US embassy cable - 03ZAGREB491

C O N F I D E N T I A L SECTION 01 OF 04 ZAGREB 000491 
 
SIPDIS 
 
TREASURY FOR VIMAL ATUKORALA 
STATE PASS USAID E&E 
ROME FOR MAUREEN GREWE 
 
E.O. 12958: DECL: 02/13/2013 
TAGS: ECON, EFIN, EAID, EAGR, EFIN, EAID, EAGR, EFIN, EAID, EAGR, EFIN, EAID, EAGR, HR, HRECON, Econ/Privatization 
SUBJECT: CROATIAN PRIVATIZATION HITS ROADBLOCK; 
IMPLICATIONS FOR IMF, WORLD BANK PROGRAMS 
 
REF: A. ZAGREB 199 (NOTAL) 
 
     B. ZAGREB 326 (NOTAL) 
     C. 02 ZAGREB 3045 
 
CLASSIFIED BY: ECONOMIC OFFICER ISABELLA DETWILER, REASONS 1.5 (B AND D 
) 
 
SUMMARY 
-------- 
 
1.  (SBU) THE POLITICAL CONFLICT OVER THE ABORTED 
PRIVATIZATION OF THE SUNCANI HVAR HOTEL GROUP, REPORTED REFS 
A AND B, IS HAMPERING PROGRESS ON THE REST OF THE PORTFOLIO 
OF THE CROATIAN PRIVATIZATION FUND (CPF) AND MORE GENERALLY 
ON CROATIA'S WHOLE ECONOMIC REFORM PROGRAM.  THE ANIMUS 
TOWARD PRIVATIZATION THAT CONTRIBUTED IN PART TO THE SUNCANI 
HVAR CRISIS, TOGETHER WITH UNREALISTIC EXPECTATIONS, IS ALSO 
CASTING DOUBT ON THE VIABILITY OF THE PARTIAL PRIVATIZATION 
OF 25 PERCENT PLUS ONE SHARE OF THE STATE OIL COMPANY, INA. 
WITH PRIVATIZATION RECEIPTS DOWN, THIS COULD RAISE SERIOUS 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00491  01 OF 04  070943Z 
CONCERNS ABOUT CROATIA'S ABILITY TO FULFILL THE CONDITIONS OF 
ITS PRECAUTIONARY STAND-BY ARRANGEMENT (REF C).  ALSO IN 
DOUBT IS THE GOC'S ABILITY TO SATISFY WORLD BANK CONDITIONS 
FOR ITS STRUCTURAL ADJUSTMENT LOAN.  END SUMMARY. 
 
SUNCANI HVAR EPISODE CASTING LONG SHADOW 
---------------------------------------- 
 
2.  (C) WHILE RUMORS THAT PERSONAL INTEREST ON THE PART OF 
PROMINENT HSS (CROATIAN PEASANTS PARTY) MEMBERS PLAYED A KEY 
ROLE IN THE CANCELLATION OF THE INTERNATIONAL TENDER FOR 
SUNCANI HVAR ARE INTRIGUING, THERE IS NO DOUBT THAT GENERAL 
SUSPICION OF PRIVATIZATION IN THE RULING COALITION -- 
PARTICULARLY IN THE HSS -- ALSO PLAYED A ROLE.  HNS (CROATIAN 
PEOPLES' PARTY) PRESIDENT, VESNA PUSIC, TOLD THE AMBASSADOR 
ON FEBRUARY 25 THAT, WHILE THERE WERE ERRORS IN THE 
PREPARATION OF DECISION DOCUMENTS FOR THE SUNCANI HVAR 
TENDER, THEY DID NOT MERIT LEVEL OF REACTION THE SALE 
RECEIVED. 
 
