VZCZCXRO9848
RR RUEHBW
DE RUEHBW #0460/01 1301524
ZNR UUUUU ZZH
R 091524Z MAY 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0268
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBW/AMEMBASSY BELGRADE 0379

UNCLAS SECTION 01 OF 02 BELGRADE 000460 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EINV EIND ELTN SR MW
SUBJECT: ON EVE OF ELECTIONS SERBIA AND FIAT SIGN LUCRATIVE MOU 
 
SUMMARY 
 
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¶1.  The GOS and Fiat signed a memorandum of understanding on 
April 30 in which Fiat would acquire 70% ownership and invest 
$1.1 billion in Kragujevac-based Zastava Autombili while the GOS 
would retain 30% ownership, invest $160 million and provide 
investment incentives to Fiat.  The deal is seen as a win-win 
for both Fiat and the current government led by Europe-leaning 
President Tadic and a positive benefit from Serbia having signed 
the controversial SAA with the EU.  This deal is particularly 
significant as it will provide jobs in the heavily 
Radical-leaning region of Kragujevac.  END SUMMARY. 
 
 
 
THE DEAL 
 
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¶2.  On April 30, the GOS and Italian automotive firm Fiat signed 
a memorandum of understanding in which Fiat would acquire 70% of 
state-owned Zastava Automobili and invest $1.1 million in the 
Kragujevac factory to produce two new car models.  In return, 
GOS would invest $160 million and retain 30% of the company. 
The government upped its ante on May 6 when the mayor of 
Kragujevac signed a memorandum of cooperation with Fiat agreeing 
to exempt Fiat from municipal taxes and fees over the next 10 
years and provide free land if Fiat decided to expand Zastava's 
facilities.  Economy and Regional Development Minister Mladjan 
Dinkic said the GOS and Fiat would sign a binding contract on 
the joint investment by the end of June 2008.  The media also 
reported that the government signed a protocol with Zastava's 
workers' unions that would ensure no layoffs over the next five 
years and offer severance payments to workers who voluntarily 
quit.  The protocol is to be included in the future contract 
with Fiat. 
 
 
 
MUTUALLY BENEFICIAL 
 
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¶3.  Jasna Matic, State Secretary in the Ministry of Economy and 
Regional Development, told econoff on April 29 that the deal was 
win-win for both Fiat and the GOS.  Fiat wanted and needed to 
expand to meet growing demand.  Its sales increased 25% in the 
last 3 years and are expected to rise further as high oil prices 
drive increased demand for smaller, fuel efficient cars.  The 
company has found it difficult to attract industrial workers in 
Europe where many prefer to work in the service sector rather 
than in heavy industry.  Kragujevac, by contrast, has many 
skilled and unemployed auto workers. 
 
 
 
¶4.  For Serbia, according to Matic, the Fiat deal was a godsend. 
 The GOS spends $1.6 million monthly in programs to support 
laid-off workers and has given an additional $1.8 million this 
year in subsidies to keep Zastava artificially alive.  Fiat was 
not Zastava's only suitor; Volkswagen (VW) also expressed 
interest.  Matic said VW was more interested in a green-field 
investment in Kragujevac.  However, when VW representatives 
asked local authorities about acquiring a large swath of land 
for development, they were told buying land would be a problem 
due to landownership disputes and claims. 
 
 
 
AND THEN THE POLITICS 
 
--------------------- 
 
 
 
¶5.  Minister Dinkic publicly linked the recent signing of the EU 
Stabilization and Association Agreement (SAA) with the Fiat deal 
saying Fiat came as soon as it heard Serbia had signed the SAA. 
Kragujevac has long been a contested political region and the 
election prospects for the Democratic Party coalition jumped 
with the MOU signing. 
 
BELGRADE 00000460  002 OF 002 
 
 
 
 
 
COMMENT 
 
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¶6.  Even though Zastava was not offered in a tender as 
originally planned, the GOS-Fiat joint venture is an excellent 
opportunity for Serbia.  The deal promises to help the 
economically devastated municipality of Kragujevac and alleviate 
Zastava's burden on the GOS' coffers.  More importantly, the 
deal is a tangible benefit that western-oriented parties have 
pointed to in the last days of the election campaign following 
Serbia's signing of the SAA and as a positive signal to 
international investors.  END COMMENT. 
MUNTER