EU slaps Serbia over 'sugar affair'

A scandal in the sugar industry here is providing fresh evidence of corruption's deep roots in this Balkan nation.

The European Union had offered Serbia-Montenegro, a country now joined in an uneasy alliance, preferential treatment to help develop its sugar-beet industry.

But recently EU investigators concluded that Serbia was buying cheap sugar on the world market - and then repackaging it as domestic produce to sell it to the EU at a huge markup.

Last month, the EU's executive body, the European Commission, announced a three-month suspension of Serbia's sugar-sales privileges. "This is some kind of break in the trust between the European Union and Serbia, and very bad for the reputation of this country," says Dusan Pavlovic, an analyst at the G-17 Institute, an economic reform think tank in Belgrade.

If Serbia doesn't clean up its act, say analysts, its proposed eventual admission to the EU, NATO, and other trade and cooperation bodies could be jeopardized. And that would be disastrous for the impoverished, politically fragile country's stagnant economy.

While some Serbian officials have tried to present the scandal as an isolated case, the particulars suggest it is emblematic of endemic corruption in Serbia and throughout the Balkans. As elsewhere in Eastern Europe, graft here typically involves close relationships between powerful politicians and people who have amassed fortunes of dubious origin in the transition from communism to a market economy.

High-profile figures in Serbia- Montenegro have been implicated in everything from large-scale smuggling of stolen cars to providing military aid to such regimes as Liberia and Saddam Hussein's Iraq.

On a smaller level, Serbian police recently announced that they had broken up a fraud involving the reexport of imported garlic to Italy, with a potential profit of more than $1 million. The scheme was similar to the suspected sugar deals: Chinese-grown garlic was imported from Italy and repackaged for sale back to Italy at inflated EU rates.

The EU faces similar problems throughout the region, having extended preferential trade deals to numerous Balkan states.

A shipment of sugar entering Greece from Croatia was recently analyzed by EU inspectors and found to contain a mix of beet and cane sugar, even though Croatia does not produce cane.

"You would be amazed at the things people can do if it's interesting tariff-wise," says a spokesman for the European Union's anti-fraud office in Brussels, which constantly battles relabeling from all sources.

In the sugar affair, Serbia got into trouble when EU auditors discovered a discrepancy: Allowed to export only its surplus, which is roughly 50,000 tons per year, since September it has shipped nearly four times that much to EU markets. Under this scenario, "producers" were buying on the world market at $211 per metric ton or less, and then reselling it to the EU at a generously subsidized price of around $630 per metric ton. All told, perpetrators may have pocketed an extra $7 million in profits.

Prime Minister Zoran Zivkovic has announced an investigation, placed government monitors in domestic sugar factories, and invited EU experts to visit and to provide "precise instructions on the protocol for sugar exports ... and all other goods that we export to the EU." The government inspectors were to have issued their findings by June 1 but they have still not been delivered.

Serbia, whose economy is still dominated by small farms, is believed to have a promising future in agricultural exports. The sugar industry is still relatively small - producing 282,000 tons in 2002 - but experts say Serbia has the potential of becoming the EU's biggest sugar producer if it gains admittance to the organization.

Few here say that the government's probe of the sugar scandal will get to the roots of the problem, however. The primary casualty thus far has been the customs-service chief, Vladan Begovic, who is regarded as a whistle-blower.

The chief anticorruption investigator for the prominent citizens' organization OTPOR, Branimir Nikolic, has publicly charged that a large sugar processor called MK Komerc was involved in the scheme. It is owned by powerful businessman Miodrag Kostic. In February Mr. Nikolic filed a formal court complaint against Mr. Kostic and MK, alleging involvement in sugar smuggling. Kostic has denied any part in improper sugar deals and has called the allegations against him an attack on the Democratic Party, to which he is a major donor.

The EU fraud investigation unit would not confirm whether Kostic or his firm are under scrutiny.

Kostic, who was a close friend of the late Prime Minister Zoran Djindjic, entered the sugar business last year when Djindjic's government decided to privatize three sugar plants in the northern province of Vojvodina, essentially giving them to him for a token 9 euros. As part of the deal, Mr. Kostic agreed to invest in upgrading the plants, which, like many other facilities here, had suffered from years of neglect.

In another publicly criticized deal, Kostic borrowed domestic Serbian sugar from state reserves, exported it to the EU, and then imported sugar from Hungary to replenish the stock. OTPOR calculates that on this turnaround, he made $7 million profit. "The deal was legitimate. But why didn't the state do it and keep the revenue?" asks Slobodan Homen, founder of OTPOR.

If Europe is to be satisfied with Serbian efforts to stem corruption in the sugar industry, formal controls will have to appear almost overnight.

"This [scandal] is symptomatic of a lack of capacity of the customs service - actually a lack of capacity across the entire administration," says David Hudson, chief of the EC delegation's political section. "You had people whose job was to stamp a piece of paper, to say 'good,' who now need to actually investigate the information they're given."