VZCZCXYZ0002
RR RUEHWEB

DE RUEHPS #0009/01 0051140
ZNR UUUUU ZZH
R 051140Z JAN 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 6893
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS PRISTINA 000009 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/SCE, EB/IFD/OIA AND EB/CBA-DWINSTEAD 
STATE PLEASE PASS TO TREASURY AND COMMERCE DEPARTMENTS 
STATE PLEASE ALSO PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: BEXP BTIO ECON ETRD EINV ELAB KTDB PGOV EFIN
OPIC, USTR, YI 
SUBJECT: KOSOVO: KOSOVO 2007 INVESTMENT CLIMATE STATEMENT 
 
REF: STATE 178303 
 
INTRODUCTION 
 
¶1. (U) Kosovo continues to be administered under the civil 
authority of the United Nations Interim Administrative 
Mission in Kosovo (UNMIK), pursuant to U.N. Security Council 
Resolution 1244.  UNMIK was established in June 1999, 
following the conclusion of the NATO military campaign 
against Slobodan Milosevic's forces.  Kosovo is entering a 
distinctly new phase with 2007 likely to see the resolution 
of Kosovo's final status and the implementation of a 
settlement that contains new responsibilities for the local 
authorities as well as the international community.  New 
powers and responsibilities will be transferred to Kosovars, 
and the executive authority of the United Nations will give 
way to a new role for the U.S.-supported international 
follow-on mission responsible for overseeing the settlement 
implementation. 
 
¶2. (U) The political situation in Kosovo remained relatively 
stable in 2006.  However, substantial democratic and 
bureaucratic deficiencies, and the lack of professional and 
technical capacity within the Kosovo civil service, weakened 
the performance of the Provisional Institutions of 
Self-Government (PISG). 
 
¶3. (U) Overall, the rule of law needs to be significantly 
strengthened.  The administration of justice continues to be 
a major problem, as the backlog of cases increases.  The 
judicial institutions and the law enforcement agencies need 
to be substantially improved to be capable of fully enforcing 
the rule of law.  Corruption is widespread and there is a 
lack of cohesive and forceful action against it.  The PISG 
established the Anti-Corruption Agency in 2005, but it 
remains a nascent institution lacking capacity and strong 
political support. 
 
¶4. (U) Kosovo,s administrative capacity remains weak. Its 
public administration is inefficient and subject to political 
interference.  Although a legal basis for the civil service 
and for public finance management is in place, there is a 
lack of transparency and accountability. Government 
coordination must be enhanced and the relationship between 
the central and municipal level needs to be further defined. 
Improving the provision of basic public services to all 
communities is a priority. 
 
¶5. (U) Under UNMIK Regulation 1999/24, the applicable law in 
Kosovo includes UNMIK laws and regulations and those of the 
Former Socialist Republic of Yugoslavia in effect in Kosovo 
as of March 22, 1989.  As a result, businesses in Kosovo 
operate under a complex and, in some cases, incomplete set of 
legal codes.  UNMIK continues to transfer responsibilities to 
the (PISG), consistent with UNSC resolution 1244 (1999).  The 
responsibilities transferred and those reserved for UNMIK are 
outlined in the Constitutional Framework. 
 
¶6. (U) UNMIK, the European Union's (EU) Pillar IV and the 
PISG foster economic development.  While privatization of 
socially-owned enterprises (SOEs) is considered an economic 
success story in Kosovo, progress in other key structural 
reform areas, such as the restructuring of public utilities, 
has been more limited. The main development in the area of 
structural reforms since 2004 has been a renewed focus on the 
privatization of socially-owned enterprises (SOEs) following 
changes in the Kosovo Trust Agency's (KTA) 
(http://www.kta-kosovo.org/) management in summer 2004. 
Privatization resumed in 2004 and achieved significant 
progress.  By December 2006, the KTA, which is responsible 
for the administration and maintenance of SOEs and 
publicly-owned enterprises (POEs),  tendered 228 out of 500 
SOEs, which created 359 new companies.  KTA has signed 190 
contracts with the new owners and privatization sales have 
generated 264,459,831 euros. 
 
