Eric Jansson Online

9. November 2009

2009-11-09T16:25:00.005Z

Nochmal, bitte!
Bitte, nochmal!
Aber diesesmal
ein Mauerfall
Herzen des Menschen, im!
Nicht nur draussen - drin!
Und nicht nur in Berlin!

Viva la Bailout!

2008-09-23T04:53:00.000+01:00

Some light entertainment below, courtesy of the pinstripe neosocialists in the White House and on Capitol Hill.

This is the actual draft text of the bailout plan -- a text which says all you ever needed to know about how totally these Goldman Sachs statists fail to understand the "economic freedom" they love only as long as they can rig it.

Notice, for example, how the Treasury Secretary is granted powers (no expiration date included) to spend $700,000,000,000 and to perform other astonishing feats, all in ways "non-reviewable and committed to agency discretion" and that "may not be reviewed by any court of law or any administrative agency."

Notice also that the Secretary, in executing this most exhilarating and very patriotic shopping spree, is committed to "take into consideration means for (1) providing stability or preventing disruption to the financial markets or banking system; and (2) protecting the taxpayer."

So, having taken these noble points "into consideration", I dearly hope that our beloved and tirelessly self-sacrificing Secretary will at least reward himself -- perhaps after spending the first $100,000,000,000 -- by using some of his ever-expanding "discretion" to treat his family and himself to a nice residence or two in the hills over Honolulu.

Like our dear Lenin after a hard day's work, he'll have earned it.

Text of Draft Proposal for Bailout Plan

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.

(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

American myths remembered

2008-09-21T03:30:00.002+01:00

By Eric Jansson
Published by Financial Times, 20 September 2008

To begin to understand how tenuous modern America’s grip is, physically, on the West once won, you only need to drive east from Los Angeles.

You go from the sprawling city, all asphalt and lawn sprinklers, through outlying areas dustier and more ramshackle by the mile, and before long the desolation of genuine desert. In under 90 minutes, you pass from a metropolis into a wilderness where nature’s inhospitality seems to militate against human habitation.

We left without a plan, just an outline: seven days in the desert and a rented Chrysler, our toddlers buckled into the back.

The American frontier is mythic, but it is no myth. It has been updated over the past century – horses traded for cars, gaslight for electricity, wooden planks for corrugated metal sheeting – and made more habitable by air conditioning. But it endures, not far from where people have forgotten it.

We first reached the frontier in a little roadside town just a couple of hours from Los Angeles, near the spectacular Joshua Tree National Park. Next door to the jail, a shop advertised “Bail Bonds, Open 24 Hours”. And not much else.

Such settlements look terribly precarious, as if a big wind could blow them away, and the New World would be virgin again, unknown to humankind. Yet the further we drove into the desert, eventually covering 2,500 miles in seven days, the more we discovered this impression was wrong.

The ancient, huge, weatherworn landscapes surrounded us, preaching continuity from the primeval to the present day. But vacant, unpeopled continuity this was not: 400 miles from Joshua Tree, we visited Saguaro National Park to see the iconic cacti. Striking as the cacti were, far better were the petroglyphs we found atop a rattlesnake-infested pile of boulders. Rock drawings, they were made by the Hohokam people, an agriculturally adept civilisation that flourished here 1,200 years before Columbus “discovered” America.

A sign suggested we look down from that boulder pile, to survey the giant valley below and imagine a patchwork of Hohokam farmers’ fields. If the sign is correct, humankind is less populous in the valley today than it was a millennium ago. This was the first of many startling reminders that the Old West of popular myth was never genuinely old. It was just early modern.

Frontier myths crowd the landscape, with white gunslingers and prospectors winning the hearts of some, and native nations attracting the sympathy of others, while forgotten ancients such as the Hohokam ask us to consider different narratives.

Contradictory myths do not mix neatly. We got a taste of this at Saguaro National Park’s splendid visitors’ centre. The film that welcomes visitors to the park suddenly launches into a telling of local O’odham spiritual traditions. Native religion gets spliced into a script that otherwise belongs wholly to modern America. The jarring edit, an attempt at balance, only reminds us who won the West and who lost it.

Less nuanced takes on the southwest, on whomever’s side, come off more successfully. In the old ghost town of Tombstone, for example, we found the unadulterated gunslinger myth in full commercial bloom. Tombstone tips its 10-gallon (hat) almost crassly to just one version of a deeply complex history, yet it was irresistibly fun.

South of Tucson, we came across the amazing 17th-century mission of San Xavier del Bac – a place unknown even to most devotees of the south-west.

In the joyously colourful mission church, one sees how the Tohono O’odham followers of Father Kino, a Tyrolean missionary who went to Bac in 1692, embraced the iconographic traditions of Rome as folk art. The church is crammed with visions simultaneously profound and naïve – a Baroque masterpiece in adobe and wood, set on the Arizona sand.

The church has meant much to the Tohono O’odham over the years, yet the scene around it felt strained. Next to the parking lot sat 20 or so members of the tribe. Slow-moving, speechless and bundled in blankets, they sold soft drinks and “Indian tacos”. We bought lunch and moved away, fleeing the wasps swarming around the stoves but also, frankly, the vendors who silenced us with a blank aversion to conversation.

We reached Chiricahua National Monument, deep in the wilderness, in the late afternoon. This astounding park of echoing canyons, bizarre rock formations and 60-mile vistas was the ancient home of the Chiricahua Apache nation, the people of Geronimo, whose long, bitter war against US federal troops, ending in 1886, was one of the last gasps of native American resistance. We had reached the heart of ancient Apache territory, a maze of hiding places, the guerrilla warriors’ base from which Geronimo and the Chiricahua, once defeated, were exiled.

We hiked to a lookout. Across a canyon, on a craggy ridge, we saw a natural formation resembling the profile of Cochise, a warrior chief who came before Geronimo. Our two-year-old son yelled out into the canyon. His shrieks echoed back like avian chatter.

There was no evidence of another soul in the immense park, yet I felt more exposed than alone. Dusk closed in on us. The silhouetted rocks appeared like human figures, marching purposefully out of the canyon.

Bound for some New Mexican motel, we drove into a black desert landscape devoid of man-made light. Turning out of the park, our headlights flashed over a herd of pronghorn antelope.

When we crossed a cattle grid at speed the car shuddered violently and somehow this caused the electrics to fail. The windows danced madly up and down. Cold night air blasted into the car. Alarmed, I braked sharply and turned off the engine, now spooked myself.

For a moment I felt desperately far from civilisation. I felt the size of the land, the unplumbed depth of its past and my vulnerability within it.

Questions Hang Over Socialists’ Return to Power

2008-07-09T14:21:00.002+01:00

By Eric Jansson
Published by BIRN's Balkan Insight

Even as Serbia’s parliament voted to thrust the Socialist Party of Serbia (SPS) back into the offices of government, the trial of Mihalj Kertes, a central Socialist figure in the nexus of state and criminal interests that held the SPS in power through the 1990s, continued at the Special Court for Organised Crime.

The contrasting fates of the SPS and Mihalj Kertes – the party restored to power, the individual on trial – says much about the state of Serbia less than eight years after the fall of Slobodan Milosevic and his SPS from power in the October 5 putsch of 2000.

The message is not necessarily a coherent one.

On one hand, Serbian President Boris Tadic and his coalition of liberalisers, populists and technocrats, “For a European Serbia”, claim the SPS, a party they condemned in the starkest terms until recently, now has changed in ways that make it a suitable partner in government.

On the other hand, the trial of Kertes and senior gangland personalities for their roles in an alleged cigarette smuggling ring, in which the Milosevic-era customs chief has pled innocent, is predicated upon a very different view of the SPS and the 1990s. Essential to the political success of Tadic and his anti-Milosevic partners since 2000, this view holds that the SPS’s record is characterised by gross abuses of state power and criminal usurpation of state institutions.

The thread linking Tadic’s newly positive view of the SPS to his pro-European movement’s long-damning view of the party’s record in government – and indeed the continued advancement of that view through state institutions such as the Special Court – is not easy to see.

But the question of whether these two views can be reconciled seems certain to hang heavily over Serbia and, in particular, its next governing coalition – at least during its initial period in office.

Since 2000, the SPS has spent eight years in the political wilderness. Following Milosevic’s death in 2006, the party’s new leader, Ivica Dacic, now elected first deputy prime minister and interior minister, started moving the party’s public image out of Milosevic’s shadow.

Although as the party’s spokesman during the Milosevic era he is closely tied to the SPS of the old regime, Dacic’s makeover has basically succeeded.

For instance, association in the popular imagination between the SPS and criminal figures linked personally with Milosevic has arguably faded, although public knowledge of their roles within the party has actually grown. Kertes, for instance, in a separate trial last year, told the Special Court that, as customs chief, he had authorised payments from Customs Administration accounts directly to the SPS.

The party’s ambiguous transition has triggered a public debate over its new nature, even within institutions of government.

Verica Barac, president of Serbia’s Anti-Corruption Council, a state institution founded in 2001 at the behest of Zoran Djindjic, Tadic’s predecessor at the helm of the Democratic Party, told the daily Blic that the SPS remains “unreformed”.

The election of a government pairing Tadic’s pro-European bloc with the SPS represents “the defeat of what we expected would happen after October 5”, Barac said.

Yet even some of Serbia’s most pro-Western, liberal voices acknowledge that the SPS has changed in some ways. “The question is how much,” says Dejan Anastasijevic, a Belgrade journalist whose pro-Western views consistently challenge the prevailing wisdom in Serbia.

“Dacic and most of his crew are pragmatic young apparatchiks rather than war criminals or ideologues. Most of the hard-core gang dropped off with Milorad Vucelic [the party’s vice president under Milosevic], who is now trying to start his own ‘Real SPS’. On the minus side, they never formally condemned anything that Milosevic did, and there are still some pretty nasty characters lurking in the shadows,” says Anastasijevic

For such individuals, whose powerful backstage influence within the SPS has long been essential to the party’s success, the alliance with Tadic may be as uncomfortable as it is for liberal Serbs who remain sceptical of Milosevic’s former party. Both groups suffered the political equivalent of whiplash when learning of the planned marriage of these old rivals.

Borka Vucic, a long-time Milosevic associate and SPS supporter who ran Serbian offshore banking operations in Cyprus during the 1990s, when international sanctions acutely complicated the country’s finances and trade, is among those deeply frustrated by the composition of the new government.

“I remember that Dacic never had any idea for collaboration with Mr Tadic, never. How it has happened in a very short period of time I really cannot understand… It is not natural to have such integration,” she says.

Vucic’s apparent bewilderment at the SPS’s new choice of allies is informed by a unique take on the institutional transitions initiated in Serbia after Milosevic’s political downfall.

Long a senior figure in the state-dominated Yugoslav banking community, Vucic saw her position undercut after the October 5 putsch, when the young economist Mladjan Dinkic stormed into the central bank as a reform-minded governor.

Dinkic accused the evicted regime of systemic, criminal abuses of power. He spoke of “missing billions” in state funds he alleged had been channelled through Cyprus, some of it by Kertes.

At the height of the dispute over missing money, Dinkic spoke openly of the Milosevic regime as a criminal enterprise. Vucic likewise used the word “criminal” to describe Dinkic’s governance of the banking system.

Since then, little satisfaction has been felt on either side of the dispute, which gradually fell quiet with the exception of related revelations in trials like those involving Kertes.

Yet Vucic has not fundamentally changed her view. “No evidence” exists of sanctions busting or state plunder during the 1990s, she says, adding that Dinkic stopped looking for such evidence when he left the central bank in 2003 and “became a politician”.

“We have some evidence about criminality during the war, but we have much more evidence of criminality on the so-called democratic side. The volume is very big,” Vucic says.

The new alliance between Tadic’s bloc and the SPS, and Vucic’s reaction to it, is a reminder of how deep the disputes between these rivals, now allies, remain.

Having submerged such sharp disputes in order to form a government together, can the SPS and its former foes actually make common cause together?

“You would be amazed the differences that can be ignored if a person's lust for political and financial power are strong enough,” says James Lyon, Belgrade-based senior advisor for the International Crisis Group.

An independent spirit

2008-07-05T23:34:00.003+01:00

By Eric Jansson
Published by Financial Times, 28 June 2008

What made the Soviet Union fall apart? Some say guns, others butter. Others credit Ronald Reagan, Mikhail Gorbachev or Pope John Paul II. No doubt these all played their parts. But a more rewarding case can be made that it was the little-known Republic of Uzupis that did it in the end.

Like most epic historical claims, the case for Uzupis's role in defeating the Soviet empire is a circuitous one. One should avoid noting, for instance, that this leafy 168-acre neighbourhood in Vilnius possessed neither statehood nor the accoutrements of it in that fateful year, 1991. Likewise, disregard the fact that Uzupis' independence, declared in 1997, remains a source of laughter in the Lithuanian capital today.

Facts do not matter here. The real power of this colourful neighbourhood - which does in fact refer to itself as a republic, Uzupio Respublika - is not rooted in the mock independence it celebrates every year on "Uzupis Day", April 1. Its power derives from a certain spirit of life.

To its residents, Uzupis's independence is really about the independence of the soul. The neighbourhood's president, prime minister and "army" of a dozen men do exist - but only ceremonially. With humour they have succeeded in capturing the gleefully antiauthoritarian community spirit that, once mature in the hearts of millions, can render powerless even a superpower.

In many people's experience, this was the dynamic that shattered Soviet totalitarianism. Today it makes Uzupis one of the most freedom-loving urban quarters anywhere east of the Baltic and west of Vladivostok. It also makes it a magnet for new residents.

"First there were artists. Now you have members of the elite moving in. At the same time you still have junkies and drunks. And then you have the middle class - dentists and so on. Two years ago there was one dental clinic; today there are five or six," says Alistair Day-Stirrat, Lithuania director for Someplace Else, a London-based specialist in emerging property markets.

Like many Vilnius residents who keep an eye on real estate, Day-Stirrat, whose fiancée happens to be an Uzupis dentist, confesses a passion for the neighbourhood. Locals like to describe it - independent, artistic, hilly and heavily in demand - as the budding "Montmartre of Vilnius".

Because Uzupis borders Vilnius's dazzling Old Town and shares some of its architectural heritage, once Lithuania's post-Soviet property renovation and investment boom got rolling in earnest the neighbourhood was sure to change.

The early bohemian invasion of the 1990s gave the area its independence movement and proposed a graceful new aesthetic with installations such as the Uzupis Angel, a winged, horn-blowing figure perched on a plinth who has watched over the neighbourhood since 2001.

Still, vast room for improvement remains and a new wave of wealthy newcomers is moving in to make it happen. On a walk through Uzupis starting at the neighbourhood's main western entrance - a bridge crossing the Vilnele River, complete with welcome sign to "the republic" - one sees evidence of both progress and the work that remains to be done.

Just across the bridge artists' workshops and galleries project their influences on to the street. Local businesses such as the café, tattooist and hairdresser advertise their community spirit by displaying the ubiquitous "UZ" sticker along with the republican symbol; a hand with a circle in the palm that recalls the ancient talisman for warding off the "evil eye".

Up cobbled Uzupio Street renovation has reached almost all the buildings, with fresh facades slapped on to pre-modern townhouses and double-glazing almost everywhere. Yet poke into the odd courtyard or down a side street and one comes across scenes of dilapidation - crumbling facades, broken sheds and rotting boards.

In a neighbourhood that has a bit of money, as Uzupis now does, the kind of structural deterioration seen here lends it character. But eventually it needs cleaning up, too. This would be happening faster if Uzupis's history were different, says Augustas Jagusinskis, a valuer for Centro Kubas, one of Vilnius's leading estate agencies.

"In Soviet times Uzupis was a very unprestigious area. The situation had to change and the market is doing its job. The main problem with the speed of development now is old residents. Either they don't want to sell or they ask millions for a house with just three or four apartments in it. They are just sitting on barrels full of money," says Jagusinskis.

The way in for wealthy newcomers is often by purchasing flats in brand new apartment buildings rather than buying them to renovate individually. Developers seize on every opportunity to purchase several neighbouring plots at a time and then build. Strong demand ensures that although Lithuania's property boom began topping out in late 2007, in early 2008 developers were still selling flats before building them.

Most developments of this kind have sprung up lately in the eastern half of the area. A hodgepodge of wooden houses in varied states of repair interspersed by sleekly modern townhouses and garden plots, this part of the neighbourhood lies between the steep slopes of Gediminas' Grave park (Gediminas was a reputed founder of Vilnius) and the small, half-idle industrial block on Polocko Street.

At the height of Lithuania's property boom, during the past three years, people who bought houses and flats here count themselves lucky. Gerardas Jurkonis, an economist who purchased a fourth-floor open-plan flat in a new project, says that between the time he bought it for 5,000 litas (€1,400) per sq metre and the moment he was given the key, its market value had more than doubled. "I would still advise others to buy here, even though the boom is over. Prices may go down in the suburbs, especially for Soviet-built apartments, but not here or in the Old Town," he says.

He praises Uzupis as a place for families that, in spite of its appearance as a quiet community, is central and well connected to the rest of the city by transport links. The greatest of these is busy Olandu Street, which runs along the neighbourhood's eastern edge. Patches of forest prevent the traffic from disturbing the community.

The area's largest new residential development, Kriviu Namai, scheduled for completion this summer, rises near the eastern border, on Kriviu Street. Built by YIT Bustas, a Lithuanian subsidiary of the Finnish construction company YIT Group, its 23 flats are expected to be sold out before landscaping on the grounds is finished in August, says Tomas Jarasunas, site project manager.

Technically, this marks a slowdown. YIT Bustas' previous project in Uzupis, 36 flats also on Kriviu Street, sold out in just six months, well before construction work was finished. Kriviu Namai is selling well but more slowly and more expensively at prices from 8,000 litas to 1,500 litas per sq meter.

Catching the jitters in a slowing market, YIT Bustas recently halted work on several projects. But Jarasunas says it is important to keep pressing forward.

One potential risk stemming from Uzupis's emergence as upscale residential district is wholesale gentrification. It still feels a long way away from its first chain café but prices in the area of Uzupis nearest the river and Old Town are already nearing parity with Vilnius's historic centre.

"What costs 7,800 litas here might cost 8,000 litas in the Old Town; not a big difference," says Kristina Leknickaite, Lithuanian commercial director for Arco Real Estate.

Few new bohemians will be moving in under these conditions. On the other hand, moving from the area Leknickaite describes to eastern areas of Uzupis, prices typically fall by about 40 per cent.

The party is not over yet.

Fabled battlefields that never saw war

2008-06-14T10:01:00.002+01:00

By Eric Jansson
Published by Financial Times, 14 June 2008

The sign was anything but welcoming. “Explosive hazard,” it read, and a little cartoon showed shrapnel flying. “Localised quicksand.” Then, in bold font: “Former military target area. Do not touch any metallic objects. They may explode and kill you.”

Under a slate-grey sky, narrow footpaths tracked by sheep’s hooves ran around pale sand dunes, cutting here and there into patches of tall grass. I heard rustling up ahead, beyond the sign, and looked to see a startled sheep scurry between two dunes. A pause. No explosion. Had the sheep sunk into the ground?

I followed gingerly. I knew exactly where I was going, having plotted carefully in advance my walk on Cheswick Beach, on Northumbria’s North Sea coast. But one steps a bit more gently when advised to watch out for bombs and quicksand.

The lurid warnings were welcome. I had not gone to the beach for unspoilt beauty; it was spoilt beauty I was after. Not many people visit this great, lonesome expanse of sand and water. A few birdwatchers go there because of its location within Lindisfarne National Nature Reserve, a mecca for migratory birds. Others make the pilgrimage to Holy Island, the offshore monastic site that played a key role in the seventh-century Christian evangelisation of the north of England.

I went there because Cheswick Beach is heavily polluted by junk left over from the second world war. I had the place to myself – miles of it, battered by the sea wind. Not just old bombs can be found on the dunes, but pillboxes and observation towers. At low tide, so I am told, one can also find the wreckage of a crashed Spitfire.

Yet the casual visitor is unlikely to recognise any of these wartime features. Zipping down a motorway, oblivious, we pass the fabled battlefield, the famous castle or the important ruin. It is hidden behind a barrier, lost in peripheral vision, or simply ignored. Demystifying such landscapes is rewarding work for a tourist.

In early 1940, the British Army, RAF and Home Guard scrambled to prepare for an imminent German air and sea invasion, Operation Seelöwe. Eventually, thanks to the summer’s Battle of Britain, Hitler and Göring called off their plan in September of that year. But tens of thousands of British anti-invasion features had already been built, and many of them remain today. They are gross physical reminders of past horror, yet in places like Cheswick Beach one finds that, over time, they have merged permanently with the pleasant English coastal landscape. These anti-invasion defences are a world to explore, hints of the past that invisibly shape our present.

My path snaked through the dunes until I reached a clearing and found my first objective, a concrete and brick pillbox topped by a two-tiered RAF tower. The pillbox was buried in sand up to its loopholes, as the gun slots are called. To enter, I would have needed to slide in on my belly. So instead I climbed the stairs up the half-shattered tower and found a platform on top, damp and crawling with snails. It offered a fine view of the scraggly dunes, immense sands, tidal pools and waves crashing in the distance. One could begin to make out the military logic of the beach.

Such exploration has never been easier. In 2002 the Council for British Archaeology completed an eight-year project, a Defence of Britain database, now searchable online, that pinpoints such sites. Add to this the satellite imagery published by Google Maps, and even an amateur like me can plan a rewarding day of discovery.

Not far from the tower I found a long row of anti-tank blocks. Had I not known what these great cubes of concrete were, I might have mistaken them for crude post-modern artwork. Dumped across a break between the dunes, like child’s building blocks, they formed a line parallel to the sea. I walked along the line until it began to disappear into the ground. The last visible block poked just an inch or two above the sand. The earth, shifting imperceptibly over time, was swallowing the blocks.

A mile or so down the shore, I found an immense crater, 31 paces across. Standing in the middle, I wondered if this was the work of an RAF test bomber or a Luftwaffe attacker, both busy in the area during the war. I struggled to suspend belief. Could this hole, which mangled one side of a grass-covered dune, really be a bomb crater?

On a different excursion, 12 miles inland at the market town of Wooler, which had been heavily fortified during the war, my search proved simpler.

The town was ringed by pillboxes, and some remain. My favourite was a little lozenge-shaped one all but hidden in the bushes above a bridle trail. From within, looking out over a narrow valley, soldiers posted there would have been well placed to pin down anyone trying to take Wooler from behind.

One pillbox, a great hexagonal structure, was now located inaccessibly in someone’s backyard. Reaching another, on a construction site, necessitated a little discreet trespassing. Yet it was worth it, partly for the challenge of getting there, partly to crouch inside and look out of the loophole, wondering who “Doris” was. Graffiti on the wall had memorialised her.

But it was back at Cheswick Beach that my explorations yielded the greatest reward. A local expert had advised that the wreck of the Spitfire was only accessible when the tide is out . But because of the quicksand warnings my steps were extremely cautious. As I searched for something other than driftwood and seaweed, an almost-full moon peaked through the clouds, shining brightly.

And I found it, or would like to believe I did – a heavily rusted metal form, mostly submerged in the sand. If it was in fact the crashed Spitfire, then it was a small part of the cockpit I saw, poking out of the sand, for fitted into it were surf-worn panes of glass, shattered.

I wondered what I would find there with more time, but left the beach as darkness deepened. A landscape, like a life, guards some secrets more closely than others.

Next Neighbourhood – Agenskalns

2008-06-07T12:18:00.003+01:00

By Eric Jansson
Published by Financial Times, 8 June 2008
Akmens Tilts, Riga’s broad stone bridge, heaves a busy boulevard across the river Daugava into the heart of the Latvian capital. For morning commuters travelling by car, tram and bus, the crossing works as a gateway into the city. It lifts them up on the Daugava’s less-developed west bank and, having carried them over the water, sets them down among the gracious spires and bustling alleyways of the central area.
In the evening, the structure’s function shifts into reverse as the same commuters return to some of this Baltic hub’s best communities. Back on the west bank, traffic streams into vast parkland, where roads diverge en route to residential quarters of radically varied characters.
One way, a street leads into old neighbourhoods graced with attractive clapboard villas. Go another and one comes across pre-fabricated, Soviet-era mini-cities built of concrete slabs. Elsewhere there are newly built suburbs and even a few luxury high-rise apartments.
At this fork in the road, the quickest route to a quiet life – as Latvian townsfolk have traditionally known it – points toward Agenskalns. This district lies straight across the parkland, just five minutes’ drive from the city centre.
In recent years it has remained amazingly unchanged while immense demand for downtown properties has pushed real estate prices in the very centre of Riga toward improbable parity with major western European cities, triggering rampant renovation and development.
With an aesthetic that owes more to the early 20th century than the early 21st century, most of this mixed district of old houses and towering trees looks much as it did before the recent boom, now turned to slump. Trams rumble down leafy cobblestone streets and in the district’s centre, where streets converge, flower vendors, taxis and pedestrians jostle for room before the entrance of an old covered market.
Now in the wake of the boom, with property prices in the Baltic country down sharply from last year’s highs, the same factors that insulated the neighbourhood from change begin to look like assets.
“Agenskalns is not cool,” says Inguss Hofmanis, of estate agency Latio.
To many Latvian homeowners as well as foreign buyers, cool has meant new or flashy. Agenskalns is overwhelmingly old, and most properties found here lack the obvious allure of those in Riga’s historic centre, where medieval and art nouveau designs interweave gloriously.
Meanwhile to the developers who have rushed to meet the demand of such buyers, cool has meant big. The bigger the project, the bigger the return on investment. Here, Agenskalns also fell short during the boom. Narrow streets, small plots and complex ownership arrangements scared developers away. They found simpler opportunities elsewhere in Riga.
For developers who have attempted to work in Agenskalns, getting in has been difficult. Local factors have made the market hard to penetrate, says Karlis Streips, a prominent journalist and social commentator.
Latvia’s morally unyielding denationalisation programme, instituted after the country cast off Soviet occupation in 1991, restituted formerly private properties not just to original owners but, when original owners were deceased, to their families. Many of Agenskalns’ century-old homes passed to families who lacked the money to renovate.
“One might have expected them to sell but people from Agenskalns have a kind of independent community spirit. They want to stay,” says Streips.
That provincial feeling, available so close to the centre, is increasingly attractive to many frustrated house-hunters in a citywide market where demand still so far exceeds supply that prices soar even in crumbling, Soviet-built zones. Wealthy buyers continue to look elsewhere but first-time buyers see Agenskalns as a good place to start and, potentially, to stay.
“The district is lovely and calm but just a step away from the hurly-burly,” says Zane Sedlova, a 22-year-old university student who earlier this year bought a two-bedroom flat in the area.
Though her property is located in a 1960s-built apartment house – one of the more popular Soviet-built varieties – it stands in a characterful part of the neighbourhood, just steps away from one of Agenskalns’ distinctive landmarks, a water tower built in striking national romantic style.
For such young buyers, accommodating prices are as important as pleasant atmosphere. One year ago, just before Riga’s market turned, prices in the centre topped 3,574 lats (£4,000) per sq metre, and prices in Agenskalns still ranged from about 857 to 1,785 lats per sq metre. Most would-be first-time buyers considered the market impenetrable.
Now, Riga’s inelastic, high-end markets retain price values for the wealthy individuals who can afford to buy there, the credit crunch notwithstanding. By contrast, middle-class property prices are falling rapidly. Average property prices fell as much as four per cent in February alone, and other months have seen significant drops, as well, according to analyses published by Arco Real Estate.
In Agenskalns, residential space in an attractive, brick building erected before the second world war is now offered for less than 1,428 lats per sq metre, while historic wooden houses are about 350 lats per sq metre. The most expensive renovations usually cost about 500 lats per sq metes but the pay off can be substantial.
Serving Riga’s market of 1m people, existing stock comprises about 300,000 apartments, 60 per cent of which are Soviet-built. Many of these post-war dwellings are approaching or past their original intended periods of use, says Aleksandrs Kregers, Latvian marketing director for new developments at estate agency Ober-Haus. Some of them might become uninhabitable “in the next 10 years”, he adds.
Under these circumstances, demand is likely to rise dramatically. The same dynamic is already helping to fuel a fresh cycle of new building. Indeed, though Agenkalns’ proximity to the centre remains one of its defining advantages, developments on its outskirts have become a strong source of upward pressure on prices in the area.
The towers of Panorama Plaza, the country’s biggest single mixed-use development, have begun rising in outer Agenskalns. Builders last year finished work on the first of four planned blocks and a second is due for completion this summer, with the entire project by Turkish developer Misa Housing Industries, due to be in place by 2010.
From upper storeys of the first tower, which tops out at 24 floors, residents enjoy expansive views of predominantly low-rise Riga and, looking inland, to dense pine forests.
Demonstrating inelasticity at Riga’s high end, work continues at the site in spite of the slumping market. Evija Ansonska of Mediju Tilts, the developer’s marketing agent, says that price falls seen across most of the city during the past year have not touched Panorama Plaza, where the developer still asks 357,000 lats for a 22nd floor, two-bedroom penthouse of 157 sq metres.
“We have enough people with enough money to buy flats here. We look to the Russian market. One third of our buyers are Latvian, but another third are Russian, and another third are from the European Union,” she says.
This also is Agenskalns. But the 22nd floor penthouse is the fruit of Riga’s most recent growth spurt. Far below, the landscape of faded façades, green patches and tramlines looks like more fertile territory for the next one.

Einstein and God

2008-05-13T14:52:00.013+01:00

We read today that Albert Einstein wrote some unpublished views on God, and these are a little surprising.

"The word God is for me nothing more than the expression and product of human weaknesses, the Bible a collection of honourable, but still primitive legends which are nevertheless pretty childish. No interpretation no matter how subtle can (for me) change this. These subtilised interpretations are highly manifold according to their nature and have almost nothing to do with the original text. For me the Jewish religion like all other religions is an incarnation of the most childish superstitions," Einstein wrote in a 1954 letter to the philosopher Eric Gutkind, according to the Guardian newspaper.

One is a little surprised because Einstein’s best-known quotation about God indicates belief in a single, ultimate Creator. “God does not play dice” is a line widely attributed to him. He is also remembered to have said at Princeton University in 1921 that “God is subtle, but he is not malicious”.

A person’s view of life, the universe and everything will change over time. Einstein, who made no secret of the development of his thought, is obviously no exception. So what became of Einstein’s God?

We should not read too much into a single letter. But perhaps we can read a bit more into it than today’s headline writers, who have taken the letter to Gutkind as unsubtle proof that Einstein simply did not believe in God.

It may be that Einstein, an undoubted genius of subtle and non-malicious mind (apparently he even came to regret his association with the invention of the atomic bomb) “got” God but for some reason refused to accept Him. Needless to say, we cannot know.

