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UNCLAS SECTION 01 OF 04 BELGRADE 000842 
 
SIPDIS 
 
C O R R E C T E D COPY -- SECTION MARKINGS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR DRL, INL, EUR/SCE 
NSC FOR BRAUN 
DEPT FOR H - PLEASE PASS TO OFFICES OF SENATOR INHOFE 
 
E.O. 12958: N/A 
TAGS: PREL
SUBJECT: SCENESETTER FOR MAY 27 VISIT OF CODEL INHOFE 
 
 
BELGRADE 00000842  001.4 OF 004 
 
 
SENSITIVE BUT UNCLASSIFIED, PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY. Your visit comes at a time when the future of 
Serbia and Montenegro (SaM) is at a critical crossroads.  Serbia will 
face difficult decisions in the weeks and months ahead on such key 
issues as:  Kosovo final status, the dissolution of the SaM State 
Union, full ICTY compliance (rendering General Mladic to the Hague), 
overcoming the suspension of Stabilization and Association Agreement 
Talks with the EU, defense reform, and generally accelerating Euro- 
Atlantic Security integration.   Future Serbian government positions, 
policies and actions regarding the critical issues outlined above 
will be a clear indicator as to whether or not Serbia is committed to 
its goal of European integration, NATO membership, and regional 
stability or turn to nationalism and isolation.  Your visit will 
center on Serbian President Boris Tadic and Foreign Minister Vuk 
Draskovic.  Both leaders have been advocates of PfP and eventual NATO 
Membership, generally constructive over Kosovo final status (although 
still opposed to independence), and outspoken on Serbia's need to 
fulfill its international obligations to the Hague. You may use this 
opportunity to send a strong message that the U.S. is committed to 
keeping Serbia on the road of Euro-Atlantic integration. 
 
¶2. (SBU) Additionally, we hope that you will use your visit to 
support the SaM defense reform process and encourage a stronger 
bilateral U.S.-SaM military relationship.  We believe that now is the 
right moment to support defense reform.  Doing so will greatly 
enhance our ability to achieve our multiple security sector goals. 
The SaM government has recently signed a WMD non-proliferation 
agreement and is in the process of moving forward on a bilateral 
SOFA, and a security cooperation agreement that includes Article 98 
guarantees.  Signature of the latter agreement could pave the way for 
initiation of IMET and FMF programs soon.  As we move forward with 
these initial steps, and attempt to re-start our mil-to-mil programs, 
we are remaining strongly firm on PIFWC (Mladic) conditionality for 
PfP membership.  By strengthening the hand of the reformers we can 
further marginalize the old guard and eventually drive them out 
entirely.  This could also lead to a further erosion of possible 
clandestine support for Mladic and others.  The reformers are on the 
rise here, but they can still lose to competing reactionary forces 
within SaM governmental and military institutions.  END SUMMARY 
 
¶3. (SBU) Political Situation. 
 
¶A. (SBU) Dissolution of the SaM State Union.  On 21 May 2006 
Montenegro held an independence referendum.  Montenegrin voters had 
the choice of returning full sovereignty to Montenegro with a Yes 
vote or opting to remain part of the SaM State Union with a No vote. 
Previously, the European Union brokered a deal with the Montenegrin 
Government and opposition to establish a 55 Percent threshold for 
independence.  On 23 May 2006 the OSCE certified that the Montenegrin 
referendum was free and fair.  As of 24 May 2006 preliminary official 
results indicate that 86.1 Percent of all eligible voters turned out 
with independence garnering 55.5 Percent of the vote while 44.5 
Percent favored the State Union.  With the referendum's success, the 
Montenegrin government will in the upcoming weeks move to dissolve 
the State Union, declare independence, and seek bilateral 
recognition.  SaM Foreign Minister Vuk Draskovic and Serbian 
President Boris Tadic offered messages of support and understanding 
to Montenegro.  In their respective statements, both leaders 
respected the expressed will of the Montenegrin people and emphasized 
that both states must work closely together in the future on common 
economic and security interests. 
 
¶B. (SBU) Political Uncertainty in Serbia.  The Serbian minority 
coalition government of Prime Minister Vojislav Kostunica maintains a 
slim five-seat majority in parliament only with the support of the 
Socialists of former authoritarian leader Milosevic.   The prospects 
of Kostunica's fragile minority government lasting until its mandate 
expires in December 2007 are uncertain. The EU's suspension of SAA 
talks on 3 May 2006 due to the Serbian Government's failure to 
apprehend and deliver General Mladic to the Hague led to the 
resignation of Deputy Prime Minister Miroljub Labus and eroded the 
Government's reformist credentials.   Further, Prime Minister 
Kostunica did not anticipate the success of the Montenegrin 
 
