VZCZCXRO0588
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHVB #0001/01 0011517
ZNY CCCCC ZZH
P 011517Z JAN 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 5484
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 05 ZAGREB 000001 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE 
 
E.O. 12958: DECL: 12/30/2015 
TAGS: PGOV PREL KAWC KCRM PHUM PREF HR
SUBJECT: TWO YEARS IN POWER: RESILIENCE AND STABILITY OF 
SANADER GOVERNMENT 
 
REF: A. A) ZAGREB 1939 AND PREVIOUS 
     ¶B. B) ZAGREB 1940 
     ¶C. C) ZAGREB 1844 
     ¶D. D) ZAGREB 1254 
     ¶E. E) ZAGREB 834 
     ¶F. F) ZAGREB 827 
 
Classified By: Ambassador Ralph Frank for reasons 1.4 (b) & (d). 
 
¶1. (SBU) SUMMARY AND COMMENT: During his second year in 
office, PM Ivo Sanader led his Croatian Democratic Union 
(HDZ) through domestic difficulties and over critical 
Euro-Atlantic integration hurdles.  At the same time, he 
sustained a government coalition whose unquestionable 
stability defies the conventions of public opinion polls and 
parliamentary seat counts.  His government continues to be a 
strong force for regional stability and has made steady 
progress in addressing such critical issues as refugee 
returns and trafficking in persons.  Sanader again added to 
the international credibility of the HDZ this year while 
sidelining or eliminating extremist voices within the party. 
 
 
¶2. (SBU) Sanader's trouble spot remained much the same as 
during his first year in office: he is most successful 
internationally while the public believes his government 
should focus domestically.  With the opening of EU 
negotiations in October, Sanader is now able to do just that 
- relax his international agenda and concentrate on the 
troubled Croatian economy.  He can already point to success 
in resolving the nation's debt to its pensioners, a legacy of 
Croatia's war budget that no previous government has been 
willing or able to tackle.  Sanader also got as much 
political mileage as he could from the summer opening of the 
Zagreb-Split highway, something of tremendous symbolic 
significance, but he will need to seriously address 
unemployment and budget-draining state enterprises in the 
coming to year to gain public confidence in the GoC's 
domestic program. 
 
¶3. (U) The following assessment of GoC accomplishments is 
organized according to Post's 2005 MPP goals.  END SUMMARY 
AND COMMENT. 
 
TIES WITH ALLIES & FRIENDS: ACCESSION PROGRESSION 
--------------------------------------------- ---- 
 
¶4. (SBU) During the year, PM Sanader continued to focus the 
majority of his energy on courting European Union officials 
with an eye on integration.  After a six-month delay, Sanader 
secured the opening of Croatia's EU membership negotiations 
when his government provided key intelligence on the 
whereabouts of International Criminal Tribunal for the former 
Yugoslavia (ICTY) indictee Ante Gotovina, satisfying the EU's 
requirement for full cooperation with the Tribunal (ref A). 
Gotovina's subsequent arrest by Spanish authorities removed 
the last significant political barrier to Croatia's future in 
both the EU and NATO while adding another layer to Sanader's 
challenge in building domestic public support for his 
integration goals. 
 
¶5. (SBU) The ultimate success of Sanader's Action Plan to 
locate Gotovina demonstrated a new level of maturity within 
the GoC, requiring interagency coordination and information 
control not previously seen in Zagreb.  The upcoming months 
of EU membership negotiations will show whether Sanader's 
government is ready for this type of technical coordination 
on a wider scale. 
 
TIES WITH ALLIES (cont'd): A NEW FOCUS ON U.S. RELATIONS 
--------------------------------------------- ----------- 
 
¶6. (C) With the EU nut cracked, the Sanader government has 
launched a concerted effort to strengthen relations with the 
U.S.  The MFA regularly consults with the Embassy on this 
strategy and has intensified efforts to attract high- level 
Administration and Congressional visits.  Hopeful of U.S. 
support for Croatia's NATO candidacy, the GoC warmly welcomed 
this month's favorable Congressional resolutions while trying 
to keep public expectations about a near-term membership 
invitation realistic. 
 
¶7. (C) Recent overtures to the Embassy related to Article 98 
indicate the GoC is serious about finding a solution to this 
key issue.  President Stjepan Mesic has flatly told the 
Ambassador in the past that an Article 98 agreement was 
politically unfeasible while Croatia was expected to send its 
citizens to The Hague.  Now that Croatia's last fugitive has 
been apprehended, public opposition to Article 98 may slowly 
 
ZAGREB 00000001  002 OF 005 
 
 
begin to soften and open some maneuvering space. 
 
