VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #0255/01 0571038
ZNR UUUUU ZZH
R 261038Z FEB 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0336
INFO RUEHVB/AMEMBASSY ZAGREB 1404
RUEHVJ/AMEMBASSY SARAJEVO 0313
RUEHBS/USEU BRUSSELS

UNCLAS BELGRADE 000255 
 
SIPDIS 
 
STATE FOR EUR/SCE RIEHL 
USEU BRUSSELS FOR MOZUR 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON PREL HR SR
SUBJECT: CEFTA - RATIFICATION LIKELY AS GOVERNMENT PREPARES NEW 
TOBACCO STRATEGY 
 
REF: BELGRADE 1974 
 
SUMMARY 
------- 
¶1. (SBU) Following the initialing of the Central European Free Trade 
Agreement (CEFTA) in December, the Government of Serbia (GOS) is 
still in negotiations with various parties to minimize the adverse 
impact CEFTA will have on the domestic tobacco industry.  Officials 
told econoffs that Serbia will ratify CEFTA and that finding a 
compromise with Croatia is unlikely due to Croatia's rigid position 
on this issue.  The GOS is now developing a new tobacco sector 
strategy that aims at mitigating the negative impacts of CEFTA on 
domestic tobacco companies through a variety of measures.  The GOS 
proposal appears to track closely with the approach that Philip 
Morris has been pushing.  END SUMMARY. 
 
SERBIA WILL RATIFY CEFTA 
------------------------ 
¶2. (SBU) On February 12, econoffs met with Deputy Minister Vlatko 
Sekulovic, of the Ministry of International Economic Relations 
(MIER), who is head of Serbia's CEFTA delegation.  Sekulovic 
indicated that CEFTA is too important for Serbia not to ratify in 
its aspirations for EU accession.  Negotiations with Croatia over 
Serbia's excise tax structure have not been effective as Croatia has 
taken a tough position against any discriminatory treatment of 
cigarette imports to Serbia.  Sekulovic said that of the options 
available to Serbia at this time, developing a new tobacco strategy 
is not only the easiest, but also the right thing to do in upholding 
commitments made to investors like Philip Morris International (PMI) 
and British American Tobacco during privatization. 
 
NEW TOBACCO STRATEGY 
-------------------- 
¶3. (SBU) In developing the strategy, Sekulovic emphasized four main 
objectives of the government: 1) Ratification of CEFTA, 2) 
increasing the quality of domestic tobacco production, 3) increasing 
exports of cigarettes and 4) preserving budget revenues from duties 
and taxes. 
 
¶4. (SBU) As a result of CEFTA ratification, the excise tax system 
must be equalized for domestic and foreign cigarette producers. 
Serbia will unify the excise tax structure, requiring higher rates 
for domestic manufacturers and providing lower rates to foreign 
ones, Sekulovic said, but implementation likely will not take place 
until January 1, 2008, thereby affording domestic manufacturers 
additional time under the current excise structure.  (Note: during 
privatization of the tobacco industry, the GOS made commitments to 
foreign investors of preferential excise treatment through January 
1, 2010.) 
 
¶5. (SBU) In order to redress domestic tobacco manufacturers' loss of 
two years of preferential excise treatment, the GOS will propose 
modifications to the Law on Excises, the Law on Customs Tax and the 
Tobacco Law.  Currently, domestic cigarette manufacturers must 
procure 50 percent of tobacco from domestic farmers.  State 
Secretary Vesna Arsic at the Ministry of Finance told econoffs on 
 
SIPDIS 
February 9 that the Ministry of Agriculture conducted a recent study 
to review the effects of this policy.  Since 2003, the study showed 
that the land used for tobacco production had decreased by 50 
percent.  Therefore, fewer farmers benefited, while cigarette 
producers lacked the supply to meet demand and in many cases were 
forced to procure poor quality product.  Both Arsic and Sekulovic 
confirmed that they expect the GOS to propose repealing the domestic 
tobacco procurement obligation in the current Tobacco Law, replacing 
it with a premium payment system that rewards quality.  This move 
will secure alignment with WTO and EU requirements in this area, as 
well. 
 
¶6. (SBU) In order to provide domestic manufacturers with a level of 
protection similar to that enjoyed by manufacturers in other 
countries, particularly in the EU, Serbia will revise the Law on 
Customs Tax to increase the duty rate to 57.6 percent (EU level) on 
cigarettes imported from all countries, except for those countries 
where Serbia has concluded free trade agreements stipulating 
otherwise (CEFTA countries and Russia).  This move will also help 
preserve budget revenues.  Both Arsic and Sekulovic indicated that 
the EU will not object to this change. 
 
¶7. (SBU) As a concession to the domestic tobacco industry, Arsic 
said that the GOS is considering waiving the requirement under which 
tobacco companies must pay RSD 1.07 per pack of cigarettes sold into 
the Serbian Health Fund. 
 
¶8. (SBU) Arsic also said that the GOS also will adopt a long-term 
schedule for excise taxes that will provide predictability to the 
industry, but also reduce the ad valorem portion of the excise from 
 
50 percent to 43 percent, to ease the impact on higher value 
cigarettes, another key goal of Philip Morris. 
 
¶9. (SBU) Tobacco industry representatives are pleased with the level 
of cooperation demonstrated by the GOS.  Eugenio Sidoli, Managing 
Director of DIN "Fabrika Duvana," the Serbian subsidiary of Philip 
Morris International (PMI), told econoffs that the GOS has actively 
engaged the tobacco companies and is incorporating many of PMI's 
suggestions into the new strategy.  On another issue, the levy of 
excise taxes by both Serbia and Montenegro on tobacco products 
shipped to Montenegro, Serbia's Ministry of Finance reinterpreted 
tax regulations to abolish the double taxation after PMI threatened 
to shift production destined for Montenegro to a factory outside of 
Serbia. 
 
COMMENT 
------- 
¶9.  Tobacco manufacturers understand the importance of CEFTA to 
Serbia and support Serbia's decision to ratify.  However, PMI has 
led the industry in its advocacy efforts to ensure that the GOS 
mitigates any adverse impacts from CEFTA accession.  It appears that 
the GOS has gotten the message regarding fair treatment of existing 
investors and is following closely industry recommendations in its 
proposed modifications to existing laws, although it remains to be 
seen whether the new government will implement the policy that the 
ministries are now developing. 
 
POLT