D. Kathleen Stephens, Deputy Assistant Secretary for European and Eurasian Affairs, "The Current Situation in Serbia," Testimony Before the Subcommittee on Europe, House International Relations Committee, Washington, DC, March 17, 2004

Thank you for inviting me to testify before your committee today, Mr. Chairman.
I am pleased to have this opportunity to share with you some of the
transformations that are taking place today in the Republic of Serbia to
share how far we have come in our relationship, to underscore our continued
commitment to a stable and prosperous Serbia and to outline the serious
challenges that remain before us.

Just over a year ago, on March 12, 2003, Serbia was rocked by the assassination
of Prime Minister Zoran Djindjic. Rather than crumble in the face of this
violent attack on the republic s democratic institutions, Serbian leaders stood
firm and fought back by launching a sweeping crackdown on organized crime and
official corruption. The investigation into the assassination revealed to the
Serbian public a nexus between organized crime, corrupt government officials
and networks opposed to cooperation with the International Criminal Tribunal
for the former Yugoslavia (ICTY). The public was appalled by the assassination
and welcomed the emergency measures instituted in its immediate aftermath, in
the belief that Serbia s leaders were serious about completing the reform
process that started with the ouster of Slobodan Milosevic on October 5, 2000.

Unfortunately, the energy and optimism that flourished in the spring of 2003
dissipated over the course of the summer. The Zivkovic government found itself
caught up in a series of public controversies and political scandals that
eroded public confidence and political support. In November 2003, Serbia s
third attempt to elect a republic president failed due to insufficient voter
turnout; a candidate from the extremist Serbian Radical Party stunned observers
by capturing almost half the votes cast. Parliament became bogged down in
extended debate on confidence motions challenging the government s leaders. In
November 2003, Prime Minister Zivkovic called early elections.

Election Results

Alarming headlines reporting the results of the December 28th parliamentary
elections might have led readers to believe that Serbia had returned to the
Milosevic era. It did not but we were concerned. The ultra-nationalist
Serbian Radical Party received the largest number of votes, 28 percent of the
vote, but not enough seats to form a government. Milosevic s Socialist Party
received only 8 percent. What the headlines failed to highlight was that
democratic parties captured more than 60 percent of the ballots cast.

Our analysis shows that the Serbian electorate has remained remarkably stable
in the three years since the end of the Milosevic regime. In fact, democratic
parties received a larger percentage of the vote in December than they did when
the Democratic Opposition of Serbia (DOS) coalition ran against Milosevic in
September 2000. The democratic bloc is fragmented, however: as a result, 9
percent of the pro-democratic, anti-nationalist vote (more than 450,000 votes)
went to parties which failed to meet the 5 percent threshold necessary to win
seats in parliament. Had these parties combined tickets with one of the larger
democratic parties, the democratic bloc would have captured 23 additional
seats. Under Serbia s Milosevic-era electoral rules, however, these lost
seats went disproportionately to the party with the largest plurality the
Radicals. Thus, although the Radicals received approximately a quarter of the
vote, it now has a third of the seats in Parliament. One of the first acts of
the new Parliament was to correct this anti-democratic anachronism by lowering
the parliamentary threshold.

On March 3, 2004, after two months of negotiation, Parliament confirmed a
minority three-party coalition government led by former Yugoslav President
Vojislav Kostunica. The new government has presented a legislative program that
focuses on domestic issues: adopting a new constitution, harmonizing Serbia s
legal framework with EU standards, building state union institutions with
sister republic Montenegro, and fighting corruption. Parliamentary leaders have
called for new presidential elections in the late spring, so that Serbia will
have both a new Constitution and new president by June 28.

