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Diplomacy in Action

Serbia (07/07)


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For the most current version of this Note, see Background Notes A-Z.

Flag of Serbia is three equal horizontal stripes of red - top - blue, and white; charged with the coat of arms of Serbia shifted slightly to the hoist side.

PROFILE

OFFICIAL NAME:
Republic of Serbia

Geography
Area: Serbia (88,412 sq. km.) is slightly smaller than Maine.
Cities: Capital--Belgrade. Other cities--Pancevo, Novi Pazar, Uzice, Novi Sad, Subotica, Bor, Nis.
Terrain: Varied; in the north, rich fertile plains; in the east, limestone ranges and basins; in the southeast, mountains and hills.
Climate: In the north, continental climate (cold winter and hot, humid summers with well-distributed rainfall); central portion, continental and Mediterranean climate; to the south, hot, dry summers and autumns and relatively cold winters with heavy snowfall inland.

People (2004 est.)
Nationality: Noun--Serb(s); adjective--Serbian.
Population (2002 Republic census): Serbia (not including Kosovo) 7,478,820.
Population growth rate: -3.5%.
Ethnic groups (2002 population census, without Kosovo): Serbian 83%, Hungarian 4%, Bosnian 2%, Albanian 1%, Montenegrin 1%, other 9%.
Religions (2002 population census, without Kosovo): Orthodox 85%, Roman Catholic 5.5%, Muslim 3%, Protestant 1%, other 5.5%.
Languages: Serbian 88%, Hungarian 3.8%, Bosnian 2%, Albanian 1%, others 5%.
Health: Infant mortality rate--8.1 deaths/1,000. Life expectancy--males 72.44 yrs., female 77.86 yrs.

Government
Type: Republic.
Constitution: Adopted in an October 28-29, 2006 referendum.
Independence: April 11, 1992 (Federal Republic of Yugoslavia (F.R.Y.) formed as self-proclaimed successor to the Socialist Federal Republic of Yugoslavia). On February 4, 2003, the F.R.Y. parliament adopted a new Constitutional Charter establishing the state union of Serbia and Montenegro. On May 21, 2006, the Republic of Montenegro held a successful referendum on independence and after Montenegro's declaration of independence on June 3, the parliament of Serbia stated that the Republic of Serbia was the continuity of the state union, rendering the two republics independent and sovereign countries.
Branches: Executive--president (chief of state); prime minister (head of government), Council of Ministers (cabinet). Legislative--Parliament. Judicial--Federal Court (Savezni Sud) and Constitutional Court.
Political parties: Alliance of Vojvodina Hungarians (SVM), Christian Democratic Party of Serbia (DHSS), Civic Alliance of Serbia (GSS), Democratic Alternative (DA), Democratic Center (DC), Democratic Community of Vojvodina Hungarians (DZVM), Democratic Party (DS), Democratic Party of Serbia (DSS), Force of Serbia (PSS), G-17 Plus (G17), League for Sumadija (LS), League of Social Democrats of Vojvodina (LSV), Liberal Democratic Party (LDP), List for Sandzak, New Serbia (NS), Reformist Democratic Party of Vojvodina (LSV), Serbian Radical Party (SRS), Serbian Renewal Movement (SPO), Social Democrat Party (SDP), Socialist Democratic Union (SDU), Socialist Party of Serbia (SPS--former Communist Party), Yugoslav United Left (JUL).
Suffrage: 16 years of age if employed; universal at 18.

Economy (excluding Kosovo)
GDP (2006): $19.9 billion.
GDP growth rate (2006): 5.8%.
GDP per capita (2006): $3,382.
Inflation rate (2006): 6.6%.
Natural resources: Coal, petroleum, natural gas, antimony, copper, lead, zinc, timber, bauxite, gold, silver, navigable rivers.
Agriculture: 12% of GDP.
Industry: 20% of GDP.
Services: 68% of GDP.
Trade (2006 est.): Exports--$6.4 billion. Major markets--Italy, Germany, Bosnia. Imports--$13.2 billion. Major suppliers--Germany, Italy, Russia.