But, strikingly, his description of “the word God” as “nothing more than the expression and product of human weaknesses” is extraordinarily near the Christian understanding. Christianity holds that God, the Word, expresses Himself within human weakness. What Einstein evidently regarded as an expression of doubt could be, with perhaps nothing altered but tone of voice, a declaration of faith.

Clearly Jesus' identity as the Christ is expressed through human weakness, since he is true man. From an orthodox Christian perspective, the Incarnation ("production" to use Einstein's secular language) came precisely from human weakness (the frail glory of a human mother). Yet the Incarnation also came precisely from eternal glory, since Jesus is also true God.

Einstein, from a Christian perspective, is likewise right to describe Biblical legend and faith incarnate as “primitive” and “childish”. The word “primitive” means first, elemental, original, and need not carry the cultural meaning of “outdated” attached to it in the modern age. As for “childish”, one hopes this is not an insult, for we should all hope, in matters of faith, to be more like children and less full of ourselves. (How wonderful and ironic that the recipient of Einstein’s letter was named “Gutkind”, meaning good child.)

Humanity has not yet pulled away from Einstein. Will we ever? He is the icon of modern scientific thought, and his shadow falls over modern philosophy and politics as well. He remains the first man for whom relativity preceded relativism, whose modern enquiries pointed early on toward the end of modernism and the obliteration of the systematic certainties which were his enquiries' very foundation.

For people in our own, post-modern age, relativism (which asks us to switch off the brain and dim the soul) almost always precedes relativity (which requires real study to understand yet is taken for granted). The post-modernist is largely stripped of Einstein’s ability to wonder and enquire, yet finds himself stuck at the altar of the icon’s thought. Like a "bad Jew" in a post-Hebraic desert of secularism, the post-modernist is really only a dysfunctional modernist, trying to hope his way out of the darkness.

Yet, shed just a little hopeful light on the darker ruminations of the icon, and those ruminations seem to reorient towards Truth.

Rise and shine! The storm of centuries is passing, and the compass that whirled around amid the worst of it once again points north!

A Baltic boom

2008-04-27T14:57:00.007+01:00

By Eric Jansson
Published by Financial Times, 26 April 2008

For real estate developers who think big, central Tallinn has become a claustrophobic place. The property boom that energised Estonia after it joined the European Union in 2004 also made the centre of this city of 400,000 a more cramped place for developers to work.

Space was already scarce before the boom. Now it is scarcer. In a market where most developers prefer to start from scratch rather than renovating old buildings, strong demand for plots has sent the Baltic country's capital sprawling into the surrounding carrot and potato fields, where fledging suburbs now rise from the soil.

And still there is Kopli, an expansive district situated on a peninsula that points away from the Old Town into the chilly, choppy waters of the Gulf of Finland.

The area arguably represents the last great chance for real estate development near the city centre. Though it is blessed with open space like almost no other part of the capital, the district has seen little in the way of development, yet it lies minutes away from the heart of Tallinn by car, bus or tram.

“In 10 years, this will probably be one of the most valuable areas of Tallinn,” says Endel Siff, a businessman living in the city who has made much of his wealth in Russian oil transit.

To understand why a growing number of Estonian real estate experts think he is right after steering clear of Kopli for years, consider the district’s peculiar history of isolation. It spent a half century as a restricted zone during Estonia’s occupation by the Soviet Union, when the military deemed the peninsula’s port a top-secret asset.

When the country regained independence in 1991, Russian sailors quartered there stayed on for many more years. When they finally left, they stripped many of the war boats in the harbour of copper pipes to sell as scrap, causing them to capsize. They left behind an almighty mess in the water and on the land.

Yet much of what was built here under Soviet rule, residential and commercial property, remains usable and inhabited. Many of the buildings that predate 1940 have been preserved, perversely, because underinvestment has been so severe that, until recently, people somehow kept them in working shape even as they sagged and sank.

Driving around Kopli, Siff offers an impromptu tour of a district that, by accident, has become a living museum of Estonian history and architecture.

On one street, century-old clapboard tenement houses still lacking indoor plumbing stand opposite a block of 1960s-builtKhrushchevki, apartment blocks nicknamed after the Soviet leader Nikita Khrushchev, during whose rule they were erected. Turn down an alley toward the shore, lined with interwar mansion houses, and one sees weather-warped wooden villas – built during Tsarist times – begging for restoration. Turn back inland and one enters a crumbling neighbourhood of grandiose, pillared Stalin-era apartment blocks.

In one such courtyard, where some front doors are falling out of their frames, vodka bottles lie strewn in the yards and old men slump on broken benches. The scene reeks of post-totalitarian deprivation. If the future is bright, it might be distant.

“We are probably talking about five to 10 years. You cannot build an oasis of prosperity if it is surrounded by poor areas but you can see that prosperity is finally reaching this area, too,” Siff says.

Siff, who does not like to think of himself as a developer, has nonetheless been dreaming up some of the biggest ideas about property development anywhere in Tallinn. His most ambitious dreams focus on Kopli, where one of his business interests, Bekkeri Sadam, a commercial port, is located.

His plans have, so far, encountered resistance from city officials. They are understandably cautious, knowing that the choices they make in Kopli are likely to define the peninsula’s role in new ways, affecting the city for many years to come.

So strong is public officials’ sense of need for a brainstorm that they presented a section of Kopli for the consideration of participants in last year’s Europan, a competition for young architects and urban planners across the continent. Contestants from Germany, Spain and Italy posted back competing visions of hypermodern residential tower blocks in a mixed-use harbour.

If such visions feel a long way off, that is only because real estate investment has not yet swept into Kopli on the massive scale seen in other Tallinn districts.

Marek Antoniak, one of the city’s leading developers with his company Artig Kinnisvara, agrees with Siff that such investment undoubtedly will arrive. “Kopli is a good area, near the city, near the sea, with good transport links. Sure, it lacks a good image, but it is the most undervalued place in Tallinn,” he says.

Small-scale investments are already evident, many of them vastly more impressive than a fresh lick of paint on an old Khrushchevka, though such basic renovations are extremely common where owners and tenants have found ways to co-operate, often after years of haggling. As this happens, the area’s peculiar history – including its sad legacy of isolation – is being converted into an asset and wealthy owners who like the heady atmosphere are moving in.

“Kopli has a very fresh vibe. It seems that everyone is looking forward to inevitable change, and change can only be good,” says Toomas Prangli, a young lawyer who last July moved there from the Old Town.

Prangli’s old neighbourhood of Toompea, an ancient hilltop area, is home to some of the country’s most coveted residential properties but he was happy to move out. Toompea, for those who live there, has been badly damaged by the real estate boom that recently petered out.

“So many foreigners bought Old Town properties as investments and rarely stayed there themselves that eventually I felt I was living in a ghost town,” Prangli says. His new loft apartment at Marati 4 in Kopli, in a Tsarist-era administrative building, boasts five-metre high-ceilings. Prangli says his purchase, lavishly renovated and managed by Uus Maa, a Tallinn estate agency, cost 30 per cent less than property in the Old Town.

Prices in similarly renovated Kopli properties range from €1,600 to €2,100 per sq metre, with Marati 4 near the top of the scale. Because apartments such as Prangli’s are commonly sold off-plan, mid-renovation, he managed to persuade four friends to buy in the same building, establishing a social base in the previously unfamiliar district.

Like many new residents in the area, Prangli says he was worried about crime but he now feels “more safe in Kopli than in Toompea”, contradicting the district’s stereotype as a stamping ground for homeless drunks and petty criminals. In Tallinn slang, when a man hits the bottle he is said to be elavad Kopli liinide – “living on Kopli rails”.

Another pleasant surprise awaiting newcomers is that, although many Estonians still regard Kopli as a place “for Russians” – a legacy of its time as a Soviet restricted zone – in fact the non-Slavic Estonian language is frequently heard in streets and shops, alongside Russian.

As more developers start working in the district, it seems almost certain to follow the trajectories of Kalamaja and Pelgulinn districts on the same peninsula, but closer to the Old Town.

Many Tallinners once looked askance at Kalamaja and Pelgulinn much as they look at Kopli now, but their popularity began to soar five years ago with a wave of renovation and construction. Bohemians came first, then young, upwardly mobile types. By this standard, Prangli has already jumped the queue into Kopli.

But then, he says he likes “to be first”.

Estonia feels the pinch of Moscow's pique

2008-04-22T14:17:00.006+01:00

Without Russian oil, terminal to become a shopping mall

By Eric Jansson
Published by the Wall Street Journal Europe, 22 April 2008

TALLINN, Estonia - Most of the world has long forgotten Estonia's dispute with Russia one year ago, which saw the Baltic nation's oil supplies cut and its high-tech economy hit by a massive cyberattack. Not Endel Siff.

A leading Estonian businessman, Mr. Siff made a fortune shipping Russian fuel through the Milstrand Oil Terminal, a well-maintained 14-hectare terminal on the coast of the Baltic Sea, and through other sites. With oil prices setting records world-wide, business should be good. But Milstrand, where Mr. Siff is chairman of the supervisory board, has filed papers to transform itself into an upscale shopping center. The plan is to load the terminal's equipment on a barge and ship it to the highest bidder. That is because Russian oil companies never resumed the flow of oil to the level upon which Milstrand depends.

The terminal's plight represents a practical example of what can occur when Russia's political sensitivities toward neighboring countries combine, officially or unofficially, with its might as an exporter of natural resources. It can generate fallout long after the initial dispute disappears from the headlines.

Shipment of oil in the Baltic has been increasing overall, but Russian oil companies have redirected much of their transit flows away from Estonia and toward newly built terminals such as Primorsk and Ust-Luga around St. Petersburg. In recent years, Russia has temporarily cut off natural-gas supplies to Ukraine and Belarus and ceased oil deliveries to Lithuania and Latvia; an embargo on trade with Georgia continues. Many analysts see Dmitry Medvedev's selection by Russian President Vladmir Putin as his successor as a way of entrenching what they describe as Mr. Putin's approach of using Russia's natural-resources wealth as a source of geopolitical leverage; the president-elect is chairman of Gazprom, a giant state-owned energy company. Senior Russian government officials don't publicly acknowledge using such leverage.

Mr. Siff's reaction demonstrates a built-in weakness of any strategy that would aim to punish independently minded neighbors with economic pressure. Estonia, which joined NATO and the European Union in 2004, has shifted the bulk of its trade from Russia, and increasingly bases its economy on services, high tech and other industries less dependent on its resource-rich neighbor. Georgia is still pressing hard for membership in the North Atlantic Treaty Organization, Moscow's primary gripe, and gaining strong support in the EU from countries such as Estonia that also have come under Russian pressure.

Unless the flow of Russian oil resumes -- a prospect considered unlikely in the near term -- Milstrand aims to convert its site to tap into the strength of Estonia's consumer economy. Approved unanimously by the company's board and awaiting public planners' approval, the plan foresees deconstruction of tanks and pipes, the conversion of three underground Soviet-built nuclear-bomb-proof tanks into public water storage, and the erection of a shopping area.

"If we do it, we will just dismantle everything, put it on a barge, advertise and sell to the highest bidder," said Mr. Siff, 50 years old, looking out his window at the terminal's gleaming white tanks, tidy lawns and railway link. With its 125,000-cubic-meter storage capacity, Milstrand is Estonia's seventh-largest terminal.

For Mr. Siff, such thinking represents an extraordinary about-face. The collapse of the Soviet Union in 1991 found him well-connected as a project manager in charge of exports at a Soviet trade organization. After tiny Estonia regained independence, he parlayed his position, expertise and entrepreneurial spirit into status as one of the country's top tycoons. His N-Terminal company co-owns Milstrand with Voorsterburgh Investeringen of the Netherlands.

Then came the spat that climaxed one year ago next week: a quarrel over the fate of a symbolically sensitive Soviet war memorial, the Bronze Soldier. When Estonian officials moved the memorial from downtown Tallinn to a suburban cemetery, ignoring Russian objections, ethnic Russians sparked riots here and a siege of the Estonian Embassy in Moscow and, Estonian officials allege, Russian hackers carried out a state-sanctioned "cyberwar" against the country's online infrastructure. The dispute also catalyzed an unofficial trade boycott.

While the street violence and cyberspace attacks soon subsided, "there is unfortunately no recovery" in oil-transit volumes, said Urmas Glase, a spokesman for Estonian railway company Eesti Raudtee. The railroad's data show that monthly Russian oil-transit volumes fell by roughly one-third after the Bronze Soldier incident. Cargo volumes of timber, paper, metals and chemicals fell sharply, too.

Oil transit in other parts of the Baltic is a different story. Seaside terminals around the Baltic last year handled 170 million tons of oil, mostly from Russia, bound for the Danish Straits, 13% more than in 2006 and about 113% more than in 2000, according to the Helsinki Commission, an intergovernmental maritime monitor in the region.

Estonia's trade with other EU countries far exceeds its trade with Russia, yet if Russian companies redirect trade away from Estonia, transit-linked businesses in the small country feel the pain. Estonia's finance ministry earlier this month cut the country's gross-domestic-product-growth forecast to 3.7%, the lowest level since 1999, when local businesses were hit hard by a Russian financial crisis. Domestic dynamics have led the slowdown, but international factors including the global credit crunch and the slowdown of Russian commercial traffic also count.

Few Estonian businesses have suffered as direct a hit as Milstrand. After transporting 1.7 million tons of Russian diesel in 2006, last year it handled fewer than 400,000 tons, only 24,000 of which flowed through during the second half of the year. What arrives is "brought in by independent traders," said Gaspard Boot, who sits on Milstrand's supervisory board with Mr. Siff.

"Of course, we have our connections with Russian oil companies. We can press them, but we cannot move mountains either," he said, noting that Russia has a financial interest in rerouting transit to its own oil-export facilities in the Baltic. Moscow has invested billions over the past decade, building up Primorsk and other sites, where Mr. Boot said Russian companies enjoy low costs through "positive discrimination" on fees.

Some companies are investing in Estonian oil-transit infrastructure now while the market is down. Mercuria Energy Group, a Swiss-registered oil trader, acquired a Tallinn terminal, Eurodek, shortly after the Bronze Soldier incident. "Sure, we're not making as much money as the terminal did two years ago," said David Ensor, Mercuria's vice president for communications. "We like the look of it as a long-term strategy investment."

By contrast, Mr. Siff's idea to shut Milstrand -- a plan Mr. Boot describes as having "a 90% chance," with the permitting process under way -- shows that at least some of the region's oil-transit businesses outside Russia prefer not to wait, or feel they can't afford to. Over time, such moves could deprive Russian oil companies of options in Baltic ports such as Estonia's that are more reliably ice-free than Russia's.

"Transit is not really the best industry to be in," Mr. Siff said. "My interests are really in high tech now." He said he is investing in laser technologies being developed in North Carolina and test-marketed in the EU.

Decision time for NATO

2008-04-02T10:16:00.002+01:00

For the first time since NATO’s initial eastward expansion in 1999, the alliance may be forced to say “no”. That is the bad news. In a roundabout way it might be the good news, too.

By Eric Jansson for Balkan Insight

With American power globally in crisis and European power defined as ever by ill-coordinated aspiration, Russian power ascends these days on the strength of natural resources wealth, strategic clarity and Western strategic discombobulation.

Atmospheric conditions do not look favourable for another round of NATO expansion, especially with coalition forces fighting toward an uncertain outcome in Afghanistan.

So should the alliance kick itself for putting the security of five European countries on the line at this awkward time?

Maybe, or maybe not.

As with past rounds of expansion, the choice being considered at this week’s NATO Summit in Bucharest is seen by almost everyone as a test of the alliance’s unity, strength and resolve.

The possibility of a rancorous internal dispute about expansion looks like bad news. However, such a disputatious moment may invite a welcome change in the way NATO handles European security.

The three western Balkan countries in question – Croatia, Macedonia and Albania – do not pose major problems as potential new member countries, even despite Macedonia’s never-ending “name” dispute with Greece.

By contrast giant, politically-fractious Ukraine and spunky, territorially-riven Georgia are tougher calls, their respective “Orange” and “Rose” revolutions notwithstanding. The very real challenges they face within are complicated by the strategic reality that they live in Russia’s shadow, like it or not.

Overt German opposition to the proposal that Ukraine and Georgia be given NATO membership action plans, known as “MAPs”, has created a strained dynamic. This could also impact Croatia, Macedonia and Albania’s prospects amid the diplomatic horse-trading in Bucharest.

Indeed, for the first time since NATO’s initial eastward expansion, in 1999, the alliance may be forced to say “no”.

Neither in 1999 nor in 2002, when the alliance triggered a second round of expansion it ultimately carried out in 2004, did NATO actually turn anyone down. In both these previous eastward rounds of expansion, which together brought ten new member countries in to the alliance, NATO opted against “big bang” expansions yet found ways to renew the hopes of those candidate countries it determined should wait, such as Macedonia and Albania.

This neat scenario is not guaranteed to repeat itself even if all three western Balkan candidate countries this week receive invitations to join. Ukraine and Georgia could still get turned away.

For the two former Soviet republics, denial of MAPs would feel a lot like “no”.

At that point, proclamations of NATO’s love and admiration will mean little. If Kiev and Tblisi come away disappointed, whatever the circumstances, count on Moscow to crow victory.

Kremlin officials make no effort to hide their disgust at the alliance’s consideration of further expansion into what they regard as Russia’s natural sphere of influence, its “near abroad”. The NATO membership since 2004 of Estonia, Latvia and Lithuania – countries which endured illegal Soviet occupations from the Second World War until 1991 – continues to sicken Russia’s neo-imperialists. Add Ukraine and Georgia, and their condition only gets worse.

Some observers and participants believe this is precisely why NATO must expand as rapidly as possible: Moscow must be shown again that it has “no veto”. Indeed, George W. Bush used the “no veto” language on Tuesday on a state visit to Kiev.

The argument makes some sense. But flip it over and one sees that Kremlin opposition to NATO expansion has itself become the anti-“veto” lobby’s imperative for expansion. Moscow has no veto, and to demonstrate this point NATO must expand, the thinking goes.

By logical extension, if NATO opts not to give MAPs to Ukraine and Georgia, then Russia will have been handed a veto by implication.

This is illusory. Somewhere between the veto Moscow in fact lacks and the imperative for NATO expansion driven by fear of Russian neo-imperialism exist the sober interests of the alliance in its present form – balanced internally by debate, compromise and even disagreement.

These sober interests clearly include the stabilisation of the western Balkans, a region in which the alliance has become deeply involved in its expanded post-Cold War mission. As such, an offer of membership to the western Balkan countries under consideration makes clear sense – especially when one considers the stabilising influence such a move could be expected to have in and around Kosovo.

The alliance’s interests less obviously include eventual NATO membership for Ukraine and Georgia, though they may include this, too. Deciding whether or not they do is likely to be rancorous business.

Fine. A strong case can be made for rancour as the very basis of NATO’s health.

This is meant to be an alliance of robust democracies in their collective military capacity, not a sissy circle of risk-averse technocrats. NATO is headquartered in Brussels, but it is not the European Commission. Its decisions should be the product of hard disagreements, worked out not through the watering-down of national interests but rather through the testing of national interests in the cold light of reality. Anything less generates distinctly insecure security policy.

If Germany holds its ground and NATO is seen to lack unity and resolve over issues of expansion this week, commentators will opine that the alliance’s fundamental unity and resolve have been imperilled, despite its unrivalled military strength. We should ignore such drivel.
NATO’s fundamental unity, strength and resolve are defined not by what happens in Bucharest but by Article 5 of the North Atlantic Treaty. This is the portion of the North Atlantic Treaty in which NATO members agree “an armed attack against one or more of them in Europe or North America shall be considered an attack against them all” and, consequently, will trigger “collective self-defence”.

Article 5 “makes” NATO, and were it ever to prove unviable in practice it would break NATO in a way that a poor outcome in Afghanistan could never do. It is also why NATO should expand with care.

While sorting out this week how collectively to take care of members countries’ national interests and considering also those of partners outside the alliance, if NATO cannot agree about all five countries whose security is on the line, an opportunity will have been lost. Differences of opinion in the alliance will appear, but not institutional fissures.

Indeed NATO may prove stronger in the long run if its European member countries become more effective, not less, at forcing fruitful debates rather than partnering passively with the sole superpower on the team, as has sometimes been the case.

It might not make for a happy summit. But for those, including many in Washington, who have long asserted that Europe should take greater responsibility for European security: isn’t that what this is?

Bosnia's former president recalls Hillary visit

2008-03-25T13:33:00.018Z

By Eric Jansson

Ejup Ganic, the former acting Bosnian president who greeted Hillary Clinton on her trip to Bosnia in March 1996 and also met one-on-one with her for "about 20 minutes" during that trip, has now offered his own recollection of the Clinton visit.

Sent today in an e-mail to me, his recollection confirms that there was neither sniper fire to dodge when the former First Lady landed at Tuzla airport, nor was there any expectation of sniper fire.

"We didn't expect snipers, although we Bosnians were rather comfortable with the situation since for four years we had bullets fired over our heads on a daily basis,” Ganic writes.

By now it is well established that Clinton, speaking on the campaign stump, exaggerated the dangers she faced when landing in Bosnia. Ganic's e-mail adds yet more evidence of this.

However, his e-mail also fills in some additional blanks. He provides circumstantial detail which, if known to Clinton at the time of her trip, might understandably have heightened her perception of danger and sense of adventure.

"Although the NATO troops were in Tuzla, we still believed that some positions on the hills were occupied by radical Serbs, so I was worried about the overall safety. I was the main host and the originally planned welcoming ceremony was shrunk down," Ganic writes.

Sniper fire or no sniper fire, it is not every day that a First Lady jets into a recent war zone where, to the best knowledge of local officials, armed rebels continue to occupy the surrounding hills.

Ganic continues with a personal assessment of Clinton. She was "up to date on many issues" and "handled herself much better than many senators who visited us during that time", he writes.

During his "official conversation" with Clinton, Ganic also recalls receiving "an impression that she had an agenda for her own advancement".

An M.I.T.-educated scientist, Ganic has lately steered clear of high political office and instead dedicates himself to running the Sarajevo School of Science & Technology, Bosnia-Herzegovina's first private university, an institution attended by some of the brightest students in Sarajevo, from all ethnic backgrounds. He launched the institution in 2004.

Here is the relevant portion of Ganic's e-mail in full:

"I was very surprised to learn from you that the former First Lady's visit to Tuzla has created so many disputes. Actually I remember that visit quite well. Although the NATO troops were in Tuzla, we still believed that some positions on the hills were occupied by radical Serbs, so I was worried about the overall safety. I was the main host and the originally planned welcoming ceremony was shrunk down. However, as one NGO brought a little girl to sing a song to the First Lady on her arrival, that prolonged the welcoming ceremony.

"We didn't expect snipers, although we Bosnians were rather comfortable with the situation since for four years we had bullets fired over our heads on a daily basis.

"After the welcoming ceremony, I had an official conversation with the First Lady on behalf of our government. I was pleasantly surprised that she was up-to-date on many issues. Although her visit was in the unsettled environment, I remember that she handled herself much better than many senators who visited us at that time.

"By talking to the First Lady, I was under the impression that she had an agenda for her own advancement and I am not surprised of her desire to win the current elections.

"Additional problem during that visit was her daughter, because our security had to worry about her as well, regardless the fact that the military people pretended to be in charge of everything.

"In my file, I have found an original photo from the official Tuzla meeting with the First Lady at that time and I am enclosing it. I believe the meeting lasted close to 20 minutes, if not more, and she, pretty much, portrayed herself as someone who represents the USA and the White House."

Modernism's leaky roof

2008-03-08T07:14:00.004Z

By Eric Jansson
Published by Financial Times, 8 March 2008

An adult buys a house and owns it, on paper anyway. But no one knows a home and owns it like a child. The child fits into nooks the adult cannot reach, hiding and retrieving things there. And as much as those small spaces within, the vast space without becomes his domain, a universe of first adventures. “Inside” and “outside”, private and public, have relatively little meaning to the child: “home” contains it all.

My brick ranch house in southeastern Wisconsin was pretty conventional from a design perspective but the universe in and around it was, nonetheless, an architectural wonderland. Past a row of similar dwellings on East Point View Drive, the children from the ranch house neighbourhood would escape over a barbed-wire fence. Taking care not to rip our clothes, we would climb over it and run into the trees beyond. What we sought on the other side was a glimpse of one of Frank Lloyd Wright’s most ambitious residential creations, completed in 1939.

Wingspread, a strange and fantastic vision, was a pharaonic ornament cast in Cherokee red, Wright’s favourite colour, and transplanted on to the American Midwestern prairie. Or it was a fish. Or a space centre. Whatever it was, it was different – and when we looked at it we knew that difference came at a steep price.

Herbert “Hib” Johnson, owner of SC Johnson the household products company, had commissioned Wright to build Wingspread as a family home and loved the beauty of the 14,000 sq ft house he got in return: an octagon of brick towers and angled windows with wings shooting out in four directions. But while he adored its aesthetic, his complaints about technical faults there also became local legend. According to one well-worn tale, when rain leaked through the roof on to Johnson’s head during a dinner party, he made a show of phoning Wright to complain in front of his guests. “Well, Hib, why don’t you move your chair,” Wright is said to have retorted.

The lesson for grade-school trespassers in the neighbourhood was simple: build pharaonic ornaments with Lego bricks, not real ones. Lived in, they are follies. Ranch houses might be plain but their beauty is that they work. Johnson and his family moved out of Wingspread in 1959 and converted it into a conference centre. The folks in their ranch houses stayed put.

This lesson held true through the middle and late 20th century. Not just in Racine, Wisconsin, but around the world the sense of tension between the beauty of form and the beauty of function went limp.

Wright had been among the few aesthetically inclined modernists who dared to challenge the defining maxim of modern architecture preached by Louis Sullivan, the American who gave us skyscrapers, that “form ever follows function”. Wright and his allies lost that battle of ideas, which is why most modern housing looks as it does today.

The challenges in engineering a brave modern design were often too great. But, perversely, the winning side was accident-prone, too, in spite of its professed devotion to rationality.

“Wright was an outrageous bastard,” says Richard Murphy, the award-winning Scottish architect, recalling the late architect’s studied disinterest in engineering considerations. But Murphy is equally critical of the architects whose austere preferences guided mainstream design during the past century: Le Corbusier and Gerrit Rietveld, among others.

A prime symbol of the modernists’ impracticality is the flat roof, which virtually all of them initially embraced without finding a way to engineer properly. “Now we’ve solved the problem of flat roofs but it used to be a big problem,” Murphy says.

The scandal is that, like children, modern homeowners through the mid-to-late 20th century often found they had no choice but to do what their masters – the modern architects – told them. So, in the cities they lived in big boxes. In the suburbs they built little ones. When roofs leaked they moved their chairs.

But at some point we slipped into a postmodern age. People awoke to find that Sullivan’s “law” had been toyed with and deconstructed so thoroughly as to be meaningless.

Diana Martinez, a New York architect at the Temple Hoyne Buell Center, at Columbia University’s highly influential architecture faculty, says: “The rendered form-follows-function dyad has all but disappeared except as a trope used to formulate new equations; that is, form follows fiction, form follows fashion, form follows libido, form follows finance, form follows fiasco. In fact, the last four examples are all titles of books.”

Along the way, the form-function dualism at the cold heart of modern architecture has broken down. Yet it remains difficult to define clearly something called “postmodern architecture”, let alone what kind of beauty such architecture represents. It is neither the beauty of function nor the beauty of form but it might be some fusion of the two.

In 1981, long before the idea of postmodernity had any popular resonance, the author Tom Wolfe, whose aesthetic interests include architecture, wrote an anti-modern manifesto called From Bauhaus to Our House. The book remains highly readable and its closing points – essentially that the emerging “postmodernists” of the time were really modernists who lacked not just taste and decency but also the courage of their convictions – still make sense today.

One of the most notable outsider’s critiques in recent months takes a very similar approach to Wolfe’s. Published late last year, Architecture of the Absurd by John Silber, an ethicist and philosopher who formerly ran Boston University, takes aim at the “genius” architects who “disfigured a practical art”. His claim is that a new generation of indulgent egomaniacs, very much in the tradition established by their modernist forerunners, is blighting our physical landscape, erecting buildings that are both ugly and dysfunctional. In his view, the clients of these architects are footing the bill for “cultural degeneration”, much like the well-heeled backers of faddish postmodern art, theatre and music. Silber admires some modern architecture, so his argument differs from Wolfe’s, but both draw from a well of layman’s outrage.

Yet examine Silber’s arguments in detail and one sees that the populist critique has moved on in one critically important way: the houses are missing.

This is because, whereas the early modernists focused almost obsessively on houses and apartments as spaces in need of revolutionary redesign, today’s leading architects, working in what some have begun to regard as an “un-private” age, typically chase huge public and institutional contracts instead. Many have never seen a house through to construction. Those who do rarely draw fire from critics.

What has changed? On the engineering side, as Murphy notes, standard solutions have been found for staple features of modern design that once caused headaches. Not just new houses but also many older, architecturally groundbreaking houses that seemed doomed to dysfunction decades ago work perfectly well now, after second-wave and third-wave investments, often made by new owners.

Conscientious owners of houses designed by Wright even find themselves called “curators” by Wright aficionados, say Larry and Victoria Smith, recent owners of the Glore House in Lake Forest, Illinois. Clients who commission new houses from today’s top architects often bring that same sense of responsibility from the day they move in – and crucially, as Silber notes, they are wealthy enough not to worry about the bills. Another reason fewer faults are found might be that, as many leading architects turn away from the single family home as their preferred medium, new house designs are becoming simpler.

Only when structural and aesthetic boundaries are tested do controversies crop up. A prominent example is Turbulence House, a New Mexico residence designed by Steven Holl, one of the world’s most celebrated architects and a prime target in Silber’s book.

Its complex shape – it features a hole through its middle and highly curvaceous walls – posed unique engineering challenges. A New York Times reviewer, reverting to classic modernist form-versus-function dualism, made fun of this and noted related construction difficulties. But the review, which might have injured Holl in a past age, failed to engage with the more complex postmodern perspectives of the architect and his clients. Holl preaches “nonconformist openness” in contrast to “technocratic architecture”. The beauty of this evolving postmodern architecture is that it celebrates a marriage of form and function that makes neither aspect primary but lets each serve the other.

A characteristic example from Holl’s portfolio – which, like few equally prominent contemporaries’ portfolios, is bursting with private houses alongside his giant public and institutional works – is the Nail Collector’s House in Essex, New York. Given “pretty free reign” by his client, Alan Wardle, Holl squeezed a sharply angled, brass-coated tower on to a tight plot at the shore of Lake Champlain. Its unusual shape is ornamented with oddities, from the L-shaped front door that fits a corner of the house to its rubber roof and the literary references to Homer’s Odyssey that determined such details as the number of windows.

