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It survived UN sanctions and Nato bombing, emerging battered and unbowed as a democracy. Yugoslavia is seizing its moment to become the business and financial capital of southeastern Europe.

Belgrade, the capital of the Federal Republic of Yugoslavia, comprising the Republic of Serbia and Montenegro, is a gracious old European city, rich in culture and the vibrant history of the Balkans, where the mighty Danube and Sava rivers meet.

For its modernizing leadership, the past is now another country with memories and anger over UN sanctions and NATO bombing rapidly fading from the political agenda. Its strategic location in southeastern Europe, bordered by seven countries including Hungary in the north, Romania and Bulgaria to the east and Macedonia and Albania in the south, presents Yugoslavia's reformist leadership with a golden opportunity.

The key players in the Federation are Yugoslav President Vojislav Kostunica, former law professor and victor at the democratic elections in October 2000, and Serbian Prime Minister Zoran Djindjic. Together with Deputy Federal Prime Minister Miroljub Labus, architect of the reform program, they are ready to create the financial and business hub of the Balkans. Instead of opting for the soft option of playing economic catch-up, with a target of 5%-6% growth a year, they are shooting high, after a decade when GDP slumped 60%, following the break up of the old Yugoslavia in 1991.

The new and vibrant Yugoslavia nurses ambitions to become the dominant regional player in East-West trade, capitalizing on a network of international relationships with emerging markets dating to the former communist era of Marshal Tito. Rebuilding Yugoslavia is a monumental task, but the time for change in the Balkans is ripe and the region is a more democratic and pluralistic place than ever.

Yugoslavia, with its skilled workforce and good educational system, is undoubtedly resilient and firmly committed to democracy, after the ouster in October 2000 of former president Slobodan Milosevic, accused of crimes agains humanity, now awaiting trial at the International Criminal Tribunal in The Hague. Even under communism, Yugoslavia was virtually independent of the former Soviet Union, and unlike its ex-Iron Curtain neighbors, its citizens had the freedom to travel and study in Western Europe and America.

Now, pay back time has arrived. The World Bank and donor agencies, including the European Union, are happy with reforms in Yugoslavia over the past 16 months and value other plus factors - macroeconomic stability, lower inflation, stable currency through a managed float of the dinar, and better tax collection.

The World Bank, co-chair of an international donor conference for Yugoslavia in June 2001 when donors pledged $1.5 billion, hopes to attract continued donor aid. Negotiations with Yugoslavia's commercial debtors through the London and Paris Clubs of creditors are aimed at seeking two-thirds write off of the $12.5 billion debt with the remainder re-scheduled. The Paris Club of creditors in November agreed to write off 51% of the $4.5 billion Yugoslavia owes them on the signing of a new agreement with the IMF this year with a further 15% to go on completion of a new two or three year program with the IMF. Discussions are still continuing with the London Club of creditors over a further $2.8 billion in debt.

The reward for successful restructuring is membership of the European Union. By 2004, the earliest year for the start in the process of EU accession, Yugoslavia must show further progress in dismantling public enterprises through privatization and restructuring of agriculture. Its farmers grow maize, wheat and soft fruit, as well as rearing cattle, sheep and pigs. Other strategic industries include some of Europe's largest copper ore reserves located in Serbia. Key manufacturing industries for privatization include chemicals, iron and steel, machinery, textiles and transportation equipment. However, many employment-generating industries, like automobiles, were paralyzed when infrastructure disintegrated and Milosevic picked at Yugoslavia's wounds. Government success in social policies to reduce poverty and create jobs is vital -- one in five Yugoslavs is jobless and a diaspora of 400,000 of the brightest and best left during Milosevic's tyranny.

Is this positive scenario too rosy? Some cynics say the cruncher for Yugoslavia is not the long march towards a western-style market economy in a country plunged into poverty and international isolation in the 1990s, but keeping the leadership of both Serbia and Montenegro singing from the same hymn sheet. Membership of the Council of Europe, slated for June or September, hangs in the balance, but will likely stall if the two Republics are at loggerheads. Montenegro, on the Mediterranean littoral with only 800,000 people, is dwarfed by landlocked Serbia's 8 million. It harbors virile aspirations for independence, with a referendum on its future slated for the spring. Its leadership demands an equal slice of the federal cake -- a classic case of the mouse that roars.