¶7. (U) According to the KTA, approximately 200 out of the 500 
SOEs are not viable.  The non-viable SOEs are expected to be 
liquidated, and in this context preparations have taken place 
for the auctioning of their assets.  In April 2005, the UN 
Special Representative for the Secretary General, the 
official administrator of Kosovo, adopted an amendment to the 
KTA regulation which introduces an  eminent domain, clause 
enabling swifter property expropriation and further limits 
the risk exposure of the seller.  This change facilitated the 
privatization of a number of SOEs, notably the 140 
agro-industrial firms, which had been delayed. 
 
¶8. (U) Some progress has been made on the restructuring of 
POEs.  The major public utilities - Pristina International 
Airport, Kosovo Energy Corporation, Post and 
Telecommunications of Kosovo, Kosovo Railways, district 
heating enterprises, and landfill, water and waste management 
companies - were incorporated in 2005 and 2006.   KTA's 
incorporation program for POEs reorganizes them under a 
different corporate governance structure, establishes clearer 
financial rules, and creates a new balance sheet to account 
for assets, investments and debts.  Incorporation clarifies 
the legal status and claims against the assets and 
liabilities of POEs, establishes proper management and 
oversight procedures, and develops a clearer financial record 
to help with potentially borrowing money from banks, 
international financial institutions, and eventually 
privatization. 
 
¶9. (U) Following the effective transfer of budget 
responsibility from UNMIK to the PISG in 2002, continued 
improvements in the process of institutional capacity 
building took place, notably in the Ministry of Finance and 
Economy.  A new regulatory environment has been established 
for the energy sector, with the adoption of a series of laws 
in June 2004, the establishment of the Energy Regulatory 
Office that year and the signature of the Energy Community 
Treaty establishing a Regional Energy Market in South East 
Europe in October 2005. 
 
¶10. (U) Electricity in Kosovo is produced by two 
lignite-fired thermal power plants with 1950s and 1970s 
technology known as Kosovo A and Kosovo B, with installed 
capacity of about 1500 MW and a small (about 35 MW) 
hydropower plant.  All five units of Kosovo A are under 
different stages of refurbishment.  Poor capacity utilization 
leads to shortages and outages.  Most of the transmission 
lines are now in operation following post-conflict repairs, 
but the substations are still in bad technical condition. 
Electricity demand in 2006 was 1100 megawatts (MW) as opposed 
to 720 MW generated.  Bill collection is a serious problem 
which impedes needed reinvestment in equipment for power 
generation and supply as well as foreign investment in the 
energy sector.  About 50 percent of the electricity supplied 
was billed in 2005 (technical and non-technical losses were 
50 percent) and only 37 percent of the amount billed was 
collected. 
 
¶11. (U) On August 16, 2006, the Ministry of Energy and 
Mining, in accordance with the PISG,s energy policy for 
Kosovo and in cooperation with the World Bank, solicited 
expressions of interest (EOI) from qualified private 
investors in an energy development project that encompasses 
the following components: 
 
a) Construction of a new power plant, Kosovo C, with an 
estimated installed capacity of up to 2100 MW and associated 
transmission capacity; 
 
b) The development of a new coal mine for existing generation 
units (Sibovc Southwest) and development of a new mine (the 
Sibovc mine) for PPC; and 
 
c) Rehabilitation of certain units of the existing power 
plant, Kosovo A. 
 
¶12. (U) On December 4, 2006 the Project Steering Committee 
(PSC), led by the Minister of Energy and Mining, announced 
the acceptance of credentials by companies and consortia 
interested in competing for the development of the energy 
sector.  There is significant American interest in the energy 
sector.  The credentials of these companies have been 
submitted in response to the EOI.  The energy sector 
development tender is a USD 2-3 billion dollar project.  On 
December 28, 2006, the PSC shortlisted four companies, three 
were American firms, and their consortia.  The PSC will 
forward a request for proposal to the shortlisted companies 
and their consortia to submit bids for the project tender by 
the first quarter of 2007. 
 
