VZCZCXYZ0003
RR RUEHWEB

DE RUEHBW #1736/01 3620908
ZNR UUUUU ZZH
R 280908Z DEC 07
FM AMEMBASSY BELGRADE
TO SECSTATE WASHDC 1981

UNCLAS BELGRADE 001736 
 
SIPDIS 
 
DEPT FOR EUR/OHI - JOHN BECKER AND EUR/SCE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON KIDE KPRV CASC SR
SUBJECT: PUBLIC DEBATE ON THE RESTITUTION LAW 
 
REF: BELGRADE 774 
 
SUMMARY 
------- 
 
¶1.  Serbia is the only country in Europe without a restitution law. 
A restitution law is a prerequisite for EU membership, but more 
importantly, it is vital to attracting badly needed foreign direct 
investment, establishing the right to private property, and 
revitalizing Serbia's market economy.  The GOS finally decided to 
rectify a six-decade old injustice by drafting a law on restitution 
and soliciting feedback on it through public working consultations. 
However, the working consultations raised a number of questions 
which indicate the law will not be adopted in the near future and 
its implementation will be difficult.  End Summary. 
 
WORKING CONSULTATIONS ON RESTITUTION 
------------------------------------ 
 
¶2.  On May 10 2007, the outgoing caretaker Serbian government "gave 
support" to a draft law on restitution (reftel), leaving the 
incoming government to approve it and send it to Parliament for 
adoption.  The law was drafted by Milan Parivodic, current Advisor 
for Legal Issues to Prime Minister Kostunica and former Minister for 
International Economic Relations.  Parivodic wrote the law with the 
assistance of recommendations from the Austrian, German and Swiss 
governments as part of a technical assistance program funded by the 
three countries at Serbia's request.  The new Serbian administration 
made few changes to the original draft. 
 
¶3.  From October through December 2007, the Ministry of Finance 
organized five working consultations on the current draft law.  The 
purpose of these consultations was to solicit feedback on the draft 
from legal and economic experts, restitution claimants, claimants' 
rights associations and from government institutions that will 
implement and enforce the law.  A Ministerial Working Group, with 
representatives from various ministries, pledged to consider 
feedback from the working consultations in formulating the final 
draft, which later will be released for further public debate. 
 
¶4.  Slobodan Ilic, State Secretary at the Ministry of Finance, said 
that once the law is approved by the government, but prior to 
Parliament adoption, it will be sent to experts in the Council of 
Europe to ensure it adheres to EU norms.  Deputy Prime Minster 
Bozidar Djelic said that the GOS would send a set of related laws on 
property issues, including the law on restitution, urban 
construction land, and private and public property, to Parliament by 
the end of February 2008.  However, this may not be realistic as 
these laws are still in the drafting stage and have not been 
approved by the government.  Slobodan Ilic said at the first round 
table in October that the law on restitution would most likely be 
adopted by the end of February 2008.  At the last round table on 
December 25, however, Ilic revised his expectation saying that the 
final draft law should be ready for government approval by the end 
of February 2008, but he did not want to predict when it would be 
adopted by the Parliament. 
 
DRAFT LAW ON RESTITUTION 
------------------------ 
 
¶5.  According to the draft, the law "shall regulate the conditions, 
the mode and the procedure of restoring property (restitution) in 
the territory of Serbia, which was seized after January 1, 1945," by 
the Tito communist regime "as well as property that was confiscated 
on the basis of racist regulations and acts of [German] occupation 
authorities after April 6, 1941" to their former owners.  (Note: 
Though not explicit, the inclusion of properties seized after April 
6, 1941 into the restitution draft is to address claims of the 
Serbian Jewish community. End Note.)  In addition, the law "shall 
also regulate the restitution or privatization of city building 
land." 
 
¶6.  In general, the draft law calls for immediate restitution in 
kind (return of the original property to its original owner) when 
possible.  If not possible, claimants would receive cash, capped at 
$14,300 per person, and bond compensation.  The bond compensation 
would be a 20-year bond that would begin payout two years after the 
law is adopted.  The bonds will bear a 4.5 percent annual interest 
rate and mature in 2028.  The bond would be capped at $1.43 million 
per claimant and $1.43 million per property.  The government has 
stated that its total cash and bond payout will not exceed $5.7 
billion.  Parivodic said though $5.7 billion will be set aside for 
claims, he expects $3.6 billion will be sufficient.  The IMF office 
in Belgrade has expressed concern about the cost of financing these 
bonds. 
 