3.  (C) WHILE MOST OF OUR GOC CONTACTS AT THE WORKING LEVEL 
IN THE PRIME MINISTER'S OFFICE AND THE MINISTRIES OF TOURISM, 
ECONOMY AND FINANCE UNDERSTAND THE NECESSITY OF ATTRACTING 
FOREIGN INVESTMENT, WORLD-CLASS TECHNOLOGY AND MARKETING 
KNOW-HOW IN TOURISM, THE GENERAL PUBLIC THINKS THAT 
PRIVATIZATION OFTEN EQUALS CORRUPTION AND THAT, IF 
PRIVATIZATION MUST OCCUR, CROATIANS SHOULD BE GIVEN 
PREFERENCE IN ANY TENDERS.  SALES OF COASTAL ASSETS ARE 
PARTICULARLY CONTROVERSIAL.  AND SALES TO SLOVENIANS -- ABOUT 
WHOM CROATS HAVE A SIZABLE CHIP ON THEIR COLLECTIVE SHOULDER 
-- ARE PARTICULARLY DIFFICULT TO ACCEPT. 
                       CONFIDENTIAL 
 
PAGE 04        ZAGREB  00491  01 OF 04  070943Z 
 
4.  (U) A COMMISSION OF THREE MINISTERS WAS TECHNICALLY 
APPOINTED TO "REVIEW" THE TENDER FOR THE SALE OF SUNCANI 
HVAR.  WHEN A WEEK LATER THE COMMISSION ANNOUNCED THE 
CANCELLATION OF THE SALE, NO ONE WAS SURPRISED.  THE OFFICIAL 
RESOLUTION ON THE CANCELLATION CONTAINED NO EXPLANATION OF 
WHY THE INTERNATIONAL TENDER WAS CANCELLED, BUT CITED SIMPLY 
"OMISSIONS" OR "FAILURES."  IN A POLITICAL FLOURISH, THE 
STATEMENT, SIGNED BY THE PRIME MINISTER, DISSOLVED THE 
SUPERVISORY BOARD OF THE PRIVATIZATION FUND AND RELIEVED OF 
THEIR DUTIES DEPUTY PRIME MINISTER SLAVKO LINIC, SDP (RULING 
SOCIAL DEMOCRAT) STALWART AND PRIME PROMOTER OF 
PRIVATIZATION, MINISTER OF AGRICULTURE BOZIDAR PANKRETIC 
(HSS), MINISTER OF TOURISM PAVE ZUPAN RUSKOVIC 
(NON-PARTISAN), MINISTER OF FINANCE CRKVENAC (SDP) AND 
MINISTER OF ECONOMY JURCIC (NON-PARTISAN). 
 
5.  (SBU) THE HOLLOWNESS OF THIS GESTURE IS BETRAYED BY THE 
FACT THAT THE LAST PARAGRAPH OF THE RESOLUTION TASKS THE 
MINISTRY OF ECONOMY -- WHOSE HEAD WAS JUST RELIEVED OF HIS 
DUTIES ON THE SUPERVISORY BOARD BECAUSE OF "OMISSIONS" -- TO 
DRAW UP A NEW LAW REFORMING THE PRIVATIZATION FUND. 
 
6.  (SBU) SINCE THE "OMISSIONS" WERE CONVENIENTLY NEVER 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ1061 
 
PAGE 01        ZAGREB  00491  02 OF 04  070944Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AF-00    AGRE-00  AID-00   CEA-01   CIAE-00 
      COME-00  CTME-00  INL-00   DODE-00  DOTE-00  PERC-00  SRPP-00 
      EB-00    EXIM-01  E-00     FAAE-00  FBIE-00  VC-00    FRB-00 
      H-01     TEDE-00  INR-00   ITC-01   JUSE-00  LAB-01   L-00 
      VCE-00   MOFM-05  MOF-01   AC-01    NSAE-00  NSCE-00  OMB-01 
      OPIC-01  ACE-00   P-00     SP-00    SSO-00   STR-00   USIE-00 
      EPAE-00  PRM-00   DRL-01   G-00     NFAT-00  SAS-00   SWCI-00 
        /015W 
                  ------------------40A04C  070944Z /38 
R 070931Z MAR 03 
FM AMEMBASSY ZAGREB 
TO SECSTATE WASHDC 9615 
DEPT OF TREASURY WASHDC 
INFO AMEMBASSY ATHENS 
AMEMBASSY BELGRADE 
AMEMBASSY BRATISLAVA 
AMEMBASSY BUCHAREST 
AMEMBASSY BUDAPEST 
AMEMBASSY LJUBLJANA 
AMEMBASSY ROME 
AMEMBASSY SARAJEVO 
AMEMBASSY SKOPJE 
AMEMBASSY SOFIA 
AMEMBASSY TIRANA 
AMEMBASSY VIENNA 
USEU BRUSSELS 
 
