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FY 1998 Country Commercial Guide: Serbia and Montenegro

Report prepared by U.S. Embassy Belgrade, released August 1997*.

I. EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at the commercial environment of Serbia and Montenegro (Federal Republic of Yugoslavia) (FRY), using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. CCGs are prepared annually at U.S. embassies through the combined efforts of several U.S. Government agencies.

United Nations (UN) trade sanctions imposed against the FRY in 1992 were suspended at the end of 1995 and were formally lifted in October 1996. The combined effects of the disintegration of former Yugoslavia (SFRY), poor economic policy choices, sanctions, and hyperinflation reduced per capita GNP by half to less than USD 1,400; increased real unemployment to over 50 percent; and cut industrial production by more than half. Limited recovery has begun but the economy remains hobbled by serious liquidity problems.

A U.S.-supported "Outer Wall" of sanctions, which precludes the FRY from joining International Organizations and International Financial Institutions (IFIs) such as the UN and the International Monetary Fund (IMF), remains in place pending progress on a range of political issues. The U.S. Government has refused to extend diplomatic recognition to the FRY as an additional condition of the "Outer Wall." Economic recovery cannot occur before the normalization of relations with the IFIs, because of the country's need for balance-of-payments support and restructuring of loans with official and commercial creditors. Additionally, such a recovery also requires deep structural reforms the political establishment has thus far been unwilling to make. (Note: Information used in this report is current as of mid-June, 1997. End note).

These conditions, together with more than three months of political instability that followed the Serbian government's efforts to manipulate the results of the November 17, 1996 local elections, account for a cautious attitude among American firms about doing business in the FRY. While business opportunities exist, particularly in infrastructure and export industries, U.S. businesses must be prepared to accept higher risks, to navigate through a difficult, and at times capricious, bureaucracy, and to operate within a cash economy.

II. ECONOMIC TRENDS AND OUTLOOK

Major Trends and Outlook: The disintegration of the SFRY created a variety of economic problems for Serbia and Montenegro (FRY). The combined effects of market disruption, war, UN trade sanctions and poor economic policy choices led to hyperinflation in 1993 and a reversal of the economic transformation which had begun in 1989. Industrial production was devastated and, despite recent growth, GDP per capita is currently only half of its 1989 level. GDP growth has been hobbled by the lack of economic reform and by the effects of the U.S.-supported "Outer Wall" of sanctions, which has prevented the country from joining IFIs, such as the IMF and the World Bank. In the absence of external financial assistance, the FRY economy stands little chance of a meaningful recovery. In addition, essential economic and political reforms have yet to be implemented. Major threats to economic stability and growth are: rising illiquidity throughout the economy, large trade and fiscal deficits, and numerous politically-mandated economic inefficiencies.

FRY GDP for 1996 was estimated at just over USD 15 billion. GDP increased by about 5.8% in 1996, the third consecutive year of growth. As noted above, this growth is from such a low base that it must be qualified as extremely modest. Despite three years of growth, industrial output in the FRY in 1996 amounted to a mere 40% of the 1989 level, while average utilization of industrial capacity was only 37%.

The FRY is not servicing its foreign debt obligations. Over 22,000 companies -- around 30% of all active firms in the FRY -- were officially insolvent at the end of March 1997. Overdue inter-company debt is now estimated at USD 1.5-2.0 billion. The biggest loss-makers continue to be 30 of the largest state/socially-owned companies, which were estimated to have produced more than 60% of all economic losses in 1996.

Much of the 1996 GDP growth was fueled by increased imports, which led to the opening of a USD 2.26 billion trade deficit. While the FRY fails to publish capital account information and the offsetting capital flows are not known, this deficit amounts to an unsustainable 15% of estimated GDP. Through the first five months of 1997, the deficit accumulated at a rate that would lead to a year-end trade deficit of approximately USD 2 billion. FRY trade deficits are to a certain extent structural, since Serbia and Montenegro ran a smaller but persistent trade deficit before the dissolution of the SFRY. The bulk of FRY imports in 1996 came from developed countries, mainly Germany and Italy, traditionally large trading partners of the FRY. U.S.-FRY trade accounted for only a small portion of the FRY's total trade picture.

Retail price increases slowed from over 100% in 1995 to 58.6% during the course of 1996. Price rises have slowed further to just 3.3% (just over 8% on an annual basis) through the first five months of 1997. This reduction in inflation has been accomplished mainly through a restrictive monetary policy. The cost of this policy has been to the health of domestic banks, which are now largely insolvent. The dinar was re-pegged to the German mark in November 1995 at 3.3 dinars per mark. The street exchange rate in mid-June was stable at 3.5 dinars per mark (5.7 dinars per USD). Many analysts believe the dinar is now overvalued by as much as 30-50% because of the impact of domestic inflation since the devaluation. Thus, tight money and stable exchange rates have also acted as a drag on production through the consequent overvaluation and illiquidity.

Government spending is estimated at over 45% of GDP and the fiscal deficit has been estimated at 5% of GDP for 1996. Most of the fiscal deficit is no longer being monetized, however, since the cost is being directly passed to the recipients of transfer payments. Payments to workers on government payrolls (e.g., health workers, teachers, soldiers, and police) as well as to pensioners and others are months overdue.

