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Cablegate: New Tobacco Strategy Adopted

VZCZCXYZ0002
RR RUEHWEB

DE RUEHBW #0441/01 0930728
ZNR UUUUU ZZH
R 030728Z APR 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0564
INFO RUEHVB/AMEMBASSY ZAGREB 1421
RUEHVJ/AMEMBASSY SARAJEVO 0329
RUEHSQ/AMEMBASSY SKOPJE 0866
RUEHBS/USEU BRUSSELS

UNCLAS BELGRADE 000441

SIPDIS

STATE FOR EUR/SCE RIEHL
USEU BRUSSELS FOR MOZUR
STATE PASS USTR FOR HAFNER

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON PREL HR SR
SUBJECT: NEW TOBACCO STRATEGY ADOPTED

REF: BELGRADE 255 AND PREVIOUS

SUMMARY
-------
1. (u) The Government of Serbia (GoS) adopted an action
plan for tobacco production and trade on March 22 in order
to smooth its relationship with the cigarette industry and
at the same time permit ratification of the Central
European Free Trade Agreement (CEFTA). The new strategy
has been negotiated with the tobacco industry to resolve
the threat posed by the elimination of a discriminatory
excise tax that protected the domestic producers, a legacy
of the privatization agreements that brought Philip Morris,
British-American Tobacco and Japan Tobacco Inc. (JTI) to
Serbia. (see reftel) Industry representatives expressed
satisfaction with the strategy and the level of cooperation
with the GoS. END SUMMARY.

FOUR MAIN PRINCIPLES
--------------------
2. (U) In a press conference, Minister of Economy Predrag
Bubalo said that the action plan is based on four
principles: 1) equal treatment for all participants at the
domestic and regional tobacco market; 2) long-term
certainty for the development of tobacco industry
capacities; 3) stability of budget revenues from excise
taxes on tobacco products and a transparent system of
taxes; and 4) adjustment of national legislation to comply
with EU and World Trade Organization (WTO) rules.

3. (U) Milan Parivodic, Minister of International Economic
Relations (MIER) and Coordinator of the Ministry of
Finance, explained that this document, which will be
applied from 2008 to 2012, regulates relations to the
mutual benefit of both the state and the tobacco industry.
He stressed the importance of the four leading tobacco
companies in Serbia: Philip Morris International, British
American Tobacco, Japan Tobacco International, and domestic
investor Monus. The four cigarette producers together have
invested more than EUR 1 billion in Serbia since 2003. In
addition, the industry employs some 130,000 people, or
about 6 percent of overall employment.

4. (U) Parivodic said that the action plan takes into
account the new reality of CEFTA and adjusts the entire
relationship between the state and the tobacco indust.
Implementing its provisions requires that Parliament ratify
CEFTA, amend the excise tax law and amend the tobacco law.
The minister said that its provisions will maintain excise
tax revenues, increase exports of tobacco products, and
provide incentives to agricultural producers to improve the
quality of tobacco, which is more important than simply
increasing volume. (Note: the excise tax unification will
take effect only on January 1, 2008)

NEW MEASURES
------------
5. (SBU) Vlatko Sekulovic, state secretary at MIER, said
that the action plan would abolish discriminatory excise
taxes, providing the same treatment to domestic and foreign
cigarette brands by introducing a single excise tax. He
added that customs duties will be increased from 15 to 57.6
percent on cigarette imports from countries outside CEFTA
and Russia, and it is expected that this change will
increase budget revenues by EUR 13 million. (Eugenio
Sidoli, PMI country director, said that the EU had
informally agreed to the tariff hike.)

6. (SBU) Sidoli told econ chief on March 28 that the excise
tax changes will provide much more revenue to the GOS over
time, but at the same time will help industry by shifting
the burden more from the ad-valorem (percentage) excise to
per-pack, specific excises. This reduces the incentive for
producers to cut prices by gain market share.

7. (U) Vesna Arsic, State Secretary at the Ministry of
Finance, said that the plan includes a measure that will
provide incentives to cigarette producers for purchases of
domestic tobacco. She said that the current obligation for
domestic cigarette manufacturers to buy at least 50 percent
of their tobacco from domestic producers will be cut to 20
percent this year and phased out as of January, 2008. At
the same time, companies will be able to import, duty-free,
a volume of tobacco equal to that procured in Serbia.
Arsic said that the GOS will implement agricultural
measures to encourage production of the necessary types of
tobacco, with the aim of increasing the quality and
competitiveness of domestic tobacco and creating conditions
for exports based on domestic tobacco.

CIGARETTE PRODUCERS PLEASED WITH THE PLAN
----------------------------------------
8. (SBU) Representatives of the Philip Morris
International (PMI), British American Tobacco, Japan
Tobacco International, and domestic investor Monus support
the plan. "Once implemented, the action plan will
transform CEFTA from a threat into a business opportunity
for domestic cigarette manufacturing, enabling the
consolidation of domestic volumes and the development of
exports," said Sidoli, at the press March 23 conference,
praising the government for its cooperative stance. He
added that the plan would introduce additional costs for
the industry, but it represented an acceptable compromise.
Sidoli told econ chief later that the plan, once
implemented, will create enough predictability for PMI to
continue investing in Serbia.

PLATFORM FOR THE NEGOTIATIONS WITH CROATIA
------------------------------------------
9. (U) Minister Parivodic said that Serbia would use the
action plan as a platform in negotiations with Croatia
within CEFTA over cigarette trade. He complained that
Croatia has higher tariffs on cigarette imports from Serbia
than on EU products, and various non-tariff barriers,
together with the non-transparent system of excise taxes,
effectively create a monopoly for domestic producer
Tvornica Duhana Rovinj (TDR) in the Croatian market.

POLT

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