PEOPLE AND HISTORY

Serbia
The Serbian state as known today was created in 1170 A.D. by Stefan Nemanja, the founder of the Nemanjic dynasty. Serbia's religious foundation came several years later when Stefan's son, canonized as St. Sava, became the first archbishop of a newly autocephalous Serbian Orthodox Church (1219). Thus, at this time, the Serbs enjoyed both temporal and religious independence. After a series of successions, Serbia fell under the rule of King Milutin, who improved Serbia's position among other European countries. Milutin also was responsible for many of the brightest examples of Medieval Serbian architecture. Moreover, Serbia began to expand under Milutin's reign, seizing territory in nearby Macedonia from the Byzantines. Under Milutin's son, Stefan Dusan (1331-55), the Nemanjic dynasty reached its peak, ruling from the Danube to central Greece. However, Serbian power waned after Stefan's death in 1355, and in the Battle of Kosovo (June 15, 1389) the Serbs were catastrophically defeated by the Turks. By 1459, the Turks exerted complete control over all Serb lands.

For more than 3 centuries--nearly 370 years--the Serbs lived under the yoke of the Ottoman sultans. As a result of this oppression, Serbs began to migrate out of their native land (present-day Kosovo and southern Serbia) into other areas within the Balkan Peninsula, including what is now Vojvodina and Croatia. When the Austrian Hapsburg armies pushed the Ottoman Turks south of the Danube in 1699, many Serbs were "liberated," but their native land was still under Ottoman rule.

Movements for Serbian independence began more than 100 years later with uprisings under the Serbian patriots Karageorge (1804-13) and Milos Obrenovic (1815-17). After the Russo-Turkish War of 1828-29, Serbia became an internationally recognized principality under Turkish suzerainty and Russian protection, and the state expanded steadily southward. After an insurrection in Bosnia and Herzegovina in 1875, Serbia and Montenegro went to war against Turkey in 1876-78 in support of the Bosnian rebels. With Russian assistance, Serbs gained more territory as well as formal independence in 1878, though Bosnia was placed under Austrian administration.

In 1908, Austria-Hungary directly annexed Bosnia, inciting the Serbs to seek the aid of Montenegro, Bulgaria, and Greece in seizing the last Ottoman-ruled lands in Europe. In the ensuing Balkan Wars of 1912-13, Serbia obtained northern and central Macedonia, but Austria compelled it to yield Albanian lands that would have given it access to the sea. Serb animosity against the Habsburgs reached a climax on June 28, 1914, when the Austrian archduke Franz Ferdinand was assassinated in Sarajevo by a Bosnian Serb, Gavrilo Princip, setting off a series of diplomatic and military initiatives among the great powers that culminated in World War I.

Soon after the war began, Austro-Hungarian and Bulgarian forces occupied Serbia. Upon the collapse of Austria-Hungary at the war's end in 1918, Vojvodina and Montenegro united with Serbia, and former south Slav subjects of the Habsburgs sought the protection of the Serbian crown within a kingdom of Serbs, Croats, and Slovenes. Serbia was the dominant partner in this state, which in 1929 adopted the name Yugoslavia.

The kingdom soon encountered resistance when Croatians began to resent control from Belgrade. This pressure prompted King Alexander I to split the traditional regions into nine administrative provinces. During World War II, Yugoslavia was divided between the Axis powers and their allies. Royal army soldiers, calling themselves Cetnici (Chetniks), formed a Serbian resistance movement, but a more determined communist resistance under the Partisans, with Soviet and Anglo-American help, liberated all of Yugoslavia by 1944. In an effort to avoid Serbian domination during the postwar years, Bosnia and Herzegovina, Macedonia, and Montenegro were given separate and equal republican status within the new socialist federation of Yugoslavia; Kosovo and Vojvodina were made autonomous provinces within Yugoslavia.

