Wikileaks - XIII

"6383","3/14/2003 17:14","03ZAGREB579","Embassy Zagreb","CONFIDENTIAL","03ZAGREB579","This record is a partial extract of the original cable. The full text of the original cable is not available.

SIPDIS

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
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)

-------
SUMMARY
-------
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. END SUMMARY.

-----------------
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 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 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

-------------
OIL RESERVES
-------------
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 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.

--------------------
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 IN 2003 COULD BE TRIMMED BY 0.8 PERCENT.

-----------------------------------
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 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.

-----------------------------
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 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.

-------
COMMENT
-------
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