Possibilities for increased trade and investment were at least temporarily derailed during the three months of political turmoil caused by the Serbian government's attempt to manipulate the results of the November 17, 1996 local elections. The FRY may now be regaining some of the lost ground as signaled by the extension of trade preferences by the European Union in May 1997 and by the June 1997 acquisition of a 49% share of the Serbian telecommunications monopoly (PTT) by the Italian state conglomerate Stet and Greece's National Telephone Company (OTE), which pumped nearly USD one billion into the economy.

Privatization, bank reform, and other reforms to liberalize the economy, increase exports, and improve the investment climate in the FRY are currently under consideration but have not yet been implemented. Over the long run, the success of such structural adjustments will play a large role in determining whether FRY GDP can begin to recover to former levels. Ultimately, the FRY must undertake the necessary measures to lift the "Outer Wall" of sanctions and join the IFIs in order to provide the conditions to attract badly-needed private investment to the country.

Principal Growth Sectors: Government officials view as essential the revitalization of economic infrastructure -- roads, railways, air transport, telecommunications, and power production. Infrastructure is generally functional but inadequate and in need of both significant maintenance, modernization, and expansion. Financial services, advertising, retailing, and other services are a growth industry in the FRY -- which could allow for increased business for U.S. service and consulting firms.

Domestic authorities hope to encourage exports in agriculture, food processing, textiles, furniture, pharmaceuticals, non-ferrous metallic ores, and tourism to earn much needed foreign exchange. These sectors could present U.S. firms with opportunities for sales of equipment, spare parts, and new technologies.

Government Role in the Economy: Economic reforms were shelved and even reversed between 1991 and 1996. The former Governor of the National Bank of Yugoslavia (NBY) was sacked in May of 1996 for fighting publicly with Serbian Socialist Party (SPS) and Yugoslav United Left (JUL) officials in order to force a rapid privatization program. Thus, the FRY lags behind its neighbors in the transition process. Large socially-owned enterprises, a carry-over from the communist regime, remain under heavy state influence; their boards of directors typically composed of individuals with close SPS/JUL ties. Federal and republic governments have retained many formal and informal levers of authority over the economy -- et. al., export/import licenses, allocation of scarce credits, control over jobs -- and use them liberally to maintain political dominance. Analysts estimate that state-run enterprises owned over 80% of capital and that the private sector accounted for only 37% of GDP in 1996.

The Government of the Republic of Montenegro, in which the ruling party is the Democratic Party of Socialists (DPS), has been more reform-oriented than the Serbian Government and passed privatization legislation in 1996. This program is still in the early phases of implementation. The Serbian Government, in January 1997, proclaimed economic reform a high priority and, as of this writing, has drafted legislation on privatization and some other economic reforms.

III: POLITICAL ENVIRONMENT

Nature of Political Relationship with the U.S.: As of June 1997, consistent with the U.S.-supported "Outer Wall" of sanctions, the U.S. Government had neither recognized the FRY nor offered to establish diplomatic relations with it. Relations remain strained by differences over several important political issues. Further stress was added to the relationship by the Serbian government's attempt to manipulate the results of the November 17, 1996 round of elections and continued harassment of the independent media. Conditions for lifting the "outer Wall" are: cooperation with the International War Crimes Tribunal; improvement in the human rights situation in Kosovo; and progress in the negotiations on SFRY succession issues.

Nature of Political Relationship with the U.S. and Major Political Issues Affecting Business Climate: The "Outer Wall" of sanctions against the FRY has been maintained by the international community, strongly-supported by the United States, to leverage progress on several issues. In addition to the denial of U.S. recognition, the FRY is prevented by the "Outer Wall" from joining international organizations such as the UN and the IFIs. The conditions for removal of the "Outer Wall" are: improvement of the human rights situation in Kosovo; cooperation with the International War Crimes Tribunal in the Hague; and progress in the resolution of the succession and continuity issues associated with the dissolution of the SFRY.

Domestic politics also impact the business climate. The SPS, DPS, and JUL continue to exert a great deal of economic influence. Their members fill key government positions and control the boards of directors of the largest enterprises. "Conflict of interests" is not a concept that has much currency in Serbia or Montenegro. Especially in Serbia, significant privatization has yet to become more than a promise.

Political System, Elections Schedule, Orientation of Major Political Parties: After the disintegration of the SFRY, on April 27, 1992, Serbia and Montenegro joined to constitute the FRY. The constitution of the FRY established a parliamentary system, with a relatively weak presidency. The FRY Parliament is composed of: the Chamber of Citizens (138 deputies) and the Chamber of Republics (40 deputies -- 20 from each republic).

In practical terms, political power in the FRY is concentrated within the ranks of the SPS and the DPS, the ruling parties within Serbia and Montenegro, respectively. These parties, the heirs to the League of Communists of the SFRY, hold majorities in both federal houses. The DPS holds a strong majority in Montenegro. In Serbia, the SPS, together with New Democracy, a junior coalition partner, holds a majority in the parliament. Government control over the media has hamstrung political opposition parties and has also largely nullified pressure for greater democratization. Strong government influence has also weakened the nominally independent judiciary.