¶8. (SBU) Most recently, the GoC has indicated willingness to 
pursue a bilateral agreement necessary to allow certain U.S. 
citizens access to Croatia's law on restitution of property 
seized by the Yugoslav government.  Despite opposition and 
media attacks over a similar agreement with Austria, the GoC 
remains committed to resolving this longstanding issue. 
 
¶9. (U) Sanader continues to seek ways to support U.S. efforts 
in Iraq while avoiding an actual troop presence.  His 
government has been quick with statements in support of Iraqi 
elections and welcoming the new government.  In mid-2005, the 
GoC sent three police instructors to the Jordan International 
Police Training Center.  The GoC also approved a tripling of 
Croatian forces in Afghanistan, from 50 to 150, and 
contributed troops to a joint Adriatic Charter (A-3: Croatia, 
Albania, Macedonia) medical unit in Kabul. 
 
REGIONAL CONFLICTS: NORMALIZATION TAKES HOLD 
-------------------------------------------- 
 
¶10. (SBU) The most dramatic thing about Croatia's relations 
with its neighbors during the year was the absence of 
anything dramatic.  With the exception of small bursts of 
outdated rhetoric around a May Chetnik rally in Serbia (ref 
E) and the tenth anniversary of Croatia's Operation Storm in 
August, the GoC has maintained normal relations with the 
government of Serbia and Montenegro (SaM).  Sanader hosted 
SaM PM Vojislav Kostunica in November (returning Sanader's 
November 2004 visit to Belgrade), and several ministries 
exchanged visits throughout the year.  While refugees and 
missing persons remain thorny issues, Zagreb now appears to 
understand that relations with Belgrade are key to achieving 
their mutual of goal of regional stability. 
 
¶11. (SBU) The GoC has continued constructive engagement with 
the government of Bosnia and Herzegovina (BiH) while 
supporting the Bosnian-Croat community on such issues as dual 
citizenship, veterans' benefits, and equal rights. 
Bosnian-Croats' voting rights in Croatia's national elections 
came under domestic political debate following what many saw 
as their undue influence in the January presidential election 
but remain unchanged. 
 
¶12. (SBU) Longstanding bilateral issues with Slovenia 
continued to rankle politically but inched toward resolution. 
 The dispute surrounding the maritime border appears 
increasingly likely to be headed for international 
arbitration, while a European Court of Human Rights ruling in 
favor of Croatian claimants in a dispute over pre-war 
deposits in Slovenia's Ljubljanska Banka has set some 
restitution claims in motion. 
 
REGIONAL CONFLICTS (cont'd): CLOSING THE REFUGEE FILE? 
--------------------------------------------- --------- 
 
¶13. (U) The GoC proactively worked on refugee returns with 
the aim of resolving all open issues by the end of 2006 per a 
January trilateral agreement with SaM and BiH.  In July, 
Croatia presented its refugee return "road map" to the 
international community with detailed benchmarks through 
¶2006.  Of the approximately 9,000 houses rebuilt this year, 
more than 70 percent were for ethnic Serbs.  Repossession of 
houses by Serbs is almost complete, with only 55 cases 
remaining, and the Croatian Electricity Company (HEP) began 
electrification of 50 primarily Serb villages. 
 
¶14. (U) The GoC has fallen short, however, in some areas, 
including addressing problems surrounding repossessed 
properties either devastated or modified by the temporary 
occupants.  Of some 9,000 requests to provide homes for 
former residents of socialized housing, only a few dozen were 
resolved by year's end.  Human rights NGOs and 
representatives of the Serb minority complained of a rise in 
violent incidents against ethnic Serbs, particularly in the 
Dalmatian hinterlands.  Police have identified perpetrators 
in only about one-third of the 50 incidents investigated in 
¶2005. 
 
ECONOMIC GROWTH: UNEVEN PROGRESS 
-------------------------------- 
 
¶15. (SBU) To judge the Government's economic accomplishments 
by words and not deeds, one would be justified in concluding 
that Croatia is finally ready to make the difficult choices 
necessary to encourage greater economic growth. 
Unfortunately, however, the Government's rhetoric has not 
always been matched by the fortitude to take on established 
 
ZAGREB 00000001  003 OF 005 
 
 
interests or recalcitrant local officials.  As a result, the 
HDZ's economic achievements after two years in office are 
decidedly mixed.  Progress in some areas, such as 
streamlining bureaucracy and reining in chronic deficits has 
been offset by stagnation elsewhere, most notably in the 
failure to privatize or liquidate loss-making state 
industries and reform the public sector, which accounts for 
an inordinately large percentage of GDP. 
 