The dualistic notions we have inherited from modernism get all mixed up at the Nail Collector’s House. Form serves function in that Wardle, a writer, says the house’s shape and harmony within the surrounding environment place him perfectly at ease, and in that its peculiar features actually work very well.

Yet function also serves form, since the house’s shape – especially through the play of light through windows as the sun moves across the sky – is deliberately devised to affect the perceptions of its occupants.

Holl says his goal is to “spark a paradigm shift toward a new focus on architecture’s potential to shape experience, interrelating body, brain and world”.

Just add the word “soul” to such a mission statement, from such a man, and modernism’s leaky roof might just cave in once and for all.

Uneasy mix of old and new

2008-02-02T13:14:00.000Z

By Eric Jansson
Published by Financial Times, 2 February 2008

John Arthur remembers a time when his delivery route was not nearly so long. As a volunteer for a South Leith church, he does the rounds pushing parish magazines through the letterboxes of a community that was traditionally situated in the area immediately around the church.

But Arthur has been having to put in more miles. The residential area of Leith, where Scotland’s capital Edinburgh meets the water, is bursting its traditional boundaries. Buoyed by a wave of property development, it now extends beyond the docks on to the vast harbours that once hummed with the sounds of shipbuilding, transport and trade. Having lost their traditional industries in the second half of the 20th century, these expanses of land today constitute a prime brownfield site for housing.

Indeed, a whole new city is rising out on the breakwaters, tower block by tower block – Leith in name but different in every other way to the stone-built sailors’ town of 20 years ago. Pending planning permission for a further 16,000 homes, Leith might soon become Scotland’s fastest-growing community.

What worries old Leithers is whether such momentous change will be for the good. Arthur says his first attempt to deliver the parish magazine to Platinum Point – one of the new harbour developments – left him scratching his head. “At first, I could not get in the door. There was simply nobody there. Then, finally, when I did find someone, they told me not to bother. That had never happened before. The idea of being neighbourly does not seem to be there,” he says.

Reshaping communities is often awkward but Leith faces particular difficulties in this regard, thanks to its rapid expansion. In recent years it has seen the Shore, formerly an industrial dockside area, converted into an attractive social hub lined with restaurants and pubs. A large administrative complex at Victoria Quay opposite the Shore, opened by the Scottish Executive in 1996, has boosted the white-collar influx to the area as prices elsewhere in Edinburgh have continued to rise sharply. Shoppers and tourists are also lured out of the city centre by Ocean Terminal, a stylish shopping and entertainment centre that doubles as a permanent mooring for the decommissioned royal yacht, Britannia.

There is no problem accommodating these newcomers. Over the past century an exodus of employers and workers has shrunk the local population by about 60,000, to its current level of 27,000.

Leith’s cultural and architectural capacity to accommodate newcomers is less obvious. Suffused for centuries with a sniggering separatism from Edinburgh proper, with which it has long had an asymmetrical relationship, residents are asking whether Leith can absorb a mass invasion of yuppie commuters and condo-style tower blocks without losing its essential character.

The answer is that it quite possibly can. Edinburgh has tried before to tame Leith, which officially became part of the capital city in 1920, but it has never entirely succeeded.

Leith’s freewheeling spirit can be traced back to the days when it was a wild port town where capitalism was raw, crime was rife and convicted pirates met their ends at a gallows on the sand. It always contrasted sharply with the royal burgh up the hill and culturally Edinburgh has never really subdued it.

In spite of the demolition of large areas of “slums” in the 1960s and early 1970s, the area has retained its reputation for edginess. As recently as 1993, Leith was the setting for Irvine Welsh’s novel Trainspotting, about a community of drug addicts. Most of the dilapidated haunts described in the book have since been demolished or updated. Yet a stroll past the barbers, butchers and Polish grocers of Leith Walk and Great Junction Street is still anything but bland and the drunks that jokingly menace the passers-by have not been totally chased away.

With its tight networks of Victorian houses cut through by little alleyways, much of old Leith retains a traditional look. This is likely to remain. Most recent constructions, whether towers or pebble-dashed duplexes, look so out of place that they do not fundamentally undermine the old aesthetic. Around Leith Links, a park claimed as the home of golf, a Georgian townhouse with nine bedrooms and a Grade B listing – the Scottish equivalent of Grade II – is advertised for £725,000 by Edinburgh solicitors Simpson & Marwick. Nearby, a mid-19th-century villa with five bedrooms sold recently for £720,000.

New developments in the area are typically cheaper. One of the most attractive, a penthouse apartment located in a freshly converted former “whiskey bond” opposite Ocean Terminal, carries a £299,950 price-tag.

Cheerleaders for the area advocate what they call “Leithal thinking”, which translates roughly as bloody-minded entrepreneurialism flavoured with community spirit. Those who move in say the place has a special feel. “It is an area where on a Saturday or Sunday afternoon the streets are full of people, sitting out and having a drink. There is just a great atmosphere,” says Jonathan More, a solicitor originally from Galashiels, 35 miles south of Edinburgh.

Around the harbour itself prices per sq ft tend to be above £260 for the most popular flats and exceed those at the best properties around Leith Links. And sales are booming in residential complexes such as Platinum Point, The Element and Bryant at Western Harbour.

In many cases the lure of old Leith draws newcomers to these new developments, despite the fact that in some ways they appear out of place. Architecturally, they could pass for tower blocks in Florida or coastal Spain. Each development is unique, yet all come from the same big new-build school of design: lots of glass, smooth white and metallic surfaces with a bit of stone thrown in to suggest solidity.

“Ironically, many of us who are drawn to Leith are drawn in by the old part but most of us are living in the new-builds,” says More, who last year bought a 1,500 sq ft penthouse apartment at The Element for £400,000. He acknowledges that some “young professionals come in and add nothing to the community” but predicts that community spirit and investment values on the harbours will grow over time.

Arthur is hardly alone in feeling that the new developments must make a more concerted effort to forge bonds with old Leith. Richard Murphy, an Edinburgh architect, criticises the new complexes as “sort of distended from Leith”.

“What has tended to happen at the waterfront, generally,” he says, “is that buildings arrive – isolated buildings. That is what we have at Platinum Point. You cannot make a city like that.”

He acknowledges that this could change with time if developers deliver on promises to make the harbours places to “live, work and play”. However, he warns that the microclimate out at the breakwaters is naturally inhospitable. Settlements all along Scotland’s eastern coast are “always set back from the coast a little bit” for this reason.

Indeed, buffeted by stiff, chilly winds off the Forth, the semi-developed areas of the Western Harbour can feel very isolated. Dust, kicked up by construction work, whips around. When gusts blow in, newly installed streetlamps vibrate and jingle along mostly empty roads. The strangeness of the scene bothers few people, for traffic is minimal, and pedestrians are even scarcer. Yet new residents pay handsomely to live here – from £244,000 for one of the less-desirable two-bed flats to more than £1m for a penthouse with four bedrooms.

Whether these investments will hold up, especially when compared with the lower prices available in old Leith, is anyone’s guess, though the developers are naturally optimistic and continue to build.

The New Cold War

2008-01-30T17:44:00.000Z

By Eric Jansson
Published by BIRN's Balkan Insight

Is Edward Lucas paranoid?

He is a kind of whirlwind – fast-moving, fast-talking, fast-thinking – who claims to be able to write “in any conditions, at any time”. He is The Economist magazine’s correspondent in Central and Eastern Europe, and somewhere along his zigzagging circuit between post-communist capitals he has just produced a volume called The New Cold War. Bloomsbury is the publisher, and it hits store shelves next Monday.

You read the book, you set it down, and then you ask yourself: is this guy paranoid?

If he is not, and his book is accurate, then our world stands on the brink of an ideological, geopolitical schism akin to the original Cold War, different but no less worthy of the name, once again posing Russia against the US and Europe.

On the other hand, if he is, then who cares? Europe can be expected to continue bumbling along in the frustratingly semi-competent, semi-united manner to which we have become accustomed, swimming more or less freely in a murk of bureaucracy and good intentions. In this case, Lucas’ grave warnings of a menacing Russia will never materialise.

There is another way to regard Lucas, of course – a third way, a European way, Europeans being congenitally enamoured of the middle ground even when the patch in question is situated on an intellectual floodplain. This view would be that Lucas is merely over-excitable, a well-meaning chronicler of life between Berlin and Moscow but frankly over-the-top. Yes, Russia is messy, but it is merely a menace to itself and a few messy neighbours.

But the right answer is that Lucas is of sound mind – sound enough to follow a story that others have mostly ignored, despite its importance. And he thinks we’re in trouble.

As a journalist, he has reported sympathetically for 22 years so far from Central and Eastern Europe’s fragile, fractious, formerly captive nations. He is one of just a few Western journalists who have paid careful, sustained attention to these places where history was reported to have ended in the anti-authoritarian revolutions of 1989-1991, prompting Francis Fukuyama’s fatuous claim that history had ceased everywhere. In fact, history carried on, but most Western journalists’ attention faltered, and Western intellectual comprehension faltered, too.

Throughout, Lucas seems to have maintained unreservedly that the Cold War was not a cynical contest between morally equivalent forces but a crucial test of free civilisation against malignant Marxism-Leninism and totalitarianism on the march. He is right, and he still applies this view to his reporting and interpretation of post-Soviet affairs, which makes his journalism unusually valuable. The threads his reporting follows lead us to The New Cold War.

In the book, he maintains that Russia’s experiment with political freedom is well and truly over, having finally fizzled in the chaos of the late 1990s, when Boris Yeltsin faded and the former Soviet intelligence apparatus, the chekists reconstituted as siloviki, seized control. These folks, with Putin as the reigning godfather, plan to maximise the Kremlin’s influence domestically and abroad by manipulating those who depend upon the country’s natural resources wealth.

The veracity of this claim is of immense importance to the Balkans and to every scrap of once-contested ground between former empires East and West.

The claim has been heard before but is often laid out sloppily. Lucas outlines it persuasively, fattens it with telling anecdotes and describes the likely consequences.

Crucially, he does this with sympathy for the average citizen of Russia and yet also with sympathy for citizens of smaller nations that most analysts and reporters have taken too little time to understand. Estonia and Georgia, two key examples, may be small on the map but as places in which the meaning and purpose of state sovereignty are being challenged directly by Russia, they deserve serious attention.

Lucas argues that the Kremlin’s intentions have become unambiguous under Vladimir Putin, the Russian president, and he clearly believes they will not change under his likely successor, Dmitri Medvedev. The Kremlin he describes views the West with spite and disdain and aims to compete against it directly, wrestling away as much ground as possible, politically and economically. The primary weapon, he says, will be Russia’s energy wealth in Europe’s under-supplied energy markets. But there are plenty of other weapons in its growing arsenal, as well.

Think of a boa constrictor wrapping itself around your neck, telling you, “I love you, and I’m only hugging you. I love you, and I’m only hugging you. I love you…” Until…

A copy of The New Cold War should be slipped under the pillow of Vojislav Kostunica, the Serbian prime minister.

Kostunica last week delivered Serbia’s state-owned oil monopoly into the clutches of the Russian state, as represented by the state-owned company Gazpromneft, Gazprom’s oil subsidiary, at a sales price worth one-fifth the monopoly’s estimated value. He also invited the Kremlin to build a natural gas pipeline across Serbia, part of South Stream, a project in strategic competition with the EU’s favoured project, Nabucco. These steps effectively place Serbia within the Russian sphere of influence.

A week earlier, Bulgaria unveiled a trio of energy deals with Russia. Georgi Purvanov, Bulgaria’s president, called the deals a “grand slam”. They include Bulgarian inclusion in South Stream, which now together with Serbia’s decision constitutes a major blow to Nabucco. Perhaps Purvanov needs a copy under his pillow, too.

Although these deals took place after Lucas completed his book, his reporting describes in compelling detail why such arrangements carry serious long-term risks, even if they look like savvy geopolitical positioning in the short-term.

“Energy security is national security, and cheap energy from ill-wishers is a bad bargain,” he writes.

In post-communist Europe, Kostunica is hardly alone in his frustration with the hypocritical moralising of US and European diplomats, who too often bring an air of judgement to the painful conflicts of a post-communist, post-war life they have not themselves been forced to endure.

Russia may appear to offer a more sympathetic approach. For example, the Kremlin understands why Serbia chokes on the bone of Kosovo independence. By contrast, I can recall listening to an American diplomat in Belgrade in 2002 describe his frustration upon discovering that no senior Serbian politicians regarded their country’s bombardment by NATO in 1999 as welcome and justified.

But, writes Lucas, Russia’s intentions are not ultimately sympathetic. On the contrary, the Kremlin is busily applying divide-and-rule tactics in Europe, much as it did in decades past.

The Kremlin rejects international cooperation in the Euroatlantic mould, which it deems flawed. It is indeed flawed. But what the Kremlin offers as an alternative is a brand of great power politics characteristic of the 19^th Century and early 20^th Century, when great empires treated vassal states as playthings, offering “protection” in the form of domination. That option is far worse.

The Kremlin pursues this policy in the diffuse, post-modern, post-imperial setting of 21^st Century Europe. Lucas thinks this should be a source of concern, since – even despite NATO’s evolution and expansion in recent years – Western powers are mostly focused on crises elsewhere and are unprepared to act in concert to defend Europe as they previously were.

The claim is not that Russia wishes to dominate ideologically and militarily, with the vice-grip Central and Eastern Europe still remembers well from the past century. Russia has learned that capitalism pays, and totalitarian ideology enforced at gunpoint breeds discontent and instability. But domination, whatever its form, is undesirable in comparison with rule of law, human rights, political freedom and economic liberty.

For readers broadly familiar with Russia’s past decade, the book covers familiar ground. It fills in gaps with useful details, including many that admirers of Putin’s efforts to date will find difficult to swallow.

The pages turn easily, but the book’s value for those who already know Russia’s story relatively well starts multiplying when Lucas dives into the subject of “sovereign democracy”, Putin’s euphemism for rent-seeking autocracy with the occasional (heavily manipulated) popular vote, and the means by which the Kremlin seeks to project this evolving post-Soviet ideology beyond Russia’s borders.

Readers whose preference is to morally equivocate between great power politics ala Washington and Brussels and the despairing Russian alternative will find themselves squirming.

Yet, even after reading, the temptations of equivocation will remain real, given how morally corrosive the experience of unrivalled superpower status has been for America’s political leaders since 1991, and how politically and philosophically lazy many European leaders have likewise been during what for the West has felt like a benign era.

Indeed, such temptations sometimes seem particularly strong in the Balkans, where the West has made grievous errors and where political thought is influenced to this day by the psychological damage of war, residual Marxist instinct and the humbug “non-aligned” propaganda of yesteryear.

Lucas is therefore wise to conclude his book with an essential plea for Western powers to live up more fully to their great ideals.

“Sovereign democracy” offers a critique of a flawed West. But it offers only a contorted version of rule of law, human rights, political freedom and economic liberty to average citizens of Russia and its vassal states.

Yet if Western nations do not consistently uphold such ideals in practice, at home and abroad, then alternative approaches like “sovereign democracy” will look more attractive to more people – sometimes to entire nations.

Just ask Vojislav Kostunica. Just ask Vladimir Putin. Just ask yourself.

Balkan exchanges defy categorisation

2008-01-25T12:34:00.000Z

Dramatic fluctuations in value on the world’s largest stock exchanges are partly mirrored in southeast Europe, but the region’s capital markets have yet to ‘couple’ with the defining trends in global finance.

By Eric Jansson
Published by BIRN's Balkan Insight, 24 January 2008

The stock exchanges of southeast Europe, which have so long dreamed of paralleling the trends of global capital markets, this week briefly saw this dream come true.

It has been a disappointing experience.

Share values plummeted early in the week. Bucharest’s BET nosedived 10.8 percent, while the Total Market Index in Ljubljana fell 10.1 percent. The BELEX 15 in Belgrade and CROBEX in Zagreb each plunged by around 9 percent, and other indices fell, too.

It was not the kind of parallel the region’s investors had hoped for, but the losses recorded on Monday and Tuesday did resemble those seen on leading European exchanges. Early this week in London, the FTSE 100 dropped 9.5 percent before rallying, and the DAX in Frankfurt fell by 12.2 percent.

Some local market analysts in southeast Europe described the parallel plunges as an indicator that Balkan exchanges were, at long last, in step with global trends.

At a certain level, this is unarguable. As Balkan countries have liberalised their economies during recent years, both within the European Union and outside it, they have increasingly exposed themselves to the pressures of international finance for good and ill.

Some markets within the region – especially Slovenia, Romania and Bulgaria, as new EU member states – are more exposed than others.

Yet a broad analysis of market data from across southeast Europe over the past 12 months indicates two broad points.

First, most of the exchanges of southeast Europe cannot easily be lumped into any other category of European exchanges. Across the region of patchwork republics large and small between Austria and the Black Sea, stock market performance bears little resemblance to what is experienced in the two other major groups of exchanges in Europe – the established exchanges of western Europe, where indexed results frequently look like amplified versions of results in New York, and the larger emerging market stock exchanges of central Europe and Russia, where fluctuations are even greater yet often diverge more notably from US-driven trends.

Second, an extreme diversity of exposure to global investment trends continues to characterise the region’s exchanges, with results varying greatly from country to country and exchange to exchange.

To examine the first point, we need look no further than the performance of exchanges in the region during this climactic week. For investors, the early week through Wednesday was characterised around the world initially by the high drama of steep share-price falls. The falls originated outside the US yet were catalysed apparently by perceived risks of US recession. Soon thereafter the market changed colour with the US Federal Reserve’s “once-in-a-generation” interest rate cut of 0.75 percent, a step seen as good news for stock investors but a surprise to many, yielding mixed results.

Faced with a selling urge on Monday and Tuesday as powerful as global markets had witnessed since September 11, 2001, share prices everywhere dropped, and southeast European share prices were no exception.

However, the average fall in southeast Europe was significantly lower than those seen in western European markets. It was lower still than falls seen on Russian and central European exchanges.

However, most exchanges in this region were also slower to recover. While leading US indices as well as those in some west European capitals, Moscow and Warsaw rallied after their initial falls, actually posting gains overall on the week no later than late Wednesday, most exchanges in southeast Europe continued to fall or merely flatten out. Exceptions were the exchanges in Ljubljana, Skopje and Banja Luka, the former being a new EU exchange and the latter being both small and idiosyncratic.

Look much further back, over the past 12 months, and other aspects of divergence show up.

One noteworthy milestone is peak-value for 2007. While indices in Serbia, Montenegro and Bosnia-Herzegovina all peaked early then turned south in April and May, the Bucharest exchange’s BET index kept growing until July, as did the prominent WIG index in Warsaw, matching central Europe’s leading index, Frankfurt’s DAX.

By contrast, indices in Sofia, Ljubljana and Macedonia did not peak until August.

Only Zagreb peaked in October, the same month as the key American indices, the Dow Jones Industrial Average and the S&P 500, along with London’s FTSE 100 peaked. While it is clearly no coincidence that the US and British indices peaked together, there is no evidence that Zagreb’s joining them was anything but coincidental.

This scattered trend calendar indicates that no global trend defined Balkan trading patterns. On the contrary, the factor that continues to define the exchanges of southeast Europe, much more than global capital markets do, is local market peculiarity: balkanisation.

This factor, magnified in most markets by low market capitalisation, is also why the region’s exchanges look back very differently upon the past 12 months.

Bucharest, Banja Luka and Sarajevo paralleled a broad global trend in that their leading indices lost value over the past 12 months, but any suggestion that this is more than coincidental is undermined by the fact that, unlike the central European and Russian exchanges, which also fell during the year, six southeast European exchanges posted spectacular growth – notwithstanding sharp recent falls.

Surprisingly, the region’s 12-month growth club is led by the tiny Macedonian Stock Exchange, whose MBI-10 index has grown by 74.5 percent. But the group of top performers also includes exchanges in Podgorica, Ljubljana and Zagreb, whose range of growth stretches from 45.8 percent to 26.4 percent.

Investors still need to factor in the extreme volatility expected of small emerging markets. For example, the Macedonian exchange, despite its remarkable 12-month growth, has also fallen steeply from its 2007 peak, with the MBI-10 losing 30 percent of its value since August. Other steep fallers include the Banja Luka exchange, whose BIRS index has suffered a brutal 53 percent hit, poorly-performing Sarajevo and the dynamic Montenegro Stock Exchange.

No fewer than seven leading indices, each reflecting performance at a different exchange across southeast Europe, have lost 30 percent of their value since peaking in 2007.

To serious investors active in southeast Europe, it is little consolation that Warsaw’s WIG did, too.

That it did is a reminder that full membership in the EU and exposure to large-scale international finance, so coveted by investors in southeast Europe, are not forms of shelter against brutal market forces. They are merely invitations to compete.

The wages of war as waged by wimps

2007-12-06T14:27:00.000Z

By Eric Jansson
Published by BIRN's Balkan Insight

Name a war in which the victor, having smashed a rival, feigns neutrality at the end and chooses not to dictate terms.

The answer: Kosovo, 1999.

There has only ever been one war like this – and on December 10 we will begin to learn even more than we already know about the wages of war as waged by wimps.

The crisis everyone now sees coming was built into the original intervention as orchestrated by Bill Clinton, Tony Blair and the NATO allies.

Clinton and Blair have never lost their feelings of romance over Kosovo. It remains their “humanitarian war” – a first “victory” for a NATO alliance finally bold enough to articulate its post-Cold War raison d’être: hard power with good intentions “on the doorstep of Europe”.

Independence for Kosovo was never the objective. Instead, Clinton and Blair created favourable conditions for independence, then withheld it. How much greater their power appeared: to win a war and yet defer the spoils!

With Serbia still smoking, Slobodan Milosevic declared victory. The victors roared with laughter. Yet now, from the grave, Milosevic may get the last laugh.

We are witnessing the delayed unfolding of a truth obvious already in 1999 but denied by many: Clinton’s model of American interventionism as witnessed during and after the Kosovo war was fundamentally flawed – no less flawed than the updated model more recently introduced by George W. Bush, merely different.

With Bush’s interventions, the world feels the blowback right away. With Clinton’s, we wait.

The fundamental mistake was to ignore a basic principle of war, to claim and pretend – in a different way than Bush proposes – that there can ever be “a new kind of war”.

The basic principle ignored is that, in war, opposing sides fight to dictate terms of peace. They do not fight to negotiate terms of peace afterwards in Vienna. Failed negotiations are the precise reason that war is joined, and victory is the only reason to fight. Fight to negotiate, and war becomes absurdity and atrocity rolled into one.

After a war, the window of time in which to dictate terms of peace is limited. The victor must strike while the iron is hot, allowing beneficiaries of the terms to celebrate and vanquished survivors to regain their feet while acclimatising to a viable post-war reality.

By contrast, when conciliatory diplomacy follows military victory, and terms are deferred, both victor and vanquished are denied the privileges of resolution. At this point, any return to negotiation becomes awkward if not pointless, as has been the case for Serbia and Kosovo.

Time stands still. Principal actors leave the scene. To others they leave the only important questions: who will lose what, and is there any chance of gain? These are the questions Kosovo faces today.

Many times I have walked down Bill Clinton Boulevard, in Pristina. I always look up at the big billboard bearing the former president’s image. He smiles and waves. How horrible war is, I think, and how tragic this non-peace has been.

Victims of the non-peace, Kosovar and Serb alike, struggle to understand why this strange fate has befallen them.

“Didn’t we fight a war?”

“Didn’t we win? Where is our victory?”

“Didn’t we lose? Can we still win?”

Tension grows in the awkward silence. For eight years, the interventionists have tried to fill this silence with statements and initiatives suggesting a certain momentum toward resolution.

Indeed, the perception of momentum quickly became the new key to victory after 1999, with the interventionists habitually seizing on any and all positive change as proof that their plans for Kosovo were working.

A policy of optimism prevailed, with inconvenient obstacles to success routinely denied or ignored. It was as if, when the smoke of battle cleared, a haze of Clintonian, Blairite relativism and denial blew in behind it.

As a foreign correspondent who began covering Kosovo after the war, I quickly learned it was considered rude or even taboo to describe Kosovo as “a province still within Serbian territory under international law”, which I routinely did in my articles, citing UN Security Council Resolution 1244.

Yet, at the same time, colleagues of mine who presumed that Serbia could never stake any claim on Kosovo again complained that it was equally taboo to mention “independence”, because it forced an awkward issue.

US and European diplomats irritably dismissed Russian opposition to Kosovo’s potential independence, belittling it as a minor tactical ploy. Any questions about precedents in international law they pooh-poohed scornfully.

A gulf in perspectives opened up between European diplomats in Pristina and their colleagues in Belgrade. Privately, those in Belgrade complained that their colleagues suffered from “Pristina syndrome”. Publicly, they denied their quarrels.

All sense of reality evaporated. About two years ago, in late 2005, a senior UN diplomat told me in absolute seriousness that he no longer had any doubt that Kosovo would be independent before the end of 2006, and that Belgrade and Moscow were prepared to acquiesce. Oh, really?

Worst of all, the haze of relativism and denial obscured gross neglect of human suffering and sometimes active mismanagement by international officials whose duty it has been to live within, and embellish, the big lie that Kosovo was becoming a multicultural model in the Balkans.

This lie was exposed violently in the pogroms of March 2004, at which point panic set in amongst the interventionists. It has taken until now for policymakers to acknowledge the broader consequences.

Nothing fundamentally is solved. The primary question that led to war over Kosovo – independence or no independence – is as unanswered as it was in 1999.

Fault for the war, originally, lies with local actors on the ground. However, fault for this perverse non-peace and for much of the nonsense that has prevailed within it belongs to the international actors who waged a war without the guts to dictate clear terms afterwards.

On this point, at least, Kosovars and Serbs should be able to agree.

Wild beauty, tamed prices

2007-12-06T14:24:00.000Z

By Eric Jansson
Published by Financial Times, 1 December 2007

Even among UK property markets, hyped for more than a decade, few places have benefited as much as Alnwick, in north England. Ever since the magazine Country Life dubbed the Northumberland market town “the best place to live in Britain” in 2002, it has proved irresistible to many buyers.

Understated beauty, a pastoral setting near the North Sea, strong schools and services, a negligible crime rate, affordable prices, easy commuting links to upwardly mobile Newcastle upon Tyne and a fantasy factor – Alnwick Castle doubles as “Hogwarts” in the Harry Potter films – have made once-obscure Alnwick a property hound’s paradise. And, as a result, residential property prices rose 70 per cent faster than the UK average over the past five years.

Now, though, the market is starting to level out, with some agents warning investment-minded buyers off Northumberland as a whole. But nearby there may be another Alnwick-inwaiting – the little town of Rothbury, about 15 miles south-west – which has all the same advantages as well as the promise of continued growth.

With a population of about 2,000, Rothbury is a quarter the size of its better known neighbour and well entrenched in the wild beauty of the countryside, regarding itself as the “capital” of Coquetdale, an undulating agricultural area pressed up against the Northumberland National Park and the Cheviot Hills. Traditionally it has been more expensive than Alnwick, which has deterred house-hunters. And to outsiders it can feel distinctly remote. Yet all that is about to change.

Property prices are now on a level with those in nearby markets, having climbed just 20 per cent since 2002, well under the national average and the 80 per cent increase seen in Alnwick. In each town, the best two-bedroom houses now start at about £240,000; a four-bedroom detached house in Rothbury, with rich interiors and immense hillside views, is currently on the market for just less than £400,000, about the same as a four-bedroom townhouse in Alnwick.

Peter Bolam, owner of estate agency R.G. Bolam & Son, says that the market has recently become “static” due to combination of factors, including an unprecedented supply of new housing and the national credit crunch. But he thinks the long-term outlook is strong, given the town’s traditional role as an expensive area in the region and its attractions, both new and old.

Rothbury is also less remote than many people imagine. It’s true that the 30-minute drive from Alnwick involves a road that thins and bends into staggering wilderness, with moorland vistas opening up and a final descent into a deep pine forest. Yet, when one reaches the town, at the base of a valley, a separate road offers a shorter route to Newcastle. Commuting is entirely possible and increasingly popular, locals say.

“We are now on the periphery, if not just over the edge of the periphery,” says Bolam. Since Newcastle is pushing outward, this is just where many people want to be. So Rothbury is witnessing a period of dramatic development given its small size. On a south-facing slope at the far east end of town, work crews at the largest single development, Whitton View, are finishing off the construction of 97 new houses. With designs sympathetic to those in surrounding neighbourhoods, Bowey Homes, a developer acquired mid-project by Irish-owned McInerney Homes, won support from hesitant local authorities, which have long placed high priority on aesthetic and community considerations. The homes cost from £195,000 for a three-bedroom space to £335,000 for one with five bedrooms.

Several smaller developments have also recently placed about 100 new houses and flats on the market. The latest, still under way, is a tasteful conversion of the local cottage hospital into seven flats, following its closure in 2006. Although all are two-bedroom flats, they vary in price from £240,000 for an upstairs unit to £315,000 for ones on the ground floor with high ceilings and direct garden access.

These new projects are adding to the town without altering its feel. That conservative air – slow-paced, tucked between the hills, predominantly stone-built – will remain because Rothbury would lose so much of its value if it changed. “It has taken 20 years to determine how Rothbury could grow and now, as far as planners are concerned, [Whitton View] is probably going to be the last of its kind,” Bolam says.

Walking through the penthouse flat in the cottage hospital conversion, the foreman on the project says he reckons it and others will sell “in no time”. Indeed, one of the two ground-floor units was sold well in advance of completion and it’s easy to see why. The building neatly satisfies the demands of country-bound urbanites, who want their modern conveniences and minimalist styling packaged in old-fashioned frames.

Steven Bridgett, a local councillor, says officials are meanwhile working to ensure that Rothbury’s expansion does not outpace an increase in services. In most small British towns, for example, the closure of a hospital would be a signal of doom but last year saw the opening of the larger Rothbury Community Hospital to replace its 19th century predecessor.

The town has also expanded public bus links to Alnwick and Newcastle to provide evening and weekend services, which “was essential, especially for young people – and young people like me really want to stay in Rothbury,” says Bridgett, who is 20. “I would not want to live anywhere else.”

Similarly important for the town’s growing population of e-commuters was the installation of broadband capability in 2004, well in advance of many rural communities in Northumberland thanks to a push from proactive locals. And big strides can be seen among leisure facilities too. Rothbury Golf Club, located where the west end of town spills out into the Coquet Valley, doubled in size this year, expanding from nine holes to 18 and opening a new clubhouse. A public swimming pool re-opened after refurbishment in 2006 and, several years ago, the local tennis and bowling clubs combined to erect a new pavilion at the foot of the hill upon which Whitton View now stands. For a community of 2,000, this is remarkable progress.

New residents are already arriving, drawn not only by the new homes and amenities but also Rothbury’s historic attractions. As a functioning market town, it’s an unlikely survivor and its impressive line-up of stand-alone businesses – two banks, multiple grocers, a butcher, baker, chemist’s, florist, ironmonger, pubs, restaurants, hotels and many others – serve villages and farms throughout Coquetdale.