Despite the attempts at a federal system of government for Yugoslavia, Serbian communists played the leading role in Yugoslavia's political life for the next 4 decades. As the Germans were defeated at the end of World War II, Josip Broz Tito, a former Bolshevik and committed communist, began to garner support from both within Yugoslavia as well as from the Allies. Yugoslavia remained independent of the U.S.S.R., as Tito broke with Stalin and asserted Yugoslav independence. Tito went on to control Yugoslavia for 35 years. Under communist rule, Serbia was transformed from an agrarian to an industrial society. In the 1980s, however, Yugoslavia's economy began to fail. With the death of Tito in 1980, separatist and nationalist tensions emerged in Yugoslavia.

In 1989, riding a wave of nationalist sentiment, Serbian President Slobodan Milosevic reimposed direct rule over the autonomous provinces of Kosovo and Vojvodina, prompting Albanians in Kosovo to agitate for separation from the Republic of Serbia. Between 1991 and 1992, Slovenia, Croatia, Bosnia and Herzegovina, and Macedonia all seceded from Yugoslavia. On April 27, 1992 in Belgrade, Serbia and Montenegro joined in passing the Constitution of the Federal Republic of Yugoslavia. In March 2002, the Belgrade Agreement was signed by the heads of the federal and republican governments, setting forth the parameters for a redefinition of Montenegro's relationship with Serbia within a joint state. On February 4, 2003, the F.R.Y. parliament ratified the Constitutional Charter, establishing a new state union and changing the name of the country from Yugoslavia to Serbia and Montenegro.

On May 21, 2006, the Republic of Montenegro held a successful referendum on independence and declared independence on June 3. Thereafter, the parliament of Serbia stated that the Republic of Serbia was the continuity of the state union, changing the name of the country from Serbia and Montenegro to the Republic of Serbia, with Serbia retaining Serbia and Montenegro's membership in all international organizations and bodies.

Kosovo
Before the conflicts of the 1990s, Kosovo was best known as the site of a famous 14th-century battle in which invading Ottoman Turks defeated a Serbian army led by Tsar Lazar. During this medieval period, Kosovo also was home to many important Serb religious sites, including many architecturally significant Serbian Orthodox monasteries.

The Ottomans ruled Kosovo for more than four centuries, until Serbia reconquered the territory during the First Balkans War in 1912-13. First partitioned in 1913 between Serbia and Montenegro, Kosovo was then incorporated into the Kingdom of the Serbs, Croats, and Slovenes (later named Yugoslavia) after World War I. During World War II, parts of Kosovo were absorbed into Italian-occupied Albania. After the Italian capitulation, Nazi Germany assumed control until Tito's Yugoslav communists reentered Kosovo at the end of the war.

After World War II, Kosovo became a province of Serbia in the Socialist Federal Republic of Yugoslavia. The 1974 Yugoslav Constitution gave Kosovo (along with Vojvodina) the status of an autonomous province with nearly equal voting rights as the six constituent Republics of Yugoslavia. Although the Albanian-majority province enjoyed significant autonomy, riots broke out in 1981 led by Kosovar Albanians who demanded that Kosovo be granted full Republic status.

In the late 1980s, Slobodan Milosevic propelled himself to power in Belgrade by exploiting the fears of the small Serbian minority in Kosovo. In 1989, he arranged the elimination of Kosovo's autonomy in favor of more direct rule from Belgrade. Belgrade ordered the firing of large numbers of Albanian state employees, whose jobs were then taken by Serbs.

As a result of this oppression, Kosovo Albanian leaders led a peaceful resistance movement in the early 1990s and established a parallel government funded mainly by the Albanian diaspora. When this movement failed to yield results, an armed resistance emerged in 1997 in the form of the Kosovo Liberation Army (KLA). The KLA's main goal was to secure the independence of Kosovo.

In late 1998, Milosevic unleashed a brutal police and military campaign against the separatist KLA, which included atrocities against civilian noncombatants. For the duration of Milosevic's campaign, large numbers of ethnic Albanians were either displaced from their homes in Kosovo or killed by Serbian troops or police. These acts, and Serbia's refusal to sign the Rambouillet Accords, provoked a military response from NATO, which consisted primarily of aerial bombing. The campaign continued from March through June 1999. After 79 days of bombing, Milosevic capitulated and international forces, led by NATO, moved into Kosovo. The international security presence, which is known as Kosovo Force (KFOR), works closely with the UN Mission in Kosovo (UNMIK) to ensure protection for all of Kosovo's communities.

