VZCZCXYZ0007
RR RUEHWEB

DE RUEHVB #0281/01 0611530
ZNR UUUUU ZZH
R 021530Z MAR 06
FM AMEMBASSY ZAGREB
TO RUEHNO/USMISSION USNATO 3429
RUEHC/SECSTATE WASHDC 5771
RUEKJCS/SECDEF WASHDC

UNCLAS ZAGREB 000281 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USNATO PLEASE PASS TO AMBASSADOR NULAND 
DEPARTMENT FOR EUR/SCE, EUR/RPM 
DEFENSE FOR OSD/ISP/NATO POLICY 
 
 
E.O. 12958: N/A 
TAGS: PREL OREP PGOV MARR HR
SUBJECT: CROATIA SCENE SETTER FOR AMBASSADOR NULAND AND THE 
NATO ROAD SHOW 
 
¶1. SUMMARY: The last few months have brought a string of 
good news for Croatia and the government of Prime Minister 
Ivo Sanader.  With EU accession negotiations opened on 
October 4 and fugitive general Ante Gotovina arrested in 
Spain on December 7, Croatia has now cleared major 
political obstacles in its path to Euro-Atlantic 
integration.  What remains are the more difficult agendas 
of defense and economic reform.  As a candidate for NATO 
membership, Croatia continues to make progress in  defense 
reform and demonstrate that it will be a net contributor to 
the Alliance's new missions.  Without traditional U.S. 
bilateral military assistance due to ASPA restrictions, our 
bilateral military exchanges focus on improving NATO 
interoperability for the Croatian Armed Forces (CAF).  On 
the economic front, Croatia has made steady, albeit uneven 
progress in enacting the reforms necessary for it to keep 
pace with its more advanced northern neighbors.  Our goal 
is to help quicken the pace of reform and make Croatia a 
source of stability and economic prosperity in the region. 
END SUMMARY. 
 
THE NEW FACE OF THE NATIONALIST PARTY 
------------------------------------- 
 
¶2. PM Ivo Sanader's  Croatian Democratic Union (HDZ) party 
was elected in November 2003 on a platform promising to 
bring Croatia into the EU and NATO.  The HDZ has proven it 
is no longer cut from the same cloth as the nationalist HDZ 
of the late president Franjo Tudjman in the 1990s.  PM 
Sanader made important gestures immediately after taking 
office -- visiting the Serb Community on Orthodox 
Christmas, reaching out to the Muslim minority, and signing 
coalition agreements with the Serb parliamentary grouping - 
- which were almost unthinkable just months before.  In 
addition, he has made great strides in normalizing 
relations with Serbia and Montenegro and Bosnia and 
Herzegovina, including high-level visits, visa-free travel 
and free trade agreements. 
 
¶3. The opening of EU accession negotiations on October 4, 
2005 was a major victory for the Sanader government. 
Croatia cleared a further hurdle on December 7, when 
fugitive general Ante Gotovina was arrested in Spain and 
transferred to the ICTY in The Hague to stand trial for 
charges of war crimes committed in the aftermath of 
Croatia's Operation Storm, which liberated the rebel-Serb- 
occupied Krajina region in 1995.  The Gotovina arrest, 
applauded by the U.S. and the international community, was 
not popular domestically, as many Croats consider Gotovina 
a hero of their war of independence; to its credit, 
however, and at some potential political cost, the HDZ 
worked to keep the few protests which did occur after the 
arrest focused on "support for Gotovina" rather than 
venting anger at the international community or the ICTY. 
 
EURO-ATLANTIC INTEGRATION: NOT IF, BUT WHEN 
------------------------------------------- 
 
¶4.  With Gotovina in the Hague, the GOC is focused on 
promoting its goal of NATO membership to the general 
public.  There is a general consensus among the political 
elite that Croatia belongs in NATO, but the GOC 
acknowledges that it must generate similar levels of 
support among the general public, and is implementing its 
PR strategy. 
 
¶5. The MOD and General Staff are committed to increasing 
participation in NATO Peacekeeping Operations, and are 
planning for and funding operations through 2015.  Over the 
summer, the parliament approved tripling to 150 Croatia's 
troop (currently primarily Military Police) contribution to 
NATO's ISAF mission in Afghanistan.  A Croatian MP platoon 
is currently in its seventh rotation in Kabul and the first 
increase in ISAF contributions will be a seven man Military 
Liaison and Observation Team to deploy with the Lithuanian 
PRT in Chagcharan.  Currently, Croatia also has 31 persons 
deployed on 10 UN peace support operations, including Major 
General Dragutin Repinc, who assumed command on December 29 
of the UNMOGIP operation in Kashmir. 
 
