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RUFOANA/USNIC PRISTINA SR

C O N F I D E N T I A L SECTION 01 OF 02 PRISTINA 000697 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR DRL, INL, AND EUR/SCE, NSC FOR BRAUN, USUN FOR 
DREW SCHUFLETOWSKI, USOSCE FOR STEVE STEGER 
 
E.O. 12958: DECL: 09/18/2017 
TAGS: PGOV EAID ECON KDEM UNMIK YI KV
SUBJECT: KOSOVO: TREPCA AND THE NEED FOR SOUND ECONOMIC AND 
BUSINESS DECISION MAKING 
 
Classified By: COM TINA KAIDANOW FOR REASONS 1.4 (B) AND (D). 
 
¶1. (C) SUMMARY:  In August, the Kosovo Assembly was poised to 
pass an ill-advised resolution mandating that the debt-ridden 
Trepca mining and minerals company be designated a 
publicly-owned enterprise (POE) rather than a socially-owned 
enterprise (SOE).  The move would have been a disastrous one, 
saddling the Kosovo government with up to a half billion euro 
worth of debt and international claims against the mining 
complex from the pre-war era.  The resolution was not 
adopted, following USOP intervention.  However, we agree with 
the Kosovars on one key point:  they need a seat at the table 
when Trepca's future will be determined.  Our emerging view 
is that, through USAID, we should play a role in ensuring 
that Trepca is privatized in a way that yields the maximum 
benefit to Kosovo and the Mitrovica region.  END SUMMARY. 
 
ONCE PROFITABLE, NOW DEBT-RIDDEN 
 
¶2. (U) The Trepca conglomerate, an SOE, includes mines, an 
industrial park in Mitrovica, and the Zvecan smelter complex. 
 It was a major employer in Yugoslavia, with over 20,000 
workers at its peak.  However, Kosovo Albanian management and 
workers were expelled in 1988-89, and in the 1990s many 
plants were closed.  Between 1995 and 2000, Serbian General 
Director Novak Bjelic engaged in a series of questionable 
financial operations including borrowing against Trepca's 
assets. 
 
¶3. (U) Today, Trepca is a decrepit and debt-ridden shadow of 
its former self.  With 5,000 workers - most of them "phantom" 
employees - it operates at a loss and has drained 70 million 
euro from the Kosovo budget since 1999.  In September 2006, 
upon application by the Kosovo Trust Agency (KTA), the 
Special Chamber of the Kosovo Supreme Court approved placing 
Trepca under Chapter 11-style administration and imposed a 
moratorium on creditor proceedings against it.  The complex 
is potentially liable for an estimated 205 million euro in 
creditor claims and 120 million euro to remedy extensive 
environmental damage.  In addition, it will take an estimated 
175 million euro of investment for Trepca to again become a 
profitable concern. 
 
KOSOVO'S PATRIMONY 
 
¶4. (SBU) Trepca remains a highly emotional issue that looms 
large in the popular imagination due to its past and the 
widely held view that it was purposely driven into the ground 
by Milosevic-era management.  Its revitalization is seen by 
many as the key to Kosovo's independent economic future. 
Popular sentiment does not favor the KTA, or the UNMIK 
administration that first conceived the Chapter 11-style 
approach, and many Kosovar Albanians oppose giving an 
independent administrator control over Trepca and its fate. 
(NOTE: While there is every indication Kosovo could develop a 
productive mining industry under the right circumstances, 
industry sources tell us that Trepca itself would have been 
closed years ago if it had been a private enterprise.  END 
NOTE.) 
 
¶5. (SBU) On August 27, the Assembly was set to vote on a 
resolution that would have called on the SRSG to stop action 
to privatize Trepca and declare it a "strategic company of 
special national interest" which should operate as a 
publicly-owned enterprise (POE).  The Assembly appeared ready 
to take this action, apparently ignorant that making Trepca a 
POE would end the moratorium and make the Kosovo government 
liable for hundreds of millions of euro worth in claims. 
Largely as a result of USOP and USAID efforts, the vote on 
this ill-advised resolution was postponed.  We have continued 
meeting with the chairs of the Trade and Industry Committee, 
caucus leaders, and the Assembly Speaker to keep it off the 
agenda. 
 
¶6. (C) Although the Assembly might have opposed the 
privatization of Trepca merely to win pre-election political 
points, we discovered that the immediate motivation behind 
 
PRISTINA 00000697  002 OF 002 
 
 
the resolution was a desire among party leaders for Kosovars 
to be better represented in the privatization process. 
(NOTE: Under the regulation that governs KTA reorganizations, 
UNMIK 2005/48, the Special Chamber, made up of three 
international and two Kosovar judges, appoints an 
administrator to oversee Trepca's Chapter 11-style 
restructuring. END NOTE.)  The administrator would then sort 
out creditor claims and privatize the assets, leaving the 
Kosovo government without a decision-making role.  Many in 
the Kosovo government strongly believe that some of the debts 
are for money that was diverted to Belgrade's war chest and 
Swiss bank accounts rather than being invested in Trepca, and 
for that reason are loathe to repay them, at least without 
further litigation.  In addition to our intervention with the 
Assembly, we met with UNMIK, which earlier did not fully 
appreciate the emotional importance of Trepca to local 
politicians.  UNMIK has since agreed to negotiate amendments 
to 2005/48 with the PISG and give them a larger role. 
 
¶7. (C) COMMENT:  If for no other reason than to stop it from 
taking ill-considered steps that could potentially undermine 
the entire privatization process for Trepca, the PISG needs a 
seat at the table when decisions regarding the future of 
Trepca are considered.  This will be challenging, as some of 
our local interlocutors will approach this issue from a 
position of political demagoguery, ill-advised economic 
nationalism, bad communist economics, and rent-seeking 
agendas.  Nevertheless, our experience through USAID with 
Kosovo C and its project steering committee suggests that we 
can empower the Kosovars -- in cooperation with other 
stakeholders in the international community -- to be 
responsible stewards of such an asset.  END COMMENT. 
KAIDANOW