¶13. (U)  The mining industry was an important sector of the 
Kosovo economy, but began to decline in the 1990's due to 
lack of investment in equipment, facilities and the 
development of new mines.  Kosovo is keen to attract foreign 
investment to reinvigorate this industry.  Kosovo has a 
varied geology containing a range of exploitable minerals 
such as lead, copper, gold, silver, magnesium and zinc.  The 
Independent Commission for Mines and Minerals (ICMM) 
regulates Kosovo,s minerals sector, issues exploration and 
mining licenses, and ensures compliance with legislation in 
accordance to international mining, environmental and safety 
standards.  In 2006, a total of 69 exploration and mining 
licenses were granted.  ICMM provides key technical 
information to prospective bidders.  In 2006, a Kazakh-Swiss 
consortium, International Mineral Resources AG/Alferon, won 
the Ferronikeli nickel mine and smelter complex SOE for 30.5 
million euros, the largest foreign investment via 
privatization. 
 
¶A.  OPENNESS TO FOREIGN INVESTMENT 
 
¶14. (U)  UNMIK and the Ministry of Trade and Industry (MTI) 
actively promote foreign investment in Kosovo.  In January 
2001, UNMIK adopted Regulation 2001/3 on Foreign Investment 
in Kosovo, and the Kosovo Assembly approved the Foreign 
Investment Law (FIL) on November 21, 2005, which was 
promulgated by UNMIK on April 28, 2006.  The law states that 
foreign firms operating in Kosovo will receive national 
treatment, which means that they will be treated no less 
favorably than domestic businesses.  The only specific 
limitation on foreign investment is a prohibition against 
foreign investors holding more than 49 percent ownership in 
business organizations that manufacture or distribute 
military products (Reg. No. 2001/3, Section 6).  However, 
local businesses are not allowed to carry arms, which creates 
a market for foreign companies specializing in armed guard 
services. 
 
¶15. (U)  The registration of businesses in the MTI's official 
registry has increased each year since 1999 and points to a 
trend of local enterprise development, to the extent it can 
be recorded in the formal economy. 
 
¶16. (U)  Kosovo continues to make progress in developing an 
economic legislative framework.  The basic legislation of a 
market-oriented economy is in place.  However, the protection 
of private agricultural and commercial property and 
intellectual property rights, remains a challenge.  In 
addition, legal uncertainty, weaknesses in law 
implementation, contract enforcement, as well as contingent 
liabilities, continue to constitute an impediment to economic 
activity and in particular to investment.  The resolution of 
private agricultural and commercial property rights is the 
current focus of Kosovo and the international community.  The 
determination of SOE ownership has raised complex issues, and 
leaves room open for litigation, thus arguably reducing the 
price which bidders are ready to offer during privatization. 
Property registers exist but are often not complete. 
 
¶17. (U) Particular attention has been given to meeting 
European Union standards and Kosovo has drafted new 
legislation and revised existing laws to ensure that its 
regulations are compatible.  A major instrument in this 
regard is the Stabilization and Association Process (SAA) 
Tracking Mechanism with the European Commission, which held 
its first session in Pristina on March 13, 2003.  This 
technical working group continues to meet in order to support 
Kosovo in its EU-compatible structural reforms through policy 
advice and guidance. 
 
¶18. (U) Nearly 70 regulations have been passed for economic 
and commercial development.  Some of the laws are regulations 
on Foreign Investment, Business Organizations, Contracts for 
the Sale of Goods, Pledges, Insurance Regulation and 
Supervision, Payment Transactions, Essential Labor Law, 
Standards for Financial Reporting, Establishment of a Pledge 
Filing Office, Law on Mortgages, Law on the Establishment of 
an Immovable Property Registry, Law on Liquidation and 
Reorganization of Legal Persons in Bankruptcy Transformation, 
The Right of Use to Socially-Owned Immovable Property, Law on 
External Trade Activity, Law on Telecommunications, Law on 
Energy, Law on Anti-Corruption, and the Law on Anti-Money 
Laundering.  All commercial laws are available for public 
access and in English on the UNMIK website: 
www.unmikonline.org/regulations.  It should be noted that 
English is the official language of Kosovo in case of a legal 
dispute or translation of documents. 
 
¶B.  CONVERSION AND TRANSFER POLICIES 
 
19.(U) Section 9 of the UNMIK Regulation (1999/24) and 
Article 9 of the FIL guarantees unrestricted use of income 
from foreign investment.  Lawful proceeds, apart from tax and 
other liabilities, from foreign investment may be disposed of 
in any manner, including repatriation or conversion to 
another currency in any domestic or foreign market.  Foreign 
investors have the right to open bank accounts.  There is no 
restriction on the currencies in which such accounts may be 
opened and operated.  Kosovo permits all conversions and 
transfers to be effectuated without delay in accordance with 
normal and customary banking procedures in general use by the 
banking industry in the EU.  All conversions are made at a 
market rate of exchange. 
 