BELGRADE 00000842  002.4 OF 004 
 
 
referendum and now faces the task of reconstructing the Serbian 
Government by integrating the existing State Union Foreign and 
Defense Ministries.  The reconstruction of the Serbian Government 
poses two key issues -- the future of Foreign Minister Vuk Draskovic 
and who will exercise command and control of the Armed Forces. 
Foreign Minister Draskovic due to his pro-western and progressive 
stances on PfP/Nato, the Hague and Kosovo is a target of the 
nationalist Radicals and Socialists.  The latter have stated that 
they will not support his nomination to Kostunica's cabinet in 
Parliament.  However, the exact mechanism to transfer the foreign and 
defense ministries has not yet been determined and Kostunica may seek 
to avoid a parliamentary showdown over Draskovic.  With regards to 
control of the Armed Forces, the Serbian constitution specifies that 
President Tadic is the commander-in-chief of the Armed Forces in both 
peace and war.  However, specific responsibilities and decision- 
making authority over defense matters is still a subject of debate. 
There are strong indications that the Prime Minister may insert 
himself along with the President or worse undermine the President's 
authority over the Armed Forces.  This may have a potentially 
negative effect on defense reform. 
 
¶C. (SBU) Future of Democracy.  The government's mandate extends until 
December of 2007, but there is constant speculation about early 
elections.  For the government, the incentive would be to secure 
passage of a new Serbian constitution, one of Kostunica's highest 
priorities as a legacy for his government. The government might also 
seek political cover on the Kosovo issue, a risky issue for any party 
in power.  While recent polls show that the reactionary and rabid 
nationalist radical and the socialist parties could win the majority 
of votes if the elections were held tomorrow, most observers here 
agree that a unified or well-led Democratic bloc of parties could 
continue to lead Serbia in the future despite all the challenges.  A 
more significant conclusion from the polling data is the increasing 
drop out rate of voters in the democratic bloc.  ICTY compliance, PfP 
Membership and an opening to Europe will have a dramatic impact in 
bringing those disaffected democrats back.  We will continue to press 
Serbia's leadership (civilian and military) to seize this 
opportunity.  President Tadic is the leader of Serbia's democratic 
opposition and largest democratic party.  His leadership in the 
months to come will be critical for the survival of democracy in 
Serbia. 
 
¶4. (SBU) Key Challenges. 
 
¶A. (SBU) Kosovo.  The Serbian government continues to engage 
responsibly on decentralization talks, while it insists that it will 
never accept Kosovo independence.  Any discussion should welcome the 
progress in the latest round of 
decentralization talks and protection of religious sites in Vienna 
and encourage military and civilian leadership to continue 
constructive engagement.  Of note, US Special Envoy Wisner as well as 
UN Envoy Ahtisaari have delivered "private messages" to both 
President Tadic and Prime Minister Kostunica about the likely outcome 
of Kosovo status talks.  There is no need to acknowledge these 
discussions, but do stress as appropriate the need for Serbia to 
support an outcome that will balance the will of the Albanian 
majority in Kosovo and their own aspirations, which we share, for a 
leadership role in a stable south central Europe that is fully 
integrated in Euro-Atlantic institutions. 
 
¶B. (SBU) ICTY Cooperation.  Serbia continues to feel the consequences 
from its failure to comply with the ICTY.  The EU's recent suspension 
of SAA talks with Belgrade resulted from the Serbian Government's 
inability to locate, arrest and render indicted war criminal General 
Ratko Mladic to the Hague.  Congress has required that the USG 
(delegated to the Secretary) determine by May 31 whether or not 
Serbia is fully complying with its ICTY obligations; non- 
certification would result in the suspension of assistance to central 
government bodies.  Full ICTY compliance continues to be a policy 
condition for Serbia's entry into PfP.  Of note, the Serbian Security 
Services have improved their efforts and shown greater determination 
to locate Mladic.  We have also seen some incremental indications of 
increased political will on the part of Prime Minister Kostunica to 
ensure Mladic's handover to ICTY.  We would also recommend that you 
 
BELGRADE 00000842  003.4 OF 004 
 
 
reinforce the need for continued progress on ICTY, particularly with 
regard to Mladic.  In the end, the Mladic issue remains the key 
impediment to Serbia's integration in Euro-Atlantic political and 
military structures. 
 
¶5. (SBU) Status of Defense Reform. 
 
¶A. (SBU) General.  With the disruptive effects of the political and 
economic situations, the military setting in Serbia and Montenegro 
remains mixed in terms of the state of defense reform, armed forces 
capabilities, and mil-to-mil relations.  In some of these areas, much 
has been accomplished in the past two years.  In laying the ground 
work for reforms, SaM has produced a Defense Strategy, White Paper, 
and just recently a Defense Doctrine.  These may only be temporary or 
transitory, but these products do lay out a direction for the Armed 
Forces in terms of orientation towards PfP, NATO, and in general 
Euro-Atlantic institutions.  The White Paper defines the 
participation in Peacekeeping Operations as one of the three primary 
missions of the armed forces, and commits the country to long-term 
reductions in personnel and equipment.  The Strategic Defense Review 
(SDR) with parliamentary ratification hoped for by the end of 2006. 
This document, which lays out the details of what in the future will 
be the Serbian armed forces organization, as well as numbers of 
personnel and equipment, has been reviewed thoroughly by 
representatives of the DAO and the National Defense University.  Far 
from perfect, we do believe the military is generally headed in the 
right direction in terms of orientation, size, missions, and 
capabilities. 
 