Three leading opposition parties -- the Serbian Renewal Movement, the Democratic Party and the Civic Alliance -- formed a coalition, Zajedno, and won the November 17, 1996 round of local elections in most of the major cities in Serbia. The Serbian government attempted to annul this victory until February 1996, when, following three months of demonstrations and international pressure, opposition victories were finally recognized. The opposition coalition has since collapsed at the national level, although it continues to function in local governments throughout Serbia.

Republic-level elections for the Serbian Parliament and president, as well as for the Montenegrin president, are expected in the fall of 1997. Current Serbian President Slobodan Milosevic has been nominated by the SPS to be president of the FRY, a position appointed by the federal Parliament. If Milosevic moves to the Federal level, it is expected that the federal government will also become more powerful vis-a-vis the governments of the two republics.

IV: MARKETING U.S. PRODUCTS AND SERVICES

Distribution and Sales Channels: By domestic law, any firm may operate in foreign and domestic trade in the FRY. Simpler laws and new conditions have fostered the rapid emergence of new, mostly private, trading firms. Currently, about 9,000 companies in Serbia and Montenegro are engaged in foreign and domestic trade. Many, but not all, handle distribution of imported products. The new firms are often headed or managed by people who once worked for the large socially-owned trade companies of the SFRY. In many cases they work in the same sectors with the same partners as they did in the socially-owned firms.

Use of Agents and Distributors; Finding a Partner: The use of agents and distributors is an important method for foreign firms to enter the FRY market. Many American firms have found that it is more efficient and cheaper to hire a good local agent or distributor than to conduct direct sales.

Illiquidity is presently a prevailing characteristic of the FRY economy. Therefore, advanced payments and confirmed letters of credit by foreign banks are typical and are recommended by already-established American firms. International consulting firms present in Belgrade such as Deloitte and Touche, Coopers & Lybrandt, KPMG, and Ernst & Young can be helpful in establishing the credibility of a potential local partner. The Commercial Section of the U.S. Embassy can provide services to support firms seeking an agent or distributor in Serbia and Montenegro. An additional source of information is the FRY Chamber of Economy.

Franchising: Franchising is not yet widely practiced in the FRY, but some examples do exist. McDonald's, which has been present in Serbia for several years, has plans to open several new franchises in the near future.

Direct Marketing: Direct marketing is not well developed in Serbia and Montenegro. Mail order houses and the sale of mailing lists remain rare. Personal presentation marketing has been employed by such firms as Avon and Amway, operating from their representative offices in Hungary. FRY business directories are available in hard copy and in a few cases on diskette but not yet on CD-ROM. Targeting customers by product type, size, sales, and location is possible on a limited basis.

Joint Venture/Licensing: Joint ventures are regulated by the Foreign Investment Law (FRY Official Gazette #42/92, 24/94 and 29/96) and the Enterprise Law (# 29/96). FRY firms are typically interested in joint-venture contracts with foreign firms -- looking for the foreign firm to provide capital, equipment, and merchandise, while the domestic firm provides working and warehouse space, personnel, local experience, and channels for distribution. U.S. firms considering such ventures should review carefully the viability of potential domestic partners. Problems can include excess labor, overdue debts, and inefficiencies. Several American firms have maintained joint ventures that predate the disintegration of the SFRY.

Steps To Establishing an Office: The establishment and work of foreign representative offices in the FRY is prescribed by the Decree on Specific Conditions for Establishment and Operation of Representative Offices of Foreign Persons in Yugoslavia (FRY Official Gazette #51/92, 81/93, 26/94 and 50/94). Representative offices may not operate in trade in armaments or other military equipment.

A representative office may begin operations after completing a registration process with the Federal Ministry of Foreign Trade. In general, the registration application must contain the name of the founding firm, the name and headquarters of the representative office, and the expected number of employees of the representative office. Additional information is required about the founding company; the expected activities of the representative office; a statement of liability (and bank guarantee if initial capital is below USD 5,000) for obligations of the representative office; permits for the permanent residence or temporary stay of the foreign nationals to be employed in the representative office; the name of the manager of the representative office; and, evidence of residence abroad if the founder is a Yugoslav national. By law, the registration process should be completed within 30 days of the date of the filing of the application. However, reports indicate that the process is paper intensive and arduous -- requiring 3-6 months to complete.

Representative offices, in the name of their founders, can conduct operations including: market research and development, contract or investment preparations, technical cooperation, and similar business facilitation activities. Representative offices are permitted to hold foreign exchange and domestic currency accounts in authorized FRY banks. Office equipment can be imported duty free, on the basis of temporary imports. Cars may be imported duty free only for the foreign employees of the office and only they are allowed to drive them. The automobile provisions have been attacked as unnecessarily complicated and restrictive.

Selling Factors/Techniques: Liquidity problems are the most severe business constraint. According to recent research, most large importers pay in advance. Short-term supplier loans are rare. Most FRY consumers no longer have access to credit. Sales techniques critical to success include close and frequent contact with buyers; motivated, well-trained agents, and aggressive market promotion.

Advertising and Trade Promotion: Most FRY firms engage in some form of advertising. Available channels include: newspapers, magazines, television, radio, billboards, and signs. Television, radio and print advertising are believed most effective. Sales promotions, public relations, and trade fairs are also common. Some local advertising agencies have links to American advertisers.

