US embassy cable - 03ZAGREB579

C O N F I D E N T I A L SECTION 01 OF 03 ZAGREB 000579 
 
SIPDIS 
 
E.O. 12958: DECL: 03/07/2013 
TAGS: ECON, MARR, HR, MARR, HR, MARR, HR, IZ, IZECON, IZECON 
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ 
 
CLASSIFIED BY: ECONOMIC OFFICER ISABELLA DETWILER, REASONS 1.5 (B AND D 
) 
 
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SUMMARY 
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1.  (SBU) THERE IS NO REAL CONSENSUS ON HOW HOSTILITIES IN 
IRAQ COULD HURT THE CROATIAN ECONOMY.  THE LOCAL MEDIA IS 
FULL OF SPECULATION, HOWEVER, AND THE COMMENTARY AND 
"ANALYIS" OFTEN BETRAY FAMILIAR -- ANTI-WAR -- BIASES. 
TOURISM IS THE SINGLE LARGEST SOURCE OF FOREIGN REVENUE FOR 
CROATIA, AND CONTRIBUTES ABOUT 20 PERCENT OF THE GDP.  MOST 
BELIEVE THAT HOSTILITIES IN THE GULF WOULD NOT DIRECTLY 
AFFECT CROATIAN TOURISM.  THERE ARE EVEN SOME WHO BELIEVE 
HOSTILITIES WOULD HELP CROATIA BY KEEPING EUROPEAN TOURISTS, 
AFRAID TO TRAVEL FAR, CLOSE TO HOME AND ON CROATIAN BEACHES. 
HOWEVER, A TERRORIST ACT IN EUROPE -- OR WORSE, IN CROATIA 
ITSELF  -- COULD HAVE A DISASTEROUS NEGATIVE EFFECT ON 
TOURISM AND THE ECONOMY. 
 
2.  (SBU) MOST LOCAL ECONOMISTS BELIEVE THAT, WHILE A 
PROLONGED PERIOD OF HIGHER OIL PRICES WOULD ALMOST CERTAINLY 
HAVE AN EFFECT ON THE ECONOMY, A SHORT BUMP-UP IN PRICES 
WOULD HAVE ONLY A MARGINAL EFFECT.  PRE-WAR JITTERS MAY ALSO 
HAVE A HARD-TO-MEASURE EFFECT ON CONSUMPTION AND EXPORTS. 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00579  01 OF 03  141724Z 
END SUMMARY. 
 
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EFFECT ON TOURISM 
----------------- 
 
3.  (U) THE HEAD OF THE CROATIAN EMPLOYERS' ASSOCIATION 
SPECULATED THAT, IF SABOTAGE OR TERRORISM OCCURRED ANYWHERE 
IN EUROPE, TOURISM IN CROATIA COULD SUFFER.  HE CITED AS AN 
EXTREME EXAMPLE THE SITUATION A FEW YEARS AGO WHEN THE NATO 
CAMPAIGN OVER NEARBY KOSOVO WAS LAUNCHED AND WESTERN EUROPEAN 
COMPANIES SHUNNED CROATIA AS PART OF AN "UNSTABLE AREA." 
CRUISE SHIPS HAD PROBLEMS SECURING INSURANCE FOR ENTERING A 
SUPPOSED WAR ZONE. 
 
4   (C) REVENUES FROM TOURISM ACCOUNTED FOR 18-20 PERCENT OF 
CROATIA'S GDP IN 2002.  DESPITE UNCERTAINTIES OVER IRAQ, 
INITIAL BOOKINGS FOR THE 2003 SEASON HAVE BEEN EXCELLENT. 
ADDITIONAL BORDER CONTROLS COULD SLOW DOWN TRAVEL VIA 
PERSONAL VEHICLES, WHICH IS HOW MOST TOURISTS COME TO 
CROATIA.  HOWEVER, "TIGHTER BORDER CONTROLS" HAVE SUPPOSEDLY 
BEEN IN PLACE SINCE SEPTEMBER 11, WITH LITTLE OBVIOUS ADVERSE 
EFFECT.  NAYSAYERS SPECULATE THAT ALLOWING FOR PASSAGE OF 
COALITION AIRCRAFT COULD ALTER FLIGHT SCHEDULES, AND AIRFARES 
COULD INCREASE IF INSURANCE FEES GO UP. 
 
