VZCZCXYZ0004
OO RUEHWEB

DE RUEHBW #0266/01 0581120
ZNR UUUUU ZZH
O 271120Z FEB 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0348
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUEHPS/USOFFICE PRISTINA 3653
RUEHSQ/AMEMBASSY SKOPJE 0853
RUEHBS/USEU BRUSSELS
RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 000266 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG ECON SR YI
SUBJECT: KOSOVO'S FINAL STATUS BURDENS ECONOMIC TIES 
 
 
¶1.  (U) This is a joint cable from USOP and Embassy Belgrade. 
 
SUMMARY 
------- 
¶2. (SBU) Belgrade econ chief and Pristina econ officer made the 
rounds of UNMIK and PISG economic agencies to identify some of the 
economic issues that are factors in current and future relations 
between Kosovo and Serbia.  Trade is a bright spot, with imports 
from Serbia up some one-third in 2006, although some issues still 
have not been resolved.  The payments system appears to be gradually 
improving, in part because of Belgrade-based Komercijalna Banka's 
decision to obtain a license from the Central Banking Authority of 
Kosovo.  Power transmission appears to be a bit smoother, according 
to Kosovo Energy Company (KEK) officials, but the relationship still 
is troubled by sovereignty-linked disputes over payments.  Telecom 
remains a sore point, with Kosovo's telecom regulator determined to 
drive out Telekom Srbija's substantial cellular business, while the 
Government of Serbia sticks to a hardline on other telecom issues. 
Key privatizations that could benefit Kosovo Serbs appear to be 
frozen by political uncertainty. END SUMMARY. 
 
THAW IN TRADE RELATIONS 
----------------------- 
 
¶3.   (SBU) Peter Walker, UNMIK Customs director, welcomed econ 
officers on February 7.  He described a gradual thaw in trade 
relations over the last five years, culminating in Serbia's lifting 
of its transit tax on third-country goods in 2005. (In addition, 
Serbia permits VAT refunds on goods transported to Kosovo, as is 
common practice on exports.)   The easing of restrictions resulted 
in a big increase of Serbia-origin exports to Kosovo in 2006, from 
about EUR 130 million to EUR 189 million.  Some 25-30 percent of 
Kosovo's exports enter from Serbia, he said. (Note:  Serbia's trade 
data is considerably different, showing exports of USD 528 million 
in 2006; the issue is further complicated by the fact that 2005 data 
included Montenegro.) 
 
¶4.  (SBU) The thaw was not without its problems, Walker noted.  The 
shift of trade to Serbian border points in 2005 and 2006 had 
resulted in initial revenue losses estimated at some EUR 20 million. 
 Customs staff in the north is mostly Serbian, and UNMIK suspects 
that corruption, at least partly driven by organized crime, had 
undermined staff performance.  Additional security measures had been 
employed, and losses have declined, he added. 
 
¶5.  (SBU) Further easing of trade could be accomplished through 
administrative and logistical improvements, Walker said.  For 
instance, seasonal backups can last hours at Gate 3, north of 
Podujevo, because of the heavy flow of summer returnees mixed with 
commercial traffic on a two-lane road.  A simple by-pass, combined 
with an UNMIK agreement to accept Serbian documentation cleared at a 
checkpoint inside Serbia, could facilitate trade, he said.  He noted 
that Serbian fuel exports should be booming, based on the increase 
of a Macedonian fuel excise tax at the beginning of 2007. 
 
PAYMENTS SYSTEM NORMALIZES 
--------------------------- 
 
¶6.  (U) The increase in trade may be driven in part by an easing of 
payments.  Komercijalna Banka, a Belgrade bank controlled by state 
shareholders, has obtained a provisional license from the Central 
Banking Authority of Kosovo and now operates nine offices in Kosovo. 
 (These are located largely, but not exclusively, in Serbian 
enclaves.)  Econoffs met with Kosta Sandic, a Komercijalna manager 
from Belgrade, and two local managers at the bank's Mitrovica branch 
on February 8. 
 
