector through 
USAID.  Dodik asked for specific suggestions.  In response, 
the Ambassador passed him a one-page summary of 
recommendations, including legislative and regulatory changes 
that would improve governance of the sector and bring it 
closer to a market-based system.  The Banja Luka Branch 
Office will follow up with Dodik and his staff to get the 
process moving on an operational level.  (NOTE:  USAID plans 
to work with the RS government, not directly with Srpske 
Sume.  Post will consult with OFAC on the appropriate 
licenses prior to any financial engagement with Srpske Sume 
if there is sufficient progress to justify increased 
engagement.  END NOTE.) 
 
Show Me the Money 
----------------- 
 
¶5.  (C)  The Ambassador asked about progress on the RS 
 
 
Telekom privatization, expected to generate up to KM 600 
million, stressing the importance of an open and competitive 
tender.  Dodik informed the Ambassador that the technical 
report was a bit behind schedule but should be finished in 
the next few days.  He alluded to difficulties with various 
interested parties, dividing them into two groups -- those 
that currently control the company and those that used to 
control it.  However, he expressed his determination to 
maximize the sales value of RS Telekom.  Specifically, the PM 
plans to follow an EBRD recommendation to keep investment 
requirements and other commitments to a minimum to ensure the 
largest possible cash offers.  Additionally, Dodik wants to 
sell not just the RS government's 65% stake in Telekom, but 
also the RS pension fund's share (15%) to increase the 
attractiveness of the company for potential buyers.  In line 
with another innovative EBRD practice that ensures top dollar 
in privatization sales, Dodik intends to hold a live 
televised auction among the top three bidders to finalize the 
deal.  The PM also acknowledged the need to use the RS 
Telekom proceeds wisely, pointing out that such a windfall 
was unlikely to come along again in the near future. 
 
Banking Supervision 
------------------- 
 
¶6.  (C)  In response to prompting by the Ambassador, Dodik 
expressed his willingness to transfer responsibility for 
banking supervision to the state level.  However, he insisted 
that the headquarters of the new agency be in Banja Luka. 
When it was clarified that the current plan did not involve 
creation of a new agency but rather transferring of 
responsibility and staff to the Central Bank (a much cheaper 
and quicker solution than creating a new institution), Dodik 
agreed -- as long as the oversight for banking supervision 
was located in Banja Luka.  He claimed that Principal Deputy 
High Representative Larry Butler had promised to secure 
agreement at the state and Federation levels for such a deal. 
 
Comment 
------- 
 
¶7.  (C)  Dodik has made economic reform a priority for both 
his administration and his election campaign and has 
delivered a number of concrete reforms already in his short 
tenure.  No economist, the PM continues to pursue some 
populist initiatives -- such as an ill-advised privatization 
review and a questionable development investment bank 
(reftel).  However, he has proven receptive to sound advice 
as well. Post will continue to search for targeted 
interventions of mutual interest that Dodik can sell as 
pro-business and anti-corruption reforms in the run-up to the 
elections, especially in the forestry sector.  End Comment. 
 
MCELHANEY