Pricing Product: For most goods, state subsidies and price supports for consumer goods have been eliminated and prices are determined by market forces. Changes in the price of certain basic products (e.g., milk, bread, flower, and cooking oil), however, must be reported to the Ministry of Internal Trade 15 days in advance and the state retains discretionary authority. The state directly controls prices of utilities, public transit, and petroleum.

Significant black market sales of many products, especially consumer goods, is an important characteristic of the domestic market. Such goods can be sold more cheaply than goods sold through legal channels because the sellers have generally avoided customs and tax payments.

Sales Service/Customer Support: This is a relatively new concept but, with a gradually increasing presence of Western firms and more competition for value-added services, responsiveness to customer needs and demands is growing.

Selling to the Government: Statistics on direct government purchases are not available but such purchases are relatively low given severe budgetary constraints.

Protection from IPR Infringement: Legal protection of intellectual property in the FRY is afforded by federal laws on patents, trade marks, industrial designs and geographical appellations of origin ("FRY Official Gazette," #15/96). Current FRY law regarding industrial property generally complies with internationally recognized standards, as well as with the standards set in the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The Law on Patents is in accordance with the Convention on the Granting of European Patents. Industrial property rights can be granted or revoked by the Federal Institute for Intellectual Property Rights in Belgrade. The institute's decisions may be challenged only in Federal court. Foreign companies or individuals must have local legal representatives in any court action.

Despite these legal protections, IPR violations are a significant problem in the FRY. Economic deprivation, institutionalized smuggling under sanctions, and lack of enforcement have created a thriving market for pirated goods. Implementation and enforcement of existing law is weak. Unofficial estimates indicate that up to 95 percent of computer software violates copyright protections. Pirated video and audio tapes and CDs are sold openly on the streets. Copies of Levi's and other brands of jeans are produced in Novi Pazar in large quantities.

Need For a Local Attorney: As a standard practice, local legal counsel should be retained when firms are contemplating an investment, joint-venture, or any contractual relationship. All legal work in the FRY must be conducted by domestically-accredited attorneys.

V: LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT

Best Prospects for Non-Agricultural Goods and Services: The term "best prospects" is used guardedly. Given the difficult state of the economy and the absence of U.S. exports during sanctions, recommendations are based more on potential than past performance. U.S. exports to the FRY totaled only USD 133 million in 1996 and no statistical breakdown is available. No attempt is made to establish a particular rank order among the selected sectors precisely because no track record exists. Prospects can be expected to improve significantly when the FRY takes the necessary actions to lift the "Outer Wall" of sanctions. Given these caveats, the sectors which provide the best prospects for U.S. exports are:

Architecture/Construction/Engineering Services (ACE)
Financial Services (FNS)
General Consumer Goods (GCG)
General Industrial Equipment/Supplies (GIE)
Household Consumer Goods (HCG)
Management Consulting Services (MCS)
Mining Industry Equipment (MIN)
Used/Reconditioned Equipment (USD)

FRY and republic officials have stressed their desire to rebuild the economic infrastructure of the country as a primary means of reviving the economy. Both republics are trying to use privatization to encourage foreign investment and economic renewal. The June 9 sale of a 49% share of "Telekom Serbija" (formerly PTT) to Italy's STET and Greece's OTE for nearly USD one billion is a concrete example.

Road, railroad, airline, and energy production sectors require varying degrees of maintenance and modernization. The government has announced plans to seek loans to pay for renovation and expansion of these systems but is also considering granting build-operate-transfer concessions. Sitting astride important transportation routes through the Balkans, the FRY hopes to build another 2,000 km of new roads. Trains are powered by vintage locomotives and, because of poor maintenance, only about half the existing rail capacities are functioning. JAT, the FRY's airline, has announced its desire to modernize its fleet and expand its operations.

About 70% of the FRY's electricity is generated by thermo-electric power plants which burn domestic soft coal. Frequent electrical blackouts and brownouts during the peak use winter months point to a power production and delivery system in serious need of rehabilitation. Plans to privatize the power generating systems in the FRY aim to boost the efficiency of production and the level of environmental protection. The existing plants are based on U.S. technology from the 1950s.

Additional privatization is expected to increase demand for financial, auditing, and management consulting services.

Several U.S. firms operating in the FRY with representative offices or through distributors sell consumer goods -- from chewing gum to computers. The domestic market is characterized by low average incomes but consists of over 10 million people, many of whom are brand conscious and already familiar with a variety of American goods. Again, the market would improve significantly with economic recovery.

Average capacity utilization in factories in the FRY is currently below 40%. Even in enterprises where continued production is economically viable, equipment is in need of repair or modernization. The liquidity crunch in which most enterprises find themselves creates a potential niche for used or re-conditioned industrial equipment. The FRY is mining copper, lead and other non-ferrous metals for export but could use additional capital investment in order to make production efficient.

Best Prospects for the Agricultural Sector: The long-term outlook for the agricultural sector, which accounts for 16 percent of the FRY's GNP, is uncertain. The FRY, with substantial investment in rural infrastructure, farm machinery, and irrigation equipment, could become a net exporter of grains, vegetable oil, fruits and vegetables and livestock.