¶7.  (SBU) Sandic said that Komercijalna's business in Kosovo is 
largely driven by trade.  National Bank of Serbia regulations permit 
Komercijalna to do business in Kosovo either in dinar or euro, at a 
competitive rate fixed in Belgrade.  (Komercijalna obtains cash from 
the National Bank of Serbia branch in Leposavic.)  Many Albanian 
traders from Southern Serbia use Komercijalna Banka, he said, and 
management expects such activity to increase.  Another source of 
growth may come from UNMIK payments to Serb property owners; 
Komercijalna has been approached by the UN Habitat agency about 
handling the payments work.  However, the bank closely controls 
lending in Kosovo, since real property pledged as collateral has 
proved not to be sellable, he said. 
 
¶8.  (SBU) Komercijalna is not the only bank serving Kosovo Serbs. 
Jugobanka Kosovska Mitrovica and Kosovkso Metohiska Banka, based in 
Zvecan, also serve the enclaves.  But Sandic observed that the two 
banks are not making money and might face difficulty in meeting the 
requirements of the Central Banking Authority of Kosovo. 
(Supervision officials at the National Bank of Serbia told us that 
they supervise these banks only through off-site supervision, since 
on-site visits are not practical.)  However, Komercijalna intends to 
expand as political conditions improve; Sandic said that the bank 
has hired Kosovar staff and made a commitment to use mixed-ethnicity 
branch teams. 
 
ENERGY:  PROGRESS ON AGAIN, OFF AGAIN 
-------------------------------------- 
 
¶9.  (SBU) Econoffs met with a variety of energy sector interlocutors 
in Kosovo.  Kosovo Energy Company (KEK) officials said that power 
availability has been better this year, for which they also credit 
their decision to contract with energy traders for delivery at 
Kosovo's borders.  However, officials at the PISG Ministry of Energy 
and Mining complain of Serbia's continuing failure to recognize its 
Transmission System Operator as a separate entity and remit revenues 
based on transit of power through Kosovo to third parties.  And they 
expressed unwillingness to consider the sort of independent power 
distributor that Serb officials seek for the enclaves. 
 
¶10.  (SBU) Pranvera Dobruna, KEK managing director, described an 
uncertain outlook for cooperation with Serbia.  Serbian enclaves 
still do not pay for power, but she said that local Serbian 
electricity company representatives had responded to appeals to 
conserve power in the enclaves over the holidays.  And power 
availability to consumers had been better this year, she said, in 
part because of milder weather but also because of such cooperation. 
 One result was better power availability in the enclaves. (This was 
confirmed by Serbian power company officials in north Mitrovica.) 
 
¶11. (SBU) Regarding the GOS offer (through the Coordination Center 
for Kosovo, CCK) of a power donation of 50 gigawatt-hours per month, 
Dobruna said that the proposal simply was not feasible.  Switching 
on service areas below the 10-kilovolt feeders on a 24-hour basis 
would require 130 gigawatt-hours, leaving KEK to pay for the other 
80 not covered by the Serb donation.  Regarding the Serb proposal to 
switch power on at smaller substations below the 10-kv level, 
Dobruna said that this would require that KEK crews drive  around 
constantly, turning power on and off every three hours at the 
smaller service areas not included in the Serb offer, a prospect 
that simply was not practical. 
 
¶12.  (SBU) Handing econoffs an e-mail correspondence with Serb power 
officials, Dobruna complained sharply about a January 29 incident in 
which KEK's request for an emergency power transfer through the 
Serbian transmission network was allegedly rejected by Serbian 
transmission authorities because only state power utilities can 
deliver emergency power. (The transfer had been contracted through a 
trader, the Energy Financing Team.)  She said that the Serbs had 
delivered emergency power on previous occasions.  Dobruna said that 
non-emergency deliveries had been more regular this year because KEK 
had adopted the policy of requiring that power traders deliver 
directly to Kosovo's borders, shifting responsibility for arranging 
transmission through Serbia (or a third country) directly to the 
seller. 
 
¶13.  (SBU) The KEK director also expressed exasperation with 
Serbia's policy of non-recognition of Kosovo's Transmission System 
Operator (TSO).  In practice, this means that Serbia is not 
compensating Kosovo for transfers of power through its territory, 
but instead is retaining the revenue with the argument that it still 
owns the transmission system.  This revenue loss may amount to EUR 5 
million by now, she said. 
 