The Economy

Many analysts believe that much of the Radicals electoral success can be
attributed to protest votes i.e., voters expressing their dissatisfaction
with government scandals and little improvement in the average citizen s
standard of living. Polling data confirms that economic issues jobs,
pensions, inflation are foremost in voters minds. Although the economy has
been stabilized, growth is anemic and unemployment high. Overall unemployment
is 20-30%, but it is as high as 80-100% in some areas -- creating fertile
ground for the messages of nationalist and populist politicians. Although price
and currency stabilization halted a dramatic rise in poverty during the 1990s,
20% of Serbs live at or under the poverty line.

Current economic data paint a picture of fragile macroeconomic stability,
threatened by continued microeconomic weakness and a lack of growth. Key
indicators are mixed. GDP may have grown by as little as 1.5% in 2003, somewhat
slower than in the previous two years. Although the previous government worked
closely with the IMF to successfully stabilize macroeconomic indicators and
increase fiscal discipline, non-financial sectors of the economy remain
dominated by loss-generating socially-owned enterprises. Lack of jobs is a key
source of public dissatisfaction. And, as Serbia has yet to address
restructuring of large enterprises, the situation is likely to get worse before
it gets better.

Economic reform is always difficult, but it has shown results. The average
monthly wage in Serbia has increased from an equivalent of 50 Euros in October
2000 to 164 Euros today. Real wages have risen by 123%. Per capita GDP has
increased from less than $1000 in 2000 to about $1940 in 2003. Unfortunately,
this is only half of the level it was in 1989.

This Administration s commitment to economic cooperation is an important part
of our overall policy to stabilize the Balkans, including Serbia and
Montenegro.. The United States has invested USD 622 million in supporting
Serbia and Montenegro s development, USD 123 million of which has been
dedicated to facilitating economic reform. In FY2003, the United States
Government provided over $31 million in economic-related assistance to Serbia.
Our assistance focuses on strengthening those institutions that will promote
and sustain economic reform and the transition to a market economy. Through
USAID, we are providing assistance to enact macroeconomic reform, improve bank
supervision, strengthen the central bank, prepare for WTO accession,
restructure and privatize troubled enterprises, reform tax policies and enhance
the business and investment environment. U.S. Treasury representatives advise
their Serbian counterparts on rationalizing tax policy, controlling public
debt, rehabilitating troubled banks and combating financial crime. We closely
coordinate our economic assistance activities with other major donors.

On December 4, 2003, Secretary Powell removed one of the last Milosevic-era
sanctions by restoring Normal Trade Relations to Serbia and Montenegro. This
created a new opportunity to promote positive economic cooperation as a key
pillar of our bilateral relationship. With the restoration of NTR, trade will
now depend on continuing progress on economic reforms. We want to increase
opportunities and protection for U.S. business, and demonstrate to a skeptical
Serbian public the mutual benefits of economic cooperation. In 2003, thanks to
investments by American firms including U.S. Steel, Philip-Morris and IBM, the
United States Was the largest source of new foreign investment in Serbia,
investing approximately USD 900 million. We want to continue and increase U.S.
investment in Serbia as it rebuilds and reforms its economy.


Our bilateral assistance to Serbia is tailored to help Serbia build the
institutions necessary for an open democratic society to take root and prosper.
This assistance to Serbia USD 100 million in FY04 represents almost a
quarter of the State Department s SEED budget, reflecting the critical role
that a democratic Serbia and Montenegro plays in ensuring long-term peace and
stability in the Balkans. In addition to economic reform, this assistance
supports democratic governance, the rule-of-law, and independent media. In
addition to SEED funds, the State Department also provides assistance to
strengthen Serbia s export and border control programs. We intend to continue
to work closely with the Congress to ensure that our assistance package is
targeted to support US interests in Serbia and Montenegro.

Certification/ICTY Cooperation

In order for Serbia to succeed, it must meet its international obligations. The
most important unmet obligation an unresolved legacy of the Milosevic era
is that of apprehending and transferring to The Hague those indicted for
horrendous war crimes. To that end, for the past four years, Congress has
conditioned SEED and other assistance to Serbia, requiring that assistance be
suspended by a certain date unless the Secretary of State certifies that Serbia
is cooperating with the International Criminal Tribunal for the former
Yugoslavia including the surrender and transfer of indictees or assistance in
their apprehension, including making all practicable efforts to apprehend and
transfer Ratko Mladic.