In the medium term, U.S. agricultural exports to the FRY will consist mainly of soybean. The FRY is also likely to import smaller quantities of wheat (durum) and wheat flour, poultry, corn seed, and cotton within the next year or two. U.S. exports of these goods are unlikely without the initiation of U.S. export assistance programs, such as GSM-102. Long-term possibilities for exports of U.S. high-value products such as nuts, raisins, snacks, cigarettes, beverage syrups, ice cream, and biotechnology products might be possible after substantial economic recovery.

Significant Investment Opportunities: Foreign investment could emerge as an important factor in the FRY economy, particularly if the federal and republic governments enact serious economic reform, reduce the degree of political control of the economy, and undertake the steps to lift the "Outer Wall" of sanctions. Authorities are willing to sell portions of state-owned infrastructure for cash to foreign partners. Pending legislation on privatization in Serbia has not yet been finalized and will not, in and of itself, be sufficient to establish the conditions for an inflow of investment capital.

While Montenegro is affected by the same economic and political conditions that affect Serbia, the republic has a more aggressive privatization program, under which all formerly socially-owned capital was transferred to government funds. Montenegro is now trying to attract foreign investment in these companies and properties. Montenegrin law also establishes tax exemptions, tax relief, and other privileges for foreign business activity in the republic. The most promising sector is tourism, given the republic's ruggedly beautiful stretch of Adriatic coastline.

VI: TRADE REGULATIONS AND STANDARDS

Trade Barriers: The FRY has begun to liberalize trade. The government has announced that 88% of all imports can enter under the FRY's tariff regime. Nonetheless, the government still retains many tools by which to restrict the free movement of goods. Non-tariff barriers are rationalized as protecting nascent industries, but appear to function largely to protect state-run monopolies.

The Federal Government establishes annual quotas for some goods, either by quantity or value. These quotas are then allocated by the Ministry of Foreign Trade. Multiple sources have indicated that quota allocations are generally based on either ruling party politics and patronage, or under-the-table cash payments. Sanitary and phyto-sanitary requirements are also selectively used to bar agricultural imports, including, for example, U.S. chicken.

Customs Valuation: The primary basis for customs valuation is the transaction value of goods (producer invoice), including all duties and taxes paid outside the FRY. By law, customs duties for all consumer goods need to be paid upon entry. Customs laws are currently under revision. The FRY Customs Tariff Law (Jan 1, 1995), was designed to harmonize tariffs with the combined tariff nomenclature of the European Union. Customs tariffs and taxes are as follows:

1. Normal customs tariff rate -- 0-44%, (averaging 10%);

2. Additional import tax -- 1-9%;

3. Equalization tax -- 1-9%;

4. Customs evidence fees -- 1%;

5. A surcharge, the difference between the import price, plus customs and duties and the average domestic price, is also assessed for certain agricultural goods;

6. Seasonal import taxes, usually around 20%, levied against imports of some fruits and vegetables;

7. Excise taxes -- 5-70% -- are also levied for products such as: cigarettes, alcoholic beverages, coffee, oil derivatives, some furs, gold, and some others.

Import Licenses: As described under trade barriers, above. Additionally, products such as hazardous materials, materials for biological weapons, psychotropic products, nuclear products and uranium ore, drugs, narcotics, precious metals, are generally controlled via import licenses. The FRY also has controls on importation of munitions, armaments, and military equipment.

Export Control: Dual-use technology and defense products require export licenses from the Bureau of Export Administration (U.S. Department of Commerce), Department of State and/or Department of Defense.

Import/Export Documentation: A unified customs declaration which classifies goods by Product Code Number is required. Certificates of origin are also required for imports. Durable consumer goods imported into the FRY must be accompanied by a written certificate containing the duration of the goods, instructions for use, and a list of authorized services issued by the importer or the foreign firm's representative in the FRY. For agriculture and food products, veterinary and phyto-sanitary certificates, issued by USDA are required. Additionally, an importer must arrange quality control testing with an authorized FRY inspection firm in order to obtain a certificate of quality.

Temporary Entry: Goods may be imported into the FRY on a temporary basis and exempted from customs duties under certain circumstances (FRY Official Gazette #49/92, 52/94), including: equipment sent to a FRY firm to produce goods for a foreign company; equipment imported by a foreign contractor to perform construction, assembling, maintenance and similar works in FRY; office equipment imported for representative offices of foreign firms; raw materials imported for processing and re-export. Sources have indicated that these provisions are unwieldy for representative offices and that other unadvertised taxes are still applied. Temporary imports must be approved by the Customs Administration, which has wide latitude in approval.

Labeling, Marking Requirements: Imports should be accompanied by a declaration containing the name and type of product and the name of the manufacturer. For high-tech products, the manufacturer must declare a servicing period and supply spare parts and required accessories.

Prohibited Imports: Cars more than four years old may not be imported into the FRY.

Standards: The Law on Standardization (FRY Official Gazette # 30/96) applies ISO 9000 standards.

Free Trade Zones/Warehouses: (The Law on Free Zones -- FRY Official Gazette #81/94). A number of free zones have been established in the FRY, including those located on the Danube (Belgrade, Smederevo, Pancevo, Prahovo, Novi Sad), those in bigger towns (Nis, Sabac, Subotica), and the sea port of Bar.