¶14.  (SBU) Merita Kostari, head of the legal department at the UNMIK 
Energy Regulatory Office, said that Kosovo would file a complaint on 
this issue.  Kosovo's TSO is now a fully recognized member of the 
Southeast Europe Transmission System Operators Association, but 
Serbia has blocked its admission to the cross-border trading 
mechanism that allocates capacity and revenues.  Kosovo would raise 
this issue in February at the next regional TSO meeting in Athens, 
she said. 
 
¶15.  (SBU) Econoffs raised the issue of licensing a separate power 
distributor to operate in Serbian enclaves.  Kostari said that, 
under Kosovo's energy law, only the PISG could nominate such a 
distributor; it could not apply independently. 
 
¶16.  (SBU) Agron Dida, deputy Minister of Energy and Mining, 
expressed similar frustration with Serbia's approach on cross-border 
transfers.  Serbia had paid such compensation to Kosovo until 2004, 
then had stopped, raising over and over their contention that system 
assets belong to Serbia.  In January 2006, when Kosovo sought more 
power to cope with demand related to the funeral of Ibrahim Rugova, 
the Serbs had stopped a Bulgarian offer to provide power but then 
offered to sell the power to KEK at a much higher price. 
 
¶17.  (SBU) The Ministry had requested that UNMIK not accept Serbia's 
offer to donate power, Dida said, as it would mean "anarchy."  The 
Serbs still see Kosovo's system as part of their system, and they 
instruct Serbs not to sign contracts with KEK because they do not 
want to recognize the rule of law in Kosovo.  When econoff raised 
the issue of creating a separate distributor to facilitate payment 
by Serbs, one of Dida's assistants insisted that the Serbs could 
function only as a supplier, to collect payments, but not as a 
distributor with independent control of a sub-network. 
 
TELECOMS A BATTLEGROUND 
---------------------- 
 
¶18.  (SBU) Anton Berisha, chairman of Kosovo's Telecommunications 
Regulatory Authority (TRA), describes a situation in which the 
Kosovar and Serbian systems have been largely de-linked.  Although 
fixed line calls to Kosovo still use Serbia's country code and, to 
some extent, transit Serbian infrastructure, Telekom Srbija has 
completely ended its reliance on Kosovo's fixed line network, 
instead using radio relay for fixed line service to the enclaves. 
Berisha said that once the TRA had dismantled a Telekom Serbija 
cellular tower, only to find it had disrupted fixed line service to 
an enclave, as well.  With regard to frequency spectrum, Telekom 
Serbija simply uses what it wants without permission, he said. 
Serbia is still blocking Kosovo's request to obtain a country code 
from the International Telecommunications Union. 
 
¶19.  (SBU) Fixed line service works without problems, Berisha said, 
although he asserted that he was not familiar with any arrangements 
under which long-distance revenues are shared with Telekom Srbija. 
But he left no doubt that the TRA is determined to push out the 
cellular operators from Serbia, Telenor and Telekom Srbija's MTS 
service.  Telenor chose not to participate in Kosovo's tender for a 
second mobile operator, he said, and it must leave the Kosovo 
market.  Such frequency use is unlicensed, he argued.  Kosovo's 
state-run telecom, PTK, has filed a lawsuit in Kosovo's courts 
against Telenor, seeking to end the company's operation in Kosovo. 
Berisha said TRA would respect UNMIK's order not to dismantle 
cellular towers in enclaves, but said that Telekom Srbija had 
reacted to TRA's dismantling of towers outside enclaves by locating 
towers on property of the Serbian Orthodox Church. 
 
¶20. (SBU) Ilija Ivanovic, Telekom Srbija's manager for Kosovo (based 
in Kosovska Mitrovica, the northern half of Mitrovica), confirmed 
that TRA had dismantled 15 of the company's cellular towers about 10 
weeks previously, damaging equipment and shrinking the company's 
coverage over Kosovo.  He did not deny that Telekom is using church 
property but insisted that it does so for technical reasons. 
However, he said Telekom's celluar service still has 300,000 
customers in Kosovo, most of them Kosovars who use it because it is 
better and cheaper than the single TRA-licensed operator. 
 
