VZCZCXRO2304
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBW #0788/01 2170823
ZNR UUUUU ZZH
R 040823Z AUG 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0252
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000788 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EINV SR MW
SUBJECT: SERBIA: PRIVATIZATION WELL ON ITS WAY 
 
Ref: a) Belgrade 0460 
 
SUMMARY 
------- 
 
¶1.  On July 30, the Embassy met with State Secretary of Economy and 
Privatization Nebojsa Ciric of the Ministry of Economy and Regional 
Development.  Fresh from negotiations with Fiat, Ciric was confident 
that the remaining 450 state-owned will soon be privatized while the 
400 socially-owned companies would be privatized, or begin the 
process, by the end of 2008 as legally stipulated.  A select few 
large companies will sale via a tender, while most others will be 
auctioned off.  Those with no bidders, however, will be bankrupt. 
Although the NIS deal is expected to be ratified in September, the 
Ministry of Economy hopes to "improve" the deal with a higher 
purchase price and investment.  End Summary. 
 
THE PROCESS, A WORK IN PROGRESS 
-------------------------------- 
 
¶2.  Though all the technical details are not final, according to 
State Secretary of Economy and Privatization Nebojsa Ciric of the 
Ministry of Economy and Regional Development, select large socially 
and state-owned firms will be sold through a tender process while 
others will be auctioned off.  Companies without buyers will enter 
bankruptcy.  Tenders will call for strategic partnerships between 
the government and private investors which Ciric admits is not 
"really privatization, but something in between." Ciric quickly 
added, however, that the strategic partner would have full 
management control of the company, despite their initial minority 
share holding. 
 
¶3.  Ciric explained that over time and with accumulated 
paid-in-capital investment, strategic partners will move from being 
20-30% shareholders to acquiring 70-80% ownership.  Ciric did not 
offer a timeframe for this ownership reversal, however.  The 
government was not looking to make money in the short term, but over 
time through dividend payments and a payout when the government 
exited the venture.  Ciric cautioned that the GOS is still 
formulating its approach with the help of advisors Unicredit, 
Deloitte and Touche, and Harrison Solicitors. 
 
DESIRE FOR A BETTER NIS-GAZPROM DEAL 
------------------------------------ 
 
¶4.  Ciric echoed previous statements made by Economy and Regional 
Development Minister Mladjan Dinkic that the deal between 
state-owned oil and gas company NIS and Gazprom should be revisited 
as the $640 million price tag and $800 million investment was too 
low.  As a result, on July 31 the government announced it would hire 
an advisor to assess NIS' value.  Merrill Lynch (with Raifeissen 
Bank) was the previous advisor, but according to Ciric, Merrill 
Lynch "did not perform well and did not act like an advisor to the 
State."  Ciric added that the government was happy with the South 
Stream pipeline and gas storage portion of the NIS-Gazprom deal and 
said he did not think anyone other than the Russians could provide 
them.  Ciric admitted that it was not clear what exactly was for 
sale in NIS which was something the new deal advisor would need to 
clarify.  Ciric expected parliament to pass the deal in September 
and to begin negotiating a "better" contract. 
 
OTHER BIG DEALS WELL ON THEIR WAY 
--------------------------------- 
 
¶5.  Ciric expects to sign the final agreement with Fiat (Reftel A) 
within a week.  The Fiat deal, according to Ciric, has piqued the 
interest of an unnamed Western European automaker who was 
considering greenfield investment in Serbia as a way to export to 
Russia through the Serbia-Russian free trade agreement.  JAT Airways 
is going on the market at a starting price of $81.6 million, down 
from the anticipated $120 million.  Ciric wanted to sell it for "1 
euro" given its heavy indebtedness and admitted that selling JAT now 
was bad timing because of slacking global financial market.  He 
believes Russia's Aeroflot, Air India, Icelandair, Italy's Air One 
and German's Air Berlin are still interested in JAT. 
 
COMMENT 
------- 
 
¶6.  Despite a failure rate of 20-30% with privatizations, the 
government still acts committed to quickly concluding sale of 
socially and state-owned enterprises, averaging 50-60 transactions 
per month.  The lessons learned from previous failures seem to have 
birthed the strategic partnership approach with a gradual shift to 
private investor ownership.  Given a number of recent protests by 
workers against their new private employers, the strategy may be 
socially more palatable.  Minister Dinkic - known for his 
decisiveness, high energy, and stubbornness - promises to be a 
 
BELGRADE 00000788  002 OF 002 
 
 
formidable negotiator opposite the Russians in achieving a better 
NIS deal for Serbia.  End Comment. 
 
BRUSH