                       CONFIDENTIAL 
 
PAGE 02        ZAGREB  00491  02 OF 04  070944Z 
C O N F I D E N T I A L SECTION 02 OF 04 ZAGREB 000491 
 
SIPDIS 
 
TREASURY FOR VIMAL ATUKORALA 
STATE PASS USAID E&E 
ROME FOR MAUREEN GREWE 
 
E.O. 12958: DECL: 02/13/2013 
TAGS: ECON, EFIN, EAID, EAGR, HR 
SUBJECT: CROATIAN PRIVATIZATION HITS ROADBLOCK; 
IMPLICATIONS FOR IMF, WORLD BANK PROGRAMS 
 
DEFINED, IT IS IMPOSSIBLE TO SAY WHETHER THE RESULTING 
PROPOSAL FOR "REFORMING" THE CPF ADDRESSES THEM.  THE CURRENT 
PROPOSAL CIRCULATING EXPANDS THE SCOPE OF THE CPF'S MANDATE 
TO INCLUDE DISPOSAL OF STATE-OWNED REAL ESTATE AND TO BECOME 
SOMETHING OF AN INVESTMENT AND EXPORT PROMOTION AGENCY.  THE 
PLAN APPEARS TO BE A HASTILY DUSTED-OFF VERSION OF ONE 
ORIGINALLY DEVELOPED UNDER EX-PRESIDENT OF THE PRIVATIZATION 
FUND AND LATER MINISTER OF ECONOMY, HRVOJE VOJKOVIC.  WHILE 
WE HAVE NOT FULLY EVALUATED THE PLAN, ONE IMMEDIATELY EVIDENT 
FLAW IS THAT IT DUPLICATES FUNCTIONS OF EXISTING AGENCIES, 
ESPECIALLY THE NEWLY-CREATED AGENCY FOR EXPORT AND INVESTMENT 
PROMOTION.  THE NEW PLAN WILL REQUIRE CONSIDERABLE PERSONNEL 
AND FINANCIAL RESOURCES AND TAKE SOME TIME TO GET UP AND 
RUNNING. 
 
7.  (SBU) IN THE MEANTIME, WITHOUT A SUPERVISORY BOARD THE 
CPF CANNOT APPROVE NEW TENDERS.  IT CAN CARRY OUT SOME 
ROUTINE BUSINESS, SUCH AS SELLING ON THE STOCK EXCHANGES 
PACKAGES OF MINORITY SHARES (USUALLY BOUGHT BY THE MAJORITY 
SHAREHOLDERS), AND DOING THE PREPARATORY WORK FOR THE 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00491  02 OF 04  070944Z 
TENDERING OF COMPANIES, MUCH OF IT WITH THE HELP OF USAID 
CONTRACTORS.  THE GOVERNMENT IS CASTING ABOUT TO FIND SOME 
WAY TO CONTINUE WITH THE MOST PRESSING ITEMS IN THE 
PRIVATIZATION PORTFOLIO -- INCLUDING SELLING OFF A NUMBER OF 
STATE AGRICULTURAL COMPANIES (AGROKOMBINATS) THAT ARE 
BASICALLY BANKRUPT.  THE STATE DOES NOT EXPECT TO EARN MUCH 
REVENUE FROM THE SALE OF THESE COMPANIES, BUT DOES HOPE THAT 
THE AGROKOMBINATS WILL, IN AT LEAST SOME CASES, RECEIVE 
DESPERATELY NEEDED INJECTIONS OF CAPITAL AND MANAGEMENT 
KNOW-HOW. 
 