¶6. Croatia has an ambitious military reform program in 
place to make the armed forces "NATO-ready" by 2007  a 
difficult task under the best circumstances.  The 
government signed off in mid 2005 on the Strategic Defense 
Review (SDR), which bases future defense planning on the 
 
assumption that Croatia has no serious threats to its 
territorial integrity and will be a full partner in 
collective defense through NATO.  The Long Term Development 
Plan for the Croatian Armed Forces, currently in semi-final 
draft form, attempts to bridge the gap between the defense 
reform vision of the SDR and the likely fiscal shortfalls 
over the next three-five years.  Defense spending is 
currently just short of the Prague Capabilities Commitment 
level of 2 percent of GDP, although obligatory pension 
payments to war veterans and a personnel-heavy defense 
budget leave only minimal resources for much-needed 
equipment procurement.  U.S. firms, including Lockheed- 
Martin, ITT and Motorola are supplying equipment to the 
Croatian military and General Dynamics is currently bidding 
on contracts for the major, upcoming purchase of armored 
personnel carriers.  We support Croatia's NATO ambitions, 
but have been very clear in our message that defense reform 
is an essential pre-condition for Croatia to demonstrate 
that it will become a net contributor to security through 
NATO operations. 
 
MAKING MOST OF MILITARY TO MILILTARY ENGAGEMENT 
--------------------------------------------- -- 
 
¶7. As Croatia has not signed an Article 98 agreement, 
International Military Education and Training (IMET) and 
Foreign Military Financing (FMF) programs were suspended in 
June 2003.  Prior to the suspension, the U.S. provided $4.2 
million in IMET grants, which allowed over 350 Croatian 
civilian and military personnel to attend training in the 
U.S. and an additionally 300 MOD personnel to receive 
training from Mobile Education Teams in Croatia.  Many of 
Croatia's IMET graduates now hold key positions of 
prominence within the Croatian Defense Ministry and Joint 
Staff.  The MoD still considers IMET one of the most 
important tools for the transition of its armed forces to a 
modern, NATO-ready force, and is spending some of its 
limited training funds to send two senior general staff 
officers to English language training in the U.S. that 
would otherwise have been IMET supported. 
 
¶8. Prior to FMF suspension, Croatia used FMF grants 
totaling $18.4 million to purchase equipment for force 
modernization and NATO interoperability.  These purchases 
included the acquisition of VHF and NTDR digital radios, 
Night Vision Devices, and MILES training simulations 
equipment.  The Croatian Air Force also used FMF grants to 
upgrade two Mi-8 helicopters with NATO-compatible radios 
and identification systems. 
 
¶9. Bilateral Activities: The USEUCOM-sponsored Joint 
Contact Team Program, an essential element of bilateral 
military engagement, has sponsored over five hundred 
bilateral familiarization events with the Croatian Armed 
Forces since 1996.  Since the suspension of IMET and FMF, 
JCTP programs have been increasingly focused on improving 
the Croatian Armed Forces' NATO interoperability. In FY 05, 
the JCTP Program conducted twenty-one events that covered a 
wide array of military activities to help focus the 
professional development and effective transition of the 
Croatian Armed Forces. 
 
¶10. Another vital aspect of US engagement has been the 
Minnesota National Guard's collaboration with the Croatian 
Armed Forces under the State Partnership Program.  Since 
1997, the Minnesota National Guard, in conjunction with the 
USEUCOM JCTP program, has participated in more than 80 
bilateral exchanges in a variety of fields to include 
infantry operations, pilot exchanges, and instruction on 
the challenges of recruitment.  This state partnership 
continues to grow both in scope and quality.  Six state- 
partnership events were conducted in 2005 culminating in a 
very successful platoon exchange in July, in which a 
composite Croatian Platoon deployed to Minnesota and 
trained alongside the National Guard unit in final 
preparation for deployment to Iraq.  The training included 
land navigation, light infantry operations, Peace keeping 
and operations in urban terrain.  Reciprocal platoon 
exchanges are programmed for FY 06 and FY 07, building to a 
proposed infantry company exchange in FY 08. 
 