GOVERNMENT AND POLITICAL CONDITIONS

Republic of Serbia
Even as opposition to his regime grew in the late 1990s, Yugoslav President Milosevic continued to dominate the organs of the F.R.Y. Government. Although his political party, the Socialist Party of Serbia (SPS), did not enjoy a majority in either the federal or Serbian parliaments, it dominated the governing coalitions and held all the key administrative posts. An essential element of Milosevic's grasp on power was his control of the Serbian police, a heavily armed force of some 100,000 that was responsible for internal security and which committed serious human rights abuses. Routine federal elections in September 2000 resulted in a narrow official victory for Milosevic and his coalition. Immediately, street protests and rallies filled cities across the country as Serbs rallied around Vojislav Kostunica, the recently formed Democratic Opposition of Serbia (DOS, a broad coalition of anti-Milosevic parties) candidate for F.R.Y. president. Cries of fraud and calls for Milosevic's removal echoed across city squares from Subotica to Nis.

On October 5, 2000, Slobodan Milosevic was forced to concede defeat after days of mass protests all across Serbia. New F.R.Y. President Vojislav Kostunica was soon joined at the top of the domestic Serbian political scene by the Democratic Party's (DS) Zoran Djindjic, who was elected Prime Minister of Serbia at the head of the DOS ticket in December's republican elections. After an initial honeymoon period in the wake of October 5, DSS and the rest of DOS, led by Djindjic and his DS, found themselves increasingly at odds over the nature and pace of the governments' reform programs. Although initial reform efforts were highly successful, especially in the economic and fiscal sectors, by the middle of 2002, the nationalist Kostunica and the pragmatic Djindjic were openly at odds. Kostunica's party, having informally withdrawn from all DOS decision making bodies, was agitating for early elections to the Serbian parliament in an effort to force Djindjic from the scene.

After the initial euphoria of replacing Milosevic's autocratic regime, the Serbian population, in reaction to this political maneuvering, slid into apathy and disillusionment with its leading politicians by mid-2002. This political stalemate continued for much of 2002, and reform initiatives stalled. Two rounds of elections for the republic presidency in late 2002 failed because of insufficient voter turnout (Serbian law required participation by more than 50% of registered voters).

On March 12, 2003, Serbian Prime Minister Djindjic was assassinated. The Serbian Government and the newly formed union government of Serbia and Montenegro reacted swiftly by calling a state of emergency and undertaking an unprecedented crackdown on organized crime which led to the arrest of more than 4,000 people. Zoran Zivkovic, a vice-president of Djindjic's DS party, was elected Prime Minister in March 2003. A series of scandals plagued the Zivkovic government through the second half of 2003, ultimately leading the Prime Minister to call early elections.

Republic of Serbia presidential elections were again held on November 16, 2003. These elections were also declared invalid because of insufficient voter turnout. Parliamentary elections held on December 28, 2003 yielded the following results:

Party

Seats

Percentage

SRS

82

28%

DSS

53

18%

DS

37

13%

G-17

34

12%

SPO/NS

22

8%

SPS

22

7%

Following the December 2003 parliamentary elections, a new minority government was formed with the Democratic Party of Serbia (DSS), G17+, and the Serbian Renewal Movement/New Serbia (SPO/NS) coalition and the tacit support of the Socialist Party of Serbia (SPS) and former F.R.Y. president Vojislav Kostunica was named Prime Minister. On June 27, 2004 after changes to the election law to allow for a valid election with turnout of less than 50% of registered voters, Boris Tadic (DS) defeated Radical Party candidate Tomislav Nikolic by a slim margin and was elected President of Serbia. President Tadic's Democratic Party (DS) did not join the governing coalition but has been working with Serbia's democratic forces to advance the reform agenda.

Following the adoption of a new Constitution in October 2006, Serbia held parliamentary elections on January 21, 2007. These elections yielded the following results:

Party

Seats

Percentage

SRS

81

28.3%

DS

64

22.7%

DSS/NS

47

16.4%

G-17

19

6.8%

SPS

16

5.6%

LDP

15

5.3%

Ethnic Parties

8

N/A

After the elections, a new government was formed with a coalition of Democratic Party (DS), the Democratic Party of Serbia (DSS), and the G17+. Prime Minister Kostunica was chosen to continue in his position.