¶C.  EXPROPRIATIONS AND COMPENSATION 
 
¶20. (U) Section 7 of the UNMIK Regulation and Article 8 of 
the FIL protects foreign investments from expropriation, 
guaranteeing due process of law and timely payment of 
compensation for valid claims.  The U.S. Overseas Private 
Investment Corporation (OPIC) operates in Kosovo, which 
further protects American investors from political risk.  In 
April 2005, the Special Representative of Secretary General 
(SRSG) adopted an amendment to the KTA regulation which 
introduces an  eminent domain, clause enabling, if needed, 
swift property expropriation and limits risk exposure to the 
Kosovo Trust Agency.  It is important to note that the 
eminent domain clause can be implemented in cases only 
pertaining to SOEs. 
 
¶D.  DISPUTE SETTLEMENT 
 
¶21. (U)  Section 17 of the UNMIK Regulation and Chapter 4 of 
the FIL assigns jurisdiction for the resolution of business 
disputes to the courts; parties to foreign investment, 
however, are free to agree upon arbitration or another 
alternative dispute resolution procedure, the results of 
which are enforceable by local courts.  The FIL allows 
foreign investor to choose any of the following procedural 
rules to govern the arbitration of the investment dispute: 
 
a. The ICSID Convention, if the foreign investor is a citizen 
of a foreign country and that country and Kosovo are both 
parties to that convention at the time of the submission of 
the request for arbitration; 
 
b. the ICSID Additional Facility Rules, if the jurisdictional 
requirements &ratione personae of Article 25 of the ICSID 
Convention are not fulfilled at the time of the submission of 
the request for arbitration; 
 
c. the UNCITRAL Rules, in such case the appointing authority 
referred to therein shall be the  Secretary General of ICSID; 
or 
 
d. the ICC Rules. 
 
¶22. (U) The commercial court has jurisdiction over disputes 
involving shipping, intellectual property rights and unfair 
trade practices.  The effectiveness of the court is 
undermined by lack of enforcement of existing laws, which 
remains the primary challenge in dispute settlement cases. 
Extremely long delays in the adjudication of commercial court 
cases are hampering Kosovo,s economic development and 
investment climate.  In addition, poor enforcement of laws is 
adversely affecting utility bill collections and the recovery 
of past due loans. 
 
¶23. (U) Kosovo has a bankruptcy law and municipal courts 
handle bankruptcy procedures for all enterprises except SOEs. 
 There is also a special bankruptcy division in the Pristina 
Municipal court. 
 
¶24. (U) The Special Chamber of the Supreme Court of Kosovo on 
Kosovo Trust Agency Related Matters was established under 
Section One of UNMIK Regulation 2002/13.  The Special Chamber 
deals with disputes and claims related to the privatization 
and economic restructuring process currently under way in 
Kosovo.  The court is composed of three international and two 
local judges.  The Chamber will have primary jurisdiction to 
hear appeals against the decisions of the Kosovo Trust Agency 
as well as creditor, ownership and property claims brought 
against SOEs and POEs and claims arising out of the 
privatization and liquidation of SOEs.  The rules of 
procedure and directives for claimants wishing to institute 
proceedings are contained in Administrative Direction 2003/13 
which also establishes the Special Chamber of the Supreme 
Court of Kosovo on KTA related matters. 
 
¶25. (U) The Kosovo judicial system has 18.9 judges and 
prosecutors per 100,000 inhabitants, and 2.85 courts per 
100,000 inhabitants, which is close to European standards. 
Despite the high proportion of judges, prosecutors and courts 
per the population, there remains a significant backlog of 
cases currently pending in local courts, indicating a clear 
need to improve the efficiency of the justice system.  There 
are also 17 international judges and 10 international 
prosecutors working in the District and Supreme Courts of 
Kosovo and the Office of the Public Prosecutors.  They handle 
approximately three percent of criminal cases considered as 
sensitive.  The applicable laws in Kosovo are the 2004 New 
Provisional Criminal Code and Provisional Criminal Procedure 
Code of Kosovo.  The courts are responsible for the 
administration of justice in Kosovo in accordance with the 
applicable law.  The court structure includes the Supreme 
Court of Kosovo, District Courts, Municipal Courts and Courts 
of Minor Offenses (including a High Court of Minor Offenses). 
A Special Chamber of the Supreme Court deals with Kosovo 
Trust Agency- related matters. 
 