True, the Tesco supermarket delivery van has begun to make regular appearances, a development regarded ominously by some local shopkeepers. But Rothbury still attracts entrepreneurs who aim to settle and work locally – not just the southern buyers of holiday homes whose investments in many Northumberland villages have rendered them half-deserted most of the year.

One newcomer is Lorraine Armstrong, an interior designer who last May moved her studio to Rothbury’s High Street from Bedlington, an ex-mining town within Newcastle’s urban ring. She’s looking to buy a home too and says she sees plenty of attractive two- and three-bedroom options in town. Meanwhile, the ample stock of brand new and un-renovated houses – many of them old stone constructions – look likely to generate plenty of business for her. “So many of the houses have so much potential. I look at them and just think: ‘Oh, I could do this there and that there’,” she says.

Perhaps more importantly, the local community has given her a warm welcome. “I noticed when I was first moving in that everybody was excited, everybody was interested,” she says.

It helps that new arrivals are not flooding in too quickly, Bridgett says. You used to recognise everyone in the queue at the Co-op grocery shop and you do not any more. But people are still familiar enough that everybody still knows everybody’s business."

Getting a grip in Croatia

2007-11-16T12:17:00.000Z

The rhetoric of economic freedom has entered Croatian politics in a new way, just in time for parliamentary elections - but what does it mean?

By Eric Jansson
Published by BIRN's Balkan Insight

See if you can guess which leading Croatian prime ministerial candidate made the following statements.

Is it Ivo Sanader, the incumbent whose crowning achievement has been to re-brand his Croatian Democratic Union, HDZ as an internationally-minded, market-friendly party of the European centre-right? Or is it Ljubo Jurcic, prime ministerial candidate of the Social Democratic Party, SDP, comradeship of ex-communists, party of the red rose?

On Croatia’s response to globalisation: “We need to remember, we are 12 hours from Silicon Valley, and we are 12 hours from Tokyo.”

On taxes: “We have to prepare the atmosphere for tax cuts.”

On labour policy: “Croatia should have a freer, more flexible labour market including free movement of workers… and this also means importing labour.”

On work ethic: “In Croatia now there is a cult of idleness. We cannot be better off if we do not start to work harder. The government should create an atmosphere for this. It is a psychological, sociological problem.”

On industrial policy: “Yesterday I visited a state-owned company that dries fruit. The capacity of the company is enough for all of Europe, but its amortisation is too high. It cannot cover administrative costs. I asked them if they had a business plan. No business plan. Basically, they had been lazy. In my approach there is no money for a company like this, because there is no future. It’s a sunk cost – finito.”

On how to boost long-term economic stability: “We need to create conditions for a free market, for competition. Competition is the key.”

On whom he would bring into his cabinet, if given the choice of any economist in the world: “It would be Maurice McTigue. He was minister in seven ministries in New Zealand. He is a man who reformed New Zealand from a situation like Croatia’s today, with a high external debt. He is the most acknowledged expert worldwide in this area today."

McTigue, a former businessman and pragmatic anti-socialist, became a hero of free-market economists when he entered government, made huge cuts to New Zealand’s state workforce, slashed agricultural subsidies to zero, shredded the rulebook of big government and put New Zealand to work, sending productivity and profitability heavenward.

If you guessed that these quotes come from Sanader, you were wrong.

Jurcic, the Social Democrat, made the first six statements in a lengthy sit-down interview with the Financial Times, during which he looked ahead to economic reforms he would embrace if his party prevails in closely-fought parliamentary elections on November 25. His praise of McTigue came later, in an interview with Vecernji List, the Croatian daily.

What do we make of this?

The idealist’s hope is that Jurcic means what he says – that he actually wants to rattle Croatia’s status quo by “levelling the playing field”, empowering individuals and the private sector, discarding disincentives to competitiveness and disrupting official corruption.

The cynic’s presumption is that Jurcic, like every politician, wants to be all things to all people. To anti-socialists who believe that individual liberty extends into the economic sphere, he offers soundbites like those above. To anti-HDZers, he is equally happy to challenge the status quo. Yet to others including SDP lefties and undecided voters – many of whom want jobs and stability above all – he offers contradictory ideas, promising not to rock the boat too much.

Who is right about this economist who, to so many people’s surprise, is within striking distance of becoming Croatia’s next prime minister?

One senses that the average voter is perplexed, for who in Croatia isn’t both hopeful and cynical? There is so much to gain in a country that underperforms economically as conspicuously as Croatia does. Yet there is so much to lose in a country that is, after all, growing economically and that, with Sanader’s help, has succeeded in getting itself on course for EU accession just in the nick of time.

In Zagreb, one hears people mumbling about “the lesser of two evils” and “the devil you know”. Such despair sounds unexceptional, but it is the bane of the democracy for which so many Croatians and people of other nations in central and eastern Europe risked so much within recent memory. For voters, election day of all days is not a time to feign ignorance and powerlessness.

One must make some kind of educated choice, and voters are not without reference points. They should be aware of at least two.

First, whatever one thinks of the HDZ, there is little disputing that its economic policy agenda, during its past four years in government, has been overwhelmed by the daunting task of preparing for EU accession. Grilled on economic policy, Damir Polancec, deputy prime minister under Sanader, almost unvaryingly answers back with reference to the EU.

Yes, relations with the EU are hugely important, but Croatia must heed a lesson already grasped retrospectively by the EU’s newest member states: national interest must define the way to accession, not the other way around. To do otherwise is to accept inertia.

Almost nothing could be worse for the political and economic health of a once-daring transition country such as Croatia, which has the potential to be better than “like the EU”, but which must challenge its cozy, top-heavy power structure in order to compete more effectively worldwide.

Second, whatever Jurcic might do as a prime minister in an SDP-led coalition government, what he has already accomplished as a candidate is extremely important.

He has shown sufficient intellectually agility and honesty to acknowledge that Croatia has real policy choices to make within the broad EU accession track. After all, the EU now contains not just Germanic, French, British and Nordic economic models but the comparatively radical economic models of countries like Estonia and Ireland.

Indeed, Jurcic may be too agile intellectually for his own practical political good. He does contradict himself. He criticises industries that under-perform in this unforgiving age of global competition, and yet he says that the former Yugoslavia had “quite good industry”. He aims to empower small and medium sized enterprises, yet one of his policy suggestions is the creation, by the government, of advisory “project teams” – an idea that carries a whiff of central planning, though the candidate strongly denies it.

However, there is some strength in this approach. If Jurcic is of two minds, it is because Croatia is of two minds, too. There is a strong popular sense that the country can do better, and yet the electorate has a certain aversion to risk.

Perhaps Jurcic’s embrace of this contradiction makes him appealing to voters who are likewise flummoxed. Would it make him a good prime minister? It might give him a strong starting point, from which to introduce reforms, or it might render him ineffective. If the latter is true, the most likely result would be that the SDP and its coalition partners would be overwhelmed politically, much as the HDZ has been, by the immense job of preparing for EU accession.

It would be a pity to be left wondering after November 25, as one still wonders today, what Croatia would be like if it really dared to ditch the status quo, scrapping the legacy of its half-discarded socialist economy once and for all.

Private debt overshadows Goldilocks scenario

2007-11-12T11:08:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

Working papers from the International Monetary Fund usually make dry reading. But one such paper has caused a splash in Croatia, as campaigning kicks off in advance of the country's November 25 parliamentary election.

The IMF paper titled "Vulnerabilities in Emerging South-eastern Europe - How Much Cause for Concern?" published last month, argued that south-east Europe had begun to show imbalances similar to those seen in East Asia before financial crisis struck a decade ago.

In a tone more prescriptive than accusatory, the authors refrained from criticising individual governments in the region, which has experienced some of Europe's swiftest economic growth in recent years. Nonetheless, they highlighted acute imbalances in Croatia, which has a higher debt level as a percentage of GDP, and a higher current account deficit, than the East Asian average before that region's 1997 crisis, despite achieving slower GDP growth, 4.8 per cent in 2006.

With the highest external-debt-to-GDP ratio of any non-EU country in Europe and the greatest exposure to foreign currency loans, Croatia faces a growing risk of financial hiccups, the authors wrote: "The probability of a sudden stop increased between 2000 and 2006, especially in Croatia and Serbia. The probabilities are driven by the rising degree of euro-isation and the extent to which tradable consumption is 'financed' from abroad."

Ivo Sanader, the prime minister, and his finance minister, Ivan Suker, quickly brushed the critique aside. "There is no financial crisis. Croatia is servicing its debts," Mr Sanader said.

But the paper's assertions provide fresh ammunition to Croatia's main opposition party, the Social Democratic Party (SDP), which has made similar concerns central to its election campaign. Economic mismanagement under Mr Sanader's Croatian Democratic Union (HDZ) has threatened economic stability, Social Democrats say.

Ljubo Jurcic, the SDP's prime ministerial candidate and chief economic strategist, argues that Croatia's economy has immense capacity for growth, but that it has been wrongly managed. Citizens have grown accustomed to an inflated standard of living "based on household debt", he says.

The dispute sets Croatia on course for an election focused closely on economic issues.

Mr Sanader's government has done much to bring Croatia more securely under the wing of the EU, with which the country began accession negotiations in 2005. He and his cabinet ministers describe their economic reform programme within the broad context of EU accession, emphasising a need to harmonise legislation with the acquis communautaire , the vast body of EU law. The HDZ portrays any challenge to this course as a potential risk to EU entry, which the Sanader government until recently promised could be achieved by 2009.

Yet the IMF paper warns against such approaches, asserting that the "EU halo effect" lowers perceived risk, sometimes unjustifiably.

The HDZ supports central bank measures aimed at limiting commercial credit growth. Its programme also includes paying down external debt, and the government has taken steps in this direction during the past year. Yet government claims that Croatia's external debt is shrinking exclude private-sector debt. Overall external debt rose from 30 per cent of GDP 10 years ago to 85 per cent last year. Central bankers predict it will rise to 86 per cent this year.

"External vulnerabilities have begun to appear and to create risks for stability," says Ljubinko Jankov, executive director of research and statistics at the Croatian National Bank, the central bank.

With financial markets experiencing a higher than usual degree of unpredictability amid a global "credit crunch", economists have begun focusing with new keenness on the price of borrowing, especially as Croatia has a growing share of short-term debts, which magnifies rollover risk.

"If there is a big global shock, it is for sure going to be a big problem for this whole region, including Croatia," Mr Jankov says.

Economists at Zagreb's European-owned banks continue to offer upbeat assessments, noting steady GDP growth, low inflation and the central bank's strict regulation of credit growth.

"Looking at credit default swap spreads there is no evidence of concern from investors and I, for a change, actually agree with Mr Suker that the current situation is stable," says Goran Saravanja, chief economist at Zagrebacka Banka, owned by Italy's UniCredit Group.

Mr Saravanja says both the SDP-led coalition that governed from 2000 until 2003, and the current HDZ government, pursued credible courses of economic reform after a decade of authoritarian rule.

The current government showed a willingness to tackle sensitive economic issues when it re-indexed pensions. Recent reforms won praise from the World Bank, which called Croatia the world's second best reformer for last year in its Doing Business 2008 report. Next year ministers must tackle economic restructuring at the state-owned shipyards and elsewhere.

Croatia is now entering an "interesting" phase, says Mr Saravanja. "We have to see how post-2000 Croatian economic policy stands up to a downturn in the economic cycle, and we have not seen that yet."

Beneath the debate over financial risk, other economic fundamentals may be at issue in the upcoming election. Mr Jurcic, though representing the traditionally centre-left Social Democrats, sometimes casts these in terms of "free market competition". He speaks of "preparing the atmosphere for tax cuts", including a 50 per cent cut on health care contributions.

Mr Jurcic's message that small businesses should be able to operate on terms equal to those enjoyed by the country's big companies strikes a chord with citizens who still feel cheated by Croatia's "tycoonisation", the local term for corrupt privatisation in the early post-communist period.

The HDZ is vulnerable to criticism from this angle, says Joel Anand Samy of the Adriatic Institute, a free-market thinktank. "In Croatia, crony capitalism is flourishing but not entrepreneurial capitalism, and it frustrates people," he says.

Damir Polancec, the deputy prime minister and HDZ candidate, suggests such criticism is overblown and that economic results speak for themselves, with GDP growth up to 6 per cent in the first half of this year. "A few years ago, one would become an entrepreneur because there was no alternative. Today, people are coming because of ideas, coming up with their own projects," he says.

In fact, few analysts expect significant policy changes after the elections, whoever wins. Mr Jurcic embraces some free market ideas, arguing that unproductive companies should have support withheld, and calling for a liberalised labour market. But he also praises former Yugoslav industrial performance and says that aggressive reforms are "politically impossible" in Croatia. Parts of the SDP's programme still carry a whiff of central planning, such as a plan to set up advisory "project teams" for industry.

Polls suggest voters are evenly split. Many have come to realise that with EU accession dominating the country's agenda, a new government led by either main party may struggle to leave an individualised mark on economic policy.

Crowds inflict profitable pain

2007-11-12T11:07:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

Carrying thousands of passengers on the Adriatic Sea, the towering cruise liners approach from the south. About three miles short of Dubrovnik, they stop on open water and release tender boats, shuttles that ferry passengers to shore. The tenders motor between the coast and the forested island of Lokrum, toward the walled city's small marina.

But squeezing into the marina can be tricky. Large enough to carry 150 passengers each, the tenders must navigate through a maze of little moored boats while competing for space with glass-bottomed sightseeing vessels that use the same diminutive dock. After careful manoeuvres, the ship-to-shore tenders land and unload passengers who promptly march into the old city.

The docking procedure can be complicated even in the low-season, when no more than two cruise liners arrive at once. But at the height of summer, as many as seven liners sometimes arrive within a short space of time. Then the marina becomes a waterborne traffic jam.

Crowds form on land, too. The exquisite old city, whose international fame multiplied when shells landed on it during Croatia's 1991-1995 war, heaves with pedestrians through the high season. These foreign visitors arrive not just by boat but by aeroplane, coach and car, bound for the famous walls, the gleaming white pedestrian streets, the cafes, restaurants and souvenir shops.

"In August and September sometimes we have had 14,500 tourists in the walled city, all at once. I hate it. I lock myself in my office until the afternoon when things slow down," says Erol Olcan, general manager at the Pucic Palace, the only luxury boutique hotel inside the city walls.

Such high-season crowds are both a headache and a source of profit for Mr Olcan and for many locals. They exemplify the kind of strain being felt as Croatia scrambles to accommodate fast-growing tourist demand. What happens in Dubrovnik, the country's leading tourism boomtown, also happens elsewhere along the coast, though usually on a smaller scale.

Croatia registered 53m tourist nights in 2006, up 36 per cent from 2000. Total annual visitors will exceed 11m this year and could top 12m by 2012, says Zdenko Micic, state secretary for tourism.

As the Croatian tourism industry absorbs this surging demand - which has yet to return to pre-war levels - the country's tourism offer looks less and less like its former self. "The Mediterranean as it once was," the national tourism board's slogan, evokes unhurried tranquillity, not crowds. The slogan still rings true, but a nagging question is what will happen in the long run if growth continues at the current rate.

Mr Micic says he envisages a well-managed shift toward upscale tourism along the coast and a careful preservation of quiet environments on the islands, of which Croatia has more than 1,000.

But change may prove difficult to manage. As new investment pours in apace, some critics already ask whether tourist destinations could put existing assets to work more effectively.

Dubrovnik, in the way it handles crowds, is a glaring example. Goran Vukovic, a local architectural consultant, says the walled city's traditional dockside area - the Lazarica which was formerly used for quarantining sailors - could easily be converted to receive vessels again. A short distance outside the city walls, the Lazarica houses quiet art galleries and offices. If the tenders landed there, rather than at the marina, docking would be simpler, demand for gaudy trinket shops could be displaced, and crowds within the walls would shrink - at least marginally.

Such lateral thinking, Mr Vukovic says, can still help Dubrovnik "to handle the attack of mass tourism" and keep it from becoming "a dead city or a museum like Venice".

However planners are moving in the opposite direction. Expensively reconfiguring the quay walls at nearby Gruz Harbour, they are making room for multiple mega-liners to dock at once.

"We know what sustainability means. We do not want to overbuild our capacities," says Mr Micic.

However, locals are often more sceptical. "We are learning, quite unexpectedly, that money is far more dangerous to Dubrovnik than bombshells," quips Mr Vukovic.

In some cases, rapid growth has led to imbalances between what visitors expect, what they actually receive and what local economies are able to provide.

Sometimes asked to pay the equivalent of â‚¬95 for a 90-minute walking tour, visitors to Dubrovnik complain that prices are too high. Yet prices are just as often surprisingly low, as local businesses struggle to adjust prices for a spectrum of clientele that includes mass tourists.

"You can get a pizza and a glass of wine for â‚¬7 in the old city. You can't call that expensive," says Mr Olcan.

At the same time, some locals find themselves priced out of their own market. Real estate prices have soared to around â‚¬4,000 per sq m.

Andreas Jersabeck, general manager at the Hilton Imperial Dubrovnik, a prominent hotel just outside the city walls, says the fast-rising cost of living has led to an undersupply of cooks, waiters and housekeepers, complicated by seasonality.

"There is a huge shortage of labour in the summer, yet in October people come queuing for jobs when we do not need them," says Mr Jersabeck. Seasonal workers, cannot afford apartment rents.

All agree that the solution involves a move away from mass tourism and an upgrade of accommodation across the country. Some 80 per cent of current space is camping or private rooms, and more than 60 per cent of hotels are 3-star. "We need more 4-star and 5-star rooms," Mr Micic says.

Data conundrum prevents deeper analysis

2007-11-12T11:06:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

When the chef at the Hilton Imperial Dubrovnik sources ingredients for his menu, especially vegetables, he looks across the Adriatic to Italy. Italian produce is "better quality at a lower price", says Andreas Jersabeck, the hotel's general manager, an Austrian.

Similarly, when new hotels spring up on the coast or old ones are refurnished, domestic furniture makers compete for contracts but rarely win. Some 90 per cent of furniture purchased by Croatian hotels and resorts is imported, according to estimates by local industry leaders at Ambienta, a furniture fair held in Zagreb last month.

Such anecdotes do not surprise local economists. Croatia imports more than twice as much as it exports - and not just food, labour and furniture.

However, anecdotal evidence of import dependency challenges the rosy picture of tourism as an important driver of production in the national economy. The more local tourism services depend on imports, the more tourism's economic rewards are exported.

Everyone agrees that tourism plays an important role in Croatia's economy. It accounted for 18 per cent of gross domestic product (GDP) in 2006, and this year has been even busier, service providers say. Visiting tourists - typically 90 per cent of them foreign - stimulate activity in other sectors, notably transport and trade but also construction and agriculture. They also bring with them a fresh supply of hard currency, restraining the growth of a current account deficit that widened last year to 7.6 per cent of GDP.

But the impact of tourism across the economy remains impossible to measure precisely, sector by sector, says Oliver Kesar, a specialist in tourism economics at the University of Zagreb. This is because local statistical resources fall short.

Analysts at the Croatian National Bank and the Institute for Tourism in Zagreb have estimated that 30 per cent of what tourists consume in Croatia is imported, "but without in-depth analysis and complete data these are very rough estimations," Mr Kesar says. By this measure, of the â‚¬50 the average tourist spends each day, â‚¬35 goes toward domestic goods and services, and â‚¬15 toward imports.

How the â‚¬35 breaks down by industry locally is guesswork. Current analysis of tourism's impact on individual industries depends on a breakdown of tourist consumption published by the Institute for Tourism in its TOMAS 2004 research project, the most recent research of its kind.

Based on a survey of tourists, this research indicated that of every â‚¬50 spent in Croatia, â‚¬15 goes toward accommodation, â‚¬13 toward food, â‚¬6.50 toward transport, â‚¬4 toward drinks, â‚¬3 toward shopping and smaller amounts on entertainment, excursions and other recreation.

But to know how each of these categories breaks down into domestic and imported goods, to tighten up analysis and forecasting, Croatian economists need to build an input-output matrix of the national economy. They have yet to do so.

"Croatia has experts for partial analyses, but we need an outside expert who has built an input-output matrix before, who can lead such a huge and delicate project," Mr Kesar says.

Such an effort would once have been futile, because a substantial volume of tourism receipts flowed into Croatia's grey economy. A significant portion still does, but a crackdown on tax evasion is gradually pushing such business into the light. Authorities conducted 28,200 inspections of tourism service providers this year, finding 4,400 irregularities along the way.

With efforts like these, data improve, economists say. The result could soon be a truer picture of how Croatian tourism works, and for whom.

Investor comes full circle

2007-11-12T11:05:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

Matt Sertic's friends had egged him on for years. Fellow Croats had quit communist Yugoslavia to live in and work in the US, and they loved it. Gloria Kolaric, one of his friends who had gone ahead, laughingly recalls telling him, "OK, either come now or I'm giving up on you."

Mr Sertic packed up. In 1985, he quit his job as an economist at a metal works in Sisak, 50km south of Zagreb. He moved first to Arizona and then to California. He could scarcely have imagined that, 22 years later, he would return as a US investor in an independent Croatia to open a factory on the same site as the old metal works.

Applied Ceramics, the Silicon Valley-based company of which Mr Sertic today is president and primary owner and Mrs Kolaric is director of quality, serves a specialised niche in the information technology sector. It manufactures spare parts of ceramics, quartz, silicon and sapphire for clients in the global semiconductor industry, leading makers of microchips.

"It was actually the last thing in my mind that we would start doing something here. There is no market for our products in Croatia. But by coincidence I met an instructor from the technical institute in Sisak who told me they were training people to work on CNC machines, which is exactly the kind of person we are looking for in the States," Mr Sertic says.

Computer Numeric Control (CNC) machines, programmable devices used to fabricate product components, are essential to the company's manufacturing process, so Applied Ceramics spotted an opportunity. The company flew 19 trainees from Sisak to Silicon Valley, taught them more, and now employs them on a new production floor based in privatised facilities at the metal works, which Applied Ceramics purchased and converted. It has invested $12m in the effort so far.

After years of trepidation, US investors have begun to discover Croatia, just as American tourists have begun to do in greater numbers. Moreover, as Mr Sertic's return to Sisak exemplifies, Croatia's large and well-educated diaspora continues to find new ways of doing business back in the old country. Both the US and the diaspora are rich potential sources of investment.

Applied Ceramics has arrived as part of the first big wave of post-war US business investment. Entirely by chance, at the same Sisak metal works, Texas-based Commercial Metals Company has just moved in as well, with a $90m investment in a newly privatised steel pipe manufacturer. That purchase was preceded last year by the $2.5bn acquisition of Pliva, a Croatian drugs maker, by Barr Pharmaceuticals.

"We have seen three significant US investments in Croatia in the past 18 months," says Robert Bradtke, the US ambassador in Zagreb. "This is a sign of increasing interest in Croatia by American investors. After a period four or five years ago when they might have thought business here was too difficult, they now see real opportunities in Croatia."

Foreign direct investment in 2007 already looks certain to exceed last year's figure of â‚¬2.7bn, the country's biggest year ever for FDI. Yet Damir Polancec, deputy prime minister, expresses a common view when he says that Croatia's overall level of FDI is "unsatisfactory".

This eagerness for FDI does not necessarily imply a simple investment environment. Mr Sertic says Applied Ceramics' investment has been costlier than planned and more difficult than anticipated. "In the beginning it looked like we might save some money by coming here, but now it seems we will not," he says.

Incentives offered by the state can be illusory, he warns, and because the rule of law is weak, "negotiation" with officials is commonplace. "You find everything is more or less negotiable. If you yell more, you find that you may pay less. If you do not yell, you will certainly pay," Mr Sertic says.

He praises his local private partners as "very forthcoming, very eager to help". But he adds that unfamiliarity with the needs of IT companies such as his own has led to some difficulties, such as hesitancy at local banks to offer credit lines. After a time-consuming search, Applied Ceramics reached an arrangement with Austrian-owned Hypo Alpe Adria.

Applied Ceramics may be in a better position to weather unwanted surprises than some other foreign investors. Mr Sertic's Croatian background means that he has a network of trusted local friends to call upon. As for costs, even if they rise marginally above the expected level, heavy global demand for the company's specialised products provides a degree of cushion.

Despite some difficulties, Mr Sertic is evidently bullish on Croatia. In addition to the factory building where Applied Ceramics now works in Sisak, he has purchased a neighbouring tower block previously used a metallurgical institute. He plans to rent it out as workshop space for young local entrepreneurs.

Healing the wounds of war

2007-11-12T11:03:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

When Croatia won its place last month as a non-permanent member of the United Nations Security Council, Vuk Jeremic, Serbia's foreign minister, was quick to congratulate Zagreb. Mr Jeremic hoped the appointment would "lead to a better understanding of problems related to the Western Balkans" at the UN.

Belgrade's warm reaction to its erstwhile rival's diplomatic achievement would have been hard to imagine not long ago.

But bilateral relations have thawed noticeably since Ivo Sanader, as Croatia's newly elected prime minister in 2003, visited Belgrade on a sensitive mission of reconciliation. Serbia returned the favour five months ago, when Boris Tadic, Serbia's president, visited Zagreb and apologised to Croats for war crimes committed by those "acting on behalf of my people".

In the new atmosphere quarrels are few, and prickly issues relating to the war that ended 12 years ago tend to set leaders of the two countries on diplomatic tiptoes.

Even when Mr Sanader took the unusual step of flying to New York last month to protest vigorously against the lenient verdicts against three Serbs tried at the UN's International Criminal Tribunal for the Former Yugoslavia, he treated Serbia gently. In his plea before the General Assembly, Mr Sanader had harsh words for the former Yugoslav regime of Slobodan Milosevic, the late president, and a critical message for the Tribunal. But he said "Serbia" just once, referring to Belgrade's "democratically oriented political forces".

Mr Sanader openly courts those forces in line with the European Union's hopes for harmony in the region. His repeated insistence that the status of Kosovo, Serbia's breakaway province, cannot be resolved internationally "without Belgrade" echoes standard EU rhetoric but is also a prize for Vojislav Kostunica, Serbia's prime minister, a conservative nationalist who has made retaining Kosovo his chief goal. Zagreb is cautious over recognition of Kosovo's independence over Belgrade's objection but would accept any EU-wide decisions. Mr Sanader also speaks of his desire to see Serbia included in the European Union and NATO.

Yet the official warmth between Zagreb and Belgrade is decidedly cautious. Leaders on both sides know what lurks beneath. For many citizens of Croatia and Serbia - especially those who have minimal contact in business or private life with their former Yugoslav compatriots - bitterness from the war era remains.

Contact is less common than it might be, because transport links remain poor. Regular air flights between the two countries were never reinstated after the war, meaning, for example, that Serbian citizens travel with difficulty to Croatian holiday spots on the Adriatic shore.

On the road network, Croatia seems to pretend that Serbia does not exist. Travellers heading east from Zagreb search in vain for signs pointing toward Belgrade. On the former Yugoslav-built Brotherhood and Unity motorway running between the two cities, signs over the eastbound lanes are marked for Slavonski Brod, a city inside Croatia, not even halfway to Belgrade. By contrast, Zagreb is heavily signposted on westbound routes out of the Serbian capital.

Such attitudes are not conducive to trade, which is minimal and growing only slowly. Croatia trades more than twice as much with Slovenia, its western neighbour of 2m people, as it trades with Serbia, a market of 8m not including Kosovo's 2m. Some 5 per cent of Croatian exports go to Serbia, but just 1 per cent of imports come from there.

Still, if one factor points the way out of this post-war era of cautious diplomacy and limited interaction, it is business. Companies working in both countries usually say national rivalries do not extend into this area.

A small but fast-growing example is New Technology, the Croatian daughter company of ComTrade, a Serbian-owned IT manufacturer and distributor. ComTrade robotically assembles its patented personal computers in Serbia and sends up to six truckloads per week to New Technology, along with machines from Fujitsu-Siemens, Toshiba and Acer.

Petar Pintar, New Technology's general manager, says that in its first year of operations the company has captured 1.5 per cent of Croatia's IT market. He says ComTrade's owner told him at the start to follow local laws zealously and to minimise risks of bureaucratic obstruction, and so far has been pleasantly surprised.

"I really do not have the impression that anything is hard to do. One customer, once, told me that he did not want to do business with a company working from Belgrade. But that is one out of 1,000," says Mr Pintar.

A much bigger boost to Croatian-Serbian trade could be seen if Agrokor and Delta, respectively the two countries' largest private-sector companies, follow through on their year-old agreement to merge their region-wide retail operations.

In addition, last year's updated Central European Free Trade Agreement brought Serbia into the pre-EU trade bloc, which already included Croatia, with a new customs union soon to take effect.

Along with the momentum of private sector investments, regional integration could strengthen the practical economic side of a bilateral relationship that is strategically close yet remains politically awkward.

Potential for rancour remains. Proceedings are to open six months from now in Zagreb's genocide case against Belgrade at the International Court of Justice. Some Croatian diplomats say dropping the lawsuit would help to improve bilateral relations, but any such move would risk a popular backlash.

'Telecommunism' helps power stock market growth

2007-11-12T11:02:00.000Z

By Eric Jansson
Published by Financial Times, 12 November 2007

Even by the dynamic standards of central and eastern Europe, Croatia's capital markets have lately been growing at an extraordinary pace.

Nowhere has this been more evident than at the Zagreb Stock Exchange, a floorless exchange quartered in one of the capital's new glass office towers.

Within the past 18 months, the ZSE has risen out of obscurity to claim a place alongside exchanges in Warsaw and Prague as one of the few in the region to attract the attention of big fund managers worldwide. Trading in Zagreb is tiny when compared with big markets, but it is accelerating at a clip.

"At the beginning of the year, we had between 300 and 800 trades per day. Now, we have 3,000 per day, with a peak volume of 8,000," says Roberto Motusic, the ZSE's managing director.

Just a handful of big sales brought about this surge in trading, driven by both foreign and domestic demand.

The first of these was a prolonged bidding war last year for Pliva, a drugs company co-listed at the ZSE and London Stock Exchange, during which Barr Pharmaceuticals of the US outbid Actavis, an Icelandic company, to acquire Pliva for $2.5bn. Later in 2006 came an initial public offering of shares in INA, the state-owned oil company in which Hungary's MOL was already the strategic investor. Recent months brought big share offerings from Pliva, which sold its veterinary arm Veterina through the exchange, and local construction giant Ingra, among others.

By far the latest, greatest lure for local retail investment through the ZSE came one month ago, when the state privatised 32.5 per cent of T-Hrvatski Telekom (T-HT), the former state-run fixed-line and mobile operator controlled since 2001 by Deutsche Telekom.