8.   (SBU) IF THESE COMPANIES ARE FORCED TO SHUT DOWN, 
THOUSANDS OF RURAL WORKERS COULD BE LEFT WITHOUT JOBS -- 
HARDLY A DESIRABLE RESULT FOR THE RURAL-BASED HSS.  IN AT 
LEAST ONE CASE, THERE ARE ATTRACTIVE DOMESTIC BIDDERS WAITING 
IN THE WINGS; IN ANOTHER A MANAGEMENT-EMPLOYEE BUYOUT WAS IN 
THE WORKS.  THERE WAS SOME DISCUSSION OF HAVING THE CABINET 
APPROVE THESE TENDERS DIRECTLY.  THE IDEA CURRENTLY BEING 
FLOATED IS TO APPOINT AN INTERIM BOARD TO APPROVE A LIMITED 
NUMBER OF PRIORITY TENDERS.  ONE THING IS CLEAR -- ONLY 
TENDERS WITHOUT A WHIFF OF CONTROVERSY COULD BE APPROVED. 
 
HEADACHES FOR THE WORLD BANK 
---------------------------- 
 
9.  (SBU) IF THE AGROKOMBINATS ARE NOT PRIVATIZED, THERE WILL 
BE ENORMOUS PRESSURE FOR THE GOVERNMENT TO INCREASE 
SUBSIDIES.  IN WHAT IS AN ELECTION YEAR, THE GOVERNMENT MAY 
CAVE.  THIS WOULD PUT PRESSURE ON THE GOVERNMENT'S BUDGET, 
PUSHING IT ABOVE ITS FIVE PERCENT OF GDP DEFICIT TARGET -- 
THEREBY IMPERILING CROATIA'S STANDBY ARRANGEMENT WITH THE IMF 
                       CONFIDENTIAL 
 
PAGE 04        ZAGREB  00491  02 OF 04  070944Z 
AND THE DISBURSEMENT OF THE SECOND TRANCHE OF THE WORLD 
BANK'S STRUCTURAL ADJUSTMENT LOAN.  WORLD BANK SOURCES HERE 
SUSPECT THAT THE GOVERNMENT MIGHT MISS ITS SUBSIDY REDUCTION 
TARGET, BUT TOLD US THEY HOPE FOR A STRONG SHOWING ON THE 
GOC'S OTHER PRIOR ACTIONS.  THIS IS FAR FROM CERTAIN, AS THE 
UNIONS GEAR UP TO OPPOSE THE DRAFT CHANGES TO THE LABOR LAW, 
WHICH AS SUBMITTED TO THE PARLIAMENT, ONLY MINIMALLY MEETS 
WORLD BANK CONDITIONS. 
 
CONCERNS ABOUT "THE BIG ONE" 
---------------------------- 
 
10.  (C) MEANWHILE, PRIVATIZATION PROBLEMS CAST A BIG CLOUD 
OVER INA, THE STATE PETROLEUM COMPANY, 25 PERCENT OF WHICH 
THE GOC WOULD LIKE TO SELL OFF.  WHILE THE INA PRIVATIZATION 
DOES NOT FALL UNDER THE PRIVATIZATION FUND, IT IS AT LEAST AS 
POLITICAL AS THE "NON-STRATEGIC" PRIVATIZATIONS.  THE 
GOVERNMENT IS KEEPING A TIGHT LID ON INFORMATION ABOUT THE 
BIDS, BUT THE RUMORS ARE NOT GOOD.  WE INITIALLY HEARD THAT 
THE RUSSIAN BID WAS THE BEST OF A BAD LOT, BUT WOULD REQUIRE 
THE SHUTTING DOWN OF THE REFINERY IN SISAK (A DEATH KNELL FOR 
THIS TOWN ALREADY STRUGGLING UNDER THE CLOSURE OF ITS 
OBSOLETE STEEL MILL), AND DANGEROUS POLITICALLY.  THE RUSSIAN 
BID WOULD ALSO REQUIRE THAT INA PUT UP AN EVEN GREATER AMOUNT 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ1063 
 