Kosovo (under UN administration)
While legally still part of Serbia, Kosovo remains an international protectorate of the United Nations as outlined in UN Security Council Resolution (UNSCR) 1244, which was passed June 10, 1999. Under UNSCR 1244, UNMIK assumes the supreme legal authority in Kosovo, while working to create "substantial autonomy and self-governance" in Kosovo. The senior international official in Kosovo is the Special Representative of the Secretary General (SRSG), who has sweeping legal authority to govern Kosovo. He presides over UN and other international organizations with missions in Kosovo, such as the Organization for Security and Cooperation in Europe (OSCE) and European Union (EU), and has the final authority in approving legislation and decisions taken by Kosovo's provisional government. In September 2006, UN Secretary General Kofi Annan appointed German diplomat Joachim Ruecker to be the new SRSG. Previously, Ruecker served as the head of UNMIK Pillar IV, where he led efforts to privatize former socially-owned enterprises.

Resolution 1244 also authorizes a NATO-led force (KFOR) to provide for a safe and secure environment in Kosovo. KFOR's current strength is approximately 16,000 international troops, including approximately 1,700 U.S. troops (mostly U.S. National Guard). KFOR numbers are expected to steadily decline as the security situation improves and as local security structures, such as the Kosovo Police Service, increase their capacity to operate effectively.

In 2001, the SRSG promulgated a "Constitutional Framework for Provisional Self-Government in Kosovo." This document established a Kosovo Assembly and new Provisional Institutions of Self-Government (PISG). In November 2001, Kosovo held its first elections for the three-year term of the Kosovo Assembly. The elections were administered and supervised by the OSCE. The main political parties included the Democratic League of Kosovo (LDK), led by Ibrahim Rugova; Democratic Party of Kosovo (PDK), led by former KLA political chief Hashim Thaci; the Alliance for the Future of Kosovo (AAK), led by former KLA commander Ramush Haradinaj; and the Serb coalition party Povratak. The LDK won the elections with 46% of the vote, and the PDK came in second with 26%. They were followed by Povratak at 11% and the AAK at 8%. OSCE judged the elections free and fair.

After significant political wrangling, Kosovo's politicians agreed to establish Kosovo's first coalition government in March 2002, with Bajram Rexhepi (PDK) as Prime Minister and Ibrahim Rugova (LDK) as President. The Provisional Institutions of Self-Government (PISG) were formed, with ministries allocated to the parties according to the March 2002 power-sharing agreement, and in the same year, the Kosovo Assembly began to function and pass its first laws. Beginning in 2003, UNMIK began transferring a significant number of governing competencies to these ministries and continues to work to build their capacity, in accordance with UNSCR 1244. UNMIK will retain many powers associated with state sovereignty, including foreign affairs and some security functions, until Kosovo's final status is decided. In November 2004, UNMIK approved the creation of three new PISG ministries: Energy, Returns and Communities, and Local Self-Government; new Ministers of Interior and Justice were later added and are now operational.

On October 23, 2004, Kosovo held elections for the second three-year term of the Kosovo Assembly. For the first time, Kosovo's own Central Election Commission administered these elections, under OSCE guidance. The main Albanian political parties were the same as in the 2001 elections, but for the addition of the new party ORA, led by Veton Surroi, and two new Kosovo Serb parties: the Serbian List for Kosovo and Metohia (SLKM) led by Oliver Ivanovic, and the Citizens Initiative of Serbia led by Slavisa Petkovic. The LDK won the elections with 45.4% of the vote, and the PDK came in second with 28.9%. They were followed by AAK at 8.4% and the ORA at 6.2%. Most Kosovo Serbs boycotted the elections with support from Belgrade, with less than one percent voting. However, Kosovo Serbs still received ten Assembly seats that are reserved to them as a minority community under the Constitutional Framework, but many chose not to take their seats.