¶B. (SBU) Orientation.  This change in orientation has not always been 
smooth or easy for the Armed Forces.  In the past few years, over 50 
General Officers, and hundreds of Colonels have been retired. 
Education and focusing of the military leadership on concepts of 
civilian control, transparency, and western military standards has 
been key.  We are in the process of growing the bilateral 
relationship further through agreements such as SOFA and a Security 
Cooperation Agreement.  Passage and implementation of these 
agreements would go a long way in giving us the tools to assist their 
defense reform needs, and help ensure a military orientation and 
posture that would be in our interests. At the heart of defense 
reform is the Deputy Chief of the General Staff, Major General 
Zdravko Ponos.  General Ponos is the author of the Armed Forces 
Strategic Defense Review and the catalyst for defense reform within 
the General Staff.  He enjoys the strong support of President Tadic 
and is expected to be the next Chief of the General Staff. 
 
¶C. (SBU) Moving Forward and The Bilateral Agreements.  It is 
important that we look for ways to engage further. While Mladic 
conditionality continues to block Serbian participation in PfP, there 
are numerous opportunities for promoting Euro-Atlantic integration 
that remain untapped.  This includes the State Partnership Program, 
which remains on hold due to the government's continued consideration 
of a bilateral Status of Forces Agreement (SOFA).  In addition to the 
SOFA, an ACSA, a Security Cooperation Agreement (with our required 
Article 98 guarantees) all remain emphasis items.  In this regard, we 
have recently received assurances from senior officials in the 
government may be ready to move forward on these agreements.  You 
should encourage President Tadic and General Ponos to continue to 
push the government to complete these agreements quickly and to look 
for creative ways to use implementation to promote Serbia's interest 
in closer security ties with both the United States and NATO. 
 
 
¶6. (SBU) The Economy, U.S. Assistance and Perceptions of U.S. 
 
¶A. (SBU) In addition to the political and strategic challenges the 
shaky coalition government faces, it must also grapple with the 
challenge of building sustained prosperity to deliver rising incomes 
to a long-deprived population.  Per capita income is USD 3,226, 
compared to USD 8,416 in Croatia, and unemployment hovers around 19 
percent.   The minister of labor and social policy reported that some 
20 percent of Serbians live with incomes below the poverty line of 
USD 2.90 a day. The Government has made significant progress, with 
the banking sector now largely privatized and the economy producing 
 
BELGRADE 00000842  004.4 OF 004 
 
 
strong growth, about 6.5 percent last year.  While the government has 
been successful in pushing forward reform in some areas, more legal 
and regulatory reform is still necessary.  Often new laws are found 
to have significant problems after Parliament approves them. 
Privatization is moving forward in some areas but has slowed, largely 
due to political reasons, with reference to large industrial 
companies left over from the socialist era..  The government also 
still faces the daunting task of restructuring the large monopoly 
enterprises, such as power and telecoms, that continue to burden the 
economy; however, the GOS is moving forward on privatization of the 
oil company, consistent with its commitment to the IMF. Serbia did 
attract a fair amount of foreign investment in 2005, about USD 1.5 
billion, but it still is not receiving significant levels of 
greenfield investment, which is the key to increasing exports and 
employment.  Investors face numerous structural barriers, including 
extreme difficulty in land transactions, but the political 
uncertainty surrounding Kosovo status negotiations plays a role, as 
well. 
 
¶B. (SBU) Over the last year, we have refocused our public diplomacy 
and assistance efforts on the economy.  We have eschewed relations 
with Milosevic-era tycoons and kleptocrats in favor of a visible 
public campaign to associate the U.S. with the demoralized SaM middle 
class.  We have made it clear that our aid will be in the form of 
tangible projects to support domestic and foreign investment and the 
creation of jobs through small and medium enterprise development. 
Slowly we are making some gains in improving our negative public 
image here, a challenge in a country where foreigners are viewed with 
distrust and where the U.S. is recognized as a powerful but 
unfriendly country. 
 
¶7. (SBU) Moving Serbia in the Right Direction.  There is still strong 
respect for American power and recognition of our commitment to 
deliver on our promises.  That gives us considerable leverage to help 
move Belgrade in the right direction on Defense Reform, ICTY and 
Kosovo and an opportunity to strengthen the hand of reformers 
committed to Serbia's full integration in Euro-Atlantic structures. 
Your visit here is a great opportunity to relay encouraging messages 
to political and military leaders in Serbia.  They need to hear that 
we are ready to declare the Milosevic's era as over and that we are 
focused on the future.  But that will require Serbia to continue the 
difficult and wrenching process of reconciliation.  Mladic and the 
ICTY are only a small part of that process, but a critical element 
for building a Euro-Atlantic future.  The military can play an 
important role in that process.  By becoming one of the institutions 
leading the country towards Euro-Atlantic integration, it could help 
inspire other changes in the country. 
 
POLT