PAGE 01        ZAGREB  00491  03 OF 04  070944Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AF-00    AGRE-00  AID-00   CEA-01   CIAE-00 
      COME-00  CTME-00  INL-00   DODE-00  DOTE-00  PERC-00  SRPP-00 
      EB-00    EXIM-01  E-00     FAAE-00  FBIE-00  VC-00    FRB-00 
      H-01     TEDE-00  INR-00   ITC-01   JUSE-00  LAB-01   L-00 
      VCE-00   MOFM-05  MOF-01   AC-01    NSAE-00  NSCE-00  OMB-01 
      OPIC-01  ACE-00   P-00     SP-00    SSO-00   STR-00   USIE-00 
      EPAE-00  PRM-00   DRL-01   G-00     NFAT-00  SAS-00   SWCI-00 
        /015W 
                  ------------------40A05A  070944Z /38 
R 070931Z MAR 03 
FM AMEMBASSY ZAGREB 
TO SECSTATE WASHDC 9616 
DEPT OF TREASURY WASHDC 
INFO AMEMBASSY ATHENS 
AMEMBASSY BELGRADE 
AMEMBASSY BRATISLAVA 
AMEMBASSY BUCHAREST 
AMEMBASSY BUDAPEST 
AMEMBASSY LJUBLJANA 
AMEMBASSY ROME 
AMEMBASSY SARAJEVO 
AMEMBASSY SKOPJE 
AMEMBASSY SOFIA 
AMEMBASSY TIRANA 
AMEMBASSY VIENNA 
USEU BRUSSELS 
 
                       CONFIDENTIAL 
 
PAGE 02        ZAGREB  00491  03 OF 04  070944Z 
C O N F I D E N T I A L SECTION 03 OF 04 ZAGREB 000491 
 
SIPDIS 
 
TREASURY FOR VIMAL ATUKORALA 
STATE PASS USAID E&E 
ROME FOR MAUREEN GREWE 
 
E.O. 12958: DECL: 02/13/2013 
TAGS: ECON, EFIN, EAID, EAGR, HR 
SUBJECT: CROATIAN PRIVATIZATION HITS ROADBLOCK; 
IMPLICATIONS FOR IMF, WORLD BANK PROGRAMS 
 
OF CAPITAL INVESTMENT.  AND THE OTHER BIDS WERE DESCRIBED AS 
EVEN MORE PROBLEMATIC.  HOWEVER, THE GOVERNMENT IS 
NEGOTIATING INTENSELY WITH AUSTRIA'S OMV, AND HAS YET TO 
BEGIN NEGOTIATIONS WITH HUNGARY'S MOL.  LATELY, THE 
SPIN-DOCTORS HAVE BEEN LEAKING THAT THE OMV BID IS THE 
FAVORED ONE. 
 
11.  (SBU) UNFORTUNATELY, THE GOC HAS PROBABLY DONE A BETTER 
JOB CONVINCING THE CROATIAN PUBLIC THAN THE BIDDERS THAT INA 
IS A CROWN JEWEL -- CLEANING UP ITS BOOKS BY WRITING OFF 
DEBT, TRUMPETING THE "RETURN TO PROFITABILITY" OF A COMPANY 
THAT IS SLOWLY DETERIORATING -- AND THE RESULT WILL BE THAT 
ANY RATIONAL OFFER WILL PROBABLY BE ATTACKED AS SELLING OFF 
CROATIA'S PATRIMONY FOR A SONG.  IN THE CURRENT POLITICAL 
CLIMATE, THERE WILL NEED TO BE NEAR-UNANIMITY ON THE TENDER 
DECISION.  WE HAVE SEEN THIS MOVIE BEFORE -- LAST YEAR THE 
GOVERNMENT'S UNREALISTIC EXPECTATIONS CONCERNING THE PRICE 
TAG FOR STATE-OWNED INSURER CROATIA OSIGURANJE SCARED AWAY 
INVESTORS, INCLUDING ALLIANZ. 
 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00491  03 OF 04  070944Z 
12.  (SBU) FINDING A STRATEGIC PARTNER IS ESSENTIAL FOR INA; 
WITHOUT AN INJECTION OF CAPITAL, ITS REFINERIES WILL FALL 
FURTHER AND FURTHER BEHIND.  IN A FEW YEARS, IT WILL BE 
UNABLE TO EXPORT TO WESTERN EUROPE BECAUSE IT WILL NOT MEET 
EU QUALITY STANDARDS.  INA ALSO NEEDS THE MARKETING LINKS 
THAT A GOOD PARTNER WOULD BRING.  NEVERTHELESS, THE 
GOVERNMENT, WITH THE CONNIVANCE OF THE MANAGEMENT OF INA, IS 
PUTTING CONDITIONS ON THE SALE -- SUCH AS RETENTION OF ALL 
EMPLOYEES FOR THREE YEARS -- THAT MAKE THIS PARTIAL SALE 
PROBLEMATIC. 
 