¶21.  (SBU) However, Ivanovic claimed the TRA, backed by Kosovo 
Police Service (KPS) units, tried to take down two towers in Zvecan 
and Trpca, but were prevented from doing so by Serbs, who then 
mounted a 24-hour watch on the sites, he said. In addition, the PTK 
had carried out work adjacent to a fixed line cable installed by 
Telekom, without actually seeking to dismantle Telekom's cable.  He 
described a situation in which Telekom crews work throughout Kosovo 
at their own risk, at times prevented from carrying out their work 
by Kosovo authorities.  Telekom had requested that UNMIK cease 
efforts to undermine its system, Ivanovic said, but had not 
responded to UNMIK's suggestion that it bid for a license:  why bid 
for a license when Telekom has one valid for all of Kosovo? (Note: 
PTT Representative for Kosovo Randjel Nojkic told USOP that no 
telecom equipment north of the Ibar River has ever been dismantled. 
End note.) 
 
¶22.  (SBU) Andreas Wittkowsky, deputy head of UNMIK's Pillar IV, 
said that Telekom Srbija had exploited a gentlemen's agreement 
allowing them to sell SIM cards in Kosovo to expand their operation 
for commercial reasons, not to serve minorities.  And its fixed line 
network operates in Kosovo in violation of UN Resolution 1244.  But 
UNMIK has prevented disruption to Telekom services in the enclaves 
for political reasons, he said. 
 
¶23.  (SBU) The pushing and shoving over links between Kosovo and 
Serbia continues in a number of areas, Wittkowsky said.  Serbia 
recently had changed its policy on bus transit to require that 
operators use Serbian-registered buses.  Previously, Kosovar 
operators had been permitted to use buses registered in third 
countries and pay a small fine, but Serbia suddenly began to force 
passengers to disembark at the border and continue on 
Serbian-registered buses, at a much higher cost. Serbia still is 
blocking UNMIK's request for membership in the International Railway 
Union.  Serbian state airline JAT recently filed an application 
requesting permission to fly to Pristina, Wittkowsky said, but PISG 
authorities argued against granting permission without a deal to 
unblock use of Serbian airspace for Pristina flights. 
 
Privatization:  Future On Hold 
------------------------------- 
 
¶24.  (SBU) Privatization in Serb enclaves has been informally put on 
hold pending greater political clarity, Ahmet Shala, deputy director 
of the Kosovo Trust Agency (KTA), told econoffs.  Sale documents for 
the Brezovica ski center had been prepared, but the sale was delayed 
at the behest of UN authorities in New York, he said.  KTA had 
consulted extensively with Serbs in the Strpce enclave, including 
the ski center's general manager, and agreed to include their 
conditions on to employment and investment issues.  But starting the 
tender required a political decision, he noted. 
 
¶25.  (SBU) With regard to the Trepca lead mining complex, the 
outlook is even more complicated because of the geography of the 
complex and because of conflicting views within the PISG, Shala 
said.  Two mines are practically on the border with Serbia, the 
concentrator mill is in the enclave town of Leposavic, while other 
facilities are in Albanian areas.  Production recently has restarted 
with some EUR 60 million in public subsidies, and the PISG is 
seeking to appoint an administrator for property.  The new advisory 
board includes Kosovo Serbs, he noted.  But there is no political 
consensus even within the PISG, Shala said, with the prime 
minister's key adviser skeptical about privatization. 
 
¶26.  (SBU) Comment.  This series of meetings in Pristina and north 
Mitrovica illustrated clearly that much of Kosovo's economic future 
is tied up in disputes with Serbs and with the Belgrade government. 
In many areas, the elements of a quid pro quo are apparent, but 
there is little political will at this point to negotiate.  The 
outlook for major investments, whether it is in development of the 
lead mines at Trepca, the ski center at Brezovica, or in the energy 
tender, will be influenced by the course of status talks and the 
temperature of the relationship between Pristina and Belgrade.  End 
Comment. 
 
¶27.  (U) USOP is grateful to Embassy Belgrade and to econ chief Mark 
Bocchetti. 
 
MOORE