FINE TUNING VS. ROUGH APPROXIMATION OF JUSTICE 
--------------------------------------------- - 
 
¶7.  Parivodic presented the draft law as a "reflection of the 
reality in Serbia and the result of hard compromises and political 
pragmatism" which is not a "fine-tuning of justice, but a rough 
 
approximation of justice."  He admitted that he is not satisfied 
with some aspects of the law, but believes the law will allow for 
the introduction of market economy principles in Serbia's real 
estate sector.  In drafting the law, he said he focused on the 
principles of efficiency and macroeconomic stability and that 
sometimes these principles outweighed the principle of justice for 
original landowners.  He also considered the good-faith-acquirer 
principle in which the person, who purchased property in conformity 
with the laws existing after nationalization, remains the owner of 
that property. 
 
¶8.  Under the current draft law, when immediate in-kind restitution 
is not possible, the disputed land would be returned to its original 
owner.  The original landowner and those currently using the land 
would then enter into a landlord-tenant lease agreement.  Parivodic 
believes a leasing relationship is a "logical continuity" of "right 
of use," and as such allows parties to reach an agreement without 
government intervention to set prices.  State intervention, if 
necessary where agreements could not be reached, would be limited to 
10 years, after which market mechanisms would take over. 
 
 
¶9.  The "right of use" describes the type of urban construction land 
ownership instituted during communism in the former Yugoslavia.  It 
entitles building owners to use land for as long as they own the 
building or a maximum of 99 years.  This right is acquired, 
transferred and terminated automatically with acquisition, transfer 
or termination of ownership of the building.  During the communist 
era, tenants were only occupants of apartments, and never apartment 
owners.  However, during the 90's, after the first democratic 
demonstrations against Milosevic's regime, Milosevic allowed tenants 
to buy their apartments, and become permanent owners, at the very 
low price of 100 Deutsch Marks (Germany currency was used because of 
Serbian hyper-inflation) in a bid to gain votes.  However, this 
scheme only complicated the situation further, creating owners of 
apartments who are not the owners of the land under that apartment. 
 
 
COMPETING PRINCIPLES 
-------------------- 
 
¶10.  The principles underlying the provisions of the draft law were 
criticized by all participants in the working consultations 
including from other government institutions and ministries that 
will implement and enforce the law.  Claimants say the law is the 
"legalization of nationalization," because while it calls for 
in-kind restitution, in many cases it would protect those who 
acquired property after land was nationalized, leaving original 
landowners with bonds.  Claimants suggest the proposed law will 
require state intervention since it does not include a defined 
dispute resolution mechanism for those cases in which a claimant 
cannot reach a lease agreement with land occupants. 
 
¶11.  The most disputed topic, however, is the restitution of urban 
construction land.  At the working consultations, Professor Dragor 
Hiber and other experts from the think tank Center for Liberal 
Democratic Studies (CLDS) advocated the privatization of urban 
construction land and the application of the Roman principle 
"superficies solo cedit," which entitles the landowner to what lies 
above that land parcel (i.e. buildings).  According to Hiber, this 
standard has been applied in restitution cases in the rest of 
Eastern Europe.  However, to resolve the problem created under 
Milosevic of separate owners of the building and land, Professor 
Hiber advocated giving the land to the building owner and not the 
original landowner.  Instead, the original landowner would receive 
financial compensation.  A representative from the Austrian 
Development Agency, who advised the Serbian government on the draft, 
complained that the current draft does not follow the true principle 
"superficies solo cedit" and parts of the draft do not adhere to 
international standards. 
 
¶12.  Parivodic explained that "superficies solo cedit" is ideal, but 
it could not be implemented in every case because of "Serbia's 
chaotic situation after communism and Milosevic."  According to 
Parivodic, the draft law will naturally follow the "superficies solo 
cedit" principle in 80 percent of the cases which will cost the 
government less because it will not have to compensate original 
landowners.  Parivodic mentioned that, according to the Austrians, 
the value of the land for restitution is estimated between $20 and 
25 billion. 
 