13.  (C) IF THE INA SALE DOES NOT GO THROUGH, THE GOC'S 
PROGRAM WITH THE IMF COULD BE IN TROUBLE.  THE IMF LETTER OF 
INTENT (LOI) SETS A DEADLINE OF ANNOUNCING THE RESULTS OF THE 
TENDER BY THIS MONTH.  UNLESS A SWEET DEAL IS NEGOTIATED, THE 
RESULT COULD BE THAT THE GOVERNMENT REJECTS ALL THE BIDS. 
THE LOI GOES ON TO SAY THAT IF PRIVATIZATION REVENUES (1.2 
PERCENT OF GDP FOR THIS YEAR) FALL SHORT, THEN THE GOVERNMENT 
MUST CUT SPENDING, IN ORDER TO KEEP THE DEBT LOAD FROM 
RISING.  WHEN WE ASKED THE IMF REPRESENTATIVE WHETHER HE 
THOUGHT THE GOC COULD MAKE ITS REVENUE TARGETS WITHOUT A 
SUCCESSFUL INA PRIVATIZATION, HE THOUGHT IT UNLIKELY. 
ADDITIONALLY, EVEN IF THERE ARE HIGHER THAN PROJECTED TAX 
REVENUES, THINGS ARE NOT LOOKING TOO GOOD ON THE EXPENDITURE 
FRONT, SINCE THE GOC'S DOWNSIZING OF THE MINISTRY OF DEFENSE 
IS BEHIND SCHEDULE AS WELL. 
 
A SILVER LINING 
--------------- 
 
14.  (SBU) A YEAR AND A HALF AGO, WHEN THE USG OFFERED 
                       CONFIDENTIAL 
 
PAGE 04        ZAGREB  00491  03 OF 04  070944Z 
ASSISTANCE TO THE GOC FOR PUBLIC EDUCATION OF THE 
PRIVATIZATION PROCESS, THE GOVERNMENT WAS RESISTANT.  A 
LOW-KEY CAMPAIGN BEGAN WITH ONLY THE SUPPORT OF THE DEPUTY 
PRIME MINISTER'S OFFICE AND THE PRESIDENT OF THE CPF.  WHILE 
PUBLIC OPINION POLLS SHOW LITTLE CHANGE IN ATTITUDES BY A 
PUBLIC REFLEXIVELY OPPOSED TO PRIVATIZATION -- DECADES OF 
SOCIALISM UNDER TITO AND YEARS OF CRONY CAPITALISM UNDER 
TUDJMAN HAVE TAKEN THEIR TOLL -- ENTHUSIASM FOR THE EDUCATION 
PROCESS SPREAD AMONG OTHER PARTIES OF THE RULING COALITIO,N 
AND THE GOC EXPANDED THE PUBLIC EDUCATION CAMPAIGN WITH ITS 
OWN FINANCIAL RESOURCES.  JOURNALISTS INCLUDED IN THE 
EDUCATIONAL PROCESS WERE EXPOSED TO PRIVATIZATION-REPORTING 
JOURNALISTS IN NEIGHBORING HUNGARY, AND ON THE SUNCANI HVAR 
STORY, THEY DEMONSTRATED THE MOST BALANCED REPORTING IN THE 
HISTORY OF CROATIAN PRIVATIZATION. 
 