5.  (U) THEN THERE IS THE OPPOSITE POINT OF VIEW.  MINISTER 
OF ECONOMY LJUBO JURCIC RECENTLY SAID IN AN INTERVIEW WITH 
BUSINESS WEEKLY "POSLOVNI TJEDNIK" THAT A WAR IN IRAQ COULD 
ACTUALLY HAVE POSITIVE EFFECTS ON CROATIA,S ECONOMY, 
PARTICULARLY ON TOURISM.  "IT IS EXPECTED THAT EUROPEANS WILL 
                       CONFIDENTIAL 
 
PAGE 04        ZAGREB  00579  01 OF 03  141724Z 
CHOOSE TO TRAVEL TO CLOSER DESTINATIONS RATHER THAN TO ASIA 
AND OTHER DISTANT PLACES," HE SAID.  HE ADDED THAT THE REST 
OF CROATIA,S ECONOMY HAD LIMITED TIES WITH IRAQ.  INDEED, 
DESPITE DIRE PREDICTIONS OF A CRISIS IN TOURISM 
POST-SEPTEMBER 11, CROATIA HAD ITS BEST TOURISM SEASON IN 
OVER A DECADE LAST YEAR, ALBEIT ALMOST A YEAR AFTER THE 
ATTACKS.  JURCIC'S OPTIMISTIC COMMENTS WERE ECHOED RECENTLY 
BY PRESIDENT MESIC IN THE DAILY, "VECERNI LIST." 
 
---------------------------- 
PROBLEMS IN THE NEIGHBORHOOD 
---------------------------- 
 
6.  (C) IN A FEBRUARY 25 MEETING WITH THE AMBASSADOR, DEFENSE 
MINISTER ZELJKA ANTUNOVIC EXPRESSED CONCERN ABOUT CROATIA'S 
VULNERABILITY TO REACTIONS EMANATING FROM NEIGHBORING BOSNIA 
AND HERZEGOVINA (BIH) TO HOSTILITIES IN IRAQ.  SHE WORRIED 
THAT THE GOC DECISION TO PROVIDE LIMITED LOGISTICAL SUPPORT 
FOR POTENTIAL ACTION IN IRAQ COULD MAKE CROATIA MORE OF A 
TARGET. 
 
7.  (U) THESE CONCERNS ARE ECHOED IN THE PRESS BY A NUMBER OF 
CROATIAN ACADEMICS AND COMMENTATORS WHO POINT TO THE PRESENCE 
OF AL-QAIDA TERRORIST CELLS IN BIH.  "THEY WILL PRIMARILY 
TARGET COUNTRIES SUCH AS GREAT BRITAIN AND THE U.S.," WROTE 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ7299 
 
PAGE 01        ZAGREB  00579  02 OF 03  141724Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AF-00    AGRE-00  AID-00   ACQ-00   CEA-01 
      CIAE-00  CTME-00  INL-00   DODE-00  DOTE-00  SRPP-00  EB-00 
      EXIM-01  E-00     FAAE-00  FBIE-00  VC-00    FRB-00   H-01 
      TEDE-00  INR-00   IO-00    ITC-01   LAB-01   L-00     VCE-00 
      AC-01    NEA-00   NSAE-00  NSCE-00  OMB-01   OPIC-01  PM-00 
      ACE-00   SP-00    IRM-00   SSO-00   SS-00    STR-00   USIE-00 
      EPAE-00  PMB-00   PRM-00   DRL-01   G-00     NFAT-00  SAS-00 
      SWCI-00    /009W 
                  ------------------448E13  141739Z /38 
R 141714Z MAR 03 
FM AMEMBASSY ZAGREB 
TO SECSTATE WASHDC 9709 
INFO AMEMBASSY BELGRADE 
AMEMBASSY BUCHAREST 
AMEMBASSY BUDAPEST 
AMEMBASSY LJUBLJANA 
AMEMBASSY ROME 
AMEMBASSY SARAJEVO 
AMEMBASSY SKOPJE 
AMEMBASSY SOFIA 
AMEMBASSY TIRANA 
AMEMBASSY VIENNA 
USOFFICE PRISTINA 
DEPT OF COMMERCE WASHDC 
DEPT OF TREASURY WASHDC 
 
                       CONFIDENTIAL 
 
PAGE 02        ZAGREB  00579  02 OF 03  141724Z 
C O N F I D E N T I A L SECTION 02 OF 03 ZAGREB 000579 
 
SIPDIS 
 
E.O. 12958: DECL: 03/07/2013 
TAGS: ECON, MARR, HR, IZ 
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ 
 