¶11. The Marshall Center is also increasingly valued as an 
engagement tool that allows Croatian MOD personnel, and the 
Ministries of the Interior and Foreign Affairs to interface 
with US military officers and regional counterparts in 
 
 
residency programs and regional conferences. Since 1995, 
the Marshall Center has hosted 135 Croatian participants in 
its residency programs in Advanced Security Studies, 
Terrorism and Security Studies, and the Senior Executive 
Seminars.  Among others, the current Croatian Ambassador to 
NATO and the head of the Counter Intelligence Agency (POA) 
are Marshall Center graduates. 
 
THE WAR IS OVER, BUT THE SCARS REMAIN 
------------------------------------- 
 
¶12. Among the more important accomplishments of PM 
Sanader's government are advances in addressing the legacy 
of the 1991-95 war.  In addition to cooperation with the 
ICTY and sounder adjudication of war crimes, the HDZ 
government has made significant progress on refugee returns 
based on its December 2003 coalition agreement with ethnic 
Serb parliamentarians.  International observers such as the 
OSCE and UNHCR have praised the government's pace of 
reconstruction of war-damaged housing and return of refugee 
property, although ethnic discrimination and resistance to 
change at the local level are persistent challenges. 
 
¶13. Of the estimated 350,000 people, mostly ethnic Serbs, 
who were displaced during the war, about 134,000 have 
returned.  This leaves approximately 215,000 refugees and 
internally-displaced persons derived from the 1991-1995 war 
 most of these ethnic Serbs now living in Serbia and 
Montenegro and Bosnia and Herzegovina.  The UNHCR re- 
registration project of March 2005 clarified the number of 
true refugees, concluding that the majority have settled in 
place and do not plan to return.  An OSCE/USAID survey 
indicated that from five to twenty percent of refugees 
would return if guaranteed employment and housing. 
 
¶14. As suggested by the OSCE, UNHCR, and the European 
Commission, the Government has created a "road map" with 
the goal of closing the refugee file in 2006.  Elements of 
this include specific benchmarks such as the resolution of 
refugee housing, equal access to information and government 
services, and information on war crimes indictments. 
 
ECONOMY: BETTER THAN NEIGHBORS, BUT ROOM FOR IMPROVEMENT 
--------------------------------------------- ----------- 
 
¶15. Croatia's economy is the most developed of the former 
Yugoslavia, with the exception of Slovenia.  Per capita GDP 
is approximately $7,800, more than twice that of 
neighboring Serbia and Montenegro and roughly equal to 
Slovakia. Over the last six years, Croatia has enjoyed 
general macroeconomic stability characterized by low 
inflation and modest economic growth of approximately 4 
percent annually.  This growth, however, has been jobless, 
with the official unemployment rate remaining stubbornly 
high at approximately 18 percent. 
 
¶16. The state still plays an overly large role in Croatia's 
economy.  Although there has been progress in shedding some 
of the state's large portfolio of assets, notably banks, 
hotels and large agricultural combines, the government 
continues to be saddled with loss-making industrial 
companies whose subsidies drain approximately 3 percent of 
GDP annually.  As a percentage of GDP, the state's role in 
the economy is far above the EU average at nearly 40 
percent.  With one pensioner for every 1.4 persons 
employed, above-average healthcare costs and out of control 
entitlement programs, the government faces many necessary, 
but politically unpopular decisions if it is to reduce 
chronic deficits and liberalize the country's economy. 
 
¶17. Croatia missed out on the initial rush of foreign 
investment in Central and Eastern Europe following the fall 
of the Berlin Wall, largely because of the war in the 
former Yugoslavia, but also because of its slowness to make 
the difficult but necessary decisions to reform its 
economy. Foremost among the factors inhibiting greater 
investment is an inefficient judicial system that can take 
years to resolve even the most basic commercial disputes 
and a stubbornly Byzantine bureaucracy.  There has been 
some improvement in this last area, with the government's 
creation of a "one-stop shop" for business registration and 
a trade and investment promotion agency to assist 
prospective foreign investors, but much more remains to be 
done. 
¶18. Croatia is also saddled by large budget and trade 
deficits.  Although the former has been reduced in recent 
years partially as a result of an IMF program, the latter 
has continued to balloon. Foreign debt, particularly in the 
private sector, has soared as well, now totaling over 80 
percent of GDP.  The fact that most of this debt is 
"euroized" limits Croatia's ability to let its currency 
depreciate, a large factor in its uncompetitive exports. 
 
¶19.  Croatia's political elite is fully cognizant of the 
need to further reform the economy and has made some recent 
progress in that direction, but  much remains to be done to 
create the conditions to compete successfully in today's 
global economy.  The beginning of EU accession negotiations 
has added new urgency to this fact. 
 
FRANK