In contrast to the previous Kosovo government, this election produced a "narrow" coalition of two parties, the LDK and AAK. The December 3 inaugural session of the Kosovo Assembly re-elected Ibrahim Rugova as President and Ramush Haradinaj as Prime Minister.

In March 2005, Haradinaj resigned as prime minister after he was indicted for war crimes by the International Criminal Tribunal for the former Yugoslavia (ICTY); Haradinaj voluntarily surrendered to authorities and traveled to The Hague to face charges. After being provisionally released while awaiting trial, Haradinaj returned to The Hague where his trial is ongoing. The Kosovo Assembly subsequently elected Bajram Kosumi (AAK) as prime minister, whose resignation in March 2006 led to his replacement with Agim Ceku. After President Rugova's death in January 2006, he was replaced by Fatmir Sejdiu.

Resolution of Kosovo's future political status remains one of the key issues in the region. Kosovo Albanians continue to advocate independence, which Belgrade rejects. The Serbian Government's position is that Kosovo should remain part of Serbia as an autonomous province. In early 2002, former SRSG Michael Steiner first articulated a policy of "standards before status," whereby Kosovo's final status would be addressed after Kosovo meets certain internationally endorsed standards for the establishment of rule of law, functioning democratic institutions, minority rights, and economic development. In 2003, the United Nations Security Council endorsed a plan to evaluate Kosovo's progress on these standards in mid-2005.

The United Nations appointed Kai Eide, Norwegian permanent representative to NATO, to conduct this evaluation in the summer of 2005. In October 2005, Eide reported uneven progress on many key Standards, but said that there was no advantage to be gained by further delaying a future status process. The United Nations Security Council endorsed Eide's recommendation, and in November 2005, United Nations Secretary General Kofi Annan appointed Martti Ahtisaari, former president of Finland, to lead a future status process.

A major focus of the UN-led process is the status of Kosovo's minority communities, especially the Serbs. Following three days of widespread inter-ethnic violence in March 2004, the UN, NATO, and the international community enhanced their efforts to ensure a Kosovo that is safe for all communities. Currently, Kosovo's Serb community suffers restricted freedom of movement and sporadic acts of inter-ethnic violence. After the war, more than 100,000 Serbs and other non-Albanian ethnic minorities fled Kosovo and many remain displaced. The international community has encouraged their return, although results have been minimal to date. The international community has also supported the decentralization of government as a measure to enhance Kosovo's governance while addressing concerns of non-Albanian communities.

In November 2005, the Contact Group (France, Germany, Italy, Russia, United Kingdom, and United States) produced a set of "Guiding Principles" for the resolution of Kosovo's future status. Some key principles included: no return to the situation prior to 1999, no changes in Kosovo's borders, and no partition or union of Kosovo with a neighboring state. The Guiding Principles also maintain that any outcome of the status process must be acceptable to the people of Kosovo. After more than a year of negotiations, which began in February 2006, the UN Secretary General presented to the UN Security Council in March 2007 his Special Envoy's Report and Comprehensive Proposal for a Kosovo Status Settlement. Based upon numerous rounds of direct talks, shuttle diplomacy and discussions with the Contact Group, the Ahtisaari recommendations called for Kosovo's independence subject to a period of international supervision, and included broad protections for Kosovo's minority communities. According to the Ahtisaari plan, Implementation of the status settlement would be monitored by a U.S./EU-led International Civilian Office, which will include an EU rule of law mission and have limited executive powers to ensure Kosovo government actions are in line with the status settlement. NATO will remain in Kosovo to help ensure a safe and secure environment and oversee the creation and development of a small, lightly-armed Kosovo Security Force.

The United States supports the Ahtisaari plan, including its call for Kosovo's supervised independence. Working with its European partners on the UN Security Council, a draft UN Security Council resolution was introduced that would lead to Kosovo's independence in accordance with the terms of the Ahtisaari plan. The U.S. is working with its fellow Council members and the parties to resolve this issue.

Legislature
The Serbian parliament is the lawmaking body of the Republic of Serbia.