¶16. (SBU) After years of false starts and broken promises, 
the last year has seen progress in efforts to improve 
Croatia's investment climate.  A government project to reduce 
the time necessary to register a business, called the One 
Stop Shop, is up and running.  Although not a single stop, 
the project has apparently reduced the time necessary to 
register a new limited liability company to just 5 days, 
efficiency unthinkable in Croatia just a few years ago. 
Similar efforts to digitize land records and make them 
available on line are starting to reduce previously 
interminable back logs in the issuance of property deeds, 
reducing opportunities for graft in the process.  An 
investment promotion agency is also operational for the first 
time after several false starts. 
 
¶17. (SBU) In the area of monetary policy, the Sanader 
government's stewardship of the economy has been relatively 
steady, with a strongly independent central bank able to stay 
above the political fray.  As a result, inflation has 
remained relatively low (although 2005 figures are likely to 
be higher following the rise in energy prices) and the 
exchange rate steady.  On the fiscal side, Croatia's 
"precautionary" Stand-By Arrangement with the IMF has forced 
the Government to begin to rein in its deficit, expected to 
be 4.2  percent of GDP in 2005 and targeted at 3.3  percent 
in 2006. 
 
ECONOMIC GROWTH (cont'd): THE MORE THINGS CHANGE . . . 
--------------------------------------------- --------- 
 
¶18. (SBU)  To hear the Government trumpet its economic 
successes, one would believe that EU accession negotiations, 
E-government, rising tourism receipts and the IMF's seal of 
approval are all that Croatia needs to catch up with its more 
advanced northern neighbors.  Unfortunately, there is another 
reality that this government has been reluctant to confront 
head on.  Government subsidies to loss-making industries and 
agriculture continue to suck up approximately 3  percent of 
the country's $32 billion GDP.  The last year has seen 
virtually no progress in the privatization or resolution of 
the state's still large portfolio of loss-making assets, 
including shipyards and metal works.  In fact, the Government 
backed out of two privatization deals in the face of 
vociferous opposition from local politicians and labor 
unions, removing the head of the privatization office in the 
process.  The state sector in general remains bloated as 
well, with entitlements and healthcare costs all running 
above the EU average.  As a percentage of GDP, the Croatian 
state's share is approximately 40 percent, high even by 
European standards. 
 
¶19. (SBU)  Where reform has also been slow to come is in 
changing the way of doing business to a system where 
resources are allocated on the basis of economic merit rather 
than political or personal relationships.  This Government 
came to office promising accountability and efficiency, but 
has little to show for it so far.  Many public tenders are 
carried out under less than transparent circumstances (if 
they are carried out at all), providing endless fodder for 
the scandal-hungry press and sending the message to potential 
foreign investors that business is not conducted on a level 
playing field in Croatia.  Until the Government addresses 
these problems, Croatia will continue to grow at a slower 
rate than is necessary if it is to boost living standards and 
reduce a stubbornly high unemployment rate. 
 
RULE OF LAW: THE SLOW PACE OF REFORM 
------------------------------------ 
 
¶20. (SBU) The GoC continued to make steady progress in the 
professionalization of its police force, gradually improving 
investigations and building public confidence.  Sanader 
reinforced this with key leadership changes, including 
appointment of the progressive and energetic Minister of 
Interior Ivica Kirin in mid-2005.  Under U.S. and EU 
mentorship, Croatian police formed their first-ever 
police-prosecutor task force to tackle an organized crime 
group involved in drug smuggling.  Justice Minister Vesna 
Skare Ozbolt pursued aggressive judicial reforms during the 
year, making significant progress in eliminating case 
 
ZAGREB 00000001  004 OF 005 
 
 
backlogs, but judicial discipline remains a chronic problem 
outside of major urban courts. 
 
¶21. (SBU) Croatian police and prosecutors made their first 
serious witness protection efforts in 2005 thanks to 
USG-funded training and other international assistance. 
While initially marred by excessive media exposure, Croatia's 
fledgling witness protection program is maturing rapidly and 
will prove critical to the prosecution of organized crime and 
war crimes. 
 