ONE CROATIAN POLITICAL SCIENTIST, "BUT STRONG SECURITY 
MEASURES THERE COULD EASILY DIVERT THEM TO OTHER COUNTRIES 
SUCH AS CROATIA, NOW THAT IT HAS SIGNED UP TO THE VILNIUS 
GROUP STATEMENT ON IRAQ.8 
 
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OIL RESERVES 
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8.  (SBU) ACCORDING TO THE MINISTRY OF ECONOMY, IF THE PRICE 
OF OIL INCREASES DRAMATICALLY BECAUSE OF HOSTILITIES IN IRAQ, 
THE MINISTRY WOULD INTRODUCE MEASURES TO CUSHION A PRICE 
SHOCK, SUCH AS CUTTING TAXES ON PETROLEUM, WHICH MAKE UP A 
SUBSTANTIAL PORTION OF THE PRICE.  THIS OF COURSE WOULD HAVE 
AN ADVERSE EFFECT ON THE BUDGET, ALREADY UNDER SEVERE 
PRESSURE ON BOTH THE REVENUE AND EXPENDITURE SIDES.  MANY 
OBSERVERS ALREADY DOUBT THAT THE GOC WILL MEET THE TARGETS IN 
ITS PRECAUTIONARY IMF AGREEMENT. 
 
9.  (U) ON FEBRUARY 20, THE GOC ADOPTED A "DECREE ON 
MANDATORY SUPPLIES OF OIL AND PETROLEUM PRODUCTS" AIMED AT 
BULKING UP THE OIL RESERVES FROM A 15-DAY TO THREE-MONTH 
SUPPLY.  WHILE THE PRESS LINKED THIS MEASURE TO THE 
POSSIBILITY OF A WAR IN THE GULF, IN REALITY THE DECREE WAS 
THE RESULT OF A LONG-PLANNED EFFORT TO MAKE CROATIAN 
LEGISLATION TRACK WITH EU REQUIREMENTS, ACCORDING TO THE HEAD 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00579  02 OF 03  141724Z 
OF THE ENERGY DEPARTMENT AT THE MINISTRY OF ECONOMY. 
 
10.  (U) THE EFFECT OF THE DECREE IS GRADUAL: MAJOR IMPORTERS 
(INA, THE STATE PETROLEUM COMPANY, CONTROLS ABOUT 85-90 
PERCENT OF THE MARKET) MUST HAVE IN "STRATEGIC RESERVES" THE 
EQUIVALENT OF 10 PERCENT OF THE PREVIOUS YEAR'S IMPORTS BY 
APRIL 1.  THIS NUMBER WILL INCREASE TO 15 PERCENT BY JANUARY 
1, 2004.  NOT UNTIL 2006 WILL COMPANIES BE REQUIRED TO 
MAINTAIN 25 PERCENT OF THEIR PREVIOUS YEAR'S IMPORTS -- I.E., 
A "THREE MONTH SUPPLY."  THE PRODUCTION DEPARTMENT AT INA 
TOLD US THAT THE COMPANY HAD BEGUN BUILDING UP ITS STOCKS 
THREE MONTHS AGO, AND WAS CLOSE TO THE APRIL TARGET ALREADY. 
INA IS ALSO ABLE TO COUNT A CERTAIN AMOUNT OF CROATIA'S 
PROVEN OIL RESERVES TOWARDS ITS STOCKS.  THEREFORE, IT DOES 
NOT HAVE TO GO OUT AND BUY LARGE STOCKS OF PETROLEUM AT 
TODAY'S HIGH PRICES. 
 
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WORST CASE SCENARIOS 
-------------------- 
 
11.  (U) INDEPENDENT ECONOMISTS HERE AGREE THAT VOLATILITY IN 
WORLD OIL PRICES COULD HAVE ADVERSE EFFECTS ON CROATIA,S 
ECONOMY.  SUSTAINED HIGHER OIL PRICES COULD BUMP UP INFLATION 
AND PUT DOWNWARD PRESSURE ON THE CROATIAN KUNA.  DEPENDING ON 
THE DURATION OF A MILITARY CAMPAIGN, THE IMPLEMENTATION OF 
SECURITY MEASURES COULD PUT ADDED PRESSURE ON THE STATE 
BUDGET BY LOWERING REVENUES FROM TOURISM.  ACCORDING TO ONE 
ESTIMATE PUT OUT BY A GROUP OF BUSINESSES, IF THE WAR IN IRAQ 
EXTENDS LONGER THAN TWO TO THREE MONTHS THE STATE BUDGET 
COULD SUFFER $200 MILLION IN LOSSES AND PROJECTED GDP GROWTH 
                       CONFIDENTIAL 
 
PAGE 04        ZAGREB  00579  02 OF 03  141724Z 
IN 2003 COULD BE TRIMMED BY 0.8 PERCENT. 
 