¶E.  PERFORMANCE REQUIREMENTS/INCENTIVES 
 
¶26. (U) UNMIK does not impose performance requirements as a 
condition for establishing, maintaining or expanding an 
investment.  UNMIK implemented a 15 percent across-the-board 
value added tax (VAT) in July 2001.  In order to encourage 
investment, UNMIK has granted those businesses that import 
capital goods a six-month deferment on VAT payment, 
conditioned upon presentation of a bank guarantee.  Exports 
are zero-rated: suppliers may export goods without collecting 
VAT from the foreign buyer.  Suppliers may claim credit for 
taxes on inputs either by offsetting those taxes against 
gross VAT liability or by claiming a refund. 
 
¶27. (U) In September 2000, the EU amended its General System 
of Preferences, eliminating quantitative restrictions and 
measures for most industrial products and granting special 
preferences to agricultural imports from Kosovo.  In June 
2002, the EU modified this preferential treatment to include 
all imports from Kosovo. 
 
¶F.  RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
 
¶28. (U) UNMIK regulations and the FIL do not interfere with 
the establishment, acquisition and disposal of interests in 
business enterprises by private entities. Foreign investment 
in Kosovo is allowed the rights of ownership, extending 
national treatment to foreign investors.  Foreign investment 
is subject to approval by the authorities only to the extent 
that such approval would be required for similar domestic 
business organizations.  The following rights also apply: 
 
a. foreign investors may transfer property rights, including 
permits, to other legally qualified persons in the same 
manner and to the same extent as domestic persons; 
 
b. foreign investors have the same right to purchase 
residential and non-residential property as domestic business 
organizations; 
 
c. foreign investors with less than a majority stake in a 
foreign investment shall be protected as domestic minority 
shareholders in accordance with the applicable law; 
 
d. foreign investments are not subject to more onerous tax 
obligations than similar domestic business organizations; and, 
 
e. foreign investors may establish subsidiary enterprises, 
branches and representative offices in the same manner and to 
the same extent as similar domestic organizations. 
 
¶G. PROTECTION OF PROPERTY RIGHTS 
 
¶29. (U) UNMIK Regulation 2002/22 promulgated the law adopted 
by the Kosovo Assembly to establish an immovable property 
rights register as a mechanism to protect private land 
ownership.  The Kosovo Cadastral Agency (KCA) has the 
authority for the overall administration of the official 
register in compliance with the provisions of the applicable 
law.  The municipal cadastral offices record immovable 
property rights in the register under the authority of the 
KCA.  Security interests against movable property, accounts, 
proceeds, etc. are protected under Regulation 2001/5, which 
provides the exclusive means in which pledges are to be 
created, become effective against third parties, and are 
enforced.  This regulation applies to all transactions, 
regardless of form, intended to create a pledge.  UNMIK 
Regulation 2002/21 promulgated the law adopted by Kosovo 
Assembly on Mortgages, establishing a uniform system for 
securing and registering pledges against immovable property, 
and to institute a mortgage and pledge registry.  The 
resolution of residential and private agricultural and 
commercial property remains a serious issue in Kosovo.  The 
Kosovo Property Agency, formerly known as the Housing and 
Property Directorate (HPD), is completing the adjudication of 
residential property disputes related to the period from 
March 23, 1989 to October 13, 1999, and is currently working 
on the resolution of private agricultural and commercial 
property claims. 
 
¶30. (U) Section 10 of Regulation 2001/2 provides for the 
protection of intellectual property rights (IPR), authorizing 
enforcement of trademark, copyright and patent laws, and any 
applicable related international conventions.  Intellectual 
property rights are also protected under the 1981 Yugoslav 
Law on Protection of Inventions, Technical Improvements and 
Distinctive Signs, and the 1991 Law on Authors Rights, both 
of which are considered applicable law by Kosovo's courts. 
However, there is insufficient protection of intellectual, 
industrial and commercial property rights in Kosovo. 
 