The state targeted citizens in T-HT's sell-off, and 358,406 of them purchased shares, making this the largest initial public offering in the country's history. Such was the clamour for a slice of the company that roughly one-third of citizen buyers took out loans to buy shares, says Tomislav Vuic, deputy president of the management board at Erste Bank in Zagreb.

The telecom sale immediately became a milestone in the development of local retail stock trading, as "sophisticated investors who really understood the market" combined with first-time investors "opening their eyes" to generate a bonanza, says Mr Motusic.

Buyers purchased shares from the state at 265 kuna each and then watched as the price jumped to 419 kuna on the first day of public trading. The price soon settled closer to 380 kuna - still an overnight gain of 43 per cent.

For many who bought shares with borrowed money, payback was therefore quick and easy.

Yet here controversy creeps in. Critics of the T-HT sale quickly questioned the initial share price set by Croatia's government. "Telecommunism," squawked the Feral Tribune, a weekly newspaper, portraying the IPO as a thinly-disguised cash handout from the governing Croatian Democratic Union in advance of parliamentary elections.

Indeed, government ministers had transparently promoted the sale beforehand, as an opportunity for a "good experience" akin to the INA sell-off 11 months ago, in which citizen buyers also made a tidy overnight profit.

Yet whatever the T-HT sale's political dynamics, Mr Motusic argues against seeing it primarily in these terms. At a time when some local political leaders still mutter Marxist misgivings about private investors in stocks and shares, calling them "crooks" and "speculators", he says the current HDZ-led government is the first in Croatia's post-communist era to back the ZSE enthusiastically. "How can I say I am not happy with that?" he adds.

Capital market growth is restrained by central bank rules on commercial credit growth. Alarmed when domestic credit expanded by 24.7 per cent last year, central bankers this year require lenders to place substantial deposits with the bank, for any money lent in excess of 12 per cent growth this year.

Bankers grumble about this intervention, but Mr Motusic says it is helping to shift demand to the ZSE.

"If you have such a restrictive monetary policy and such a hunger for new projects, such a booming real estate market and other sectors, then it is just a question of time when some other type of capital will start seeking ways to invest. It can only be done through venture capital or through the capital market. This really gives a push to our development," he says.

Public share offerings are therefore increasingly common, alongside the privatisation of state-owned companies. Meanwhile, the growing base of active buyers - in contrast to the one-off buyers of INA or T-HT shares - makes the market more liquid.

"Five years ago we had 5,000 to 10,000 Croatian households actively investing in stocks. After INA, it was about 35,000. Now it could be 100,000," Mr Motusic says.

The allure of the edge

2007-10-26T17:30:00.000+01:00

By Eric Jansson
Published by Financial Times, 27/28 October 2007

Vyborg was not to blame. We should have brought a map. As we drove north through the last city in Russia before the Finnish border, the road signs failed us.

Midnight had come and gone. The summer sky bathed the world in a strange northern half-light. Tinted in cobalt blue, sleeping Vyborg wore a sad expression on her face, pockmarked by darkened factories, concrete blocks and grim little discos.

We trawled through vacant streets, guessing at junctions, doubling back when the way ahead looked doubtful. With no one awake to offer directions, we succumbed to the spell of the bordertown.

One is easily lost in such places, with or without a map. Truer to say, one feels a certain displacement, the dimensions of which transcend geography. The gain and forfeit history yields everywhere are magnified where nations meet to turn their backs on each other. Mutual admiration, fear and longing colour the scene.

Even the name, Vyborg, hinted at such displacement. My knowledge of the place was sketchy, but the name looked Germanic. Clearly this had not always been Russia. Indeed it was Finland once, yet the landscape surrounding us was purely post-Soviet urban provincial, with its dreary buildings, crumbling streets and crooked street lamps.

Then we found a road leaving the city and the scene suddenly altered. A bridge lifted us over smooth waters – the eastern extreme of the Gulf of Finland. Glancing over a shoulder, I briefly spied an astonishing castle rising from a small island and, dimly in the background, a row of fairy-tale façades.

The vision vanished as suddenly as it had appeared. The road bent away and soon we were passing through thick forest towards the border.

Between the pines, the night was black. But when the road emerged along the Saimaa canal – where ships cross the border – navigational lamps on the water’s surface glowed green and the natural half-light penetrated the wood, faintly revealing the shapes of Russian soldiers standing among the trees. We had stumbled upon a place that truly fit the description “neither here nor there”. Later, looking into its history, I understood this was no surprise. Vyborg and the Karelian Isthmus have long defied mastery. The spell of the frontier is strong.

I have known this since making a fleeting visit to the Iron Curtain as a boy. As we neared the end of Austria, sign after sign warned US citizens against proceeding further but we carried on towards Czechoslovakia until, across a fence, we could look with fear and wonder into another world. The border was delimited as much within ourselves as it was across those fields.

Erasing such inner borders can be difficult. The borders that more often matter to us run through ordinary places, along man-made frontiers.

They run by places like Daugavpils, Latvia, near the Belarusian border. In Soviet times, visits by outsiders to Daugavpils were rarely allowed. In today’s independent Latvia, prejudice still sets it apart. Nationalists deem this, their country’s second largest city, “not real Latvia”, sneering at its Russian-speaking majority.

Yet reality discredits bigotry. Daugavpils bears many scars but it is not the occupied wasteland its detractors describe. Wars have often wrecked it but today the city is a surprisingly pleasant riverside settlement. Vast parks vie for space with a massive fortress and architecturally jumbled streets. Concrete blocks blight many areas but, elsewhere, timber and brick constructions remain, an echo of early modern times.

The chatter in streets and shops is Russian, Latvian, Polish and Belarusian. Once prevalent, Yiddish is sadly absent, as almost everywhere in central Europe.

Love the jumble or despise it? I thought it better to admire Daugavpils and mourn it all at once. She is broken, yet she is beautiful.

The world is full of such places. Some go forgotten for a time until conflict recreates them, and then they may disappear again. Witness Brcko, Bosnia, a town sometimes cursed, sometimes blessed to exist in the crotch of borders between Croatia and Serbia – peaceful in the Yugoslav era, wild thereafter.

When I first visited Brcko, its location between the borders had made it a haven for retail pirates and smugglers of all stripes. Townsfolk I met bragged openly about their illegal exploits. Their sprawling market, nicknamed “Arizona” by US soldiers, was an infamous mecca for Balkan pirates. Crushed by conflict, the town was defaced by bullet holes and blast craters, and yet in the leafy centre square it felt remarkably cosy. Not all was ill.

Since then, Brcko has blossomed into a success story much of Bosnia would like to emulate. Arizona is cleaned up but continues to thrive. The wealth it generates gets reinvested locally. Bosnia, Serbia and Croatia may all be rivals but for the moment seem to see the surrounding borders as an asset.

Perhaps such borders, in a growing European Union, will someday vanish altogether. I shall not hold my breath, yet far stranger things have happened.

At least twice, during a period of residence in Berlin, I felt a chill of delayed recognition while walking down the Friedrichstrasse. My mind elsewhere, I had strolled blithely across the Zimmerstrasse without paying any mind. I turned around to look at an empty intersection. There within recent memory had stood Checkpoint Charlie, epicentre of a political, economic and ideological schism that gripped the globe not long ago and haunts us still.

Once diminished, can such a border reappear? Surely it depends whose memories are at stake, and whose futures.

This summer, my wife, children and I packed into the car and drove to Coldstream, Scotland, for an annual cavalcade. A handsome bordertown, Coldstream hugs the edge of the River Tweed – a fine place to spend a summer day.

From the raised riverbank, a tourist looking south sees graceful slopes leading towards the Cheviot Hills of Northumberland National Park. But local eyes see something more: one of those slopes is Branxton Hill, from which King James IV of Scotland led a suicidal charge against English troops at the Battle of Flodden in 1513, a mythic moment of desolation for the Scots. Do not imagine it is forgotten.

We followed as the cavalcade paraded through town in a hail of cheers. It crossed the river and retook the hill, where they prayed for the battle dead. Their lead man cut a piece of turf from the hilltop with a sword. He wrapped it gently in the Saltire, the Scottish flag, and they rode off.

Back in Coldstream, when the riders returned, a woman sang a riverside lament. The turf was unwrapped and placed on the ground. The act suggested Scottish blood returning to Scottish soil. Onlookers watched silently. When most had walked away, two witnesses stayed behind. They approached the turf, crouched beside it and gazed at it. One took out a digital camera. Zooming in, he captured an image.

Some borders are more easily erased than others.

Golf and whiskey – pomegranates and lemons

2007-09-20T12:15:00.000+01:00

By Eric Jansson
Published by Financial Times, 20 September 2007

Perhaps golf and whisky should not mix with business. That they frequently do is a boon to Scotland’s business tourism industry.

Business trips, many of them international, yield more than a fifth of overall tourism receipts north of the border, according to a survey commissioned collectively by Britain’s national tourist boards. The published figure for 2006 was £911m, but because business trips so often generate leisure tourism activity the real total is almost certainly higher.

Fabled courses to play, legendary distilleries to tour and “exclusive use” castles that can be rented for corporate events help keep demand high, official promoters say.

Accordingly, Scotland punches well above its weight in this area. Edinburgh last year hosted more international association meetings than any other small city in the world, according to the International Congress and Convention Association (ICCA). Such meetings are the tourism industry’s biggest money spinners, luring delegates by the thousand, typically outspending leisure tourists by more than a factor of two.

Yet in a sector that witnessed 11 per cent growth last year worldwide, Scotland conspicuously lacks capacity, and the market shows signs of strain. Higher capacity markets such as Vienna and Paris, Europe’s top destinations for association meetings, ably absorb extra volume; they registered growth of 12 per cent and 30 per cent respectively in 2006. Scotland and other British markets saw comparatively minor increases.

“A lot of markets are growing faster. We cannot afford to be complacent,” says Caroline Packman, head of the business tourism unit at the national tourist board, VisitScotland. Author of a rebranding effort under the slogan “Scotland means business”, she adds that a long-term effort to preserve and boost competitiveness is underway.

A £1bn wave of private and public investment currently underway should help. Scotland’s leading conference and exhibition centres, the city-owned Edinburgh International Conference Centre (EICC) and Scottish Exhibition and Conference Centre (SECC) in Glasgow, plan dramatic additions worth a combined £142m. Other prime venues such as Gleneagles, the Perthshire hotel and golf resort that hosted the G8 Summit in 2005, and the Old Course Hotel in St Andrews are expanding or upgrading, too.

The EICC’s plans carry a particular sense of urgency. Opened in 1995, the innovative space plugged a gap in the capital’s conferencing market, where previously “the only places to go were hotel ballrooms,” says Sandy Pearson, marketing manager. Twelve years later, after counting 1.5m delegate days – the conferencing industry’s equivalent of hotel overnights – the 1,200-seat centre sees loyal clients outgrowing its space.

Expanding in the middle of Edinburgh’s financial district has proved difficult. Plans to break ground earlier this year broke down when Cala-AWG, a construction company, suddenly backed out citing higher than expected costs. Ms Pearson says the move came “totally out of the blue”, frustrating EICC executives. Last week, they sent fresh recommendations to Edinburgh city council, requesting consent for essentially identical expansion plans.

By contrast, nearby Glasgow boasts ample capacity for big events. The facility’s five big halls and iconic 3000-seat Clyde Auditorium, known locally as “the Armadillo”, generate reliable profits. Yet with the SECC operating at 70 per cent capacity, Mr Closier sees room to grow, as demand spills over from crowded markets elsewhere.

“We get people who have tried to put on a conference in London. They come up here and say it is a breath of fresh air,” Mr Closier says.

His planned addition – with designs by architects Foster & Partners, funding and planning consent all in hand – will be Scotland’s largest arena. Due for completion by 2011, it promises to offset demand for concert space in existing SECC buildings while providing a new sporting venue for the Commonwealth Games in 2014, for which Glasgow is a candidate city.

The Commonwealth Games, though not directly impacting business tourism, could also help the industry by adding hotel rooms, Mr Closier says. For big events, scarce accommodation has sometimes caused problems, as in 2005 when 14,000 members of the European Respiratory Society descended upon Glasgow. Some participants required bussing to and from hotels in St Andrews, 82 miles away, says Mrs Packman.

Additional flexibility could be provided in the form of a high-speed rail line between Glasgow and Edinburgh. Such a link would cut travel time from the current 50 minutes to as few as 12, says Laura Gordon, director of the publicly-funded Glasgow-Edinburgh Collaboration Project.

Sceptics of collaboration include Mr Closier, who notes the contrasting natures of medieval Edinburgh and modern, “rebellious” Glasgow. He warns against “trying to make a pomegranate out of an apple and a lemon”.

But Ms Gordon argues that Scotland’s distinctive markets must embrace intercity collaboration as an internationally proven model for the industry. Successes in Copenhagen and Malmö, Germany’s Rhine-Ruhr region and other markets could show the way forward for Edinburgh and Glasgow, she says.

The first post-modern bank run

2007-09-17T11:18:00.000+01:00

There is a reason why people do not paint landscapes in a hurricane. The next gust is too likely to change the scene. Also, one gets wet. For the same reason, there is little purpose in describing in detail the ongoing run on Northern Rock, the British bank suffering most from the great credit crunch of 2007.

Know this, and you know enough: when “the Rock” – now nicknamed “the Crock” by wags in Britain’s financial press – unveiled its deal last week with the Bank of England over access to emergency funds, it effectively announced its own demise.

Will anyone catch Britain’s fifth largest mortgage lender, currently in freefall? The Rock’s share price fell by more than 30% last Friday. As of this moment on Monday morning, fewer than three hours into trading, we already see an equivalent drop.

Depositors are lining up to withdraw funds from branches across the country, just as they did on Friday and Saturday. Invisibly, holders of “Internet savings accounts” are doing the same online, and confusing queues in cyberspace force frustrating waits there, too.

A secondary question is, if no one is prepared to catch this bank in free fall, what will the mess look like later, for whom? Watch the herd. Analysts have gone from describing this last week as a potential “one-bank-collapse” to describing it today as a “systemic threat”.

Efforts by executives and policymakers to renew confidence among depositors so far seem to be falling on deaf ears. This is the nature of any bank run, but we have some novel ingredients, too.

Alistair Darling, the Chancellor, went on BBC Radio 4 this morning to reassure depositors that, because of the Bank of England’s pledge of emergency funds, the Rock really did have enough money for them, and their deposits were secure. In theory, this kind of reassurance persuades depositors that they need not withdraw.

However, in practice, the reaction has so far been the exact opposite. The Bank of England’s pledge and Darling’s reassurances, as received by depositors in a highly competitive market, imply no reason not to withdraw.

Add to this the fact that online depositors, since their relationships with the bank exist solely in the “virtual” realm of cyberspace, evidently feel no customer loyalty whatsoever.

The crisis at Northern Rock is therefore neither merely a matter of one bank’s potential fall, nor merely a source of systemic risk. It is Britain’s first post-modern bank run, with individuals showing how very little interest they have in their relationships with institutions, public and private. Institutions therefore fail utterly to speak effectively to disinterested individuals.

So while many people now say that trust in the system is breaking, it would be more accurate to say that trust was already broken, over years, in advance of this crisis. An erosion of trust created the conditions for today’s scene. The risk was foreseeable but remained invisible as long as the financial markets’ liquidity boom continued.

By anchoring its operations in the fickle wholesale credit market, the Rock showed how shallow its commitments really were. Today, by withdrawing funds so rapidly even when the risk of non-collection is zero, depositors are showing equally shallow loyalty to the bank.

It shall be interesting to see where else, in the current credit squeeze, real market values get forced downward by the glaring commitment deficit in post-modern society’s moral balance sheet.

Picking bones with Bono

2007-09-07T18:10:00.000+01:00

Gideon Rachman, the Financial Times' chief foreign affairs columnist, wonders aloud why Bono the pop singer and global aid campaigner is so maddening. He proposes that it has something to do with Bono's embrace of the "mainstream NGO view of poverty", but he finds the problem difficult to disentangle. I write back here:

Gideon, surely you are onto it with your "mainstream NGO view of poverty" point.

The view is very peculiar: it is a sort of corporatised or perhaps collectivised version of the moral argument that sacrifice is required. It says that, yes, the vice president of a London bank is the neighbour of the starving herdsman in Darfur, and that neighbours must love each other as themselves. However, as a solution to bridging the gap in power and means between such neighbours, it proposes neither the immediate lowering of the banker nor the immediate ascent of the herdsman. Instead, it proposes a systemic fix, with governments and corporations acting as proxies for the morally compromised banker. The proposed fix is paradoxical. It implies guilt on the part of the fortunate individual but mitigates the need for reaction by the individual, since reaction is ultimately worked out through taxation or adjustments in sales prices. It also implies that material/circumstantial equality (or at least similarity) is morally required of all people; in other words its content is at very least neo-Marxian even if its form is globalist and pro-market. These paradoxes grate.

However, they grate much more coming from Bono, who embodies corporate bohemianism. He has sung many songs well and communicated important messages through them. But in his political role he sells a brand of moral imperative which is paradoxical -- and yet he sells it as the real thing.

But it gets worse. Bono escapes criticism, because he is neither stupid nor naive. Pressed, I expect he would acknowledge that his branded morality is not the real thing. However, it may be the best try that existing systems of corporate and collective power can manage, in terms of effectiveness and popular marketability. His personal defense would be that politics is the art of the possible, and that terrible suffering and need in much of the world are real -- an effective defense.

All this frustrates the critic. The quarry has got away, and the problem remains unsolved. The problem is that the critic is struggling to reckon with his own failure, perhaps like Bono's, to differenciate and correspond between the mechanics of collective responsibility and the imperatives of individual morality. It is a frustrating position. But don't blame Bono for it. He only appears to be the personification of a problem we all share. Moreover, he is trying to do something about it.

That he falls short is unextraordinary.

Shelter from the storm?

2007-08-21T11:08:00.000+01:00

By Eric Jansson
on FT Alphaville, 21 August 2007

How will emerging markets respond to the evolving global crisis in financial markets? The question was posed today on Alphaville, the FT’s blog for market banter. Alphaville notes uncertainty as to whether emerging markets could become safe havens during the current storm. It also notes that local risks complicate such markets, giving as an example a spike in kidnappings in Columbia.

The question Alphaville poses is worthwhile. However, it is also indicative of the tendency among fund managers in highly developed economies to view EM as a homogeneous investment zone, whereas, in fact, EM is an extremely heterogeneous area of investment.

The temptation in the current crisis, as always, is to oversimplify in order that the response can be kept simple. Investors in EM prefer large-cap investment vehicles – large-cap, that is, within the context of EM economies – and they tend to analyse market behaviour accordingly, with a focus on macro trends. By contrast, the example of a spike in Columbian kidnappings implies that micro factors "on the ground" can also become driving forces. This is a fair point because a big challenge in judging EM performance is understanding the interplay between solid macro and fluid micro factors.

EM macro-micro interplay is frequently irrational. EM across the board often feel pain when risk-aversion grows in highly developed markets, despite continuing improvement of local fundamentals. Why? Because developed-market investors in EM stocks and bonds often categorise their EM holdings as "high-risk", and broadly these investors move out of high-risk investments globally when risks in their home markets increase. This phenomenon can amplify risk in EM capital markets. It also magnifies the difficulty of understanding local market volatility and reacting to it profitably. Likewise, micro to macro, when local micro problems spike under globally risk-averse circumstances, EM frequently experience a degree of foreign capital flight.

Beneath the froth of foreign capital investment, obviously, EM reactions are diverse because markets are diverse. The important question today is how important this froth is in each individual market, and how well each market can stand on its own if that froth starts to evaporate or curdle.

In smaller emerging markets, as the current credit crisis plays out, the reaction might well be small; froth is minimal in such markets because large-cap vehicles are scarce there. By contrast, some froth is likely to evaporate or curdle in larger emerging markets, yielding a measurable reaction (note the Asian and Russian reactions) – yet at the same time local capacity to weather the storm can ultimately prove greater in large markets with substantial local capacity.

The only answer, at the end of the day – as in the US credit market – is to understand individual investments in their real context. In EM, the real context means the local context of specific EM economies, companies and industries. There will be some uniform trends, but impact will be diverse, dependent upon proportional levels of exposure. Meanwhile, for clues, look at the way individual EM stock markets have responded so far. Those least touched by big foreign funds show trends divergent (positively) from those we are witnessing in major markets worldwide. The bad news is that some such markets could be real safe havens, yet some undoubtedly are not, and data describing exposure to froth is scarce.

Such are the realities of economic interdependence in a complex world.

Keepin' it real with Jesus

2007-08-14T11:04:00.000+01:00

Sermon at St Cuthbert's Church, Norham
12 August 2007

Dear Lord, I pray that what I say now may be of true service to these my brothers and sisters in Christ. Inspire our hearts, forgive our errors and fill us with your Holy Spirit. Amen.

Perhaps you heard this past week about Pat and Sheena Wheaton. They are a couple of New Zealanders, and they have a new baby boy. There’s been a little problem over his name. Pat and Sheena thought long and hard about it. Somehow, after deliberating, they decided that they would name him “4Real”. That’s a name: “4Real” – the number 4, R, E, A L.

This might have passed unnoticed, but there was a public ruckus about it. The New Zealand government registry refused to accept “4real” Wheaton’s given name, because it had a number in it, and names – the registry said – are to be made up of letters only.

This sparked a public debate. Pat and Sheena Wheaton got upset. They said they would never give up, that no matter what the registered name might be, they would keep calling their boy “4real”. But the registry held its ground.

So they called him “Superman” instead. (No word yet on what they are calling Superman in the privacy of their own home.)

I am pretty conservative when in comes to names. Laura and I chose pretty straightforward names for our children. But still, I sort of hope that Pat and Sheena still call their boy “4real”. It is a terrible name, but it’s very hip, and it seems to give a nod to one of the ideals that looms very large in the popular consciousness nowadays. That ideal is authenticity.

The way we value authenticity can be tracked, like almost everything else, by whether or not we are willing to pay for it. And it seems, increasingly, like we are willing to pay for authenticity – or at least for appearances of authenticity. One of a thousand examples: more and more people will pay for “organic food” because it seems to them more real, more authentic – untainted. And there is even a name for this amongst people of my generation, especially people who like rap music. They say that they are “keepin’ it real”. To those of you who don’t know, a rough translation of “keepin’ it real” is “staying down to earth” and not pretending to be something that you are not. Of course, the way this plays out in an image-driven consumer society has very little to do with “keepin’ it real”, for real – it’s about projecting an image of plausible authenticity. Try to get your head around that one.

Our three readings today are not just about projecting images of plausible authenticity. They are about REAL authenticity. The stuff that lasts forever, that remains even when our final defences collapse and scatter in the wind. The scary stuff.

● First we have Isaiah. He prophecies about God’s demand that our worship be real, our prayers genuine, and our religion true. There is worrying stuff here for religious people:

“New moon and sabbath and calling of convocation –
I cannot endure solemn assemblies with iniquity.

Just to remind you, we are told this is the voice of God:
“Your new moons and your appointed festivals
My soul hates.
They have become a burden to me,
I am weary of bearing them.
When you stretch out your hands,
I will hide my eyes from you;
Even though you make many prayers,
I will not listen;
Your hands are full of blood.”

Strong words! So what does God want instead of religious graces?

“Cease to do evil,
Learn to do good.
Seek justice,
Rescue the oppressed.
Defend the orphan,
Plead for the widow.”

Isaiah says God wants us to walk the walk, not just talk the talk.

● OK, next we had St. Paul, writing to the Hebrews. Again, the message is about authenticity. Paul writes about keeping the true faith even in barren, hostile circumstances. His example is Abraham and Sarah. Paul writes that Abraham was so old he was “as good as dead”. Sarah was barren. They lived on the move, in tents – but they believed in God’s promises. They believed in a “city that has foundations, whose architect and builder is God… a heavenly country” and God gives them a start, with the birth of Isaac. Even after that, of course, Abraham’s descendants live as “strangers and foreigners on the earth – people seeking a homeland”.

In other words, they are keeping it real. They want to live in a way that does not compromise their faith and hope, despite all the troubles found in this world. Many of us might call this unrealistic, naive. But because they long for such a life, “God is not ashamed to be called their God; indeed, He has prepared a city for them.”

● Finally, our Gospel reading – Jesus, as recorded by St Luke.

Here Jesus talks about living for eternal things, but he makes crystal clear that living for eternal things means living practically – with freshness, immediacy, urgency, even fear. “Be dressed for action. Have your lamps lit!” he says. “The Son of Man is coming at an unexpected hour.”

What a great trio of readings. We are listening to total harmony here. St Paul is in harmony with Jesus. Jesus is in harmony with the prophet Isaiah.

So what!– It’s only natural these readings are in harmony with each other. They all come from the Bible! Jesus was a Jew. He agreed with the prophets of the Old Testament, no doubt. He read them as a child. As He grew up, He taught these prophecies in the synagogue, and He looked for their fulfillment. Naturally Jesus is in harmony with Isaiah. And then, St Paul: of course Paul is passing on Christ’s teaching, right? Simple. So what!

But no. Not “so what”. The harmony is much, much better than that. This is not merely the same song sung by three different singers – Isaiah, Jesus and Paul. It’s not even just variations on a theme. Each one is fulfilling the last. Think about it like this instead: Isaiah sings a song – he sings about an entirely new kind of music than the one that Jews knew at the time. Then Jesus comes: Jesus is the new music. Then, Paul. Paul is dancing to the new music. Why? At the time St Paul was writing, the whole Church was just learning to dance to the new music, and in his letter to the Hebrews, Paul is telling his fellow Jews how to do it, how it came to be and how it fulfills the ancient hopes of Abraham and Sarah.

And it does.

Perhaps it isn’t said frequently enough: Christianity isn’t really about Christ’s teachings. I am skating near thin ice here, but this is still solid: the core teaching of Christianity is not the things that Jesus said. His teachings matter a lot. They matter hugely. They are indispensable to our faith. But the core teaching of Christianity is Jesus Christ himself. Not just what he said, but what He is and who He is.

Christianity is about The Authentic Man, the divine incarnation. It is our effort to embrace the whole challenge and opportunity that the divine incarnation poses to the human race.

Our faith is about Jesus’ birth, His life among us, His murder – and then about the way in which He overcomes sin and the grave so that we can be reconciled with God, in Him. At its highest point, our faith is about the Resurrection. If you have doubts about Easter, than you should have doubts about everything we are doing here today, too, because Christianity without the Resurrection is not Christianity. So our faith is not, at root, about Christ’s teaching – it is about what God accomplishes through the real life of his Son. “Keepin’ it real.”

And Jesus, like no one else, is great at “keepin’ it real.”

The spirit of our faith is very different from what our instincts might suggest it should be. Our instincts tell us that what is good is also pretty mild. We like “nice”, because it is unthreatening. Almost instinctively, in this age anyway, when people think of “spirituality” they think of quiet spaces – they might think of meditation: dim lighting, some candles, deep thoughts and so on. I love it when people say, “He’s very spiritual.” Or “Wow, she’s so spiritual.” We mean something important when we say such things, but in some ways we are talking nonsense. We are ALL spiritual, ALL the time! ALL aspects and moments of human life are spiritual: the notion that somehow a person can flick the “spiritual” switch on and off is a fallacy of modern secularism. In a way, it’s just like the mistake we like to make about Jesus: we think Christianity is about His teachings, in isolation – no it’s about the whole Man. It’s the same way with every human being: our spirit is not found in what we say alone, or in how we behave – our spirit is wrapped up in our whole being – it has a grip on us… we cannot just think or act our way out of it.

So it matters very much. Each of us needs to ask: What’s driving me today? Is it the Holy Spirit? If it’s not, then by definition it is some spirit that is not holy.

But Jesus is the ultimate holy man. Really, the ultimate holy man. But he’s not “spiritual” in the dreamy – forgive me, in the “hippy” far out “spiritual” kind of way. In fact, He is terribly direct. He is an arresting guy. He is not “nice”. Love is far greater than “nice”. Jesus is Love, and yet sometimes He seems to be doing just about everything a man can do to wreck His reputation with the powers that be, and He does not mind. The Beatitudes are often remembered as His grand statement about the nature of the Kingdom of Heaven – it is our world upside down: the first are last and the last are first, the meek inherit the earth, the poor in spirit get blessed, and so on. Well, you might have noticed that in our Gospel reading today Jesus is at it again.

We love to call Jesus the Lamb, the Shepherd, the Son, the Lord – all true, all excellent, deeply honest and accurate ways to describe Him. But here Jesus takes an opportunity to describe Himself, and to whom does He compare Himself? Does He compare Himself to a King? A Shepherd? Does He say, “You know, I’m so gentle and sweet – I’m as gentle and sweet as a Lamb.”

No, Jesus does exactly the opposite. He says, “I’m like a thief.”

He’s going to crawl through the darkness. He’s going to break through the windows of our souls and, when we’re not expecting it, the light is going to switch on. He’s going to rob us of our clothes; today in this church we should be as spiritually naked before God as Adam and Eve were in the garden, after they first sinned. Jesus strips us of our pride – not just our pride but our very ability to feel pride in anything or anyone other than Him, in whom everything can be perfected, in whom everything can be redeemed.

Our reading from Luke ends at chapter 12 verse 40. But if you read further, you find out that Jesus is not just like a thief – He is also an arsonist of sorts. He’s going to set our old house on fire, and let our sin burn away in the inferno. “I have come to bring fire on the earth, and how I wish it were already kindled!” That’s what He says.

Christ, we should remember, comes with the refiner’s fire. This is what it means: your wretchedness, your inner pain, the horrible sins you have left behind and cannot ever imagine acknowledging in public now, the sins that are painful even to recall to yourself in private, the pride that makes you fearful, that tendency you have to grasp onto perishable things just for a moment’s comfort – ALL those things will burn away in the refiner’s fire.

And you ask yourself… can I stand it?

Evidently it’s not going to be easy, because sometimes we are too much like the people described in Isaiah’s prophecy.

There is this tendency – I mean, I have this tendency, and I know I’m not alone – to go to Church and then just go through the motions. It’s grotesque, but Christians so often succeed in making Christ seem boring, in making Him seem inauthentic. You know what that is? It’s dead religion. It’s the same thing Isaiah describes, and God abhors it. “Trample my courts no more. Bringing those offerings is futile.”

But the true practice of our faith is not futile. Christ is not boring. If you think the Son of God is a drag, then you need to be reintroduced to the Man Himself.

Our whole existence – any shred of justifiable hope that we have in this life – is justified not by ourselves, or by the goodness of Creation, but by Jesus’ self-sacrifice – the sole offering that God, by definition, will never abhor – that one offering that can never become empty or idolatrous, because it is the authentic, perfect sacrifice, accomplished in the holy humility that characterizes eternal glory.