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EFFECTS ON OTHER BUSINESSES LIMITED 
------------------------------------ 
 
12.  (U) SOME 53 PERCENT OF CROATIA,S EXPORTS IN 2002 WENT 
TO THE EU, WHICH IS NOT EXPECTED TO BE DIRECTLY AFFECTED BY 
THE CONFLICT.  A RECENT ARTICLE CONTAINED INTERVIEWS WITH 
SEVERAL EXPORTERS.  A FEW CROATIAN EXPORTERS NOTED PRE-WAR 
CONSUMER NERVOUSNESS IN OTHER MARKETS, SUCH AS BRITAIN AND 
TURKEY.  NO ONE DISCUSSED -- OR THE JOURNALIST DID NOT REPORT 
-- THE POSSIBILITY OF EXPANDED EXPORT OPPORTUNITIES IN AN 
IRAQ UNDERGOING RECONSTRUCTION AND RENOVATION AFTER OVER A 
DECADE OF SANCTIONS. 
 
13.  (C) KONCAR, A STATE-OWNED MANUFACTURING AND ELECTRONICS 
FIRM THAT EXPORTS TO IRAQ UNDER THE UN ADMINISTERED 
PROCUREMENT PROGRAM, COULD ONLY IDENTIFY EVENTUAL, POSSIBLE 
RAW MATERIAL PRICE INCREASES AS A NEGATIVE.  ANOTHER COMPANY 
THAT EXPORTS DREDGING EQUIPMENT SAID A 26 MILLION EURO 
CONTRACT THAT IT HAD NEGOTIATED WITH A BELGIAN PARTNER AND 
THE IRAQ GOVERNMENT LAST SUMMER WAS EXPERIENCING DELAYS IN 
BEING FINALIZED.  HOWEVER, PRIVATELY MFA OFFICIALS HAVE 
EXPRESSED HOPE THAT CROATIAN COMPANIES WOULD BENEFIT FROM 
 
                       CONFIDENTIAL 
 
                           CONFIDENTIAL     PTQ7300 
 
PAGE 01        ZAGREB  00579  03 OF 03  141725Z 
ACTION EUR-00 
 
INFO  LOG-00   NP-00    AF-00    AGRE-00  AID-00   ACQ-00   CEA-01 
      CIAE-00  CTME-00  INL-00   DODE-00  DOTE-00  SRPP-00  EB-00 
      EXIM-01  E-00     FAAE-00  FBIE-00  VC-00    FRB-00   H-01 
      TEDE-00  INR-00   IO-00    ITC-01   LAB-01   L-00     VCE-00 
      AC-01    NEA-00   DCP-01   NSAE-00  NSCE-00  OMB-01   DHS-00 
      OPIC-01  PM-00    ACE-00   SP-00    SSO-00   SS-00    STR-00 
      USIE-00  EPAE-00  PMB-00   PRM-00   DRL-01   G-00     NFAT-00 
      SAS-00   SWCI-00    /010W 
                  ------------------448E22  141739Z /38 
R 141714Z MAR 03 
FM AMEMBASSY ZAGREB 
TO SECSTATE WASHDC 9710 
INFO AMEMBASSY BELGRADE 
AMEMBASSY BUCHAREST 
AMEMBASSY BUDAPEST 
AMEMBASSY LJUBLJANA 
AMEMBASSY ROME 
AMEMBASSY SARAJEVO 
AMEMBASSY SKOPJE 
AMEMBASSY SOFIA 
AMEMBASSY TIRANA 
AMEMBASSY VIENNA 
USOFFICE PRISTINA 
DEPT OF COMMERCE WASHDC 
DEPT OF TREASURY WASHDC 
 
                       CONFIDENTIAL 
 
PAGE 02        ZAGREB  00579  03 OF 03  141725Z 
C O N F I D E N T I A L SECTION 03 OF 03 ZAGREB 000579 
 
SIPDIS 
 
E.O. 12958: DECL: 03/07/2013 
TAGS: ECON, MARR, HR, IZ 
SUBJECT: IMPLICATIONS FOR CROATIA'S ECONOMY OF WAR WITH IRAQ 
 
IRAQ'S POST-WAR CONSTRUCTION. 
 