¶31. (U) Old Yugoslav laws on IPR are applicable in Kosovo. 
Some efforts to develop more stringent property rights 
legislation are underway.  There have been laws promulgated 
to protect intellectual, industrial and commercial property 
rights but enforcement remains weak and impedes the 
development of a comprehensive IPR regime in Kosovo. 
Intellectual property rights are flagrantly and visibly 
infringed in Kosovo.  A significant number of counterfeit 
consumer goods (notably CDs, DVDs, clothing items and 
computer software) are available for sale and traded openly. 
This situation needs to be remedied by urgent action. 
 
¶H.  TRANSPARENCY OF THE REGULATORY SYSTEM 
 
¶32. (U) In order to promote fair and open competition for 
government tenders and transparency in the procurement and 
regulatory systems, the PISG and UNMIK publish the rules, 
regulations and procedures on their respective websites: 
www.unmikonline.org; www.assembly-kosova.org; 
www.pm-ksgov.net.  As UNMIK continues to establish regulatory 
institutions, procedures for obtaining licenses and permits 
vary widely, with a corresponding variance in the degree of 
transparency in the process. 
 
¶33. (U) The Public Procurement Regulatory Agency recently 
initiated audits of some of the procurement activities of the 
Kosovo ministries and agencies that received funds from the 
Kosovo consolidated budget.  The Central Procurement Agency 
in the Kosovo Ministry of Public Services manages bulk 
procurement and the provision of services for the PISG.  All 
tenders advertised through the Central Procurement Agency are 
advertised in English, Albanian and Serbian. 
 
¶I.  EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
¶34. (U) UNMIK established the Banking and Payments Authority 
of Kosovo (BPK) in November 1999.  BPK performs many of the 
functions of a central bank, with the exception of issuing 
currency and regulating monetary policy.  In September 2006, 
the Banking and Payments Authority of Kosovo (BPK) was 
transformed into the Central Banking Authority of Kosovo 
(CBAK).  The CBAK is an independent body whose role is to 
foster the development of competitive, sound and transparent 
banking and financial sectors, and facilitate economic 
growth.  The CBAK supervises and regulates Kosovo,s banking 
sector (six banks with approximately 240 branches), insurance 
industry (eight insurance companies), pension funds and other 
micro finance institutions, and performs a number of other 
tasks normally undertaken by a central bank, including cash 
management, transfers, clearing, management of funds 
deposited by the Ministry of Finance and Economy or other 
public institutions, collection of financial data, and the 
management of a credit register.  The CBAK is not authorized 
to grant any loans, including liquidity, to banks.  The 
primary focus of its monetary policy is to foster financial 
stability. 
 
¶35. (U) The insurance sector is small but has grown rapidly 
in recent years. At the end of 2006, there were ten licensed 
insurance companies in Kosovo.  The implementation of an 
online communications system and premium payments service 
through banks was introduced in 2004. 
 
¶36. (U) Neither the banking system nor the non-financial 
enterprises is ready to finance large investment projects in 
the private sector.  During the last three years, there has 
been minimal private investment in Kosovo, outside of real 
estate construction and development.  About 80 percent of 
bank loans are short-term credits with interest rates ranging 
from 12-14 percent, which do not support long-term 
investments.  Most of the deposits are demand (&a vista8) 
deposits. 
 
¶J.  POLITICAL VIOLENCE 
 
¶37. (U) Political violence has dropped dramatically since the 
riots of March 2004.  In 2006, there were some isolated 
incidents of interethnic violence and sporadic political 
protests, but none of these events adversely affected 
Kosovo's political stability.  The U.N.-authorized, NATO-led 
peacekeeping &Kosovo Force8 (KFOR), composed of forces from 
41 countries (both NATO and non-NATO), maintains internal 
security and defense against external threats.  KFOR also 
assists UNMIK's multinational civilian police corps (U.N. 
International Police, or CIVPOL) in its role as uniformed and 
criminal police.  The UNMIK-run Kosovo Police Academy has 
trained more than 7,500 local police officers for the Kosovo 
Police Service (KPS).  CIVPOL has transferred basic policing 
functions to KPS, while continuing to provide oversight and 
monitoring.  The Kosovo Protection Corps (KPC), a civilian 
emergency preparedness service, is trained to respond to 
civil and medical emergencies. 
 