Skeptics fear centrifugal forces will prize Yugoslavia apart, despite the advances since Kostunica's election victory over Milosevic in September 2000 and the new foreign investment law passed by the federal parliament in January 2002. The new law is the major condition for securing the final tranche of a huge stand-by loan from the IMF. The legislation liberalizes the economy by allowing foreign firms and individuals to set up businesses in all sectors apart from weapons production and trade. Not only is red tape cut, but investors gain new rights to repatriate funds and buy real estate without restrictions.

In the words of the Deputy Finance Minister, Veroijub Dugalic: "Security and a stable economic and political situation is what we have to provide for anyone who decides to place capital here."

The government's aim is for foreign investment to more than double in 2002 from last year's $270 million, with a mouth watering menu of big-ticket reconstruction projects

"We don't want to be dependent on aid but we would like to insist on foreign direct investment," says Goran Svilanovic, Yugoslavia's pro-business foreign affairs minister. "We must work to deliver regional stability in the Balkans, because it opens the door to foreign investment, as will free trade agreements and a proper legal framework to encompass privatization. Finally, we must settle debt. We know what we must do."

Minister Svilanovic is unequivocal about Yugoslavia's desire to join the EU and is co-operating with neighboring states from the former Yugoslavia that also seek the Holy Grail of economic and political integration within the EU. Yet he also choreographs a 'balanced relationship' with the US, Russia and China, and is breathing life into Yugoslavia's ossified web of links with sub-Saharan and Arab countries, developed during the cold war. While acknowledging the challenges of managing relations between Serbia and Montenegro, Svilanovic returns again and again to Yugoslavia's key selling points. Summarized, these are its strategic location at the center of a 'European corridor' joining west and east and linking to the Islamic south, centrality in the Balkans market of 60 million people, plus trade with Turkey. "Yugoslavia is a Balkan country, a southeast European country, a Mediterranean country, a central European country and a Danube state," he says. "Think of the advantages."

And yet Minister Svilanovic, and his colleagues, are pragmatic enough to concede that Yugoslavia's honeymoon with the investor community is over, after an initial surge of goodwill for the reformist government. Along one line of thinking, he says, Yugoslavia - "just another country that does have prospects and a strong reformist government pushing hard to change its image for the better."

Minister Svilanovic also thinks Yugoslavia has another trump card up its sleeve -- human resources. "We have very educated people who are able to work with high tech and who have experience of capitalism because we were never really a strong, hard core, communist country." As with Lebanon after its civil war, financial reconstruction is the key driver, almost as important to Yugoslavia as fixing blocked waterway and repairing bomb-damaged bridges over the Danube.

"Belgrade can become the financial center of southeast Europe," says the National Bank of Yugoslavia (central bank) Governor Mladjan Dinkic, a youthful but hard-nosed 37-year-old economist. In October 2000, the governor inherited 86 banks, together with helter-skelter hyperinflation, now reined back to an inflation level of 1% a month. Many hoarded their life savings in Deutschemarks (DEM) under mattresses. Altogether there are 49 commercial banks in Yugoslavia, with 31 in the 'A' category and fully licensed, and another 18 with medium authorization licenses.

Société Générale was the first foreign bank but a queue soon formed including Raiffeisen and National Bank of Greece. The governor is also bullish about inquiries from Citibank, Deutsche Bank, Volksbank of Austria and ING from the Netherlands. The entry level is to buy an existing domestic bank, up to 100% equity, and then capitalize with a minimum of $5 million. "Our main idea is to create competition in banking," says Dinkic. "We make no distinction between a domestic or a foreign bank. We must adopt European standards to begin the process of integration with the EU forecast for 2004."

Support for banking reform comes from Centrobanka in Belgrade, the majority of whose customers are in agro-industries. From being among the smaller banks, Centrobank now ranks fifth in terms of quality. "We hope to go one step further up the ladder this year," says General Director Ljubisav Bacanin, whose aim is for Centrobank to remain liquid in both dinar and foreign currency reserves. "We have even profited from Governor Dinkic's measures, because companies which had accounts at non-liquid banks came to us."