When Congress first included a certification provision for Serbia in the FY01
SEED budget, cooperation with the Tribunal was virtually non-existent. Serbia
has come a long way since then. A total of 23 indictees have gone from Belgrade
to The Hague. This number includes two presidents, including Slobodan
Milosevic. Serbia and Montenegro has institutionalized procedures for
cooperating with the Tribunal through legislation and through the National
Council for Coordination with the ICTY, which reviews and responds to requests
from the ICTY Prosecutor for access to witnesses and documents. Serbia s
amended Law on ICTY cooperation has made it much easier for government
officials to receive national security waivers, allowing them to cooperate with
ICTY investigators and testify in Tribunal proceedings. And, since the creation
of the state union and the assassination of PM Djindjic in March 2003, Belgrade
officials have increased their efforts to locate and arrest fugitive ICTY

The Serbian government has also created a special prosecutor and court
dedicated to war crimes cases. An important test for this new court began on
March 9, 2004, with the opening of the trial of seven defendants accused of
participating in the deaths of approximately 200 POWs and civilians at the
Ovcara Farm near Vukovar in Croatia in 1991. This is only the most recent
domestic prosecution of war crimes charges in Serbian courts. Last September,
the Belgrade District Court convicted and sentenced four defendants for the
abduction and murder of seventeen Muslims in October 1992. The Special
Prosecutor is also in midway through the case against a leader of the Skorpion
paramilitary unit charged with the murder of ethnic Albanians in Podujevo,
Kosovo in 1999.

Despite improved efforts by the Serbian government in 2003 to locate and arrest
these fugitive indictees, we believe that as many as 16 ICTY indictees spend a
preponderance of their time in Serbia. This includes Gen. Ratko Mladic,
indicted by ICTY in connection with the massacre at Srebrenica and other
crimes, as well as three high-ranking generals whose indictments ICTY made
public in October 2003 and who are now living openly in Belgrade. The United
States and the international community speak with one voice on this: it is
unacceptable that these individuals have thus far eluded justice.

Without speaking to Secretary Powell s upcoming decision, I can say that the
Administration is not presently satisfied with Belgrade s level of cooperation.
As a member of the United Nations, Serbia and Montenegro is obligated to
cooperate fully with the Tribunal, a UN institution. Cooperation means applying
full effort to locate, arrest and transfer fugitive indictees, as well as
making witnesses and documentary evidence available to the Tribunal. We are
particularly focused on our effort to see Ratko Mladic brought to justice.

As noted earlier, the state union and republic governments have come a long way
on ICTY cooperation in the past three and a half years. While we commend Serbia
for establishing institutions to facilitate cooperation with the Tribunal, the
international community also expects Serbia to render indictees to face justice
before the Tribunal. Our expectations extend beyond establishing procedures for
cooperation plainly stated, we are looking for results. With Ratko Mladic
still at large, the three recently-indicted generals living freely in Belgrade
and twelve other indictees unaccounted for, this Administration cannot be
satisfied with the current level of cooperation with the Tribunal.

In the past two months, Secretary Powell, Under Secretary Grossman and Under
Secretary Larson have personally pressed home to Serbia s new leadership the
need to resolve Serbia s outstanding ICTY obligations, including especially
transferring Mladic to the Tribunal. I delivered the same message when I met
with Serbian leaders in Belgrade on March 4. Cooperation with the Tribunal is
the key to Serbia and Montenegro s future integration into Euro-Atlantic
institutions, including membership in NATO s Partnership for Peace and progress
toward a Stabilization and Association Agreement with the EU. We will continue
to press this obligation.