Principal Government Officials

Republic of Serbia
President--Boris Tadic
Prime Minister--Vojislav Kostunica
Deputy Prime Minister--Bozidar Djelic
Ambassador to the U.S.--Ivan Vujacic

Serbia maintains an embassy in the United States at 2134 Kalorama Rd., NW, Washington, DC 20008 (tel. 202-332-0333).

DEFENSE
Military branches include the Army of Serbia, which includes ground forces with internal and border troops, and air and air defense forces, and Civil Defense. Civilians fit for military service were estimated at about 2,088,595 for 2001. The 2002 estimate for military expenditures as percentage of GDP was 3.6%. The Ministry of Defense has undertaken significant reform initiatives, which if continued, will help move Serbia closer to full Euro-Atlantic integration.

ECONOMY
Serbia's economic progress since the fall of Milosevic has been substantial, with output up nearly 46% since 2000. The stable dinar, a budget surplus, and a restructured financial sector all demonstrate the success of stabilization policies. The short-term economic outlook for Serbia is positive, but enterprise restructuring and unemployment remain major challenges.

Growth in 2006 was a healthy 5.8%, but this pace slowed during the first quarter of 2007. In 2006, due to a shift in central bank policy to target inflation, the inflation rate declined to 6.6%, from 2005's 17.7%. Further decreases in inflation are expected in 2007. The increase in industrial production of 4.7% in 2006, compared to a mere 0.8% in 2005, is the highest in six years, and a welcome development after the stagnation of 2005. Industrial growth continued in 2007, averaging 4.8% during the first quarter. The current account deficit was 10.6% of GDP in 2006, with healthy export growth of more than 43%. Higher imports and consumption rates in early 2007, however, indicate that the trade gap may widen and cause the current account deficit to creep higher. Based mainly on large privatization receipts, foreign exchange reserves held by Serbia's central bank skyrocketed over 18 months to nearly U.S. $12.9 billion as of May 2007, or an amount covering about 10 months of imports. In March 2007, the National Bank of Serbia completed pre-payment of its debt to the International Monetary Fund (IMF) with a payment of $232 million, which followed a June 2006 payment of $978 million.

In 2006, Serbia recorded its best year yet with respect to foreign direct investment (FDI), but greenfield investment is still rare. A large part of the record U.S. $5.4 billion in FDI for 2006 was realized from the sale of the leading mobile telephone company to Norwegian company Telenor for Euro 1.5 billion. The Government of Serbia has also adopted a strategy for oil company NIS that calls for gradual privatization, with initial sale of a 25% stake and management control to a strategic investor. During the first two months of 2007, FDI totaled $752 million, a small increase over the same time period last year.

The privatization of the banking sector has been completed, with over 70% of assets owned by foreigners. In the last major deal, National Bank of Greece signed a deal in September 2006 to buy Vojvodjanska Banka, Serbia's sixth-largest bank by assets, for Euro 385 million.

While economic reform has been moving forward in many areas, enterprise sector reform is still halting. Over 26% of all persons employed in Serbia work for state owned enterprises or the central and local governments. Privatization of the least attractive socially-owned companies, which still employ about 235,000 workers, has been left for the very last. They still place a drag on the economy via substantial fiscal and quasi-fiscal subsidies. Even successful privatization of socially-owned enterprises often means jobs losses, and this, together with the overall lack of greenfield investment, has driven unemployment to 21%.

While economic growth in Serbia continues at a healthy clip, this indicator alone may be misleading. Serbia is still far behind its neighbors, with GDP still only 65% of the level in 1989; production volumes have reached only 45% of that recorded when Serbia was part of the Yugoslav economy. Sectors such as textiles, motor vehicles, and electronic equipment have never recovered from the depression of the 1990s.

FOREIGN RELATIONS
From the breakup of the Socialist Republic of Yugoslavia in 1989, the foreign policy of the F.R.Y. was characterized primarily by a desire to secure its political and geopolitical position and the solidarity of ethnic Serbs in the Balkan region through a strong nationalist campaign. The F.R.Y. supported and exploited the expansion of violent conflicts--in Bosnia and Herzegovina, Croatia, and its own province, Kosovo--in order to advance its policies. Since October 2000, Serbia has all but eliminated its nationalist rhetoric and has worked to stabilize and strengthen its bilateral relationships with neighboring countries. In 2002, F.R.Y. resolved its longstanding border dispute with Macedonia and established full diplomatic relations with its neighbor and former adversary Croatia.

