VZCZCXRO7633
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0210/01 0711342
ZNR UUUUU ZZH
R 121342Z MAR 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1054
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 BELGRADE 000210 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON PREL EFIN EINV PGOV SR
SUBJECT: SERBIA: Serbia: How the Economic Crisis could Lead to a 
Government Crisis 
 
Ref: A) 08 Belgrade 1226  B) Belgrade 208  C) Belgrade 184 
 
SUMMARY 
------- 
 
¶1. (SBU) Politicians in Serbia are facing the increasingly sober 
reality that the global economic crisis will hit Serbia hard this 
year.  After initially trying to duck under the economic crisis 
wave, the political leadership is now resigned to the fact that 
Serbia must address the economic challenges ahead.  So far the 
disorganized opposition has failed to seize the economic situation 
to make political gains, but there will be a political cost as the 
Serbian public faces an ever grimmer economic landscape.  While a 
government reshuffle is possible this summer to cast off scapegoats, 
it is more likely that the coalition will hunker down, turn to 
populist rhetoric and blame the IMF -- and the United States --for 
hardships.  President Tadic has become more personally engaged on 
economic issues as he has realized the serious threat from the 
economic uncertainties of the coming year to the stability of the 
Serbian government.  End Summary. 
 
Mood Change with the New Year 
----------------------------- 
 
¶2. (U) Serbia's economy slowed dramatically in the last quarter of 
2008, but at the time the political leadership was still trying to 
paint a rosy picture of a Serbian economy that could avoid the storm 
in the developed markets and one minister even suggested that Serbia 
could even benefit from the crisis.  As the New Year brought clear 
evidence of the depth of the economic challenges that Serbia will 
face, politicians have begun to take a more sober public line.  They 
no longer talk of avoiding the effects of the crisis, but of 
mitigating or minimizing the crisis's effects. 
 
¶3. (U) So far, few Serbian companies have been forced to lay off 
workers or close facilities.  There has not yet been a wave of 
bankruptcies or business closures.  The banking system survived the 
initial wave of financial pressure (ref A), and while banks have 
capital, few are offering credit to new customers and firms with 
weak financial positions find it difficult to refinance debt. 
Economists are revising their economic growth estimates for 2009 
downward almost monthly.  Last November our contacts suggested that 
2-3% growth would be possible in 2009.  In January most said Serbia 
would be lucky to grow by .5 or 1% in 2009.  Now even the government 
has revised its official estimates downward and several leading 
economists suggest that Serbia's economy could shrink by up to 1% in 
¶2009.  On the streets people are concerned, but not sure how they 
will feel the crisis's effects. 
 
U.S. Steel - Crisis Effects Clear and Growing 
--------------------------------------------- 
 
¶4. (SBU) U.S. Steel is one of Serbia's largest private employers, 
and was Serbia's largest exporter.  Rick Vietch told the Ambassador 
in January that U.S. Steel did not have immediate plans to lay off 
workers, but the firm had shut down one of its two blast furnaces, 
and would have already shut down the other if the gas crisis hadn't 
slowed the company's production in the first half of January. 
Vietch said the company's wage costs in Serbia were relatively low 
so they could keep the workers busy with maintenance and finishing 
work for steel brought in from U.S. Steel's Slovakian plant, but in 
the coming months the firm might have to consider layoffs or a 
shortened work week if orders did not pick up.  As Vietch predicted, 
U.S. Steel announced on March 6 that they would implement a four day 
work week. 
 
¶5. (SBU) Zoran Drakulic of the local mining conglomerate East Point 
Holdings told us on February 11 that March through May would be a 
critical time for the Serbian economy.  Others we talk with point to 
May and June as critical months where the Serbian economy could be 
under extreme pressure. 
 
Government Reshuffle Possible? 
------------------------------ 
 
¶6. (SBU) The active Belgrade rumor mill was filled with talk of new 
elections around the New Year, but now all governing coalition 
members are reiterating that this is not an appropriate time for new 
elections.  The May-June timeframe that many contacts mention as a 
potential peak in pressure fits closely with the timing of the 
rumored government reshuffle.  A shakeup in ministerial portfolios 
could make scapegoats of one or two economy related ministers, and 
perhaps cut the number of ministries from the bloated 24 existing 
ministries.   The challenge of a reshuffle would be the very tricky 
task of rebalancing the delicate coalition balance among the various 
political alliances in the coalition.  Our contacts said that if the 
government were forced to actually cut back on the bloated public 
sector and lay off public employees, it would be a sign that the 
 
BELGRADE 00000210  002.2 OF 003 
 
 
situation had taken a very sharp turn for the worse. 
 