CLAIMANTS' ASSOCIATIONS WEIGH IN 
-------------------------------- 
 
¶13.  In the working consultations, many claimants' rights 
associations voiced their opposition to bond compensation and 
financial limits.  They said they would accept only in-kind 
restitution or property of equal value.  Amcit Bogdan Veljkovic from 
the Restitution Network said that Serbia's S&P BB- bond credit 
rating should carry a 20 percent annual interest rate instead of 4.5 
percent, otherwise owners would have to sell their bonds at a 
significant discount and would receive only 10 percent of their real 
value. Veljkovic also opposed the individual and property 
compensation caps.  He was supported by the Serbian League 
representatives Amcit George Ilic and Branislav Trajkovic, The 
League for the Protection of Private Property representative 
Slavenko Grgurevic, and by The Association of Jewish Municipalities 
in Serbia.  Both organizations support the idea of a Restitution 
Fund in which the government would give claimants parcels of 
premium, newly developed commercial and residential real estate. 
 
MALA FIDE VS. GOOD FAITH DISPOSAL 
--------------------------------- 
 
¶14.  There were many complaints from experts, as well as from 
government representatives, on the section of the draft that states 
"disposal of seized property after June 8, 2005, when the Law on 
Seized Property Reporting and Recording was enacted shall be 
considered as "mala fide" on the part of the buyer and the seller, 
so that they shall be liable for losses sustained."  This means that 
property acquired and sold before June 2005 (i.e. nationalized 
property during communism and cheaply sold property during the 
Milosevic period) should be considered as good faith disposal. 
However, property sold on the open market through the privatization 
process after June 2005 should be considered mala fide disposal.  In 
the mala fide disposal, either the government or the new buyer will 
be responsible for compensating the original landowner.  It is 
unclear as to who would make this determination.  Rajna Andric, 
Director of the Deposit Insurance Agency, and Luka Andric, State 
Secretary for Privatization at the Ministry for Economy and Regional 
 
SIPDIS 
Development said that the law would be retroactive to include 
bankruptcy and privatization cases.  Such cases would be revisited 
to determine whether the buyer or the state will return or 
compensate the original landowners.  Djordje Vukotic from the 
Secretariat of the Council for Regulatory Reform argued that the 
 
SIPDIS 
Serbia's mala fide clauses in bankruptcy and privatization cases 
would not hold up in the European Court of Human Rights in 
Strasburg. 
 
¶15.  Parivodic explained that any sale after June 8, 2005, should be 
considered as mala fide on the part of the buyer and the seller 
because the Law on Seized Property Reporting gave legal assurance 
that a restitution law would be adopted in the future.  He also 
expressed disappointment that the government did not adopt a law 
that prohibited selling seized property.  He added that there were 
two phases of privatization and two solutions for restitution. 
According to the 2001 Privatization Law, the government assumes the 
responsibility for compensating original landowners for property 
sold through the privatization process because the law explicitly 
mandates that 5 percent of privatization revenues be set aside for 
restitution claims.  In addition, since 2004, privatization sales 
contracts stipulate that the buyer accepted responsibility for and 
risk of future restitution claims. (Note: Privatization of 
nationalized property in Serbia is ongoing as no court can 
technically ban the sale of nationalized property since no law on 
restitution exists at this time. The privatization of socially-owned 
property is expected to conclude by the end of 2008. End Note.) 
 
¶16.  The Serbian government would like to move forward with 
restitution, but there is no consensus on the right approach.  There 
is division, not only between political parties, but within parties 
as well.  Dusan Rakitic, Harvard Club and Democratic Party (DS) 
member, told econoff on November 23, that his party is divided on 
the issue.  There are members of DS, together with Rakitic, who 
support Parivodic's restitution in-kind concept, but there are 
others, like Professor Dragor Hiber, who support financially 
compensating original landowners.  The latter is in line with the 
recently released proposed draft law on property rights, which Hiber 
helped author. 
 
Comment 
------- 
 
¶17.  Restitution is necessary for political and economic 
democratization in Serbia.  Clear title and land ownership is a key 
factor in attracting additional foreign investment and to economic 
growth.  The Ministry of Finance's effort to solicit stakeholder 
input was important in clarifying the concerns of different parties 
and increasing public participation.  It is now up to the government 
to weigh the different interests and send a draft law to parliament. 
 The type of restitution law that emerges could result in a shift in 
economic, and perhaps, political power in the future.  If 
restitution in-kind is adopted, valuable land would return to the 
former middle and upper classes of pre-communist Serbia who could 
bolster their economic and political influence.  If land is given to 
those who own buildings on the land, and not the original 
landowners, then tycoons, friends of the Milosevic regime, and those 
who bought apartments for 100 Deutsch Marks as a part of Milosevic's 
election strategy, would benefit most from the law.  Given the 
interests at stake and divisions about the best solution; it is 
unlikely the government will pass a law before local elections, 
which are now expected in May 2008.  End Comment. 
 
PEDERSON