Economic activities in free zones are encouraged by tax, customs, and foreign exchange incentives, thus providing more favorable conditions for business. The zones are designed to increase the competitiveness of exports. Free zones may be founded by domestic or foreign firms, through the Federal Ministry of Finance.

Special Import Provisions: Pesticides and seeds must be included in the respective National Lists of Approved Pesticides and Seeds before they may be imported. A lengthy testing procedure is required for a product to be included on these lists.

Membership in Free Trade Arrangements: The FRY has announced but not yet implemented measures to bring its trade regime into compliance with WTO standards -- though it is not yet eligible for membership. The FRY has only recently been granted preferential trade status by the EU and still has not qualified for U.S. most-favored nation status. The FRY has signed a bilateral free trade agreement FYR Macedonia.

VII: INVESTMENT CLIMATE

Openness to foreign investment: The federal and republic governments of Serbia and Montenegro (FRY) strongly desire foreign investment to boost economic performance, especially given the FRY's exclusion from International Financial Institutions (IFIs). The state, however, continues to play a commanding role in the economy and, to date, has not demonstrated its commitment to economic liberalization. Some reforms were adopted in 1996 and more are being submitted to federal and republic parliaments in late June of 1997. Government officials have announced their intentions to privatize portions of large state firms involved in infrastructure -- 49% of Telecom Serbija was sold to foreign investors in early June 1997.

By law, foreign investors have the same rights, obligations and legal status within an enterprise as domestic investors, provided the same is true in the foreign investor's country. Foreign investment is not screened by the government according to any particular criteria. No discriminatory or preferential export and import laws affect foreign investors. High tariff rates and surcharges, as well as quantity limitations for some imports, have made it difficult for foreign firms in the FRY to import the quantities of goods necessary to initiate large-scale sales operations. While there is no formal discrimination against foreign firms, sources have indicated that FRY law and institutions can be manipulated by domestic firms -- many of which remain socially-owned -- to disadvantage foreign firms.

Right to private ownership and establishment: A foreign person or entity wishing to invest in an existing enterprise, establish a new enterprise, or obtain concessions for the use of a particular natural resource, may do so if reciprocal arrangements exist in the foreigner's country. Foreign investors, in accordance with the Law on Foreign Investment, have the right to: manage a company; transfer their rights and obligations as determined in the act of founding the company to other foreign or domestic entities; share in, transfer, repatriate, and reinvest the profits of a mixed-ownership company; be reimbursed the initial investment or unused resources, under certain circumstances; and to recoup some investment in case of liquidation or bankruptcy.

Under FRY law, private and public enterprises are accorded equal treatment. In practice, however, public enterprises are protected by the government, have easier access to credit, and receive other types of preferential treatment.

Protection of property rights: Foreign citizens have property rights, including ownership of land and the right to perform economic activities, in accordance with the federal law. Citizens of any Paris Union countries enjoy in FRY the same protection as FRY citizens. The protection of rights of other foreign persons is subject to reciprocity. Property is normally purchased in cash. The FRY has adopted solid laws to protect intellectual property, but enforcement is weak.

Performance Requirements/Incentives: The Law on Foreign Investments introduces incentives for foreign investment, including free imports of equipment, fixed assets, and building materials directly related to the investment. Passenger vehicles are not accorded this treatment. Foreign exchange as initial capital or earned doing business with foreign countries may be maintained in a foreign exchange account with an authorized bank. Unhindered repatriation of profits and repatriation of capital is granted by the FRY constitution, but the federal government has reserved the right to temporarily suspend such transactions if necessary.

Firms established by foreign capital are exempt from profit tax for 72 months after entry in Serbia and 60 months in Montenegro. If a firm is located in a free zone, this tax break lasts for 6 years in Serbia and 10 years in Montenegro. New jobs created by investors are graced with a two-year 40% reduction in wage taxes in Serbia (50% in Montenegro). Foreign citizens employed in Serbia by foreign investors are entitled to a 50 percent reduction in income tax. The Montenegrin Law on Special Conditions for Foreign Companies contains some additional incentives for foreign investment under certain circumstances.

No particular performance requirements are imposed for establishing, maintaining or expanding the investment. No local content laws apply to foreign investments except in free zones.

Issuance of visas can be bureaucratically difficult and time consuming, but the process does not deliberately discriminate against foreign businessmen. Visas can be withheld from potential political opponents of the regime.

Transparency of the Regulatory System: Competition is regulated by the Law on Trade (FRY Official Gazette #50/93, 41/94, and 29/96) and the Law against Monopolies (FRY Official Gazette #29/96). Generally, bureaucratic and regulatory procedures are neither transparent nor efficient.

Corruption: FRY law treats bribery/corruption as criminal offenses. Nonetheless, sources indicate that both are common, especially in government procurement and in the regulatory system.

Labor: Labor issues are regulated by several laws, including: the Law on the Fundamentals of Labor Relations (Official Gazette of FRY #29/96), the Law on Labor Relations (Official Gazette of Serbia #53/93, #9/94, #48/94 and #53/95), the Law on Labor Relations (Official gazette of Montenegro #42/90, #28/91, #17/92 and #27/94), and the Law on the Conditions for Establishing a Labor Relationship with Foreign Nationals (Official Gazette of SFRY #11/78).