Also in 2002, the F.R.Y. Government established a commission to coordinate cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) and began serving warrants for the arrest of persons indicted for war crimes who sought refuge in the country. The crackdown on organized crime following the assassination of Serbian Prime Minister Djindjic also resulted in the apprehension and transfer to The Hague of several persons indicted for war crimes. In 2004 and 2005, a significant number of ICTY indictees surrendered to the Tribunal, but six persons indicted for war crimes--most notably Bosnian Serb General Ratko Mladic--remain at large and most are believed to be in Serbia and/or the Republika Srpska. Until they are all in The Hague, Serbia will not have met all of its ICTY obligations.

Immediately preceding the NATO bombing campaign of the F.R.Y. in spring 1999, the U.S. and most European countries severed relations with the F.R.Y., and the U.S. Embassy was closed. Since October 5, 2000, foreign embassies, including that of the U.S., have reopened, and Serbia, as the successor state to the F.R.Y., regained its seat in such international organizations as the Organization for Security and Cooperation in Europe (OSCE) and the UN and is actively participating in International Monetary Fund (IMF) and World Bank projects. In 2003, Serbia was admitted to the Council of Europe. Serbia has also indicated its desire to join the EU and NATO's Partnership for Peace. Both NATO and the EU have made full ICTY cooperation a prerequisite for Serbia's increased cooperation with these organizations. Negotiations with the EU on a Stabilization and Association Agreement (SAA)--the first step toward eventual accession--began after a positive feasibility study in April 2005. Despite two rounds of successful technical talks, the EU suspended talks in May 2006, citing a lack of movement by Serbia on apprehending Mladic and other indictees. In November 2006, NATO invited Serbia into Partnership for Peace, but made further progress toward NATO membership conditional on better ICTY cooperation. In June 2007, the EU resumed talks on an SAA with Serbia in the wake of improved cooperation on war crimes issues.

Foreign Aid
Prior to 1999, Belgrade received no foreign aid from the United States or western European countries. Since the fall of Milosevic in October 2000, however, European Union aid has steadily increased, and the U.S. also gives aid to Serbia, though there are congressional restrictions based on Serbia's need to meet its international obligations to the International Criminal Tribunal for the former Yugoslavia (ICTY). In May 2006, Secretary Rice did not certify that Serbia was cooperating with the ICTY, suspending approximately $7 million of aid for fiscal year 2006.

U.S.-SERBIA RELATIONS
At the outset of hostilities between NATO and the Federal Republic of Yugoslavia in the spring of 1999, the United States and the F.R.Y. severed diplomatic relations. In response to the events of October 2000, the following month the United States reestablished a diplomatic presence. The U.S. Embassy formally reopened in May 2001. The Serbia Embassy in Washington and the U.S. Embassy in Belgrade have reestablished bilateral relations and provide a full range of consular services. Serbia currently enjoys good diplomatic relations with all of its neighbors.

Principal U.S. Embassy Officials
Ambassador--Cameron Munter
Deputy Chief of Mission--Jennifer Brush
Public Affairs Counselor--Rian Harris (acting)
Political Counselor--Nancy Cohen
Economic Counselor--Troy Pederson
Consul General--Carolyn Gorman
Defense Attache--Lt. Col. Eric Von Tersch
Foreign Commercial Service--Cameron Werker
USAID--Michael Harvey
Management Officer--Thatcher Scharpf

U.S. Office Pristina (Kosovo)
Chief of Mission--Tina Kaidanow
Deputy Chief of Mission--Alexander Laskaris
Political-Economic Section Chief--Thomas Yazdgerdi
Public Affairs Officer--Karyn Posner-Mullen
Defense Attache--Col. James Playford
USAID--Ken Yamashita
Management Officer--Robert Ruehle

The U.S. Embassy in Serbia is located at Kneza Miloša 50, 11000 Belgrade (tel. 381-11-361-9344).



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