Overcoming a legacy of war crimes is not the only challenge that the current
leaders of Serbia inherited from the Milosevic regime. Since the conclusion of
the 1999 NATO campaign, Kosovo has been administered by the UN Mission in
Kosovo (UNMIK). UNSCR 1244 called for the establishment of an interim
administration for overseeing the development of provisional democratic
self-governing institutions to ensure conditions for a peaceful and normal life
for all inhabitants in Kosovo.

The United States government does not support any particular future status
outcome for Kosovo. Instead, we are focused on achieving eight standards
identified by the United Nations in 2002 as critical for Kosovo's democratic
development. These standards are the same we would expect any modern, European
society to achieve. The standards address rule of law, functioning democratic
institutions, freedom of movement, sustainable returns and the rights of
minority communities, the economy, property rights, a dialogue with Belgrade,
and the Kosovo Protection Corps.

The United States and our Contact Group partners (UK, France, Germany, Italy,
Russia and the EU) have proposed setting a Review Date to evaluate Kosovo's
progress towards meeting the internationally-endorsed standards outlined by
UNMIK. Under Secretary Marc Grossman rolled out the Review Date strategy with
UN SRSG Harri Holkeri and the Contact Group during his visit to the Balkans in
November 2003.

The first comprehensive review will occur around mid-2005, and earlier if
progress warrants it. If the review is positive, then the international
community would be prepared to begin a process -- as yet undefined -- to
determine Kosovo s future status. If the review is negative, we will set a
subsequent Review Date. The Review Date process gives shape and focus to the
UN-endorsed policy of "standards before status." Its timetable strengthens the
will and the ability of the international community and Kosovo to build
institutions in Kosovo consistent with international standards for democracy,
tolerance and rule of law.

We have not ruled out any future status outcome. But the outcome must be one
that enhances regional stability. The leaders and people of Serbia play a major
role in this process. A stable, democratic, multi-ethnic Kosovo is in the
interest of Serbia and Montenegro and the entire region. Belgrade s playing a
constructive role for example, supporting the review date process and
participating in the Belgrade-Pristina dialogue is the surest route to
ensuring satisfactory resolutions for the issues of greatest concern to the
Serbian public: the return of persons displaced from their homes, the security
of Serbs living in Kosovo and protection of minority rights. These are also
concerns for the UN and for the Contact Group, concern reflected in UNMIK s
Standards for Kosovo.

Serbia hosts the largest number of displaced persons in the region over
500,000 refugees and IDPs within its borders. Approximately 225,000 of this
number are ethnic Serbs who left homes in Kosovo. Although displaced persons
have returned to Kosovo at a steadily increasing pace each year since 2000, the
overall number of returns is very small. Fewer than 10,000 displaced minorities
have returned to Kosovo. Violence against Serbs has declined dramatically since
1999, but the appalling murders of Serbs in Obilic and Gorazdevac in 2003 and
in Lipljan in February are compelling evidence that much work remains to be
done. We urge all the citizens of Kosovo to cooperate fully with UNMIK, KFOR
and the Kosovo Police Service, so that the perpetrators of these crimes can be
brought to justice and all residents of Kosovo can enjoy the right to live in a
safe and secure environment.

State Union

Just over a year ago, the republics of Serbia and Montenegro redefined their
relationship, transforming what had been the Federal Republic of Yugoslavia
into the looser state union of Serbia and Montenegro. The state union is led
by a president and a five-member Council of Ministers responsible for Foreign
Affairs, Defense, Internal and External Economic Relations and Human and
Minority Rights. All other governmental authority has devolved to the republic
governments. Despite the many compromises at the core of the state union
structure, differing views about relations between the republics make the
future of the joint state uncertain in the minds of many of its citizens.

The republics do agree, however, that accession to the European Union is the
key long-term goal of their joint foreign policy. Since the adoption of the
state union s Constitutional Charter in February 2003, both Belgrade and
Podgorica have worked to harmonize laws in the two republics so that both are
consistent with standards in the EU. Given that the two republics have
developed increasingly divergent financial, economic and monetary systems, this
has been an arduous process, one that will likely continue for many months.

