VZCZCXRO2640
PP RUEHC
DE RUEHVB #0337/01 0721125
ZNR UUUUU ZZH
P 131125Z MAR 06 ZDK UR RUEHZC 8804
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 5844
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 ZAGREB 000337 
 
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DEPT FOR H - PLEASE PASS TO OFFICES OF SENATOR VOINOVICH 
AND SENATOR DODD 
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TAGS: OREP PREL PGOV HR
SUBJECT: CROATIA SCENE SETTER FOR SENATOR VOINOVICH 
 
ZAGREB 00000337  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY: Croatia and the government of Prime 
Minister Ivo Sanader have enjoyed several important 
successes since your last visit in May 2005.  With EU 
accession negotiations opened on October 4 and Hague 
indictee 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.  The 
GoC continues to demonstrate leadership in normalizing 
relations with its neighbors and is actively promoting 
regional stability.  Zagreb advocates clear involvement of 
Belgrade in determining the final status of Kosovo and is 
anxious to play a helpful role following Montenegro's 
upcoming referendum on independence.  END SUMMARY. 
 
INTEGRATION: POLITICAL BARRIERS TOPPLED, DEFENSE REFORM 
UNDERWAY 
--------------------------------------------- -------------- 
----- 
 
¶2. (U) PM Sanader has continued to push Croatia solidly 
down the path to both the EU and NATO.  Croatia cleared a 
major hurdle with Gotovina's arrest and his transfer to the 
International Criminal Tribunal for the former Yugoslavia 
(ICTY) to stand trial on charges of war crimes committed in 
the aftermath of Croatia's Operation Storm, which liberated 
the rebel-Serb- occupied Krajina region in 1995.  The 
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, and at some potential political cost, Sanader's 
Croatian Democratic Union (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. 
 
¶3. (U) With Gotovina in The Hague, the GOC is focusing on 
EU negotiations and public promotion of its goal of NATO 
membership, which is currently supported by less than half 
of the citizenry.  There is a general consensus among the 
political elite that Croatia belongs in NATO, but the GOC 
acknowledges that it must do more to generate similar 
levels of support among the general public. 
 
¶4. (U) The Ministry of Defense 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. 
 
¶5. (U) 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 thanks to a 
defense budget burdened by excess personnel and obligatory 
pension payments to war veterans, leaving only minimal 
resources for much-needed equipment procurement.  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. 
Ambassador Victoria Nuland, the U.S. permanent 
representative to NATO, echoed this message during a March 
7 visit that may be mentioned during your visit. 
 
THE REGION: LEADING THE STABILITY CHARGE 
---------------------------------------- 
 
¶6. (U) PM Sanader is very interesting in playing a leading 
role in promoting regional stability.  He continues to 
promote high-level exchanges and hosted Serbian Prime 
Minister Vojislav Kostunica in Zagreb in November 2005. 
The GoC's approach remains one of moderation in the pursuit 
of fully normalized relations.  During that visit, Sanader 
called for Belgrade's full involvement in determining the 
final status of Kosovo. 
 
¶7. (SBU) While fully supporting international efforts in 
the region, Croatia urges caution and full consideration of 
potential reactions to all proposals.  In this context, the 
 
ZAGREB 00000337  002 OF 003 
 
 
GoC is willing and anxious to play a helpful role in 
maintaining stability.  It is ready, for instance, to 
assist however possible following the upcoming referendum 
on independence in Montenegro. 
 
WAR LEGACIES SLOWLY FADING 
-------------------------- 
 
¶8. (U) Since your last visit, we have witnessed important 
events in addressing the legacy of the 1991-95 war.  Two 
major convictions of Croatian defendants in retrials for 
war crimes against Serbs demonstrated that ethnic bias is 
disappearing from the courts.  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. 
 
¶9. (U) Of the estimated 350,000 people, mostly ethnic 
Serbs, who were displaced during the war, about 134,000 
have returned.  A UNHCR re-registration project of March 
2005 concluded that of the remaining 215,000, mostly now 
living in Serbia and Montenegro and Bosnia and Herzegovina, 
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. 
 
¶10. (U) 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 
--------------------------------------------- ----------- 
 
¶11. (U) 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. 
 
¶12. (U) 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. 
 
¶13. (U) 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. 
 
¶14. (U) 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 "euro- 
ized" limits Croatia's ability to let its currency 
depreciate, a large factor in its uncompetitive exports. 
 
 
ZAGREB 00000337  003 OF 003 
 
 
¶15. (U) 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