COMMENT 
------- 
 
15.  (C) THE TWO MAIN COALITION PARTIES NEARLY DISSOLVED THE 
GOVERNMENT AND SOUGHT EARLY ELECTIONS OVER SUNCANI HVAR. 
WHILE WE KNOW THAT THE SDP AND HSS BURIED THE HATCHET TO 
AVOID EARLY ELECTIONS, THE LACK OF PUBLIC DEBATE OVER THE 
MERITS OF WHAT BROUGHT DOWN THE CROATIAN PRIVATIZATION FUND 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ1065 
 
PAGE 01        ZAGREB  00491  04 OF 04  070944Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AF-00    AGRE-00  AID-00   CEA-01   CIAE-00 
      COME-00  CTME-00  INL-00   DODE-00  DOTE-00  PERC-00  SRPP-00 
      EB-00    EXIM-01  E-00     FAAE-00  FBIE-00  VC-00    FRB-00 
      H-01     TEDE-00  INR-00   ITC-01   JUSE-00  LAB-01   L-00 
      VCE-00   MOFM-05  MOF-01   AC-01    NSAE-00  NSCE-00  OMB-01 
      OPIC-01  ACE-00   P-00     SP-00    SSO-00   STR-00   USIE-00 
      EPAE-00  PRM-00   DRL-01   G-00     NFAT-00  SAS-00   SWCI-00 
        /015W 
                  ------------------40A061  070944Z /38 
R 070931Z MAR 03 
FM AMEMBASSY ZAGREB 
TO SECSTATE WASHDC 9617 
DEPT OF TREASURY WASHDC 
INFO AMEMBASSY ATHENS 
AMEMBASSY BELGRADE 
AMEMBASSY BRATISLAVA 
AMEMBASSY BUCHAREST 
AMEMBASSY BUDAPEST 
AMEMBASSY LJUBLJANA 
AMEMBASSY ROME 
AMEMBASSY SARAJEVO 
AMEMBASSY SKOPJE 
AMEMBASSY SOFIA 
AMEMBASSY TIRANA 
AMEMBASSY VIENNA 
USEU BRUSSELS 
 
                       CONFIDENTIAL 
 
PAGE 02        ZAGREB  00491  04 OF 04  070944Z 
C O N F I D E N T I A L SECTION 04 OF 04 ZAGREB 000491 
 
SIPDIS 
 
TREASURY FOR VIMAL ATUKORALA 
STATE PASS USAID E&E 
ROME FOR MAUREEN GREWE 
 
E.O. 12958: DECL: 02/13/2013 
TAGS: ECON, EFIN, EAID, EAGR, HR 
SUBJECT: CROATIAN PRIVATIZATION HITS ROADBLOCK; 
IMPLICATIONS FOR IMF, WORLD BANK PROGRAMS 
 
HAS ADDED EVEN MORE DOUBT TO THOSE MISTRUSTFUL OF ANY SORT OF 
PRIVATIZATION.  THIS IS A GOVERNMENT WITH MANY SOCIALIST-ERA 
DINOSAURS, INCLUDING AT TIMES THE PRIME MINISTER, WHO ARE NOT 
FIRMLY CONVINCED OF THE NECESSITY OF MARKET-ORIENTED REFORMS. 
 THUS WHEN PUSH-COMES-TO-SHOVE, SHORT-TERM POLITICAL 
CONSIDERATIONS EASILY TRUMP ECONOMIC REFORM.  IT APPEARS 
THAT, IN WHAT IS A PRE-ELECTION PERIOD, ANY PRIVATIZATION 
THAT COULD RESULT IN LAYOFFS, INVOLVE FOREIGN OWNERSHIP, OR 
EVEN WHICH COULD BE SEEN AS PROVIDING COMPETITION TO DOMESTIC 
FIRMS, WILL COME UNDER ATTACK.  ELECTION YEAR CALCULATIONS 
WILL PROBABLY LEAD TO VERY MARGINAL PROGRESS ON 
PRIVATIZATION, MOUNTING DEBT, AND LOST TIME ON ECONOMIC 
REFORM. 
ROSSIN 
 
                       CONFIDENTIAL