Domestic and foreign legal entities enjoy equal legal status with respect to labor issues. The FRY wishes to join the International Labor Organization (ILO) and strives to maintain the appropriate legal framework. The maximum working week is 40 hours. The minimum retirement age, with a minimum of 15 years of service, is 65 years for men and 60 for women. In April 1997, the average monthly gross wage amounted to over 1,500 dinars (USD 250). Some additional small allowances are traditional. The gross minimum wage is approximately USD 150 per month.

Despite some legal modifications, authorities continue to cling to socialist labor ideas. The government makes it difficult for independent labor unions to function. The government is also nominally committed to full employment. The official unemployment rate is 28% but the de facto rate is much higher since many of the nominally employed are on long-term mandatory leaves of absence and are unlikely to return to their old jobs. The level of employment has been a major sticking point in government efforts to sell off some large state enterprises.

Efficient Capital Markets and Portfolio Investment: Capital markets remain undeveloped. The Belgrade Stock Exchange was constituted in 1989 and the Podgorica Stock Exchange was constituted in 1996. Securities can be traded in either exchange but, given the state of privatization in the FRY, securities trading is extremely limited. In practice, both exchanges operate primarily in short-term (30 days or less) commercial paper.

Commercial banks, which suffer severe liquidity problems, have not adjusted to operate on the basis of market principles. The National Bank of Yugoslavia (NBY), has taken over some of their functions, including the execution of some short-term credit activities. This is one factor in the creation of the black market for currency.

Bank credits are often allocated on a political rather than a market basis. In essence, credits are informally directed to socially-owned or other favored firms at lower than market interest rates. Given that credit is a very scarce resource in the FRY, short-term commercial paper (up to 30 days) carries interests rates exceeding 200% annually. Thus, private entrepreneurs are significantly disadvantaged in the capital and financial markets. Foreign firms receive the same treatment as domestic firms.

FRY financial authorities are taking steps to make legal, regulatory, and accounting systems transparent and more consistent with international norms. Assets and liabilities of companies are measured by book values which generally overvalue the worth of firms. FRY bank accounting systems are especially egregious in this regard. Portfolio investments are foreseen in the most recent revisions of the Law on Enterprises and the Law on Securities, however, few real portfolio investment channels exist.

According to official data, the assets of the ten largest banks in Yugoslavia total about USD 3.5 billion, or 60% of all FRY bank assets. Some experts have estimated that this figure is overstated by approximately 25%. The banking system is not sound -- around 50% of assets are low quality and another 40% are non-performing.

Socially-owned firms independently decide whether to privatizatize and, at least in theory, control all investment decisions relating to their firms.

Conversion and Transfer Policies: Conversion and transfer policies are regulated by the Law on Foreign Exchange Operations and the Law on Foreign Investment. The FRY does not restrict the conversion or transfer of funds associated with an investment, including remittances, earnings, lease payments, and loan payments. The NBY is legally obliged to carry out such operations within seven days. In practice, however, these operations are often settled via debt swaps.

Low hard currency reserves, tight monetary policy, and the deep trade deficit combine to make it difficult for importers to obtain foreign exchange. The law sees such exchange operations as the province of the NBY, but most financial transactions are arranged via the black market. Many international financial channels and transactions are unavailable to FRY banks because of their liquidity problems and their inability to rebuild links severed during sanctions. Additionally, some FRY banking assets remain frozen pending the resolution of SFRY succession issues. The FRY is not currently servicing its large foreign debt.

Expropriation and Compensation: Authorities have retained the right to expropriate property in the "public interest." According to the Law on Expropriation (Official Gazette of Serbia #53/93), the state must offer fair (at least market) value for expropriated property. In cases where property was expropriated in the past, the compensation generally fell below the market value. No significant expropriations have occurred recently nor are any anticipated. Expropriation and nationalization are not permissible in free zones.

Dispute Settlement: FRY legislation regarding investment disputes is generally in accordance with international rules (Rules on the Foreign Trade Arbitration Court with Yugoslav Chamber of Commerce and Industry, i.e. of the Law on Litigation Proceedings -- FRY Official Gazette #87/93). Inconsistent implementation and lack of enforcement of foreign and domestic judgments by local courts remains the biggest impediment to fairness. Typical problems include the inability or unwillingness of local courts to enforce monetary judgments. An additional problem is that government and court decisions appear at times to be influenced through ruling party channels. The law can become a very flexible tool under these circumstances and post has observed that it can be used to assist domestic interests to the detriment of foreign investors.

The FRY accepts binding international arbitration of investment disputes between foreign investors and the state -- including the New York Convention on Recognition and Enforcement of Foreign Arbitration Awards. The FRY Arbitration Court is relatively independent and typically settles disputes when small business is in question. For bigger investments, foreign firms generally seek arbitration in foreign courts to settle disputes.

Political Violence: Assassinations and bombings have taken place in recent years but these appear to have been aimed exclusively at political and criminal rather than commercial targets.

