VZCZCXRO7777
RR RUEHPOD
DE RUEHBW #1396/01 2851056
ZNR UUUUU ZZH
R 121056Z OCT 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1597
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0012
RUEHVJ/AMEMBASSY SARAJEVO 0375
RUEHVB/AMEMBASSY ZAGREB 1449
RUEHSF/AMEMBASSY SOFIA 0867
RUEHBM/AMEMBASSY BUCHAREST 0266
RUEHUP/AMEMBASSY BUDAPEST 1127
RUEHSQ/AMEMBASSY SKOPJE 0888
RUEHTI/AMEMBASSY TIRANA 0383
RUEHPOD/AMEMBASSY PODGORICA 0125
RUEHPS/USOFFICE PRISTINA 3715

UNCLAS SECTION 01 OF 02 BELGRADE 001396 
 
SIPDIS 
 
SIPDIS 
STATE FOR INL/C/CP 
DOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV SR MW
SUBJECT: C MARKET - TYPICAL TYCOON PRIVATIZATION 
 
 
Summary 
------- 
 
¶1.  Rival Serbian Tycoons Beko and Miskovic, agreed in August 2005, 
reportedly at Prime Minister Kostunica's initiative, to jointly take 
over C-Market, the largest retail chain in Serbia.  The agreement 
was used to chase out other bidders via back-room advice, an 
official ruling of the Securities Commission and intimidation.  As 
the sole bidder, Beko-Miskovic's company acquired it at less than 
market value, later earning at least EUR 150 million.  The back-room 
procedures in this case illustrate how many lucrative privatizations 
went awry in the post-Milosevic era. 
End Summary. 
 
Beko Testimony Enlightens C-Market Privatization 
--------------------------------------------- ---- 
 
¶2.  The sworn testimony of Milan Beko, now a leading democratic 
government financier, on August 12 in the "bankruptcy mafia" court 
case, highlighted the back-room dealings in the privatization and 
later takeover of C-Market - Serbia's largest retailer.  Beko's 
statement was used by the Anti-Corruption Council to bolster their 
two-year-old complaint about the C-Market privatization and reignite 
the issue. Beko is known as the "businessman from a shadow," a 
former Milosevic Privatization Minister and the behind-the-scenes 
buyer of several Serbian companies.  Miroslav Miskovic, former 
Milosevic DPM, the only Serb on the Forbes list of the richest 
people in the world - 891st, and owner of Delta Holding the largest 
and most profitable Serbian-owned company, collaborated with Beko in 
the C-Market purchase. 
 
Beko& Miskovic Agreement Kostunica's Idea? 
------------------------------------------ 
 
¶3.  In a September 21 conversation with Econoff, the Anti-Corruption 
Council head corroborated Beko's testimony and documents presented 
in the court case attesting to the fact that the two major Serbian 
competitors interested in C-Market takeover, Beko and Miskovic, met 
with then C-Market Director Slobodan Radulovic and Danko Djunic 
(former Delloite & Touche Managing partner, former Milosevic DPM, 
and former AmCham President) on August 19, 2005 at Prime Minister 
Kostunica's initiative.  The four of them signed a Memorandum of 
Understanding (MOU) that stipulated steps that would result in 
acquisition of majority C-Market shares via: 
 
-- purchase of shares distributed free to C-Market workers by one of 
the earlier Milosevic' era privatization laws - around 75% of 
shares; 
 
-- purchase of state-owned shares; and 
 
-- additional capitalization. 
 
¶4.  The acquisition would result in 60/40 C-Market ownership split 
between Beko and Miskovic in favor of Beko.  The whole operation was 
to end in the period between August 2007 and February 2008 when 
Miskovic would buy out all Beko's shares, or both could sell it to a 
third party. 
 
Eliminate Competition: With Intimidation ... 
-------------------------------------------- 
 
¶5.  The third signatory of the MOU - C-Market Director Radulovic was 
also involved in the purchase but, according to a letter he sent to 
the Anti-Corruption Council, a month before the memorandum was 
signed, Radulovic was invited to an interview with Interior Minister 
Jocic and was told that C-Market must be sold to a "domestic 
company."  At this meeting Radulovic was intimidated by threats that 
certain information about his family would be published if he did 
not cooperate.  The press has speculated that Radulovic then made a 
deal to leave the country without being prosecuted for the 
mismanagement of C-Market and EUR 20 million losses he generated in 
the company by over invoicing to his daughter's company - a supplier 
of C-Market.  Radulovic remains outside Serbia while Minister Jocic 
replied to the accusations by inviting Radulovic to come back to 
Serbia and explain (and be arrested). 
 
 Or Friendly Advice, and a Convenient Court Ruling 
--------------------------------------------- ------- 
 
 
BELGRADE 00001396  002 OF 002 
 
 
¶6.  The MOU then was used to chase away other interested investors - 
Slovenian Merkator and British Investment Fund Ashmore.  Merkator 
gave up the acquisition after a few meetings between Beko and 
Merkator representative Zoran Jankovic, which Beko confirmed in his 
testimony.  However, Beko denied that he influenced the Merkator 
decision.  Merkator's official explanation was that the company 
chose not to bid due to an "unfavorable climate created in the 
public."  The Ashmore Fund was disqualified from the bidding by a 
Securities Commission decision as their offer and bank guarantees 
were not from the same legal entity.  As the sole bidder, joint 
company of Beko and Miskovic purchased in December 2005 75% of 
C-Market shares for $53 million - a price estimated by an 
Anti-Corruption Council economist to be four times lower than actual 
market value. 
 
¶7. Small shareholders had no option to sell their shares at the 
Stock Exchange due to the commercial court's prohibition.  Small 
shareholders (mostly C-Market workers) were eager to sell their 
shares, which they had received for free, at any price. 
Shareholders had been unable to sell shares at that time as trading 
of C-Market shares was halted by a Commercial Court decision which 
Radulovic reportedly engineered using connections with court judges. 
 Small shareholders were also under constant threat of being fired 
by Director Radulovic if they did not cooperate with his efforts. 
This enabled Radulovic to control C-Market although he had only a 
few percent of shares in his hands.  Through this deal, profit was 
transferred directly from shareholders and state to the pocket of 
Beko and Miskovic. 
 
Profit Transfer from Shareholders & State to Tycoons 
--------------------------------------------- ------- 
 
¶8.  Kostunica's main incentive to push the deal, according to Beko's 
testimony, was to avoid repeating the scandal that happened when 
international firms were rebuffed in favor of local purchasers in 
the privatization of bottled water firm Knjaz Milos.  The deal 
enabled large profits for tycoons who finance most of the major 
political parties including Kostunica's DSS.  Radulovic claims in 
his letter that Beko and Miskovic earned $210 million directly and 
$420 million indirectly through this deal. 
 
Comment 
------- 
 
¶9.  The C-Market saga is one illustration of the complex web of 
political and economic connections that are pervasive in the Serbian 
economy.  In Serbia, rivals sometimes find it convenient/lucrative 
to cooperate (whether tycoons or politicians) to achieve their own 
objectives.  The candid testimony from Beko, with corroborating 
testimony and documents, provides an example of how parts of the 
Serbian economy have been distorted through corruption and political 
insiders.  Serbia's economic transformation continues, but the 
legacy of the 1990's has concentrated wealth and powerful interests 
that shape the political and economic landscape of today.  End 
Comment. 
 
BRUSH