You and I have an opportunity today, right now, to keep it real. We are going to celebrate Holy Communion together. Let’s not do this as dead religion. Let’s do this, truly, in Jesus Christ – with the acceptance of His sacrifice in the front of our minds, with urgent humility and repentance in our hearts, with the Holy Spirit defining our relationships with each other, and with acceptance of what all this will mean for us when, after the end of this service, we walk out the door. With God’s help, we can do all this, and I pray that we shall.

So let us pray:
Lord, you plead with us through your prophet Isaiah,
You confront us in the person of Jesus Christ,
You challenge us as your Church –
to keep it real,
to give up niceties and replace them with authentic grace, real and unscripted love.
Give us your grace.
Continue to teach us in the ways of your true love.
Be with us now in this service
And as we prepare to come to your table.
Amen.

Like Katrina, Britain's floods sink homes — and Conservatives

2007-08-08T08:17:00.000+01:00

By Eric Jansson
Published by the New York Sun, 7 August 2007

NEWCASTLE, England — Lake-size puddles glimmer in low-lying fields. Corrupted floorboards and ruined furniture pile high on sidewalks. Far from New Orleans, this is the scene of Britain's worst floods since 1947, which left three dead in July and are predicted to cost insurers up to $6.6 billion, according to Risk Management Solutions, an American-based catastrophic risk modeler with a European headquarters in London.

Observers' early comparisons to Hurricane Katrina, which ravaged America's Gulf Coast in August 2005, ultimately proved wildly disproportionate. Katrina left more than 1,400 dead in Louisiana alone and cost insurers more than $40 billion, according to the Insurance Information Institute. Yet as the last floodwaters drain away, one comparison to Katrina holds up: the peculiar distribution of political cost.

Just as Katrina boded ill for President Bush and his Republican Party, with critics accusing the federal government for falling far short in its emergency response, floods have left Britain's top conservative politician stranded in a sea of criticism.

In the latest sign of crisis for David Cameron, the leader of the Conservative Party, one of the party's biggest donors Tuesday said he was withdrawing financial support. Sir Tom Cowie said Mr. Cameron's handling of the floods and other matters had left the party looking "arrogant." "All I can say is I am very, very disappointed with the state of the party. I will not mince my words: I shan't send them any more money," he told the Guardian newspaper.

As the rain fell, a different outcome seemed likely. Prime Minister Brown and his governing Labour Party appeared susceptible to criticism, having reacted hesitantly to years of warnings from flood-defense experts at Britain's Environment Agency. Mr. Cameron donned rubber Wellington boots and tromped through the neighborhoods of his submerged West Oxfordshire parliamentary constituency, where he offered praise for the "grit and determination" of ordinary folk, local journalists reported.

Mr. Cameron's reward? Jeers in the national press and the most vigorous speculation yet over whether he can lead Britain's biggest opposition party back to power after Labour's decade of dominance, first under Mr. Blair and, since June 27, under Mr. Brown.

"As Gordon Brown's bounce gets ever higher, Mr. Cameron appears to be cowering under the trampoline," an article in the Daily Telegraph said.

After the floods, a poll published by Conservativehome.com — considered a key barometer of enthusiasm among grass-roots Conservative Party activists — found that confidence in Mr. Cameron's potential to become Britain's next prime minister had sunk precipitously, to less than 50% from 77% last January.

But the news is not bad only for British Conservative Party members. Britain's summer floods offer the latest example of how right-of-center politicians can get battered by natural disasters.

Unlike Mr. Bush, bitterly criticized for staying far from hurricane-affected areas in the immediate aftermath of Katrina, Mr. Cameron plunged straight in. Yet after sloshing through floodwaters with Martin Ivens, a columnist for the Times of London, Mr. Ivens mocked him as "Dead-in-the-water-Dave." Similarly negative assessments rang throughout the British press.

The flood damages sustained by Mr. Cameron stemmed in part from his decision to keep a foreign trip on his schedule, a whirlwind visit to Rwanda that invited accusations of aloofness.

Yet Mr. Cameron got plenty wet before he flew to Kigali, and he returned soon thereafter to his constituency. A deeper explanation for the Conservative leader's woes flows from his decision to focus on flood victims' resilience. By emphasizing private initiative over the government's role, Mr. Cameron held true to his party's ideological foundations, but he bypassed what party loyalists saw as an opportunity to criticize the government — a common charge.

"Pick up a newspaper and it is full of this administration's failures, most of them directly linked to Brown's role when chancellor. Yet the Conservatives are not calling the prime minister to account," Michael Portillo, a Conservative former government minister, wrote in the Times of London.

Mr. Brown, who for the past decade as chancellor managed Britain's purse, has so far polled well as prime minister. Yet Mr. Cameron faces an immense challenge in re-engineering Britain's political climate, in part because the weather literally might be against him.

In contrast to the Bush administration, accused by critical European governments of too slowly embracing the politics of climate change, most British officials — Mr. Cameron and much of his Conservative Party included — have done so vigorously. Releases of statistical data from the Met Office — the government's weather bureau, which is part of the Ministry of Defense — are routinely embroidered with warnings about climate change.

For example, a Met Office press release issued at the height of the floods on July 26 described the record level of rainfall seen between May and July before concluding with a note that "we all need … to meet the challenges posed by climate change." Similarly, an earlier Met Office press release issued after this year's unusually dry, hot April described record average temperatures that month within the context of "temperature rise … being experienced on a global scale."

The dry, hot April had earlier yielded predictions of a dry, hot summer and long-term projections of a "Mediterranean" climate for Britain. The exceptionally wet, cool summer that has followed has not dashed such expectations. Peter Stott, a Met Office climatologist, folds the apparently contradictory phenomena into a unified global warming hypothesis. "With a warmer climate, there could be an increase in extreme rainfall events despite the expected general trend toward drier summers," he said.

Nigel Lawson, a Conservative former chancellor under Margaret Thatcher, the former prime minister, is one in a small but determined chorus of voices that has noted with growing concern the politicization of Britain's weather.

In a speech last year at the Center for Policy Studies in London, seen as an important address by British skeptics of global warming, Mr. Lawson warned that the country's climate change politics increasingly resembled that of "primitive societies" in which "it was customary for extreme weather events to be explained as punishment from the gods for the sins of the people."

Under such circumstances, an opposition leader who declined to lodge meteorological complaints against his opponents in government might be charged with timidity or disengagement — precisely the charges that Mr. Cameron now faces.

Visions of paradise face up to reality

2007-07-05T09:36:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

Leopards and bulls rest in the shade of fruit trees. Peacocks strut down the aisles of ancient churches. Deer lap water from an ornate urn, from which springs the "tree of life".

To archaeologists, the vivid mosaics at Heraclea Lyncestis suggest visions of paradise both figurative and practical – figurative because the animals and geometrical patterns portrayed pointed to paradise for the early Christians who once worshipped at the site, practical because there is so much more promising work left to be done there.

Since the 19th century, when an Ottoman sultan authorised the first excavations of the city, archaeologists have uncovered 1300 sq m of mosaic flooring, much of it exquisitely preserved.

Yet their efforts to date have scratched just the surface of what Heraclea may ultimately offer up. Engin Nasuh of the Bitola Institute and Museum, chief archaeologist at the site, says test digs in surrounding vineyards indicate that only "about one tenth" of the ancient city has been excavated so far.

The existing finds are remarkable for the views they afford of Greco-Roman convergence, from Heraclea's founding in the 4th century BC through the Roman conquest two centuries later and eventually the westward spread of Christianity.

At such sites in the Republic of Macedonia, a look backwards in time reminds citizens that their claims to European identity are not merely aspirational but foundational.

As the country inches closer diplomatically to the European Union, EU diplomats frequently proclaim an emerging "European perspective" for the western Balkans. But standing amid the ruins of Heraclea, Mr Nasuh notes with some satisfaction that this place's European heritage actually predates the EU by millennia.

"There is a kind of mysticism here, a magic, what you might call a European feng shui," he says.

Heraclea blatantly no longer stands at the centre of the continent's development, as it did when it was an important city on the Via Egnatia, the Roman road linking Jerusalem and Rome. Today its ruins lie on the dusty outskirts of Bitola, a city little known outside the region.

Yet the stones there continue to afford glimpses into Europe's cultural heritage that resonate today.

A startling example is the site's "small basilica", the ruins of a church that Mr Nasuh says may have been built before 300 AD. Its eastern walls are rectangular on the outside but curved behind the altar space within – evidence, the chief archaeologist says, that the Christians who built it may have been compelled to disguise the building's true purpose, worshipping secretly in the shadow of official Roman persecution.

The small basilica, a much bigger basilica, episcopal residence and other buildings now lie beneath the periphery of a Hellenic amphitheatre adapted in Roman times for gladiatorial games.

But the site is less glorious than it could be. This summer, visitors will be disappointed to find sand covering the expansive mosaic floors of the big basilica. The archaeologists dumped it there to protect the ancient tiles from Macedonia's changeable weather. They have yet to devise a better method of preservation.

Chronic underfunding impedes progress at the site, along with "a general lack of long-term strategy and planning for preservation of cultural heritage in Macedonia," says Mr Nasuh.

Heraclea's total budget for 2007 is €40,000, most of which is earmarked for construction of a museum shop. Sales at the new shop may ultimately yield the local cash flow that the site currently lacks, enabling workers to operate with greater independence from the state budget drawn up in Skopje.

Meanwhile some EU countries, most notably Italy, have started stepping into the void. Interested in part because of its own ancient ties to Heraclea, Rome has offered funds to improve site security and night-time illumination.

But international co-operation could be better. Unresolved rivalries stemming from the break-up of Yugoslavia almost two decades ago still pose a problem. Serbia, where centralised Yugoslav state institutions were based, has so far refused to relinquish archaeological records from Heraclea.

Mr Nasuh blames academic rivalry.

The records, to which, he says, his counterparts in Belgrade refuse him access include studies from the Yugoslav era on key archaeological questions, such as what lies beneath some of the mosaic floors.

"There is almost certainly enough material for 20new doctorates in there," he says.

Yet if it is true that only a tenth of the site has been excavated, the very ground under Mr Nasuh's feet may yet yield enough archaeological material for hundreds of doctorates.

Ski resort entrepreneurs have mountain to climb

2007-07-05T09:33:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

Just past the hamlet of Smrdliva Voda - translated roughly as "Stinkwater" - the paved road up Mount Kozuf breaks into a heavily rutted dirt path. Angel Nakov's 4x4 keeps roaring uphill.

Mr Nakov and his business partners are building the road. Higher up, once it runs out, he turns his vehicle on to an even more primitive path, bouncing all the way. When that too disappears, he turns straight uphill toward Kozuf's peak and steps on the accelerator. The car bounds over the wildflowers and blueberries that grow densely on the slope.

Finally it becomes too steep, and Mr Nakov jumps out to climb the last few hundred metres. At the top, only a small pillar marks the border between "SFSJ" – the extinct Socialist Federal Republic of Yugoslavia – and "E", Greece.

From the peak 2,160 metres above sea level, almost the entire Republic of Macedonia can be seen to the north. Looking south, there is the Aegean sea, the Greek port of Thessaloniki and Mount Olympus on the far horizon. Along the east-west ridge, one can still spot gun placements from the First World War when the Salonika Front ran through.

Such is the spectacular view from the summit of what is surely one of the most audacious entrepreneurial schemes underway in the Republic of Macedonia.

It started as "a joke" that is now 15 years old, Mr Nakov says. In the early 1990s, as the manager of a duty-free shop at a border crossing, he developed a taste for business. But he longed to mix business with pleasure. Pleasure on weekends lured him up the mountain with family and friends.

At the time, horses were the only way up. A large slice of wilderness in the southern Republic of Macedonia, including Kozuf, opened up to the general public only in 1991, after four decades spent as a closed military zone following the Greek civil war.

When Mr Nakov and his riding friends "discovered" the mountain, they immediately thought of a year-round resort, he says. But it took years to squeeze their giant dream into an actionable business plan. Now, as executive director of the private company Ski Centre Kozuf, he says they have it.

Together they have spent €4.2m to date, for which there is no ski resort to show. However they do have 55 hectares of land with detailed planning permission for a village in the valley below, initial buildings, machinery to tend the slopes, a first ski lift, passable access roads, links arranged with public utilities and a slick advertising campaign.

A deal with the state foresees swapping a share of lift-ticket income in exchange for use of the mountain.

"We can say we have a very rare situation among new projects in south-east Europe. Our paperwork is all in order. Now our work is practical," Mr Nakov says.

Work at the site is accelerating with the help of an €8m loan from Stopanska Bank, a local lender owned by the National Bank of Greece, he says. With an additional €4m under negotiation, plans call for €12m in spending in 2007, bringing in plumbing, sewage systems, power lines, snowmaking machines, a six-seat chairlift and – at a stretch – possibly, the construction of the first 60 chalets.

Further cash inflows are expected from property sales, with parcels going for €49 per sq m. Ski Centre Kozuf aims to capitalise on soaring UK demand for holiday homes. "We expect to sell 60 per cent to Brits, 20 per cent to Greeks and the rest local," he says.

But the company also aims to share burdens with a strategic investor. Some €80m will be needed up to 2009 to complete the whole village and mountain to a high standard, according to the plan.

But will the project work in the end? "It's a good idea, but I have some doubts," says Mirko Tripunoski, a tourism expert who – to local acclaim – launched the mountain resort Popova Shapka, or "Priest's Cap", in 1982. Kozuf may struggle to flourish year-round, in case of weak summer demand or warm winters, he warns.

But Mr Tripunoski's Popova Shapka today is a post-Yugoslav wreck. If the broken chairlifts and sorry scenes on its towering slopes near the Kosovo border are a sign that mountain tourism can go wrong here, they also point to unmet demand.

Hopes pinned on foreign investors

2007-07-05T09:29:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

Facing a global attention deficit, many a small country at some stage plumps for a 30-second spot on CNN or BBC World, hoping that a flicker of local scenery and music might yield a bounce in tourism revenue or charm the odd potential investor.

Not the Republic of Macedonia. When the southernmost former Yugoslav republic launched its own promotional blitz last year, its target was global finance.

Arriving at the World Economic Forum annual meeting in Davos, Switzerland, in January, invitees received complimentary copies of The Economist magazine tucked into glossy wrappers describing Macedonia as "a new business heaven in Europe".

Months later, the country's advertising bonanza carries on, scoring repeated hits in 59 top-flight business publications in 39 countries.

Questioned by taxpayers, government officials refuse to disclose how much the state-funded campaign costs. Yet, even without a figure, the effort by its nature reveals how sure officials in Skopje are that any significant economic breakthrough to be expected in the coming years will be powered by foreign investment.

No one disputes the need for a breakthrough. Real economic growth was steady through 2006 with a 3.2 per cent rise in gross domestic product. The government reports a GDP growth spike of 7 per cent in the first quarter of 2007, year on year. But the country's potential remains woefully underexploited. Rising growth, low inflation and shrinking external debts leave almost untouched a staggering official unemployment figure of 36 per cent.

Two questions arise. First, is it true that foreign investment will provide the fundamental boost needed to speed growth and create jobs? The answer depends on the nature of investment. If the majority of companies pulled in build factories – as a growing number are doing – jobs will come.

Second, is the government's promise of a "heavenly" business climate to be believed? Foreign investors on the ground give positive answers, with contextual reservations.

Since entering office less than 11 months ago, ministers have launched "really positive" reform efforts, says Aristides Vlachos, president of the International Council of Investors in Skopje. He heaps praise on Skopje's "regulatory guillotine" project to cut red tape, but adds that "it is too early to see results".

Reformist ministers find it difficult to make good on promises, dependent as they are on the post-socialist country's anaemic civil service. "We have the impression that the government is trying hard to bring change, but state administration does not follow. They have to get rid of the old bureaucrats," Mr Vlachos says.

Examples abound. A prime achievement is the creation of a "one-stop shop", a system designed to simplify the process by which new companies are registered, cutting the time needed from five days 12 months ago to three days now.

By September, this should be reduced to just 24 hours, says Vera Rafajlovska, the economy minister.

In fact, says Mr Vlachos, the one-stop shop is "a positive idea but still not real". The time for registering new companies remains "variable" and still requires visits to multiple state offices.

The "Invest in Macedonia" campaign also promises exceptionally low tax rates – 12 per cent on corporate and personal income and zero on reinvested profit – lowered further still for investors in free economic zones.

The rates described are technically accurate. But critics note that other important taxes go unmentioned. With certain wage-related contributions counted separately from income tax, aggregate wage taxes actually exceed 75 per cent, says Sam Vaknin, an economic adviser to past governments.

"Yes, corporate profit tax is the lowest in Europe – although Albania is now matching it – but if you calculate the total tax burden on businesses it is either the second or the first, competing with Sweden," Mr Vaknin says.

By launching its campaign before pro-business reforms really work, the government risks fostering "disillusionment and disenchantment" among new arrivals conducting due diligence, he adds.

But the critique may be too sharp. Even sceptics such as Mr Vaknin say they believe that government ministers are trying sincerely to liberate economic potential by cutting taxes, opening the economy and attacking corruption.

According to Trajko Slaveski, finance minister, critics were proved wrong when they predicted that lower personal income and profit tax rates would threaten the state budget – already the region's smallest as a proportion of overall economic activity. "Lower taxes did not just yield higher revenue, they yielded 20 per cent more than we projected," he says.

Partly this reflects the immense amount of business done off the books in an country where many people's flair for entrepreneurial profit-making far exceeds their respect for the tax authority. Some economists estimate that the "grey economy" accounts for 50 per cent of GDP.

Many workers take jobs secretly while keeping their unemployed status – the only way to qualify for free state health insurance, says Burt van Selm, resident representative for the International Monetary Fund. "Funny quirks like this need to be worked out," he says.

Mrs Rafajlovska, head of a private consultancy before becoming a minister, says the practical opportunities for meaningful reform have exceeded her expectations. When she first entered her government office, she found "a huge pile of papers on the desk". She was told they were companies' requests for ministerial approval "on all sorts of issues".

"I told them to tell companies they do not need a minister's approval to work legally. Now, look, there is no pile," says Mrs Rafajlovska.

It is a start.

Refinery rift nears its end

2007-07-05T09:23:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

The OKTA oil refinery has always stood a bit apart from the centre of power in the Republic of Macedonia. Though just 10km from downtown Skopje, the complex is situated in a desolate valley below barren slopes east of the city.

Yet the distance from the refinery's executive offices to the centre of government has sometimes seemed even greater during a long-running rift between the refinery's owner and the Macedonian state.

Later this month, that sense of estrangement is due to end. A Paris-based arbitration court is expected to settle, once and for all, the dispute between Skopje and Hellenic Petroleum, the Greek state-controlled energy group that purchased OKTA in 1999.

Both sides say they expect the court to settle all outstanding issues regarding the state's controversial sale of the refinery to Hellenic's subsidiary ELPET Balkaniki.

Relations between the state and the company, acrimonious for years after the sale, have "normalised" since 2004, Macedonian government ministers and Hellenic executives say. But both sides would also welcome a formal end to the dispute.

With Skopje striving to show a more welcoming face to incoming investors, Nikola Gruevski, the prime minister, already refers to Hellenic's problems as "a case from the past".

Michael L Myrianthis, OKTA's chairman and Hellenic's director-general for international activities, likewise says he believes Mr Gruevski's government is "making a genuine best effort" to improve relations with present and future investors.

Such comments are indicative of a gradual but dramatic reconciliation observed over the past three years.

On buying the refinery in May 1999, as the regionally destabilising Kosovo war raged next door, Hellenic had absorbed steep risks to secure a commanding position in the market. The company even moved ahead with large-scale refurbishment and infrastructure investments despite Macedonia's brief descent into inter-ethnic conflict in 2001.

Quick cash from the refinery sale had arguably helped to limit the post-Kosovo fallout for Skopje.

But as the dust settled after Macedonia's late-2001 Ohrid inter-ethnic peace agreement, opposition critics held the OKTA sale up to continued public scrutiny. They claimed the sale price of $32m had been too low and that Hellenic had gained monopolistic advantages in a non-transparent deal.

Added criticism from the World Bank and European Union, especially over the Greek company's extraordinary rights to import oil at a reduced tariff, ultimately yielded a turn in state policy.

By 2004, Hellenic officials complained of daily trouble from the state authorities, including blockages of OKTA's bank accounts in 2003 and claims by state officials that Hellenic had not acquired title to the land upon which the oil refinery stood. Repeated interventions slowed planned investments, Hellenic said.

The result, after eight years, is a complex dispute characterised by multiple grievances on both sides, with the state and Hellenic Petroleum each claiming to have suffered material losses through unfair treatment since the time of the sale.

In advance of this month's ruling, Mr Myrianthis plays down the refinery's importance to Hellenic Petroleum. "We can live without it. We can replace [its output] from Thessaloniki if needed, though that is not our intention."

A ruling in the state's favour could force payouts from the company – although even then Hellenic would not withdraw from the country now, Mr Myrianthis says.

A ruling in Paris in Hellenic's favour would vindicate the company's strategy of "long-term thinking".

Instead, he says he hopes the court will chastise the state, but only mildly. A ruling that is "too one-sided" might serve to reignite political controversy over the refinery – an outcome neither side wants.

Rebuilding a sector, piece by piece

2007-07-05T09:21:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

When Johnson Controls, a big manufacturer of car interior systems, went looking for its newest production site for high-end electronic components, the Republic of Macedonia was not the obvious answer.

The former Yugoslav automotive industry crashed decades ago, and with it the southern republic's role as a components supplier.

Moreover, the US manufacturer bases its European operations almost 2,000km away, in the industrial heartland of Germany's Rhine-Ruhr region.

But Europe's car industry is rapidly shifting east, where producers benefit from cheaper labour costs and spare industrial capacity. Johnson Controls, whose European turnover reached $8.8bn last year, is no exception.

Slovakia – midway bet-ween Germany and Macedonia – has become the prime beneficiary of this shift. Volkwagen opened production there in 1991, and Kia Motors and PSA Peugeot followed last year.

Yet increasingly, capacity in Slovakia is sapped. As component makers rush to supply the new production lines, their operations spill over into other eastern European countries and also beyond the manufacturing centres of Poland, Hungary and the Czech Republic.

For two years, Johnson Controls struggled to identify a new site where production could be linked to a research and development centre it recently opened in Bulgaria. "It was not easy to find a location where such high-end products can be produced, offering the right infrastructures, as well as availability from skilled engineers, within reasonable distance of our engineering centre in Sofia," says Philippe Simon, vice-president of operations for Johnson Controls' electronics division.

But Skopje, 200km away from the R&D centre, offered tax breaks in a free economic zone and ready access to skilled engineers through a Johnson Controls-sponsored programme at the University of Skopje.

The result is a big construction site near Skopje's international airport, the first in the previously empty Bunardzik free economic zone. Steel girders rise high above the foundation of what will be a 6,000 sq m workspace for the assembly of printed circuit boards, to be shipped to a Johnson Controls plant in Namestovo, Slovakia.

The $20m total investment is minute, measured against other auto industry investments in eastern Europe. The new operation will start by employing just 150 workers. But after watching the Republic of Macedonia's previous automotive components industry wither in the wake of Yugoslavia's collapse, local companies hope it will spur regeneration.

Indeed, Johnson Controls is counting on a degree of local renewal. Mr Simon says the company, which expects to be importing components at first, intends to cut costs by buying locally supplied plastics by 2010.

The excess capacity is available. Production by the country's existing manufacturers accounts for 16 per cent of gross domestic product, and on average they operate at just 63 per cent of capacity.

Viktor Mizo, head of the Republic of Macedonia's investment promotion agency, says excess capacity and low average wages put the country in an excellent position to capitalise on leading manufacturers' search for new, reliable markets in eastern Europe. Central European economies already suffer from over-investment and outbound labour migration, he argues, while economies further east lack the stability which, in the wake of the Balkan wars, Skopje now claims.

"Some would look to Ukraine, but given the political situation there, you cannot today see a €1.5bn investment going there. If you cannot go east, go south-east," he says.

The automotive industry's next test of Mr Mizo's sales pitch comes later this month, when London-based Johnson Matthey, the speciality chemicals company, takes a decision on a potential €75m investment in the Bunardzik free economic zone.

In March it signed a memorandum of understanding in Skopje for construction of a plant for catalytic converters. Its board will decide on the deal this month.

Mobile debate is tender matter

2007-07-05T09:19:00.000+01:00

By Eric Jansson
Published by Financial Times, 5 July 2007

Less than a year into the Macedonian government's campaign to liberalise the country's telecom-munications sector, public debate about the issue is heating up.

"Everyone is for telecoms liberalisation, but there are differences of opinion about how to do it," says Mile Janakieski, the 28-year-old transport and communications minister.

His choice has been to let the market work in the fast-growing mobile sector. Keen to challenge the dominance of the country's two existing mobile operators - Deutsche Telekom-controlled T-Mobile Macedonia and Greek OTE's local operator, Cosmofon - the government in February sold a third mobile licence to Mobilkom Austria, the mobile subsidiary of Telekom Austria.

Boris Nemsic, chief executive of Telekom Austria, calls the €10m purchase of a 10-year renewable licence "an excellent extension of our footprint" in the Balkans. The company, aiming to launch local service in September, is likewise launching operations in Serbia, bolstering its Balkan portfolio.

But announcement of Mobilkom's purchase spurred additional market interest. "Many companies came forward saying they were interested in being the fourth," Mr Janakieski says.

The minister soon signalled that a fourth licence might be issued as well. Six companies have since expressed formal interest in a tender, among them Russian and Israeli operators.

Mobilkom Austria was given no warning about a fourth licence. "We did not promise not to publish a fourth tender, and they did not ask. They are strong enough to play on the market," the minister says.

But the move has vexed the new licence-holder. Mr Nemsic says he understands the government's "legitimate political wish to break up the duopoly" but adds: "We have to distinguish political wishes from [investment] logic."

Debate now rages about potential overcrowding in a telecoms market where mobile penetration has already reached 72 per cent, accounting for 60 per cent of the overall telecoms market. T-Mobile Macedonia and Cosmofon, which reject the "duopoly" name, say they have doubts. So do opposition politicians.

Rubin Zareski, chief executive of T-Mobile Macedonia, the leading operator, says he is "OK with a third mobile operator" but asserts that "the market is already full".

Mr Zareski also attacks the analysis on which the government justifies its drive to boost competition. This holds that insufficient competition has let the two existing operators keep prices artificially high.

"If you have a duopoly, that means you agree on prices and prices do not change. But look at two years ago, one year ago, six months ago, and you see there is competition. Prices are dropping - in our case by 30-35 per cent per year," he says. T-Mobile's high profitability, he says, results not from overpricing but from "extremely high efficiency".

Irony runs deeply through this tiff. The government aims to make straight the way for new foreign investors, yet already it risks offending companies that are relative newcomers.

T-Mobile Macedonia's history began just six years ago with the €342m privatisation of the country's state telecoms utility, MakTel. The buyer was Matav, a Hungarian company controlled by Deutsche Telekom and later renamed Magyar Telekom.

Mr Zareski says the government is not acting in a "highly professional" manner - hardly the signal that Skopje intends to send out.

Macedonia must seize chance to depoliticise business

2007-07-04T07:46:00.000+01:00

Macedonia is pledging to curb corruption and depoliticise business; it absolutely must follow through.

By Eric Jansson in Skopje
Published by BIRN's Balkan Insight, 3 July 2007

Governments change and investors’ fortunes follow. It is the iron rule of banana republics: when new ministers take office they get a slice of the action, and companies scramble to redirect “contributions” from the old to the new.

A redeeming feature of the Macedonian government sworn in eleven months ago is that its ministers publicly insist this must not happen here.

Moreover, privately they seem to mean it. The outward evidence of their sincerity is a growing docket of corruption cases in the courts and a startling crackdown on illegal construction, in which authorities are literally dynamiting unpermitted buildings.

One finds inward evidence as well. For example, Vera Rafajlovska, the economy minister, has halted a practice by which she says private companies sometimes sought ministerial “approval” for commercial decisions. It invited corruption, wasted time and created “a huge pile of papers on my desk”, she says – so it is gone.

For companies in Macedonia – and therefore for the future prosperity of the country as a whole – these are important developments. Businesses seeking long-term profits want a predictable investment climate and a fair playing field, so curbing corruption and depoliticising business is essential.

No one claims that the scene is squeaky clean in the southernmost former Yugoslav republic, nor is it likely to be any time soon. Some economists reckon that, if they could measure off-the-books trade and add it to registered economic activity, the country’s gross domestic product would double.

However, through the efforts of two successive governments over the past five years, Macedonians who previously despaired of a day when official corruption would end are starting to believe that, at least, it can be challenged.

This summer, three cases of major investments – two foreign and one domestic – suggest that Macedonia has also reached a turning point in the overall depoliticisation of business. This is a matter of equal importance to the anti-corruption fight, to which it is closely related.

OKTA

The prime case is OKTA, the oil refinery purchased in 1999 by Hellenic Petroleum.

Debates over whether the 32 million dollar privatisation eight years ago was conducted properly, and whether Hellenic has since enjoyed unfair oil importing privileges, have proved inexhaustible. The seesaw of perspectives on the deal, from one government to the next, has always been awkward – a sign that Hellenic has friends in some political parties, none in others, and that its fortunes change when governments come and go.

Meanwhile what has mattered, ultimately, to the economy? Hellenic has not plundered the refinery but upgraded it, preserving jobs and investing more than 200 million dollars – all in the quest for profits and a future share in the wider Balkan market for oil products, in which Macedonia is only a bit player.

Later this month, an arbitration tribunal in Paris is expected to hand down a decision on OKTA’s relationship with the Macedonian state, which should end grumbling about the 1999 sales contract, once and for all.

OKTA has already “normalised” its relationship with the government well in advance of the decision, say Michael Myrianthis, the OKTA chief, and Nikola Gruevski, the prime minister.

Nonetheless, with both sides promising to honour the tribunal’s decision, it should provide a tabula rasa for future dealings. Hellenic’s position, at last, will no longer be influenced substantially by party politics. This promises to place one of the country’s biggest foreign investors on a more stable footing – a very important development.

Ski Centre Kozuf

A seesaw effect similar to the one experienced by Hellenic Petroleum has also dogged the domestic investors behind Ski Centre Kozuf, a new mountain resort being built in the highlands bordering Greece, near Gevgelija.

Their fortunes rose under the VMRO-DPMNE-led government in office until 2002, but they then faced debilitating delays under the Social Democrat-led government that followed.

Angel Nakov, Ski Centre Kozuf’s executive director, says problems began due to local disagreements with a Social Democrat MP. After “two lost years” that included “135 days of full-time inspections by financial and ecological authorities and police” a court decision stopped it. The company succeeded in making peace with the Social Democrats.

Now, with VMRO-DPMNE back in power, the project is really roaring to life. Ski Centre Kozuf has secured an 8 million euro loan from Stopanska Bank, enabling work on the mountain to accelerate.