An Opportunity to Blame Others for Hard Decisions 
--------------------------------------------- ---- 
 
¶7. (SBU) Leading DS party-connected figures Goran Pitic, chairman of 
Societe Generale in Serbia, and Aleksandar Vlahovic, member of 
Parliament and partner in Eki Investments, both told us that the 
crisis gave the government an opportunity to freeze public sector 
wages and pensions.  The freezes would have a harsh affect on the 
public, but the economic situation gave the government an excuse to 
blame others, including the IMF, and would ultimately help to 
rebalance the economic costs to the budget of pensions and wages 
with needed funds for investment in infrastructure. 
 
¶8. (SBU) Unfortunately, while the government has taken some steps to 
address the crisis -- boosting bank deposit insurance, establishing 
a program to subsidize interest rates and share risk for business 
loans, and seeking increased support from international financial 
institutions - there is not a comprehensive strategy or a clear 
economic leader in the government.  Prime Minister Cvetkovic, Deputy 
Prime Ministers Dinkic and Djelic, and Finance Minister Dragutinovic 
all have strong economic credentials, but for different reasons each 
is limited in their ability to shape overall policy and lead the 
government and the public. 
 
¶9. (SBU) The economic pressures on the budget also offers an 
opportunity to reduce the amount of money the Serbian government 
spends in Kosovo.  Already the Serbian government has taken steps to 
reduce the salaries paid to Kosovo Serbs in Serbian government paid 
jobs from 200% of Serbian domestic salaries to 150%, and in some 
cases there are reports this will fall further.  Cutting salaries 
opens the door to attacks from opposition parties claiming that the 
government is selling out Kosovo Serbs, but it is possible the 
government could calculate that the crisis pressure on the budget is 
sufficient to justify the political risk of reducing spending on 
Kosovo. 
 
Effects Likely Deeper Outside Belgrade 
-------------------------------------- 
 
¶10. (SBU) Recently resigned State Secretary in the Finance Ministry 
Janko Guzian told us on February 12 that he believed Belgrade would 
be able to manage through the crisis, but that smaller cities in 
Serbia that were dependent on one or two factories as the engines of 
the local economy could face even more severe hardship or collapse 
as the economic climate worsened and some industries were forced to 
shut down or go into bankruptcy.  In these small cities there were 
not alternative jobs or informal economy opportunities that could 
bridge the period until economic recovery began to emerge.  Many 
smaller Serbian cities - the so-called "losers" in the privatization 
process -- have already been left behind in the Belgrade-centered 
economic growth of the past five years and now many see even the 
very small prospects for new investment disappearing. 
 
Expectations Delayed Again 
-------------------------- 
 
¶11. (U) In other discussions with contacts, and with our own staff, 
many remind us that Serbs faced much more dire financial situations 
in the past and that many Serbs were capable of adapting to severe 
economic hardship, as they did in the 1990's.  However, our staff 
noted that the Serbian economy was much different today and that 
many coping mechanisms used in the 90's would not be available to 
Serbs today with a more open economy.  Serbia also lost much of its 
best and brightest as Serbs voted with their feet and left 
Milosevic-era Serbia.  In addition, the Serbian public has suffered 
through continued delays in the high expectations that came in 2000 
with Milosevic's overthrow.  Since then, the political upheavals of 
the assassination of Prime Minister Djindjic, the seemingly endless 
election cycle, and the Kosovo crisis have all distracted successive 
governments from focusing on the economic future that other former 
Yugsolav and former Soviet-bloc countries have enjoyed since joining 
the EU. 
 
Threat of Populism 
------------------ 
 
¶12. (U) Populism is a traditional theme in Serbian politics and 
during this economic crisis the pressure for politicians to resort 
to populist rhetoric and measures is significant.  Populist and 
socialist rhetoric has been used by all of the major political 
parties and could become more common and more strident as layoffs 
and corporate bankruptcies increase.  DPM Dinkic's recently floated 
proposal for government investment in the RTB copper mine is likely 
to find support among Socialists and former Socialists, who remember 
well the populist rhetoric of the Milosevic era, as well as the 
exaggerated "good old days" of Tito's Yugoslavia with its extensive 
 
BELGRADE 00000210  003 OF 003 
 
 
social safety net.  Senior DS leader Dragoljub Micunovic recently 
emphasized to us the need for the government to maintain 
"solidarity" with the people and to support the largest 
manufacturers and exporters. 
 