Bilateral Investment Agreements: No bilateral investment agreement between the United States and the FRY is likely until after normalization of relations.

OPIC and Other Investment Insurance Programs: The OPIC program in former Yugoslavia was terminated in 1992. The FRY has announced its intention to became a member of the Multilateral Investment Guarantee Agency, but this can take place only after the "Outer Wall" of sanctions has been lifted.

Capital Outflow Policy: Repatriation of capital for non-residents is free of restrictions. Capital outflow for FRY residents is restricted.

Major Foreign Investors: Foreign capital is invested in Yugoslavia in many different fields. However, it is most frequently invested in trade, auditing and accounting, tourism, catering, transportation, chemicals, pharmaceuticals, lumber, and machinery. Foreign investments have originated from many countries, including: Italy, Greece, Germany, France, Great Britain, the United States, Canada, Hungary, Russia, and Romania.

Recent investment has been channeled primarily into new companies. The Serbian government hopes to encourage capital to flow into existing companies with the privatization legislation currently under consideration in Parliament. Most new firms are of the limited liability type. Issuance of stock remains exceptional and few partnerships exist.

Foreign investment in the FRY has increased since the suspension/lifting of UN trade sanctions. Data available through the first six months of 1996 indicates that 650 contracts were signed and approved, of which 416 are related to founding of mixed capital companies, and only 38 are related to existing companies. These contracts were valued at 127 million German marks. As noted earlier, the recent sale of a 49% share of Telekom Serbia (formerly PTT) to foreign investors for nearly USD one billion dwarfs all other recent foreign investments in the FRY.

VIII: TRADE AND PROJECT FINANCING

Brief Description of Banking System: The banking system in the FRY is in terrible condition. International links were broken by sanctions and are by no means fully re-established. The entire economy is characterized by illiquidity and bank loans are largely non-performing. Hundreds of millions of dollars in bank assets remain blocked, pending resolution of negotiations on SFRY succession. The banks are saddled with huge debt, much of which the state imposed upon them. For example, the banks continue to hold much of the FRY's international debt, estimated at over USD 10 billion. According to estimates, about 90% of the total assets of FRY banking system are immobile.

Almost no capital in the form of savings is flowing into the banking system because citizens have no confidence in it. This caution stems from the freezing in 1991 of the citizens' hard currency accounts, valued at over USD 4.3 billion. The NBY withdrew operating licenses from 14 banks during 1996 but most other banks have equally serious problems. There are still more than 100 banks operating in FRY. Most assets are concentrated in six large socially-owned banks and several privatized banks.

Interest rates for commercial paper, almost all of which matures in 30 days or less, were extremely high during 1996. Real interest rates for NBY credits to commercial banks, however, were frequently negative in 1996. At the beginning of 1997, the NBY eased its monthly discount rate to 3%, but given the slower rate of inflation so far in 1997, real interest rates on NBY credits have remained positive.

Foreign Exchange Controls Affecting Trading: No legislative restrictions limit the ability of a domestic company to pay for imported goods or services. Banks authorized to perform foreign transactions normally open accounts with banks abroad and perform payment operations on what is essentially a cash basis. Foreign exchange in corporate or individual accounts with such banks may also be converted into dinars and transferred to current accounts for domestic payments. Foreign exchange may not be purchased for speculative purposes. Purchases are permitted at any time to pay for a particular import, by presenting the contract or the invoice. The current tight monetary policy has left dinars in short supply and most foreign exchange transactions are routinely executed on the black market.

General financing availability: Financing business from internal savings will continue to be extremely difficult as long as the "Outer Wall" of sanctions remains in place. The FRY's current strategy depends upon attracting foreign investment in the interim.

List of Banks with Correspondent U.S. Banking Agreements:

IX: BUSINESS TRAVEL

Business travel to the FRY requires a visa which should be obtained well in advance from the Embassy of the FRY in Washington, D.C., prior to departure from the U.S. Visas are not normally granted at land border points, and never granted at airports. While no travel advisory is currently in effect for the FRY, visitors are advised to check with the Department of State when planning a visit because the potential for violent incidents persists in the country. Ethnic tensions remain high, especially in the Kosovo and Sandzak regions. Travelers may be stopped by police at any time and should be prepared to show passports with valid visas.

Holidays:

When a holiday falls on a Saturday or Sunday, the holiday is observed the following

Business infrastructure: Many businessmen in larger towns speak English or German. When necessary, a translator can be hired. Only two hotels in Belgrade have business centers where secretarial services are available (Hyatt and Intercontinental). Credit cards are accepted in most hotels but not yet in many shops or restaurants. Office space or housing can be rented through specialized local agencies or by placing advertisement in a local daily newspaper.

X: APPENDICES

APPENDIX A:

APPENDIX B: DOMESTIC ECONOMY

* - Federal Statistics do not include workers on involuntary paid leaves; real unemployment is estimated at around 50%.

APPENDIX C: TRADE (USD-millions)

APPENDIX D: INVESTMENT STATISTICS

(See investment climate statement)

APPENDIX E: U.S. AND COUNTRY CONTACTS

APPENDIX G: TRADE EVENT SCHEDULE

*International Copyright, United States Government, 1997 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U. S. Copyright Law, Title17, United States Code.

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