As with Hellenic, troubles began when the Social Democrats entered government, then subsided midway. The key, however, is that peace has proved durable through last year’s change in government.

The result? More investment and more jobs – precisely what Macedonia needs.

Mobile Telecoms

OKTA and Kozuf are examples of good news. By contrast, the mobile telecoms market is the next big test case.

Since re-entering government, VMRO-DPMNE has followed through on a campaign promise to introduce more competition to a “duopolistic” mobile telecoms market, heretofore shared between just two operators – T-Mobile and Cosmofon.

Whether the companies actually constitute a duopoly is not the point here. What matters is the method by which competition is being introduced.

Without controversy, the government earlier this year published a tender inviting offers on a new operating license. It was won by Mobilkom Austria, the mobile subsidiary of Telekom Austria.

However, controversy began immediately after the sale, when ministers let it slip that a fourth license would also be offered. This profoundly irritated not only Mobilkom Austria but also T-Mobile and Cosmofon, both of which are local subsidiaries of foreign investors – in T-Mobile’s case Magyar Telekom, the Hungarian operator owned by Deutsche Telekom, and in Cosmofon’s case OTE of Greece.

Divisions between political parties are now emerging, with the Social Democrats favouring a more predictable environment for investors in the telecom sector and VMRO-DPMNE actively shaking things up.

This could prove to be nothing more than a disagreement over best policy. But Mile Janakieski, the transport and communications minister, dismisses Mobilkom Austria’s interests with a casual disinterest that could alarm other investors, too. “They are strong enough to play on the market,” he says.

If the government were to continue pushing this line aggressively and opposition parties saw potential traction in challenging it on grounds of fair play, this dispute could easily politicise the telecoms sector – a major source of investment in the country.

However, if they can avoid this outcome even while pursuing their competing policy goals, then Macedonia will have passed an important test.

Notes on a Russian overture

2007-06-05T13:42:00.000+01:00

Aeroflot’s interest in buying Serbia’s JAT Airways is ultimately about European business, not murky geopolitics.

By Eric Jansson
Published by BIRN's Balkan Insight, 5 June 2007

With Kosovo’s political future up for grabs, a common temptation is to view every Russian overture toward Serbia through the lens of geopolitical intrigue. This temptation persists in business as in politics, since successive Serbian governments since 2000 have retained state ownership of large public enterprises, thereby preserving direct state influence over a giant portion of Serbia’s economy.

What does one make, then, of the overtures presently being made by Aeroflot, the Russian state-owned airline, toward its Serbian counterpart, Jugoslovenski Aerotransport, better known as JAT?

Returning from meetings on Russia’s Black Sea coast, Velimir Ilic, Serbia’s infrastructure minister, last week delivered the news: not only does Aeroflot hope to purchase JAT, it promises to invest lavishly, pay off the Serbian carrier’s sizeable debts and – here’s the political miracle – maintain JAT’s existing workforce of 1,700 employees.

The deal is not done, only proposed, but from the perspective of government ministers in Belgrade it must look sweet. Privatisation of public enterprises is on their agenda, but, with labour unions unwilling to give significant ground, the way forward looks difficult.

A job-saving deal over JAT could prevent some unneeded headaches while helping to preserve some of the political capital Serbia’s new government will need if it intends to move forward with the more urgent restructuring and privatization of bigger public enterprises like Elektroprivreda Srbije, the power utility, and Naftna Industrija Srbije, the oil company.

So, undoubtedly from the Serbian side, politics is in play – though much less Kosovo than the state budget.

However, to view the proposed deal as seen by Aeroflot and its owner, the Russian state, one must look beyond Serbia and the Balkans to the evolving dynamics of European economy, paying particular attention to the fast-changing airline industry.

Here one finds a dizzying variety of factors in play. These include the underperformance of big, traditional airlines based in slow-growing western European economies; the European Union’s “open skies” containment of its own most dynamic competitors; the novel reality of competition between Russian airlines operating internationally; the increasing scarcity of “virgin” markets in which emerging international competitors can establish new hubs; and a regional market left exposed by the failure of Balkan airlines to establish dominant market share in southeast Europe.

First, a look at big, underperforming western airlines – specifically Alitalia, in which the Italian state holds a 49.9 per cent stake. Alitalia is ailing, and Rome wants out. The Italian government aims to privatize 39.9 per cent of the carrier, if not its entire stake. Aeroflot, by contrast, is currently buoyed financially by booming demand for air travel in a swiftly-growing Russian economy, and in Alitalia it sees for the first time an opportunity to expand westward through acquisition.

For Aeroflot, an Alitalia deal would utterly dwarf any deal with JAT. Aeroflot’s fleet of 92 aircraft is smaller than Alitalia’s fleet, yet almost seven times bigger than JAT’s. Both Aeroflot and Alitalia are members of the powerful air carriers’ SkyTeam alliance, in which their combined capacity would be formidable.

With the Balkan market placed geographically between Moscow and Rome, Aeroflot as an owner of both Alitalia and JAT would be well positioned as a powerful force in Balkan air travel, internally and externally.

Under such circumstances, Aeroflot would be an indirect beneficiary of the conservatism and protectionism that, while fading, still characterises the western air industry.

Twelve months ago, the European Union signed a deal with countries of the western Balkans, setting in place preliminary agreements to establish a European Common Aviation Area, including non-EU member states, by 2010. However, the EU stopped short of extending its “open skies” regime to the western Balkans, even as it extends it to markets as far afield as the United States and, potentially, Japan.

The consequence is less competition in the Balkan skies, including non-entry for the EU’s most dynamic competitors, the discount airlines, some of whom have lobbied Brussels unsuccessfully for equal-terms access to the Balkan region.

In such a market, Aeroflot, a conservative company itself, sees a chance to compete – and compete it must, for other Russian airlines are pushing it to do so.

Last month AirBridge, a consortium led by Boris Abramovich, chief executive of KrasAir, a major Russian carrier, completed its purchase of Hungary’s indebted national carrier Malev. The purchase will give KrasAir a vital springboard for competition in central Europe, which Aeroflot thus far lacks.

Yet, with a western “outpost” in Budapest, KrasAir will find itself pressed hard by big EU airlines, for Hungary is “open skies” territory. By contrast, opting to compete from Belgrade, Aeroflot could hope to benefit comparatively from weak competition in the immediate surrounding region. Most major European carriers run just one route in and out of Belgrade, and none compete for the small but fast-growing Balkan market.

With Belgrade as a regional hub, an Aeroflot-owned JAT could be expected to exert greater commercial leverage than any other carrier in the region, while exploiting international outlets as well.

What’s in it for Aeroflot is money and market share, pure and simple. If such a deal goes through, Belgrade’s romantics may well speak of Orthodox brotherhood, but once again they will have lost the plot.

Life on the amputation waiting list

2007-06-02T15:03:00.000+01:00

By Eric Jansson and Neil MacDonald
Published by Financial Times, 30 May 2007

Even in Serbia’s sharpest moments of division, one idea seems to unite the country. “The only issue we can almost completely agree on,” says Slobodan Milosavljevic, a government minister from the pro-western Democratic party “is that Kosovo is an integral part of Serbia and that it has to stay Serbian territory.”

Unfortunately for this overwhelming majority, which comprises Serbia’s pro-European Union reformers, ultra-nationalists and everything in between, much of the rest of the world disagrees.

This year, members of the United Nations Security Council aim to forge an agreement on the “final status” of Kosovo, a breakaway province of 2m people. While international negotiations have rolled on, many people on the ground – Kosovo’s ethnic Albanian secessionists included – are beset by feelings of powerlessness and drift. “Kosovo is poisoning the political atmosphere,” says Dejan Anastasijevic, one of the few Belgrade journalists to have backed the notion of “supervised independence” being advanced by the UN’s special envoy for the province.

Kosovo has been occupied by Nato since 1999, when the western military alliance intervened to stop the former Yugoslav regime’s persecution of the province’s 90 per cent ethnic Albanian majority. The intervention triggered an escalation in which thousands perished and hundreds of thousands fled as refugees. The UN has since overseen the province but struggled to resolve ethnic tensions that continue to flare, frequently against Serbs, and most disastrously in a three-day pogrom in 2004.

Because the previous Security Council deal on Kosovo, Resolution 1244, reaffirms former Yugoslav borders, Belgrade argues that there is no legal basis for imposing independence. Yet because Nato intervened on the ethnic Albanian side and the US and other countries have issued veiled endorsements of independence, Kosovo’s one-time guerrilla leaders likewise consider their goal within reach.

International debate over the province deprives both sides of a way to break the deadlock. Earlier this month, Sergei Lavrov, Russia’s foreign minister, reiterated Moscow’s view that the proposal advanced by Martti Ahtisaari, the UN envoy and former Finnish president, was “unacceptable”. Whether Russia, which publicly sympathises with the Serbs, would use its veto in the Security Council to block a resolution permitting independence remains to be seen. But western diplomats, who once doubted such a scenario would arise, are no longer sure. Vladimir Putin, Russia’s president, showed little flexibility this month at an EU-Russia summit and a bilateral meeting with Condoleeza Rice, the US secretary of state.

Western diplomats have raised the possibility of a breakthrough “within weeks”, but deadlines over Kosovo have repeatedly slipped before. The six-nation Contact Group consisting of the US, Russia, Britain, Germany, France and Italy pledged to resolve outstanding status issues in 2006, warning that postponement would increase the risk of renewed bloodshed.

Bratislav Grubacic, a Belgrade-based political commentator, says a return to war is out of the question. “Serbia does not have the capacity to go to war. We have an army of 30,000, under equipped, and the police will not go either.” Yet this does not mean Belgrade lacks leverage. “Serbia can be a factor of destabilisation by being stubborn, prolonging the situation and provoking the ethnic Albanians, so Serbia can say, ‘look, they are to blame’,” Mr Grubacic says.

Some analysts predict a surge in violence even if the ethnic Albanian majority is granted “supervised independence” – which in practice could mean a transition to eventual independence with strict political oversight, an extended Nato-led military presence and policing under the European Union, resembling the international regime in Bosnia-Herzegovina.

Some Serbian government ministers imply that “maximal autonomy”, sometimes described as “everything but a seat at the United Nations” for Kosovo, is the only way to avert bloodshed. “What we are talking about here is one logical solution, and another one that is against international law, against elementary economic and political logic, and that some countries are trying to impose,” says Aleksandar Popovic, a government minister from the prime minister’s conservative Democratic party of Serbia.

“You know, the 1938 Munich Agreement was also imposed. Part of a democratic country was removed from it by the decision of some other players, and they said it was because we would have peace, and you remember what happened later. I do not see a better parallel.”

Kosovo’s ethnic Albanian leaders refuse to alter their position that Serbia, through the former regime’s cruel treatment of ethnic Albanians before and during the war, lost the moral rights to the province. They decry Belgrade’s “cynical” citations of international law.

Optimists hope relations between leaders in Belgrade and Pristina, Kosovo’s provisional capital, will improve after an outcome is determined. Last year tensions over another sensitive secession died down after Montenegro voted to dissolve its political union with Serbia. But Montenegro was a separate republic before it broke away. Kosovo remains legally a Serbian province. despite its UN administration and Nato occupation.

Partition could yet emerge as a compromise option, but only with further negotiations under less restrictive terms, some analysts say. Such a move would introduce additional complexities, likely prolonging the debate further. Western diplomats warn of endless Serb stalling, while Serb negotiators insist that “serious talks have not yet happened.”

A siren song in Europe's 'ecological black hole'

2007-06-02T15:00:00.000+01:00

By Eric Jansson
Published by Financial Times, 30 May 2007

If planners in communist-era Yugoslavia had prized public health over industrial might, perhaps they would not have built a massive oil refinery, petrochemical complex and fertiliser plant upwind from the humble city of Pancevo, 20 km north of Belgrade.

If Nato, when it bombed Serbia in 1999, had prioritised the protection of Pancevo’s civilian population above the destruction of these facilities, perhaps it would not have smashed them all at once. The resulting infernos unleashed what local residents grimly quip was like a “science experiment” of intermingled toxins, wafting into town and seeping into the nearby Danube river.

But the 75,000 residents of Pancevo and 45,000 in surrounding villages must live with the toxic legacy of their 20th century as it is, not as they would wish it to be. Many are determined that the current century should be kinder to them. Hence, green activism – which barely registers a blip elsewhere in Serbia – is locally on the ascendant.

Few people in the Balkans have campaigned more justifiably for an environmental clean-up. Last year a survey commissioned by the European Commission and the Council of Europe called Pancevo “the ecological black hole of Europe”.

In January, an air quality study conducted by the Italian National Research Council’s Institute for Atmospheric Pollution found that benzene levels in Pancevo’s industrial zone were 10 times greater than the European Union limit of five micrograms per cubic metre of air.

Residents complain of physical suffering. “Sometimes you feel like your stomach is upside down, you have a headache, you’re slow, drugged,” says Nenad Zivkovic, a reporter for Pancevac, the city’s weekly newspaper.

Nonetheless, local campaigners say they have struggled to persuade the government that their plight is urgent. They disagree with political leaders in Belgrade on how best to measure pollution. Outside interventions such as the Italian study have so far failed to bring the two sides into full agreement.

Aleksandar Popovic, the Serbian government minister in charge of environmental affairs until earlier this month when he switched to energy and mining, says Pancevo has created “its own rule” for measuring pollution, contradicting standard EU methods the government prefers to observe.

Where Pancevo’s emergency warning system measures hourly averages of pollutants, including benzene, EU limits are based on annual averages. In Pancevo’s urban zone, the annual average benzene contamination last year was almost nine micrograms per cubic metre – excessive but still within the EU’s limit for industrial zones, says Mr Popovic.

“Benzene is carcinogenic only if you are exposed to a very large amount over a very large amount of time, years and decades. So we can go through 120, 160, 1,000 [micrograms] inhaling it briefly, and nothing will happen to us,” he says.

Local activists are unmoved. Zoran Stanizan, a high school teacher who has spearheaded a series of public protests, says that recent hourly averages have exceeded 220 micrograms per cubic metre, a level considered seriously unsafe by residents. Under such conditions, “the clouds of pollution sometimes look like British fog”, he says.

Mr Popovic and other ministers assert that Pancevo’s environmental clean-up has moved forward with remarkable speed. For example, all but 19 of the oil refinery’s formerly leaky 140 storage reservoirs, which the government calls the main source of unwanted emissions, have been rebuilt, air tight. Yet state officials receive little credit for their efforts, locally.

Instead, they have been hit by efforts to shame them into faster action. Last November, when Boris Tadic, the Serbian president, made a rare appearance in Pancevo, local officials sounded the city’s emergency warning sirens upon his arrival. The incident placed the president in an awkward position, but Mr Stanizan claims it yielded a flurry of positive attention from public officials, including a fresh visit from Mr Popovic and money for emergency repairs.

Much work remains to be done. But, if nothing else, Pancevo’s siren story shows that some Serbian citizens, arguably Europe’s gloomiest cynics, have started to believe again that they can directly influence their elected leaders.

Doing business in Serbia's unpredictable climate

2007-06-02T14:58:00.000+01:00

By Eric Jansson
Published by Financial Times, 30 May 2007

For one nervous moment earlier this month, Vuk Hamovic, one of Serbia’s most successful private businessmen, thought political risk might force his company out of the country. Energy Finance Team (EFT), his electricity trading and investment group, chose at the end of 2000 to locate its trading floor and largest office in Belgrade. The move marked a moment of personal triumph for Mr Hamovic.

Based in London through the 1990s, he had helped bankroll Serbia’s democratic opposition under the regime of Slobodan Milosevic, the former Yugoslav president. The democratic bloc’s sudden ascent to power in October 2000 signalled Mr Hamovic’s moment to invest in his native country.

EFT has since grown quickly. Now operating in 17 central and east European countries, it posted turnover of almost €600m in 2006.

But when power-sharing negotiations within Serbia’s “democratic bloc” faltered and ultra-nationalists appeared poised to re-enter government, Mr Hamovic and his colleagues drew up emergency plans that would have moved EFT’s trading floor from Serbia to Hungary. If ultra-nationalists had taken control, “we would have packed our bags and gone,” he says.

Risks to EFT’s operations would have been acute, since it is feared that an ultra-nationalist resurgence would raise the threat of international sanctions. “Even a 48-hour blockage could have triggered defaults on key contract obligations, with huge implications,” says a company spokesman.

It never happened. Risks vanished when Serbia’s democratic reform parties cut an 11th-hour deal blocking the ultra-nationalists from power, under intense diplomatic pressure from the US and the European Union.

Yet EFT’s flash crisis of confidence provided a stark reminder of how unpredictable Serbia’s investment climate remains, despite the country’s surging economy. Serbia’s reformers have clung to power since 2000, but they have been divided throughout by competing visions and bitter partisan rivalries. Amid the infighting, economic reforms have sometimes raced forward and sometimes stalled.

Few companies have felt compelled to consider leaving altogether, as EFT did. On the contrary, investors’ interest is growing quickly as Serbia consistently registers brisk economic growth while showing plenty of capacity for more, even by east European standards.

The ultra-nationalists’ brief chance at power was anomalous – many big investors ignored it – and the market’s confidence rose again when it passed.

However, many companies find themselves stymied by failures of state officials to adhere to timelines for the conception and introduction of reforms. Political wrangling frequently stands in the way of faster economic growth.

A prime example is the restructuring and privatisation of large, inefficient public enterprises, none bigger than the state-owned oil company Nafta Industrija Srbije (NIS) and electricity utility Elektroprivreda Srbije (EPS). Action on both was held up for years under the last government of Vojislav Kostunica, which focused more intently on Kosovo’s status and constitutional reform before calling inconclusive early elections that extended the delay.

With Kosovo’s status up for grabs this year, the government’s primary focus is likely to remain elsewhere. But investors still regard restructuring and privatisation as an important opportunity and an important test for the new government.

Mr Kostunica is promising to act. The prime minister has announced plans to attract new investments worth €3bn to the energy sector by 2010. A large portion of this sum is anticipated in the form of privatisation revenue from NIS, while one-third will cover construction of a new gas pipeline. Restructuring of EPS is likewise to go ahead, as should privatisation of big state-owned insurers.

Branko Pavlovic, a former privatisation chief under Mr Kostunica who now advises trade unions on privatisation issues, predicts the government will bide its time. NIS and EPS together employ about 80,000 workers. Although their unions officially profess support for privatisation, as Mr Pavlovic says he urges them to do, he also claims that union officials are poised to resist “realities of privatisation” such as slow wage growth.

A clash with these big unions will give government officials an excuse to avoid effective restructuring and privatisation of the big state-owned companies, Mr Pavlovic says.

“They will spend as much time as possible not doing it, and they will try to maintain as much control as possible.” This is because NIS and EPS are not only companies but patronage machines, each providing offices for “more than 1,000” appointees, typically selected along party lines.

Investors hope more pertinent market criteria will determine the fates of NIS, EPS and other big state-owned companies. But some acknowledge that the government must proceed with care. For example, Mr Hamovic, who insists that EFT has no interest in buying EPS despite persistent rumours, argues that the electricity utility cannot be effectively restructured until electricity prices are allowed to rise closer to international market levels. “There are no overnight answers,” he says.

Serbia's economy shows plenty of room for improvement

2007-06-02T14:55:00.000+01:00

By Eric Jansson
Published by Financial Times, 30 May 2007

Pedestrians in the underground walkway beneath Terazija, one of downtown Belgrade’s busiest avenues, stroll past one of Serbia’s most unusual retail ventures. Hangup, a minuscule but stylishly-appointed shop, is just big enough to accommodate a shop assistant, perhaps two customers and Hangup’s merchandise. It specialises in one thing only: wooden coat hangers.

“I buy my coat hangers there. I think everyone does now,” says Danica Popovic, a liberal economist at the University of Belgrade.

As elementary as Hangup’s business is, Mrs Popovic says that the peculiarities of Serbia’s post-socialist economy play a role in ensuring its survival. Where else in Europe can a hyper-specialised retailer of a low-priced item hope to survive in a busy town centre location? One factor is Serbia’s uneven application of bankruptcy law to larger companies, says Mrs Popovic. Robna Kuca, the Yugoslav “socially-owned” retail chain where Belgraders typically bought coat hangers during the communist era, has slumped to a state of near-collapse.

Because it declared bankruptcy in advance of European-standard legislation introduced last year, and because Robna Kuca’s creditors also declared bankruptcy, the process has been muddled. The chain’s privatisation was expected to be this year, but political obstacles got in the way.

Another factor is lingering market isolation. While a few big Europeans retailers have entered the market, operators such as Tesco, Carrefour and Ikea have so far stayed away.

Regional companies loom larger. Global sellers of fast moving consumer goods have yet to open full-scale operations in Serbia. Local businesses and consumers thus remain insulated, in part, from the full impact of globalisation, including the super-abundance of inexpensive products undercutting local specialist suppliers.

“The coat hanger salesman is one of the winners in this situation, but Serbia as a whole is a loser,” Mrs Popovic says.

When economists say Serbia’s economy continues to operate far below capacity, this is often what they mean. The economy is growing impressively, but there remains vast room for improvement.

Gross domestic product (GDP) grew about 6 per cent last year, a steady repeat of 2005. Inflation, which dogged Serbia two years ago, has been tamed with the help of a determined central bank, shrinking last month to an annual rate of 3.3 per cent.

A robust banking sector, now 80 per cent owned by European Union-based banks after a series of big privatisations, is spurring rapid rises in commercial investment and consumer spending.

Despite recent political uncertainties that have stalled some market reforms, successful privatisation deals demonstrate Serbia’s renewed magnetism as the largest market in the former Yugoslavia, with strong interest expressed from both western and eastern European investors.

Serbia’s effort since 2000 to transfer ownership and economic initiative to the private sector has clearly worked, Mrs Popovic says.

Trade statistics offer vital evidence. Total exports are up by 370 per cent since 2001, growing faster than imports, although import volume is still double the level of exports.

The coat hanger shop’s owner and supplier typifies the trend. Weber International, a private Serbian company, manufactures 3m locally-made coat hangers a year, exporting to Germany and Italy on top of sales in Serbia.

Radovan Jelasic, the central bank governor, says he is “very, very confident about where Serbia is heading”. Yet he adds that more can be done to liberalise the economy, which he describes as “captive” to large, inefficient public enterprises.

“We have already broken some of the big taboos. Serbs now know it does not matter if the company that owns your bank is not Serbian, but they still think that the question of who owns the power lines running down your street is a patriotic issue,” Mr Jelasic says.

Restructuring and privatisation of large public enterprises – such as the power utility, oil company and the state-owned companies that still dominate the insurance sector – is essential, the governor says.

But he adds that sales this year would be premature: “This year would be better spent preparing strategies for privatisation rather than taking concrete steps.”

The primary risk is that political will may falter in the near term, as Serbia’s discordant pro-democratic bloc sets to work in the new government installed earlier this month, says Vuk Djokovic, director of CEVES, the Centre for Advanced Economic Studies.

“The mid-term prognosis for Serbia’s economy is good, but the capacity of this administration to go on with reforms is limited. Political will is lacking throughout the whole civil service,” Mr Djokovic says.

Only when reformers succeed in opening the market further will the post-socialist hangups that have become fixtures of Serbia’s economic landscape eventually disappear.

Additional reporting by Vesna Hadzivukovic

Taming Serbia's wild raspberries

2007-06-02T14:44:00.000+01:00

By Eric Jansson
Published by Financial Times, 30 May 2007

The refrigerated trucks come under cover of darkness, rolling through the little valleys of central Serbia’s fertile fruit-growing region, around the farming town of Arilje. In June and July, when the raspberry harvest comes in, thousands of private smallholders rush to sell their freezer-friendly Willamette berries to the highest bidder. Many cut deals with the pirate truckers who pay in cash, load up at night and leave by morning, local industry experts say.

Some growers benefit financially from these on-the-spot deals, although the pirates are notorious for pricing high and then paying low. But the losers are many. Growers lose the security of guaranteed contracts, legitimate traders lose predictable supply, and the state loses revenue in unpaid fees and evaded taxes.

The biggest loser is Serbian agriculture as a whole. Once the world’s largest exporter of frozen raspberries, Serbia now ranks third, according to the Serbian Chamber of Commerce.

Mira Bojovic, deputy general manager at Zemljoradnicka Zadruga Arilje (ZZ Arilje), the region’s largest farmers’ co-operative, speaks of “chaos in the market”. Piracy is just one symptom, not the cause, of broader problems faced by Serbia’s farmers, who toil in a “legal vacuum” created by unfinished economic reforms.

ZZ Arilje is a prime example. The co-operative boasts impressive capacity, with more than 3,000 smallholders in its membership. In a good year, it can produce and export 8,000 tonnes of raspberries, about 9 per cent of Serbia’s raspberry exports. But in 2006 it exported just 6,000 tonnes, due directly to colder weather and indirectly to market woes.

A big difficulty is access to credit. Legislative reforms introduced since 2000 have not taken into account the existence of co-operatives such as ZZ Arilje, a complex private, member-owned agricultural organisation that pre-dated Serbia’s communist-era collective farms. “Ownership transformation” is thus an urgent need, Mrs Bojovic says. “The capital of the co-operative is not legally defined yet, so we are not in a position to take advantage of state loans.”

Meanwhile, the market has been flooded with new companies over the past two years – small-scale cold storage and trading companies formed by individuals specifically to take advantage of state loans with fixed 2 per cent annual interest and built-in grace periods for late payment. The commercial credit available to ZZ Arilje is much more expensive with interest rates of about 2 per cent a month and no grace period. This means that new entrants can operate comfortably with much smaller profit margins than market leaders can afford.

Under such circumstances, ZZ Arilje’s members, none of whom farms more than two hectares, are increasingly tempted to sell shares of their harvest to small traders. Such defections sap the co-operative’s efficiency, to the detriment of its member-growers.

While domestic market competition is flourishing, such imbalances have become a drag on Serbian raspberries’ international competitiveness, says Petar Radosavljevic, general director of Malina Produkt, a large cold storer and exporter.

Local demand for Serbian raspberries has been driven up sharply by the many new cold stores and traders, while harvest volume and international demand grow less quickly. Consequently, local wholesale buyers last year paid up to €0.80 per kilogramme. By contrast, competitors in Chile, another important raspberry growing country, paid just €0.50 per kilogramme, Mr Radosavljevic says.

One way to restore Serbia’s international berry clout, the big exporters say, is to diversify into blackberries while adding value, for example, with flashy packaging and branding. Another way is to complete economic reforms and establish a better legislative basis for fairer domestic competition. Slobodan Milosavljevic, Serbia’s new agriculture minister, may do just that. He carries pro-market credentials as a cabinet veteran from the country’s first reform government under Zoran Djindjic, following the pro-democracy putsch in 2000.

“Serbia desperately needs economic reforms to be continued and finished in the next few years,” Mr Milosavljevic says. Part of this work will be closing legal vacuums such as the one in which ZZ Arilje is stuck. But to do this, the government must address in finer detail Serbia’s most fundamental and sensitive post-socialist reform issue – how to define and protect private ownership in law. It will not be easy.

Like living in a Chagall painting

2007-01-15T10:40:00.001Z

By Eric Jansson
Published by Financial Times, 13 January 2007

I met the old man in a kitchen. Whose kitchen I cannot say. It was impossible to tell who lived where in Lasi, the tiny village deep in Latvia’s glorious countryside where I had holed up for the weekend at the invitation of a friend.

Everyone, including the villagers’ dogs, a comic parade of mutts lorded over by a motherly shepherd bitch, wandered in and out of each other’s creaky wooden houses, passing through open doors with nary a knock or holler. They rummaged through each other’s refrigerators, catnapped on each other’s sofas, used each other’s outhouse toilets and sweated themselves clean in the same pirts, the scorching communal sauna.

From the moment I left my car on the rutted track, waded through the chest-high cow parsley and inserted myself into Lasi’s jolly rhythm of life, I became the beneficiary of these people’s magnificent capacity to share.

At the kitchen table sat the wizened old man, one eye squeezed theatrically into a squint and the other, sky blue and bulging in my direction, sizing me up sceptically. With his massive manual labourer’s hand he grabbed the vodka bottle. He slid a second glass out into the middle of the table and filled it for me, to the rim.

It quickly became evident that my paltry Latvian vocabulary was inadequate for the quality of conversation required on the occasion. But the old fellow, bursting with a lifetime’s supply of bittersweet anecdotes and folk wisdom, was willing to employ his surviving Soviet-era Russian if I was pleased to drink with him.

“Amerikanets”, he called me when I explained I grew up near Chicago. The name stuck all weekend, though, as he refilled my glass again and again, I, of course, forgot his.

As the vodka flowed, we traded anecdotes, political philosophies and notes on faith. The old man served up an account of his war against the Red Army six decades ago, some thoughts on the lines dividing western and eastern Europe (“Russians are Asians dolled up in European costume”) and a hearty denunciation of the Lenin cult. I answered with tales from my stint on Capitol Hill in Washington, a view on the origin of justice as perceived by citizens in western democracies and a wordy moan deriding the effort of modern states to pose themselves as gods above men.

Time arrived for the pirts. The men, about 10 of us, tramped back through the cow parsley, stripped under a blazing sun and climbed into the little board-and-nail shack. The interior greeted us with its burning breath. The old man scrambled on to the top tier and I followed.

We all whipped each other with birch branches, dunked heads in bucketfuls of water and passed around drinks to replenish our fast dehydrating bodies. Everyone lasted 20 minutes but after that, one by one, they began to give out. “Enough,” a man would say, leaving the pirts and collapsing into a bathtub full of cold water propped outside. The old fellow and I stayed put, layered in sweat and shining in the candlelight, until we were alone.

“Amerikanets! What are you doing in here still? We’re the last. I thought you Americans were soft, but you’re a man!” he roared, clasping my arm and shaking it. I was woozy but I beamed in the darkness. Out he went. I took another minute to revel in my victory of endurance, then stumbled to the cold tub.

The nap that followed, taken in a fallow field shaded by a giant oak, was vivid with dreams. My Saturday in Lasi already felt like a Chagall painting. The balmy summer afternoon dozed on in perfect stillness but for the buzzing bees, until the sudden blast of a nearby shotgun startled me to my feet. Karlis, the local Soviet-Afghan war veteran, came striding through the grass, shooting and bellowing: “Time for a swim!”

Men and women piled into cars. We bounced our way to a nearby bend in the mighty Daugava, Latvia’s section of the river Russians call the Dvina, flowing west to the Baltic sea. At the riverbank, we clambered down through brush and boulders to the shimmering water’s edge.

No sooner had I removed my shirt than my resolution began to wobble. Karlis had already run ahead. I saw him, stark naked, charge like a bull into the river and dive in, followed by two women, equally bare and yelping with delight. The others likewise disrobed to the last thread – men, women and children together, some 20 friends and relatives.