¶13. (SBU) Serbian officials have welcomed foreign investors and 
regularly highlight the contributions of international firms to 
Serbia and Serbia's economy.  However, there is a potential for 
politicians to blame international firms if widespread layoffs 
occur.  One troubling indicator of the different treatment for 
international firms was that in January when U.S. Steel spoke with 
Srbijagas about the gas supply situation during the cutoff of 
Russian gas to Europe Srbijagas, and then later a government 
official both recommended that U.S. Steel contact the U.S. Embassy 
to secure additional gas supplies from Hungary. 
 
Opportunity for Labor Unrest 
---------------------------- 
 
¶14.  (U) In addition to populist rhetoric, Serbia also has a 
tradition of politicians manipulating labor unrest for nationalist 
aims.  While talk of labor demonstrations has diminished following a 
peak near the end of last year, there remain potential flashpoints 
for labor unrest.  The collective bargaining agreement (ref B) could 
be used later this year as an excuse for unions to launch protests 
against the government.  Cutbacks in subsidies to agriculture 
(tobacco subsidy cuts already resulted in small protests in Belgrade 
against the government), or on electricity and heating, or public 
transportation, could be used to rally support for demonstrations. 
These cuts could be blamed on IMF conditions or international 
pressure, but local political parties may seek to use protests to 
press a nationalist/populist agenda. 
 
President Coming to Grips with the Crisis 
----------------------------------------- 
 
¶15.  (SBU) President Tadic's comments at a March 1 session of the 
Democratic Party (DS) main board give some cause for optimism that 
Serbia's leadership is coming to grips with the magnitude of the 
looming economic crisis and is taking steps to weather the storm. 
Several sources have told us that in a closed session, Tadic harshly 
remonstrated several DS ministers by name - including FM Jeremic, 
MOD Sutanovac, Minister of Agriculture Dragin, and Minister of State 
Administration Markovic - for allowing their personal rivalries to 
spill over into state business and failing to coordinate with each 
other.  Deputy Prime Minister Djelic told us on March 2 that the DS 
main board agreed that the government needed to stabilize the 
exchange rate, but the government has few tools to use in this 
effort.  In his public comments, Tadic underscored the need for 
unity and said that early parliamentary elections would be an 
unnecessary burden on the country's economy during a time of 
economic crisis. 
 
¶16. (SBU) Because Tadic consolidation of power in his hands has 
ensured that there are no other strong leadership voices in the 
government, he has placed himself in a position as the only player 
who can rally the entire team and set an agenda across the disparate 
coalition and the rival interests in the DS.  Tadic has 
traditionally followed the path of his predecessor, Kostunica, 
largely ignoring the economy, instead focusing on political battles. 
 Recently, however, Tadic appears to have recognized that he needs 
to have a better grasp of economic issues.  In addition to meeting 
more regularly with business leaders, Tadic spent more than a day 
and a half at the annual conference of Serbian economists and 
business leaders (septel)at the Kopaonik ski resort, asking 
questions, seeking ideas and speaking frankly about the difficulties 
ahead. 
 
Comment 
------- 
 
¶17. (SBU) Serbian politicians recognize that the economic crisis 
will increase public discontent and disillusionment with the slow 
progress toward increased living standards and closer relations with 
the EU.  We expect this summer to be a peak in pressure on the 
economy and the government.  The politicians now see the economic 
perils, but they have not articulated a comprehensive strategy to 
address Serbia's economic challenges.  While a reshuffle of some 
ministers is possible to shift blame, it would be difficult 
rebalance the delicately negotiated coalition.  As a result, the 
government is likely to turn to increasingly populist rhetoric and 
point to the IMF as the bad cop, forcing tough economic choices to 
restrict spending.  None of the governing coalition parties would 
gain from forcing new elections, and all seem now to recognize that 
fact.  However, recognition of rational facts and political actions 
traditionally are not synchronized in Serbia.  End Comment. 
 
MUNTER