14.  (SBU) A CONTACT AT THE MINISTRY OF FINANCE TOLD US THAT 
THE GOC HAS LITTLE OR NO OFFICIAL DEBT OUTSTANDING WITH IRAQ. 
 A NUMBER OF CROATIAN COMPANIES HAVE BEEN OWED MONEY SINCE 
BEFORE THE GULF WAR, BUT HAVE BEEN COLLECTING THEIR DEBT IN 
INCREMENTS OVER THE YEARS THROUGH THE UN COMPENSATION 
COMMISSION PROCESS.  OUR CONTACT FELT THAT WHILE COLLECTIONS 
WERE A FRACTION OF CLAIMS, THEY MAY WELL APPROACH THE REAL 
VALUE OF WHAT THE COMPANIES COULD LEGITIMATELY EXPECT. 
 
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CENTRAL BANK RUNS THE NUMBERS 
----------------------------- 
 
15.  (C) THE HEAD OF THE RESEARCH DEPARTMENT AT THE CROATIAN 
NATIONAL BANK ALSO DISCOUNTS ANY MAJOR EFFECTS ON THE 
CROATIAN ECONOMY, AT LEAST IF ANY CONFLICT IS OVER FAIRLY 
SOON.  FORTUNATELY, INFLATION IS ALREADY RELATIVELY LOW, AND 
OIL MAKES UP A FAIRLY SMALL SHARE OF THE TOTAL CONSUMPTION 
BASKET.  THE NATIONAL BANK BELIEVES THAT IF OIL PRICES 
REMAINED AT $30/BARREL FOR A PROLONGED PERIOD (MORE THAN 
THREE MONTHS), INFLATION COULD BE BUMPED UP BY A PERCENTAGE 
POINT.  "THIS WOULDN'T KILL US," OUR NATIONAL BANK 
INTERLOCUTOR TOLD US.  ALSO, HE RECOGNIZED THAT OIL PRICES 
ARE EXPECTED TO FALL SUBSTANTIALLY AFTER THE CONCLUSION OF 
                       CONFIDENTIAL 
 
PAGE 03        ZAGREB  00579  03 OF 03  141725Z 
HOSTILITIES. 
 
16.  (SBU) THERE WOULD BE A STRONGER NEGATIVE EFFECT ON THE 
BALANCE OF PAYMENTS.  THE CROATIAN NATIONAL BANK ESTIMATES 
THAT THE CURRENT ACCOUNT DEFICIT COULD RISE BY 0.3 TO 0.5 
PERCENT OF GDP BECAUSE OF HIGHER OIL PRICES SHOULD PRICES 
REMAIN AT $30/BARREL FOR A LONG PERIOD OF TIME. 
 
17.  (SBU) THE BANK ALSO TRIED TO LOOK AT THE EFFECT ON 
CROATIAN EXPORTS, PRINCIPALLY TO EUROPE, OF A CONFLICT, BUT 
THE EFFECTS WERE IMPOSSIBLE TO QUANTIFY.  OUR INTERLOCUTOR 
SAID IT WAS GENERALLY ACCEPTED THAT PRE-WAR UNCERTAINTIES 
WERE DAMPENING GROWTH IN EUROPE AND AROUND THE WORLD. 
 
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COMMENT 
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18.  (SBU) ALTHOUGH HOSTILITIES IN IRAQ LIKELY WOULD NOT HAVE 
A SIGNIFICANT IMPACT ON THE CROATIAN ECONOMY -- AT LEAST AS 
LONG AS THEY DO NOT DRAG ON -- THE OFFICIAL AND MEDIA 
ANGST-MEISTERS WILL CONTINUE TO PROPAGATE GLOOMY FORECASTS, 
MAKE DUBIOUS CONNECTIONS AND PROJECT SCENARIOS TO EXTREMES. 
TERRORISM IN EUROPE (OR WORSE, IN THE REGION) AND THE OVERALL 
STATE OF EUROPEAN ECONOMIES WOULD MORE SEVERELY AFFECT THE 
CROATIAN ECONOMY. 
ROSSIN 
 
                       CONFIDENTIAL 
 
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