¶K.  CORRUPTION 
 
¶38. (U) Section 15 of Regulation 2001/3 states that foreign 
investors shall observe business practices consistent with 
the principles of the Convention on Laundering, Search, 
Seizure, and Confiscation of the Proceeds of Crime (Council 
of Europe, Strasbourg, 8 July 1990); the Convention on 
Combating Bribery of Foreign Government Officials in 
International Business Transactions (Organization for 
Economic Cooperation and Development, Paris, 21 November 
1997); and the Criminal Law Convention on Corruption (Council 
of Europe, Strasbourg, 27 January 1999).  Violation of these 
conventions could cause a foreign investor to be disqualified 
from conducting business operations in Kosovo. 
 
¶39. (U) Corruption in Kosovo is widespread at all levels 
throughout government and private industry, and adversely 
impacts commercial development.  The Law on the Suppression 
of Corruption was promulgated in May 2005 providing; inter 
alia, for the creation of a Kosovo Anti-Corruption Agency. 
The law prescribes that an anti-corruption strategy should be 
prepared by the anti-corruption agency for the Government to 
be approved by the assembly.  Since 2003, a financial 
investigation unit, staffed by Italian Guardia di Finanza 
officers, has the mandate to conduct financial inspections of 
public bodies and public enterprises as well as other 
organizations receiving public funds and launch criminal 
investigations. 
 
¶40. (U) There are frequent reports about irregularities in 
public tendering procedures.  The recent revision of the 
public procurement law, and a significant increase in public 
audits from the Kosovo Office of the Auditor General on 
budget and procurement irregularities, are important steps 
forward.  The public procurement law reflects EU standards in 
defining a clear division between the executive and 
regulatory functions.  Tax evasion is high, and many local 
and foreign businesses are deeply concerned about the 
professional ethics of government officials who allegedly 
take bribes or extort firms in exchange for licenses, 
permits, movement of paperwork or routine public services. 
Traditional lending and business practices tend to favor 
connections and nepotism over creditworthiness.  Rumors of 
politically-motivated racketeering are common. 
 
¶L. BILATERAL INVESTMENT AGREEMENTS 
 
¶41. (U) Under UN Security Council Resolution 1244, Kosovo,s 
international relations and negotiations fall under UNMIK 
authority. However, the PISG is closely involved with these 
initiatives to ensure that the Kosovo government is fully 
capable of fulfilling its obligations under the 
constitutional framework for self-government.  In May 2003, 
UNMIK submitted a statement of intent to the Stability Pact, 
committing itself to the obligations set out in the 
Memorandum of Understanding on Trade Liberalization and 
Facilitation.  Following a declaration of intent on 29 May 
2003 to follow the Stability Pact Memorandum on Trade 
Liberalization and Facilitation in Southeast Europe, UNMIK 
started to negotiate bilateral Free Trade Agreements (FTAs) 
with countries in the region under the umbrella of the 
Stability Pact Trade Working Group. For the purpose of 
negotiating FTAs, a Trade Policy Working Group was 
established comprising members from UNMIK, government 
ministries, UNMIK Customs, the Kosovo Chamber of Commerce, 
and other stakeholders. 
 
¶42. (U) Albania was the first country to sign a free trade 
agreement (FTA) with Kosovo in 2003.  Kosovo concluded an FTA 
with Macedonia in 2005. The Kosovo-Macedonia FTA gives Kosovo 
full duty free access to the Macedonian market, while 
maintaining some duties on imports, particularly in the 
agriculture sector. In 2006 Kosovo signed FTAs with Croatia 
and Bosnia-Herzegovina.  In December 2006, Kosovo became a 
signatory to the Central European Free Trade Area CEFTA) and 
EU Common Aviation Area.  Kosovo participates in the 
Stabilization and Association Process (SAP), the EU,s policy 
framework towards the Western Balkans, by following the 
guidelines of the European Partnership. The SAP steers 
Kosovo,s reform process according to EU best practices and 
European legislation. The Partnership document outlines the 
main priorities that Kosovo needs to fulfill, thereby also 
taking into account the rQuirements of the Standards for 
Kosovo, which are a series of laws, policies and institutions 
that the PISG must create in the areas of rule of law, 
property rights, economy, among others, to help develop a 
viable, sustainable government.  The Stabilization and 
Association Process Tracking Mechanism (STM) is the 
instrument that guides and monitors Kosovo,s development 
with regard to the European Partnership.  Important elements 
of the STM are the regular political meetings between the 
European Commission and the Kosovo authorities at which 
progress is discussed and further challenges are identified. 
 