Another backer is Slobodan Djurisic, General Manager of PRVA Preduzetnicka Banka in Belgrade, who is bullish about the foreign investment climate. "The market size offers plenty of opportunities for rapid economic recovery and for a fast pay back for new investors," he says. "The improvement of the stock exchange will also facilitate expansion in the banking sector." Djurisic identifies the need for international banking technology and know-how in Yugoslavia but also favors foreign banks entering strategic alliances with domestic institutions, to leverage their local savvy and business contacts.

The recent conversion of the dem to the euro produced a windfall

With foreign currency reserves up from $360 million when Dinkic took the helm to $1.08 billion a year later. In Serbia, an estimated 80% of 'mattress money' was in DEM rather than the inflation-prone dinar, but with the Euro conversion, this money first trickled, then flowed into time deposits in Yugoslav banks.

Conversion rules were designed to push customers towards the banks, with Montenegro requiring sums over DEM 10,000 to be changed through a bank account. "In Yugoslavia as a whole, there is an estimated DEM 5-7 billion 'in the socks' in the gray economy," says Ljubomir Mihajlovic, president of Komercijalna Banka (KB) in Belgrade. "We are creating a framework of confidence for individual depositors and foresee a good future for the leading banks in Yugoslavia in which KB will play a role. We are getting closer to Europe and are accepting the EU's banking standards."

Yugoslavia offers some of the cheapest skilled labor in the world, with average wages around $70 a month, but industry, especially the 'rust belt' in Serbia, took a hammering from UN sanctions. The systemic fault is lack of available capital to finance growth. There is a need for strategic partnerships with multinational corporations to leverage opportunities in neighboring markets. Where some companies see problems, others spot opportunities.

The Yugoslavian Iron & Steel Metallurgy Corp (Sartid), founded in 1913, is the biggest producer of iron, steel, hot and cold rolled strips and sheets, as well as marketing downstream steel products. Zivomir, Deputy Managing Director, says Sartid more than covers domestic demand and is a global player, with the vast majority of its exports to European markets, principally Germany, Italy and Spain. Yet production is 50% less than 12 years ago, despite competitive pricing. Nevertheless, Sartid sustained its investment in human resources, remaining the market leader in Yugoslavia, and now courts a "stable investment partner", for marriage not co-habitation, either European or American. "Our message is -- Sartid is here," he says.

Among Yugoslavia's most stellar performers in the global marketplace, selling products in more than 50 countries, is tire manufacturer Tigar Rubber Products Company, based in Pirot in southeast Serbia. Founded in 1935 for rubber processing, Tigar switched into making auto tires in 1959, establishing partnerships with Goodrich of the US and later with Michelin of France. With production at 11,000 tires a day, its principal markets are the UK, France, Germany, Italy, Spain and Scandinavia, but Tigar also exports to South Africa and is committed to a comprehensive and ground-breaking welfare program for its employees and their dependants. "The sanctions imposed on Yugoslavia motivated us to create a teambuilding spirit and we have helped our workers to survive harsh times," says Dragan Nikolic, Tigar's managing director. "We are working hard to prove that Yugoslavia is the place where business can be located successfully. By fostering the economy and conducting better business, we will contribute to the overall security in the region." Not only is Tigar helping 250 students with their education, but it is developing outreach job creation programs for the Pirot region, including agro-industries.

Tourism in Yugoslavia is still strong in Montenegro, with its ravishing coastline and dramatic mountainous hinterland. For the business traveler, while the Yugoslav welcome is warm, the offer is not always to international standards. An exception is the Hyatt Regency in Belgrade. "In 1990, when we came to the market, a tourism economy existed, and the country was quite open," says Francois Dussart, general manager. "The past ten years saw an extremely tough decade but foreigners are now returning, and so will investment and reconstruction. There is also more stability and that means business will really start to prosper."

In striving to be the best, Hyatt Regency, the only real choice for international business travelers and their laptops, is still not content with its top market position in Belgrade. It is currently investing in new food and beverages outlets, refurbishing rooms, and striving to offer a top-class spa and gym at its health club, along with positioning the Hyatt as a conference location and venue for community events. These changes will also prepare it for possible future competition from other international five-star hotels. Meanwhile, Hyatt represents partnership in progress with the new elite and is reaping the reward of past loyalty, a potent symbol of the new Yugoslavia.



This section was produced by Business Focus.
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