The European Commission is now conducting a feasibility study to evaluate
Serbia and Montenegro s readiness to negotiate the serious obligations
contained in a Stabilisation and Association Agreement, the first step on the
path to accession. If the outcome of the feasibility study is positive, the
European Commission will initiate negotiation of this contract designed to help
Serbia and Montenegro undergo the political and economic transition necessary
for a closer relationship with the European Union. The EC has delayed
completion of the feasibility study originally expected in the spring of this
year for a variety of factors, one being Serbia s record on ICTY cooperation.

Defense Reform

Progress on defense reform has been one of the true success stories for the
state union in the past year. Assuming the position of state union Defense
Minister after the Djindjic assassination, Boris Tadic immediately undertook a
military house-cleaning. He pledged full cooperation with the ICTY, dismissed
Milosevic-era generals and senior officers, disbanded the Military Commission
on Cooperation with The Hague (which, contrary to its name, obstructed
cooperation with the Tribunal), and signed an order placing all army and MOD
personnel under the obligation to apprehend and/or report any information on
fugitive war crimes indictees. Tadic has also implemented a sweeping agenda of
defense and security reform, subordinating the military to civilian control for
the first time in more than fifty years. Serbia and Montenegro is in the
process of adopting new National Defense and Security Strategies, creating a
framework to right-size and modernize the military services. These strategies
identify NATO not as the enemy but as the objective.

Implementation of these reforms is essential and we want to help. On May 6,
President Bush determined that a bilateral military relationship with Serbia
and Montenegro serves the U.S. national interest. We are ready to initiate an
International Military Education and Training program to support defense reform
in Serbia and Montenegro, as soon as Belgrade signs an Article 98 agreement. We
are preparing ourselves for an expanded bilateral military relationship by
building up the Office of the Defense Attache at Embassy Belgrade and by
engaging state union officials in discussions with our senior military leaders
in the region. In November 2003, Defense Minister Tadic and Army Chief of Staff
Krga visited AF South. In December, Admiral Johnson returned the courtesy,
presiding over the first visit of a U.S. naval vessel to Serbia and Montenegro
with a call at the Port of Bar on December 16 and meetings with Defense
Ministry and military officials in Belgrade the following day.

On June 19, Serbia and Montenegro formally requested an invitation to join NATO
s Partnership for Peace in a letter to then Secretary General Robertson.
Belgrade is aware that two outstanding issues must be resolved before it can be
invited into Partnership for Peace: full cooperation with the ICTY and Belgrade
s claims against eight NATO allies in the International Court of Justice. Once
these issues are resolved, the United States will support Serbia and Montenegro
s membership in the Partnership for Peace.

Last July, state union Foreign Minister Svilanovic and then Serbian Prime
Minister Zivkovic offered to contribute a military unit to an international
military operation engaged in the Global War on Terror (GWOT). Although
discussions regarding a possible deployment were suspended once parliamentary
elections were called in November 2003, we look forward to exploring this
option now that the elections are over and republic and state union ministries
are being filled. Serbia and Montenegro has also offered diplomatic support for
the GWOT, welcoming the fall of Saddam Hussein and offering material support to
the new government in Afghanistan.


Milosevic was once described as the first politician to realize that Tito was
dead. What we now have is a policy that recognizes that Milosevic is behind
bars, that his regime is over and that Serbia is on a new path. Mr. Chairman,
even though the challenges that Serbia faces are daunting, we have seen real
progress in promoting economic reform and democratic values. There is still
work to do. The challenge now is to continue the hard work of consolidating
democratic institutions, restructuring the economy and honoring Serbia s
international obligations. We want Serbia to succeed. This is an essential part
of our overall policy of promoting Balkan stability. We are watching the new
government closely and will judge it on its actions. We now look to the new
government to demonstrate its commitment to Serbia s future. We will be there
to assist Serbia if it chooses to continue along the path toward Euro-Atlantic


Released on March 18, 2004

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