¶43. (U) In 2005, Kosovo became a member of the Athens Process 
on Energy for the Southeastern Europe Energy Community 
Treaty.  This is a significant step for Kosovo in achieving 
increased regional cooperation, as well as securing more 
sources of energy which is essential for economic and social 
development and stability.  In June 2004, Kosovo signed the 
Memorandum of Understanding (MOU) on the Development of a 
South East Europe Core Regional Transport Network.  The 
signatory countries, the European Commission, the Stability 
Pact and international financial institutions are working 
jointly to expedite the implementation of the MOU. 
 
¶M. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
¶44. (U) The U.S. Overseas Private Investment Corporation 
(OPIC) has been actively involved in Kosovo since 2000 by 
providing financing, political risk insurance and other 
investment vehicles to American investors.  Through OPIC 
assistance, American investors are currently involved with 
projects in the energy sector and real estate development. 
 
¶N. LABOR 
 
¶45. (U) On October 8 UNMIK approved Regulation 2001/27, the 
Essential Labor Law.  The law requires that employment 
conditions are observed by contractual parties such full time 
status is relegated to a 40-hour work week, payment of 
overtime, occupational health and safety standards, 90 days 
of maternity leave and annual leave, among other provisions. 
The labor law does provide for a minimum wage but does not 
set an amount.  Overtime is limited to 20 hours per week and 
40 hours per month.  The Ministry of Labor and Social Welfare 
created a labor inspectorate to ensure the labor law is 
adhered to by employers.  Labor and contractual disputes are 
adjudicated in local courts. 
 
¶O. FOREIGN TRADE ZONES/FREE PORTS 
 
¶46. (U) On January 30, 2004 UNMIK approved a new Customs Code 
(Regulation (2004/1), replacing the old Yugoslav Customs Code 
and related executive instrument that were applicable in 
Kosovo.  The Kosovo Customs Code is a business friendly 
regulation, compliant with standards of the European Union 
and the World Customs Organization.  The Code provides 
business friendly mechanisms - bonded warehouses, inward and 
outward processing, transit of goods, free trade zones, with 
the aim of facilitating trade and stimulating exports of 
goods.  The purpose of bonded warehouses is to enable storage 
of goods under Customs supervision.  The customs warehouse 
procedure allows the storage of non-Kosovo goods, without 
such goods being subject to import duties or commercial 
policy measures, and Kosovo goods, where legislation 
governing specific fields provides that their placement in a 
customs warehouse shall attract the application of measures 
normally required for the export of such goods.  Through the 
provision of regulated and monitored inward and outward 
processing, individual companies are allowed to bring into 
Kosovo, without paying taxes or customs duties, components 
for the production of goods destined for export. 
 
¶47. (U) There are no free trade zones, foreign trade zones 
and free ports in Kosovo.  However, the Customs Code permits 
the establishment of free zones for manufacturing and export. 
 
 
¶P.  FOREIGN DIRECT INVESTMENT STATISTICS 
 
¶48. (U) Kosovo's foreign investment statistics are not fully 
comprehensive or readily available due to the nascent 
development of the Ministry of Trade and Industry's (MTI) 
Investment Promotion Agency (IPA), established in 2005. 
According to IPA data, foreign direct investment (FDI) was 
estimated to be 650 million euros from 2005 to July 2006, 
with 250 million euros of this amount coming from the 
privatization process, 277 million euros reported as minimal 
declared capital in the MTI Business Registration Office, and 
133 million euros identified as direct investment and 
commercialization.  IPA noted that these figures are 
estimates and believes that FDI is higher. 
 
¶49. (U) The IPA reported that the number of registered 
businesses in Kosovo is 1,588, of which 22 are American 
companies.  The other companies come from EU countries (249), 
Southeastern Europe (784), Switzerland (36), and Asia and 
other countries (497).  According to IPA data, most foreign 
businesses are involved in trading (63 percent), service 
industries (18 percent), production, extraction and 
processing industries (11.5 percent), and construction (7.5 
percent). 
 
 
 
LASKARIS