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Cablegate: Zagreb Weekly Activity Report - August 28, 2008

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PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
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DE RUEHVB #0624/01 2420923
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P 290923Z AUG 08
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FOR EUR/SCE, EUR/PPD, EUR/RPM AND EUR/ERA
OSD FOR POPOVICH

E.O. 12958: N/A
TAGS: PREL PGOV ENRG ECON KCRM HR
SUBJECT: ZAGREB WEEKLY ACTIVITY REPORT - AUGUST 28, 2008

1. (U) IT'S THE ECONOMY....BACK FROM THE BEACH, THE GOC SETS
PRIORITIES FOR REST OF 2008:
On August 26, in his first press conference after the
government's summer recess, PM Sanader spoke on the GOC's
plans to curb inflation, privatize shipyards, and gain
momentum in EU accession negotiations.
INFLATION: To curb inflation, Sanader said the
government would try to hold the price of natural gas for
home use constant through the end of 2008, and try to do the
same for commercial use as well. He said he was sure
inflation would fall to 6-6.5% by the end of the year, having
reached a 14-year high of 8.4% year-on-year in July. (Note:
The Croatian National Bank (HNB) forecasts an average annual
inflation rate of 7% for 2008, compared to 2.9% for 2007.)
Finance Minister Ivan Suker said the GOC designated HRK 600
million ($124 million) in budgetary funds to curb inflation.
Sanader said the government's other anti-inflation measures
would include keeping public expenditures in check and
monitoring other prices for "unjustified hikes." Measures
being taken by the HNB include limiting credit expansion and
allowing the Croatian kuna to appreciate against the euro.
SHIPYARDS: At the same press conference, Deputy PM and
Minister of the Economy Damir Polancec said the GOC would
invite bids for all six of Croatia's state-owned shipyards by
the end of 2008, with the "ambitious but feasible" goal of
starting the privatization process the first quarter of 2009.
The shipyards now operate at a loss, requiring large state
subsidies to survive. Restructuring the industry is one of
the requirements for Croatia's EU accession.
EU ACCESSION: Sanader said the government hopes to
open all twelve remaining chapters by the end of 2008 and
close some chapters as well. He added that he remains
confident Croatia can complete negotiations by the end of
2009. The government has its negotiating positions prepared
for two additional chapters--fisheries and agriculture--and
intends to submit them in September. COMMENT: Progress on
the fisheries chapter is especially notable. The screening
report for that chapter was held by the EU Council for two
years. On July 29, Slovenia unblocked the report and Croatia
was invited to submit its negotiating position for the
chapter. (SLitke)

2. (U) SANADER SAYS SHARE SWAP WITH MOL STILL MOST LIKELY
FATE FOR INA:
On August 26, PM Sanader also told the press that talks about
Croatia's gas and oil company INA continue with Hungary's
MOL. He said a share swap is the mostly likely deal to
emerge, though a sale of the GOC's 44% stake in INA shares is
still being considered. MOL has held a 25% share of INA
since 2003 and is looking to obtain a majority stake.
Sanader said he believed a share swap would allow the GOC to
exert more influence on MOL's future policies (including,
presumably, extending the prohibition against MOL selling its
current INA shares which is due to expire in October 2008).
He added that the GOC's budget does not need revenues from a
sale of shares. The government expects to make its decision
very soon and added that much would depend on the outcome of
MOL's public bid on all non-state INA shares, which is
currently being reviewed by the Croatian Agency for
Supervision of Financial Services (HANFA). (SLitke)

3. (U) SURGEON FLEES COUNTRY AFTER CORRUPTION CONVICTION:
A Croatian surgeon, Dr. Ognjen Simic, was sentenced to nine
years in prison on August 25 in a landmark graft trial.
Simic was not in court for the sentencing, having fled to his
father's home in Bosnia. As a dual citizen, he will likely
remain in Sarajevo as the Bosnian Constitution does not allow
for extradition of its citizens. Dr. Simic was found guilty
of taking thousands of dollars in bribes from patients
needing heart surgery. His sentence is the most severe for
corruption since Croatia became independent in 1991.
Prosecutors were disappointed by the verdict, however, and
plan to appeal. They are seeking 12 years in prison as well
as a guilty verdict on money laundering charges. The case is
one of several investigations that USKOK (Office for
Suppression of Organized Crime and Corruption) is conducting
concerning graft in the medical field. USKOK's ongoing
Operation Dijagnoza has already resulted in ten indictments
for bribery and abuse of authority in 2008 with several
trials to start soon. (CZimmer)

4. (U) CROATIA UNITED IN SUPPORTING TERRITORIAL INTEGRITY
OF GEORGIA:
On August 26 the Foreign Ministry issued a press release
reaffirming its support of the sovereignty, independence and
full territorial integrity of Georgia following GoR's
recognition of the independence of the breakaway Georgian
regions of Abkhazia and South Ossetia. The MFA noted that it

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would continue to coordinate and harmonize its positions with
the EU and NATO. Responding to criticism in the media, PM
Sanader stated that the GoC was not adopting a passive
position on Georgia as a non-permanent member of the UN
Security Council. He said that there was no reason for
Croatia not to follow the policy of the EU and NATO as an
aspiring member to these bodies. President Mesic also
released a statement on August 26 expressing concern about
Russia's recognition of South Ossetia and Abkhazia. He noted
that the GoR's policy could create the impression of trying
to avoid negotiations on the status of South Ossetia and
Abkhazia, even though such talks were stipulated in the
agreement that President Sarkozy brokered with President
Medvedev. Mesic added that the status of autonomous oblasts
in the former Soviet Union did not provide legal basis for
their case for independence to have precedence over the right
of internationally recognized countries to maintain their
territorial integrity. (PD'Amico)
Bradtke

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