¶22. (SBU) In addition to the Gotovina hunt, the Sanader 
government achieved increased success in domestic war crimes 
prosecutions, though ethnic bias remains a problem.  Several 
ongoing cases involve retrials of Croatian defendants 
improperly acquitted in the past, and the quality of court 
proceedings has increased markedly from the initial trials. 
In recognition of this improved atmosphere, the ICTY 
completed transfer of the case against Rahim Ademi and Mirko 
Norac to the Croatian judiciary in October. 
 
¶23. (SBU) Croatia showed significant improvement in the fight 
against trafficking in persons and was removed from the 
Department's Tier Two watch list in 2005.  The GoC undertook 
serious prevention and public awareness campaigns.  Anti-TIP 
training to police, prosecutors and judges began to pay off, 
as Croatia convicted one trafficker during the year and has 
prosecutions now pending against 13 suspected traffickers. 
 
 
DEMOCRACY - POLITICAL STABILITY DESPITE THE NUMBERS 
--------------------------------------------- ------ 
 
¶24. (SBU) While the HDZ's poll numbers have dropped during 
the year (mostly in a likely temporary surge in the 
popularity of the far-right Croatian Party of Rights - HSP - 
ref C), Sanader's governing coalition remains solid.  The 
PM's parliamentary majority may be slim on paper, but he has 
a growing number of informal allies he can call on as needed, 
as he did when passing the GoC's most recent budget in 
November by a three-to-one margin.  Early parliamentary 
elections remain highly unlikely in the near term. 
Emboldened by rising poll numbers, the opposition Social 
Democratic Party (SDP) has stepped up its rhetoric slightly, 
calling for early elections by the end of 2006, but it 
continues to lack the votes in parliament to launch a 
credible no-confidence campaign. 
 
¶25. (U) The GoC oversaw two successful elections in 2005 - 
presidential in January and local in May.  Both were deemed 
free and fair, though the local elections highlighted the 
need for two practical reforms: introduction of the direct 
election of mayors/county prefects and the establishment of a 
permanent state electoral commission.  The GoC has introduced 
legislation on both reforms to Parliament. 
 
¶26. (SBU) The local elections also demonstrated the 
resilience of the HDZ, making the most of post-electoral 
coalitions after lackluster electoral results.  Some 
negotiations, however, led to tensions with national 
coalition partners in the Independent Democratic Serbian 
Party, whose officials were shut out of the HDZ's local 
coalitions in Knin and Vukovar. 
 
DEMOCRACY (cont'd) - MANAGING THE NATIONALIST RIGHT 
--------------------------------------------- ------ 
 
¶27. (SBU) Following the Gotovina arrest, Sanader demonstrated 
his firm grip on rhetoric within the party.  Protests in 
support of Gotovina remained peaceful and controlled under 
Sanader's influence (ref B), and those who pushed for more 
radical and nationalist demonstrations were unable to muster 
support.  In the meantime, the GoC is delicately shifting its 
focus from the Gotovina manhunt to the Gotovina defense, 
where it will play a role countering elements of the ICTY 
indictment citing a "joint criminal enterprise" involving 
members of the then Croatian government. 
 
¶28. (SBU) Sanader continued his housecleaning of the HDZ 
during the year, isolating or eliminating the party's extreme 
nationalists.  Most notably, he expelled Eastern Slavonian 
strongman Branimir Glavas from the HDZ early in the year. 
While Glavas mounted an impressive local election comeback in 
Osijek and the surrounding county in May, routing the HDZ 
with his independent list of loyalists (ref F), his national 
influence has withered.  An aggressive police investigation 
into war crimes committed in Osijek in 1991 has implicated 
Glavas and forced him to concentrate his energies locally 
(ref D). 
 
ZAGREB 00000001  005 OF 005 
 
 
 
¶29. (SBU) Andrija Hebrang, former Deputy Prime Minister and 
Minister of Health and Social Welfare, left the cabinet for 
health reasons in the spring but has remained active within 
the party and Parliament.  With less responsibility, Hebrang 
has re-emerged as the loudest voice from the HDZ's far right, 
though some suspect with Sanader's silent approval.  Hebrang 
and his attacks on critics of Croatia's past leadership are 
useful to Sanader, placating opponents of party reforms and 
keeping the HDZ's right wing from being lost to the HSP. 
While Hebrang shows the party's traditional conservative base 
that the HDZ has not forgotten them, Sanader can go about the 
important business of tackling Croatia's difficult economic 
problems and educating the public on the benefits of 
integration and EU and NATO membership. 
FRANK