Reform stumbles as Dinkic falls

Mladjan Dinkic, Serbia's ousted central bank governor who expects the government to "suffer the consequences of their decisions."

IN LATE JULY, Serbian prime minister Zoran Zivkovic completed a visit to Washington to present Serbia for the 21st century. He posed for the traditional handshake photo with secretary of state Colin Powell, and declared that relations between Serbia and the US were the best they had been for 50 years.

But while Zivkovic met with US firms such as Morgan Stanley and Bechtel to discuss the possibility of their investing in Serbia, the free-market reform project at home was starting to unravel with the resignation of a key figure behind Serbian reforms in the past three years.

"Don't expect me to go easily like some other leaders they dismissed by changing the constitution," said the departing official. "The time will come when certain things will come to the surface and everyone will suffer the consequence of their decisions." Fighting talk indeed. But you would expect nothing less from Mladjan Dinkic (pictured above), the pugnacious governor of the National Bank of Serbia (NBS) - or rather former governor.

After a series of political manoeuvrings that could have come out of Niccolò Machiavelli's The Prince, Dinkic was deposed from his throne in late July.

Just when investors thought Serbia was clawing its way back towards normality and stability, the Balkan state has managed to add further uncertainty to an already confused situation. The assassination of Serbian prime minister Zoran Djindjic in March elicited widespread and deserved sympathy worldwide, but the ousting of the well-regarded Dinkic might prove to be a shock too far for a country that is increasingly struggling to maintain economic credibility amid a growing sense of political crisis.

While the café-strewn streets of Belgrade may be peopled by legions of Serbia's self-assured jeunesse dorée, the gloss increasingly looks to be coming off the country's investment story. "Some political shocks caused by internal infighting are inevitable in any transition economy," says Richard Segal, head of research at emerging-market investment-banking boutique Exotix in London. "But," he adds, "Serbia has certainly suffered more than its fair number of political shocks in recent months."

The country may scream relative value when compared with many of the EU soon-to-bes in central Europe but the fact remains that the high returns available on EU wannabe Serbia's debt increasingly look justified given the heightened sense of risk.

The dramatic manner in which Dinkic left one of the few official institutions in Serbia that could lay claim to any credibility in the world at large will have done little to assuage growing concerns that political and economic reform in post-Milosevic Serbia is at best losing momentum.

Certainly political monitoring agency International Crisis Group thinks so. Its report entitled Serbian reform stalls again, published shortly before Dinkic was dismissed, was decidedly bearish about the current state of play.

"The reformist zeal displayed by the Serbian government following the March 12 assassination of premier Zoran Djindjic appears to have dissipated," the ICG report said. "A number of important and positive steps were taken while the shock of that political murder was still fresh. Increasingly, however, their impact is being counterbalanced by actions that bring into question the government's ability to press decisive political and economic reforms home so as to achieve the goal of integration with wider European institutions."

It was not always thus. Indeed one of the more encouraging signs following the brutal slaying of Djindjic was the relatively mature and calm reaction to a truly shocking event, a fact that ICG itself acknowledged. "In the immediate aftermath of the shooting, public commitments to cooperate with The Hague Tribunal were made; the army began to be put under civilian control; the highest-profile organized crime gang and parts of the Milosevic-era parallel security structures were dismantled; several dozen prominent murders, many dating back to the old dictator's time, were solved; and the new union of Serbia and Montenegro was admitted to the Council of Europe."

The ICG report cautions, however: "As welcome as that burst of activity was, however, new troubling signs have appeared. Those who openly criticize the government on ties to organized crime risk arrest, and officials have launched legal actions to silence the media and respected human rights organizations. Serious human rights violations, including torture, have occurred in the prisons to which those rounded up in the post-assassination crackdown have been sent. The government has almost completely destroyed the independence of Serbia's already dysfunctional judiciary, is imposing media censorship and has given the police sweeping powers of extra-judicial detention."

Zivkovic: his popularity boost after Djindic's murder fades

The DS and the new premier, Zoran Zivkovic, received a significant post-assassination boost to their popularity, largely because of their attacks on organized crime. But the approval ratings have dropped in recent weeks. This is apparently because suspicions have grown among the general public that the government is covering up its own association with criminal elements.

As the ICG report concludes: "Without strong and consistent international pressure, the opportunity that Djindjic's death appeared to offer to mobilize a shocked public behind the reforms Serbia needs will be lost."