Prudish instinct held me back but soon my restraint felt absurd. So I did it. Like an audience member at Stravinsky’s Rite of Spring forced suddenly to join the cast, I plunged in, starkers. This clearly pleased the old man, bronzed head to toe from a thousand previous dips of the same kind. He laughed loudly then dived beneath the surface.

European Christianity reached nowhere later than the Baltic states, where in the 13th century it arrived masked in the ghastly armour of the Teutonic knight. Histories now recall how native Livonians in those day ran to the rivers and ponds to “wash off their baptism” when the invader was away. Amid the splashing, shouting and show of flesh, I wondered if our romp in the Daugava physically resembled those ancient scenes.

Swimming made for pleasurable work against the chilly river’s relentless westward flow. But a few minutes of going nowhere wore me out so with some others I retreated to the reedy bank, panting, to collect stray clothes and bask in the sun.

White butterflies flapped paper wings in the tall grass. Fat bumblebees climbed precariously over the petals of bobbing wild flowers. Laughter rang out from the far side of the river. Soon we would drive back to Lasi for supper and another round.

Testing the limits of intervention

2007-01-02T16:07:00.000Z

By Eric Jansson
Published by Financial Times, 20 December 2006

W hat will be the political legacy of more than a decade of international intervention in Bosnia-Herzegovina?

Few experts have answered this question more provocatively than the European Stability Initiative, a think-tank founded in a Sarajevo café seven years ago and now based in Berlin. Researchers there argued three years ago that, although the peace achieved in 1995 had laid a foundation for future stability, ongoing involvement by the international community had infantilised Bosnia’s domestic political leadership.

Successive UN-appointed high representatives have wielded powers to impose or reject laws, to back elected politicians and ban others from office. ESI called this situation an outrage. Bosnia resembled a “European Raj”.

Vigorous international intervention in Bosnian politics had reached the point of diminishing returns, the think tank said. The high representative had grown into a de facto executive whose farthest-reaching powers – a set of extra-constitutional levers called the Bonn powers – should no longer be used.

The UK’s Paddy Ashdown, the previous high representative, left office last year after using the Bonn powers frequently and aggressively in an effort to prepare Bosnia to fly on its own.

Christian Schwarz-Schilling, the veteran German parliamentarian who became high representative in January this year, is a staunch proponent of the ESI perspective. The resulting changes in the workings of Bosnia’s political system, from Lord Ashdown’s time in office until today, have therefore been immense.

A friend of the Berlin think-tank with a long background as an international mediator in Bosnia, Mr Schwarz-Schilling took up his post in early 2006 as the choice of Angela Merkel, the German chancellor, whose turn it was to select a candidate. He brought with him an ESI member, Chris Bennett, as his spokesman.

The infusion of anti-interventionism into the Office of the High Representative, an international office established on an interventionist premise, has not been universally welcomed. Mr Schwarz-Schilling endures much fierce criticism behind his back, even from OHR staff. Yet he is keen to defend a record that, according to his critics, has been mostly “doing nothing”.

Taking a hands-off approach may have caused some backsliding, he says, but “when we intervene, the truth does not rise to the surface”.

One of his highest-priority jobs is to determine whether his job can be eliminated next June, when the post could be downgraded to that of a European Union “special representative”. The EU supervisory position envisaged for Bosnia would carry fewer powers, in effect shifting the country from post-war semi-protectorate to fully sovereign status. When the international committee formed under the Dayton peace treaty makes its final assessment in February, “the question has to be really open”, he says.

Mr Schwarz-Schilling says he has not yet made up his own mind about the closedown date, but a retraction of the Bonn powers would be “too dangerous” at this moment. The country’s reform agenda is in a “very bad” state, with local political leaders failing to take sufficient responsibility for their own proposals – some of which would bankrupt the state if allowed to proceed.

Before Bosnia’s October general elections, the international community suffered a significant failure when a US-drafted proposal for constitutional reform failed narrowly to attract the required two-thirds support in the state parliament. That disappointment has left the US and EU without a clear plan for strengthening the domestic political system to ensure readiness for sovereign rule.

“We have no starting point at this time for constitutional reform,” Mr Schwarz-Schilling says.
Some senior European diplomats describe 2006 as a grim year for Bosnia. Yet Mr Schwarz-Schilling says there has been at least one big breakthrough. “Before I came, there was an illusion that everything was great. Now there is not.”

Yet the OHR remains, as the ESI pointed out, the country’s de facto executive.

With the relaxation of authority at the top, Bosnia’s elected leaders have tested the limits of international patience.

Milorad Dodik, the dynamic prime minister of Republika Srpska, the Bosnian Serb sub-state, raised the high representative’s ire by floating the idea of a referendum on independence. Such secessionist talk is the ultimate taboo in post-war Bosnian politics. While no one denies that the referendum would gain overwhelming support from Bosnian Serbs, the inviolability of Bosnia-Herzegovina’s borders as an ex-Yugoslav republic were a central plank of the Dayton accords.

Lord Ashdown might well have fired him outright. Mr Schwarz-Schilling’s reaction was more tentative. He spoke about sacking Mr Dodik, but then backed off. A Bosnian Serb political cartoon showed Mr Dodik casually urinating in Mr Schwarz-Schilling’s eye. Not many years ago, even the cartoonist would have faced international sanctions.

Mr Schwarz-Schilling insists he was “not outplayed” by Mr Dodik, even if the incident “did damage”. The Bosnian Serb leader “now knows that a referendum is not a possibility”.

Mr Dodik has strengthened links to Serbian leaders in Belgrade. Meanwhile the Bosnjak-Muslim and Croat members of Bosnia’s tripartite presidency insulted their Serb counterpart – a member of Mr Dodik’s party – by leaving together, unannounced, for a meeting with Stipe Mesic, president of Croatia.

Haris Silajdzic, the Bosnjak president, shows little appetite for painstaking diplomacy despite his relentless insistence that multi-ethnic rule can work. He even attacks the constitutional viability of the three-member presidency to which he has been elected. “It’s ridiculous, for God’s sake, a merry-go-round.”

Yet the president says that the US and EU, in particular, played with fire when lobbying for constitutional change this year. The proposed amendments would have enhanced “entity-based” voting in the state parliament, further cementing the powers of the Bosnian Serb sub-state. “It was practically the dissolution of the state,” he says, adding that it convinced some Bosnian Muslims previously allied to the US that Washington is no longer a friend.

Many true Bosnians from all ethnic groups remained peaceful despite facing the gravest threat during the war, Mr Silajdzic says. The international community should keep its high-mindedness to itself. “They come and lecture us on civility? I mean, come on.”

It may be time for Mr Schwarz-Schilling’s hands-off approach. But the initial results are not heartening.

Doin' the Kalashnikov

2007-01-02T16:03:00.000Z

By Eric Jansson
Published by Financial Times, 20 December 2006

How to define the borders of a region when the usual measures – economic, political, cultural and topographical – overlap confusingly?

In the Balkans, one way is with music. Driving south-east from Austria, turn on the car radio and scan for unfamiliar sounds. Where the warbling melodies start, you’re crossing in. Where they dominate the dial, you are there.

By the time you get to central Bosnia-Herzegovina, you are fully submerged. All the hallmarks of Balkan music – the singers’ tortured warbling, the tonal structures modestly challenging to the western ear, the pounding beats of pumped up “turbofolk” pop songs – are unrelenting. Not just Bosnjak, Serb and Croat influences but Hungarian, Roma, Turkish and other sounds blend with the inevitable doses of rock n’ roll and hip-hop.

Balkan music is a volatile concoction. Though instantly identifiable, it can also be difficult to define. Selling it outside the region is even harder.

Yet at least one of its practitioners has found a way to shape Balkan music appealingly for a global audience. Goran Bregovic, a Sarajevan of mixed Serbo-Croat parentage, left Bosnia during Yugoslavia’s painful collapse. He has since lived in Paris, returning to Bosnia for holidays and gigs.

Formerly a rock n’roller with the Yugoslav-era band Bijelo Dugme (White Button), Mr Bregovic, 56, now works with broader orchestral forms. His compositions charm a broad international audience, although many listeners do not know him by name.

He frequently composes for the cinema, most recently contributing to the score for Borat, Sacha Baron Cohen’s wildly successful spoof, which Mr Bregovic predicts could prove “socially as important” as Charlie Chaplin’s 1940 parody, the Great Dictator.

“Humour is a higher form of communication,” he says. Like other artists from black-humoured Bosnia, Mr Bregovic deploys it powerfully and sarcastically in his music.

Among the original compositions he performs with his brass-heavy touring orchestra is a wild song called Kalashnikov, after the ubiquitous AK-47 assault rifle. Punctuated with blurting horns and hearty cries of “Boom! Boom! Boom! Boom! Boom!” the song manages to convey both a gleeful, devil-may-care will to destroy while delivering, through its conscious excess, a subtler message that perhaps the listener should care.

It may be easier to joke like this in Paris than in Sarajevo. At the executive level occupied by the international community in the Bosnian capital, diplomats do their utmost to infuse public life with a distinctly humourless political correctness – the antithesis of the whimsical, combative Balkan culture that many say perpetuated the war. Songs such as Mr Bregovic’s are a reminder of the grittier, franker culture that prevails at street level.

He manages to pose himself both as an advocate of inter-ethnic tolerance and as a battler against homogeneity in an age of globalised tastes and perspectives.

“Fortunately the world does not begin and end with MTV. In all parts of the world, I seem to come across curious people who appreciate weird composers whose music doesn’t sound like the mainstream,” he says.

This is a lesson many younger musicians in Bosnia struggle to heed. Sarajevo has long been a creative centre for aspiring pop and jazz musicians, a hub of nightlife and liberalism. Still, most upstarts are tempted either to mimic western groups, as Mr Bregovic acknowledges Yugoslav-era rockers did, in a “faint provincial echo” of their idols, or to indulge the kitschiest excesses of turbofolk. Local musicians rarely innovate. They do, however, respond to local stimuli, turning Bosnia’s political frustrations into fodder for protest songs.

A prime example is Sarajevo-based Dubioza Kolektiv (The Dubious Collective). Adding traditional Bosnian musical riffs to the western idioms of reggae, dub and hard core, the group of seven performers – a woman, Adisa Zvejic, joined by six unambiguously angry young men typically dressed in fatigues – rant stylishly about public life in Bosnia.

There is nothing inauthentic about the frustrations expressed by Ms Zvejic when she belts out Dubioza Kolektiv’s anthem “Triple Head Monster”, a boisterous tongue-lashing of Bosnia’s ludicrously ineffective tripartite presidency and political corruption in general. Her sentiment is one of the few shared across the country’s ethnic divides.

Diplomats at the helm in Sarajevo, if any hear this storm of noise or see the seething video that accompanies it, must feel lucky the anger is not directed at them.

High hopes, slippery slopes

2007-01-02T16:01:00.000Z

By Eric Jansson
Published by Financial Times, 20 December 2006

“Say it’s like Colorado,” says Dragan Petkovic, grinning and dragging on a cigarette in an empty café at Jahorina, the Bosnian ski area where he is deputy manager.

But it is not like Colorado.

Outside, freshly fallen snow makes the mountaintops sparkle on a crisp, bright morning. Jahorina’s modest peaks link together in a row, forming a high ridge of brilliant white set against a clear blue sky. Ski trails plunge from the bare heights, cutting through tall pines on the mountainsides.

Mr Petkovic and others would like to see Jahorina become a major European ski destination. Unfortunately the similarity with premier resorts ends with the natural scenery.

Bombsites are not a big problem. Little visible damage remains from the airstrikes on Jahorina in 1995, when Nato warplanes dropped 1000-lbs bombs to disrupt the area’s use as a command centre and recreation spot for Ratko Mladic and the Bosnian Serb army. The mountain has been demined, too.

Still, the ski area suffers from the fundamental problems of underinvestment, lack of planning and Bosnia’s ongoing war-related isolation in the south-east European tourism market.

Jahorina saw bright days in the past – none brighter than its brief stint as an alpine skiing venue during the XIV Olympic Winter Games. The war cancelled out whatever marketing advantages the Olympic legacy once afforded. Yet hope springs eternal at this high-altitude destination 45 minutes away from Sarajevo.

Already, during the three-month high season, a healthy stream of visitors flows in from nearby Serbia and Slovenia, along with the nearby capital city. The trick now is to broaden and enrich the market by raising quality dramatically, say local tourism investors.

“Jahorina is a real skiers’ mountain. It is not a place for the elite right now, but that does not mean it never will be,” says Dragan Cirkolovic, manager at the Hotel Bistrica, one of the largest hotels on the slopes.

According to a master plan commissioned by public tourism officials for the Republika Srpska, the Bosnian Serb sub-state, and drafted by Hypo Alpe Adria Consulting, the ski area can be brought up to a high European standard by 2016.

The proposed upgrade is a massive undertaking, expected to cost an estimated €400m over a decade. This would be one of Bosnia-Herzegovina’s largest investment projects, dwarfing anything else seen in the tourist sector – and most other sectors. Indeed the sheer scale of the proposal raises doubts about its practicability.

Some tourism experts say Sarajevo’s dream of becoming a major winter sports destination, competing with the Alps, is a fantasy, despite Jahorina’s prospects. “It is never going to happen,” says Thierry Joubert, a Dutch entrepreneur at the helm of Sarajevo-based Green Visions, a specialist operator focusing on eco-tourism, including backcountry skiing.

Yet it is not entirely impossible to imagine a refurbished Jahorina rebranding itself, in the words of the master plan, as “the top mountain destination in southeast Europe”.

The master plan’s implementation will depend heavily on the participation of private investors, a prospect that Mr Petkovic, among others, welcomes. “We need privatisation right away. Better today than tomorrow,” he says.

Wholesale privatisation is not on the cards for Jahorina, although Bosnia’s other former Olympic ski areas, Igman and Bjelasnica, have considered the option. Defacto privatisation of business operations looks more likely. The master plan calls for a wide variety of investments, some private, some public and some through public-private partnerships, to tackle the resort’s many current shortcomings.

The plan would leave almost no aspect of Jahorina’s operations and infrastructure untouched.
It points out, for instance, that the resort area itself is prohibitively small. Four Jahorinas would fit inside a big European or American ski area. There is, however, plenty of room to expand onto the virgin territory of neighbouring mountains. The plan recommends two major rounds of expansion, with the first new slopes opening in 2010. By 2015, Jahorina’s total terrain is meant to reach a world-class 1,360 hectares.

The plan also foresees upgrades to key ski-related infrastructure – especially the lifts. Whereas many European and American resorts have invested since the 1980s in high-tech lifts and heated gondolas, Jahorina still uses the same pokey chairlifts of two decades ago.

Better accommodation will also be critically important. Most of the hotels clustered at the base of the slopes look anything but graceful. A few are totally unchanged from Yugoslav days, with hammer-and-sickle plaques on prominent display in entry halls. Just one, the Hotel Termag, offers what most western visitors would consider a high standard of comfort and style.

The planners know how much must be done to recapture Jahorina’s fleeting glory. But they still have a question to answer: how would Jahorina’s the area’s hypothetical private investors ever be able to recoup the enormous upgrade costs? Europe’s skiers, after all, already enjoy abundant, high-quality, low-cost competition in the Alps.

The wild frontier of European securities

2007-01-02T15:51:00.000Z

By Eric Jansson
Published by Financial Times, 20 December 2006

Ahmed Hodzic and FIMA International, the Sarajevo stock brokerage he runs, operate on the wild frontier of emerging Europe’s new securities markets.

To visit FIMA’s offices, one must leave the cozy eastern end of the Bosnian capital, the zone where the big yellow Holiday Inn and the twin glass towers of the UNITIC office try to offer visiting foreign businesspeople a sensation of being somewhere like home.

The taxi pulls up at a concrete apartment block riddled with shrapnel splashes and bullet holes. Dreary shops occupy the street level. In a window above a hairdresser, a paper sign reads “FIMA”, indicating that the company’s entrance is around the other side.

Though a back passage and up a dim flight of stairs one finds Mr Hodzic and his assembled brokers, attending to telephones and computer screens. Market demand imposes a sober discipline in the modest office. Mr Hodzic checks his watch and explains that a surge in trading is anticipated in half an hour.

Perched in this battered apartment block, FIMA International claims to handle a third of total turnover on the five-year-old Sarajevo Stock Exchange.

By its appearance, the local brokerage firm is still a world away even from Croatia, where FIMA International’s parent company, FIMA Holding, is based.

But Mr Hodzic is counting on the emergence of a bigger, livelier market for Bosnian securities, having witnessed similar developments elsewhere in the region. “Our people still do not believe in markets like the Croatians or the Slovenes now do, having seen what happens when markets really take off. But they should, and I hope they will,” he says.

Growing demand is evident. Most of the business after the Sarajevo exchange’s opening involved domestic trades of publicly-issued funds, akin to privatisation vouchers. Today some 90 per cent of FIMA International’s clients are foreign. Many but not all come from wealthier Balkan economies, Mr Hodzic says.

This influx has helped push the SASX-10, an index of 10 leading Sarajevo-listed stocks, up 70 per cent from January to early December, despite lacklustre performance in the first half of this year.

Brokers in emerging markets expect big fluctuations. The recent strong gains do not eliminate concerns expressed by Mr Hodzic and other securities market experts that growth is artificially restrained by Bosnia’s restrictive trading rules and by a lack of transparency on the Sarajevo exchange.

Outdated law is the fundamental problem. Sarajevo is located in the Federation, the post-war “entity” in Bosnia-Herzegovina populated predominantly by Bosnjak-Muslims and ethnic Croats, where a new draft law on securities has been stuck in parliamentary procedure for a year.

The current law dates back to before the Sarajevo exchange existed. The result is a complicated mismatch between legislative theory and market realities, with regulatory institutions ill-equipped to carry out their duties and traders left to improvise. Neither brokers nor exchange officials are satisfied, yet together they have failed to persuade legislators to move faster.

“We constantly apply pressure, but we don’t have results,” Mr Hodzic says. Despite growth in demand, “investors have taken out a lot of money and gone to other markets such as Montenegro”.

Growth is also restrained by the division of the country’s securities markets along post-war entity lines. The country’s other, Serb-dominated, entity Republika Srpska, is home to a second, smaller exchange in Banja Luka. Laws prohibit a broker based in one entity from trading securities on the exchange in the other entity. Everyone but the country’s most hard-line ethnic politicians wants this changed.

The Serb sub-state has taken the first step, offering to open its market to Federation brokers if lawmakers in Sarajevo reciprocate. So far there is no deal, but chief executives at both exchanges are agitating for openness.

Jasna Zrilic, director of Broker Nova, the biggest broker in Banja Luka, predicts eventual market unification. “I think that the Sarajevo Stock Exchange and the Banja Luka Stock Exchange will be one in the future. It’s only natural. They are both so small,” she says.

One reason they are small is the underdevelopment of Bosnia’s bond market, still in its earliest infancy amid predictable political friction. For now, company shares and investment funds are the only products on offer.

Kemal Kozaric, governor of the country’s central bank, has dropped his previous cautious opposition to the issuance of securities by the central state. “There is no reason for Bosnia not to go ahead and issue state securities. I have been preaching so much on this point at conferences that my chest hurts from all the effort,” he says.

Privatisation stokes Bosnian rivalries

2007-01-02T15:36:00.000Z

By Eric Jansson
Published by Financial Times, 20 December 2006

When a foreign investor bought Republika Srpska’s fixed-line and mobile telecommunications operator this month, privatisation officials in Bosnia-Herzegovina’s Serb-dominated sub-state cheered. The “entity” government set a minimum price of €400m for a 65 per cent stake in Telekom Srpske, and the winning bid came in at €646m.

It was a record-breaking privatisation price for Bosnia-Herzegovina, a country hungry for foreign investment. So why do Bosnians grumble about it?

As with most disputes in the country, it boils down to ethnic rivalry.

Privatisation sales are carried out at the entity level – by separate agencies in Republika Srpska and in the Federation, the entity dominated by Bosnjak-Muslims and ethnic Croats. Within the Federation, smaller sell-offs are the preserve of individual cantons. Big sales, therefore, boost overall revenue and investment but reinforce the country’s internal divisions. Few deals have been more sensitive than Telekom Srpske’s.

A significant reason is the buyer, Serbia’s state-owned operator Telekom Srbija.

For many non-Serb citizens, Belgrade’s involvement arouses deep suspicions. Conspiratorially- minded critics say the sale will help security services in Belgrade to listen in on Bosnian telephone conversations.

Vojislav Kostunica, Serbia’s prime minister, says the deal is all about smart investment, especially as Belgrade intends to sell Telekom Srbija to a global telecom operator.

Yet Mr Kostunica also has a rare knack for stoking nationalist fires with vague and muted rhetoric. “It is natural for Serbia to occupy the position that belongs to us,” he said of the telecom acquisition at a meeting with Milorad Dodic, prime minister of the Bosnian Serb statelet.
Telekom Srpske’s impressive sale price has also raised questions about non-business considerations behind the Serbian bid. The only other bidder, Telekom Austria, offered just €467m.

Vladimir Mackic, director of privatisation in Republika Srpska, says there was no political interference in the Telekom Srpske sale. “Our politicians want us to work according to the law,” he says.

He says he was disappointed six other bidders dropped out before the final round.
Policymakers in the Federation are also, by their own admission, upset that Mr Dodik’s privatisation team was quicker to the draw. BH Telekom, one of two Federation-based operators, is also slated for privatisation.

Despite their entity-based ownership, all local operators are licensed to offer mobile telephony throughout Bosnia-Herzegovina. With the injection of capital from Belgrade, the Bosnian Serb network will gain an early lead in the race to capture the whole mobile market. This reduces BH Telekom’s market value.

Before the Federation moves forward on BH Telekom, privatisation officials there aim to sell at least two other big properties, the civil engineering firms Energoinvest and Hidrogradnja.

While the entity has already sold 71 per cent of all its companies slated for sale, these have been mostly small firms and represent only 40 per cent of the earmarked assets.

Big sales in the Federation have included a steel mill, now owned by Mittal Steel, and a cement factory scooped up by Germany’s Heidelberger Zement, but nothing big sold this year.

Meanwhile, Mr Mackic’s team is looking ahead to the Serb statelet’s next big thing: the public power utility, Elektroprivreda.

Privatisation of the Bosnian Serb power system also, in effect, began this month. The decision by CEZ, the Czech power utility, to invest €1.5bn in the sub-state’s power network introduces new ownership into the sector.

By contrast, the Federation’s recent energy sector privatisation looks small. MOL, the Hungarian oil company, and its Croatian affiliate INA in August purchased a 67 per cent stake in Energopetrol through a €110m deal involving recapitalisation and direct payments.

That also raised tensions within the Federation, as the government in Croatia controlled INA at the time. Zagreb has since sold off its INA stake, but Bosnjak lawyers are still trying to undo the Energopetrol deal.

Croatian FDI flows fast and furious

2006-10-30T09:48:00.000Z

By Eric Jansson
Published by Financial Times, 30 October 2006

A year ago it appeared certain that British American Tobacco would pack up and leave Croatia. The world's second largest tobacco producer, a prominent investor, declared publicly its view that the investment climate was "hostile".

The tone of the complaint indicated BAT's departure was imminent after an eight-year struggle to make good on an investment, estimated to be $70m, in Tvornica Duhana Zadar (TDZ), a cigarette rolling plant. BAT had once called its "foothold in the Balkans", although major problems culminated in bankruptcy for the TDZ operation last year.

BAT's complaint and TDZ's bankruptcy chimed with a survey published by the World Bank and International Finance Corporation, ranking Croatia 134th in the world for its record on investment protection and rating its economic performance behind all other former Yugoslav republics.

For government officials in Zagreb, who describe Croatia as an excellent, proven destination for foreign investment, this was bitter news.

But a year later, BAT is still there and foreign direct investment is increasing apace.

Rather than walking away, the company has chosen to fight for the shares of TDZ which BAT insists it rightfully owns. Its determination to reclaim a competitive stake in this relatively small country of 4.5m people, now the subject of a multi-faceted legal battle, is indicative of multinationals' settled view of Croatia as a desirable entry point to the broader Balkan market of 60m.

Foreign direct investment topped $1.3bn last year, an 8 per cent rise on 2004, which was equal to 3.3 per cent of gross domestic product. This year, foreign investment figures will rise again, much more sharply, following US-based Barr Pharmaceuticals' $1.9bn acquisition of Pliva, a Croatian pharmaceuticals manufacturer.

The Pliva deal is so big in Croatia's diminutive economy that analysts predict central bankers will need to intervene to minimise the consequent appreciation in the value of the national currency, the kuna.

Damir Polancec, deputy prime minister in charge of economic policy, lists a series of reforms that, he says, keep foreign investment streaming in. However, he adds that Croatia "cannot be satisfied" yet with the current level.

Reforms include a "regulatory guillotine" intended to cut red tape, a "one-stop-shop" enabling new companies to register with the state in four to eight days, tax incentives and a public service reform that Mr Polancec says will help smooth relations with business.

The strong influx in foreign investment, BAT's decision to stay, and the government's actions in favour of business put the alleged hostility in context. But they do not cancel out foreign investors' complaints entirely.

Here BAT's case is instructive. The tobacco company's position in Croatia fell apart last year when the High Commercial Court stripped the company of its majority shareholding in TDZ, cutting its stake from 85 to 25.21 percent, ruling that BAT had acquired shares illegitimately, a claim the company vigorously denies.

But even before the ruling, BAT alleges, the company was undermined by excise taxes that discriminate against foreign cigarette brands in favour of TDR, a local tobacco giant, and "trade blockages", for six years the subject of an unresolved case pending at the Croatian Agency for Protection of Market Competition.

In a statement this month, BAT said: "Although Croatia has started accession negotiations with the European Union and has already harmonised some regulations with EU standards, we believe the Croatian government could do more in terms of pro-actively managing the process of harmonisation of tobacco related regulations and in particular the law on excise.".

Mr Polancec says he believes that BAT has "in no way suffered from discrimination so far", while adding that Croatia's judicial system can be expected to judge fairly if it has.

But other prominent investors echo BAT's allegation of malign neglect and interference by state institutions.

"Most of the problems stem from the fact that the Croatian decision-makers still do not fully understand how a free market economy should function," says Denis Mohorovic, spokesman for MOL, the Hungarian oil and gas company that in 2003 purchased a 25 per cent stake in INA, Croatia's state-owned oil company.

MOL's chief complaint regards the state's regulation of oil prices and debt write-offs to state-owned customers, which Mr Mohorovic claims has "effectively decreased INA's value in excess of $710m between 2003 and 2006."

Mr Mohorovic adds that the government's newly unveiled plan for continued privatisation of INA, through offerings of a 17 percent stake on the London and Zagreb stock exchanges, is "too small to make a significant difference".

Mr Polancec responds that "all we are doing is following the law on INA's privatisation" passed in 2001, and, indeed, MOL remains fundamentally pleased to remain INA's strategic investor. INA's pre-tax profits more than doubled from 2003 to 2005, reaching 1.5bn kuna (€203m) last year. Mr Mohorovic calls Croatia "a good market with solid growth and a skilled and reliable workforce, but also one that still creates some serious challenges for any business wishing to work in it."

In a broader central European and Balkan economy where administrative barriers to investment and corruption remain commonplace, this may be regarded as good enough. But it is far from ideal.

Star entrepreneurs but an unreformed state sector

2006-10-30T09:46:00.000Z

By Eric Jansson
Published by Financial Times, 30 October 2006

This summer's bidding war for Pliva, a generic drug maker, marks how Croatia's top companies have attained global standards.

The rival bidders, Barr Pharmaceuticals of the US and Actavis of Iceland, pushed the price to $2.5bn before Barr won this month.

Bruce Downey, chairman and chief executive of Barr, spoke of the combination of "two great companies". Rarely do western investors describe acquisitions in central Europe or the Balkans in such glowing terms.

But Croatia is an exception, with several large comapnies.

Pliva, listed on the London and Zagreb stock exchanges, boasts the largest turnover of any drug maker in central and eastern Europe.

Podravka, a food pro- cessor, claims a hefty market share in eastern Europe, where its Vegeta brand spice is a household name. State-owned Uljanik, a shipyard, claims a significant share of the world market for car- transporters.

The growth of such companies, backed by strong performances by small and medium sized businesses, helped gross domestic product rise 6 per cent in the first half of 2006, up from by 4.2 per cent in 2005.

Unemployment remains uncomfortably high at 14.3 per cent, but is falling and is at its lowest level since 2000. Central bankers are keeping inflation low, despite soaring oil prices.

New arrivals are surprised at the appearance of wealth in a country whose economic reality has normalised faster than its international reputation.

World Bank economists say the country has adopted a genuine reform path, as indicated by a raft of legislation adopted to cut administrative hassles.

In a survey last month, they rated Croatia seventh in a list of the world's top reforming economies. The former Soviet republic of Georgia was placed first.

But difficulties persist. The same World Bank survey included a list of "countries where doing business is easiest", in which Croatia came 124th, just five places above dictatorial Belarus.

This state of affairs is generally blamed on an early wave of privatisation in the 1990s, when the government sold state assets to known loyalists in a process now known as "tycoonisation".

Many "tycoons" were newcomers to business, who sapped the capacity of their companies or sold them off in parts, while amassing private fortunes.

Where the state chosenot to privatise, as withthe shipyards, subsidies often insulated lacklustre management from com- petition. Large portions of the economy are still unrestructured as a result.

That may change. The era of private disinvestment is over, replaced by a spending spree. Credit is readily available amid frantic competition in a financial sector dominated by western banks, and private investment is soaring.

Investment as a share of GDP grew 10 per cent over the past five years, "and most of this increase came from the private sector," says Zarko Miljenovic, chief economist at Zagrebacka Bank, which is owned by Italy's Unicredito.

At the same time, the government has moderated its spending habits, cutting back on infrastructure investments and slowing the growth of pensions, while stabilising the country's external debt.

Athansios Vamvakidis, resident representative for the International Monetary Fund, praises Mr Sanader's government for halving the annual budget deficit over three years, from 6.1 per cent in 2003 to 2.8 per cent, the figure projected by policymakers in 2006.

Goran Saravanja, senior economist in Croatia for Austria's Creditanstalt Investment Bank, says the picture is not quite as pretty as the IMF paints it: "If you include debt to pensioners, the budget deficit goes up to 4 per cent.

"It's not included in the IMF-sanctioned numbers, but it is significant," he says. "The headline figures look good, but when you cut beneath the surface there has not been much reform."

Private indebtedness is increasingly a greater concern than public indebtedness.

Another risk is posed by politics. With parliamentary elections due next year, some economists, including Mr Vamvakidis of the IMF, wonder aloud whether the government will maintain fiscal responsibility.

But he adds thatthe political temptation to scrap restructuring and privatisation plans forthe critically important shipyards will be tempered by economic reality.

"The situation is so bad" that commercial banks have begun denying some shipyards credit needed to cover operational costs, he says. "The pinch is here."