Discord erodes force of Serbia sanctions

Date: 16/07/1998

By Mark Turner

NATIONAL governments look set to water down tough European Commission proposals for EU economic sanctions against Serbia, imposed after Belgrade's crack-down on Kosovar Albanian separatists.

Union foreign ministers stole a march on the US last month by banning all new investments in the country, but a row broke out afterwards over the scope of the freeze. National governments felt that the tough wording of the Commission's draft text amounted to a total trade embargo. They claimed it went too far and was unworkable in practice.

Under the terms of an early Commission text, EU companies would have been forbidden to “obtain ownership or control, directly or indirectly, of any kind of asset in the Republic of Serbia”, including companies, shares, bonds, loans, intellectual property rights, and any “tangible and intangible, movable and immovable property”. The draft also banned participation in economic activities which contravened those rules.

This provoked complaints from companies such as Telecom Italia and Siemens, German textile-makers and a number of governments, including Greece, which was funding construction of a motorway in Serbia.

Industrialists feared they would be unable to purchase essential equipment parts, in effect penalising them retroactively for old investments. The issue boiled down to a debate over the nature of 'new' investment. Should a company be allowed to replace a broken machine part with a better one, or could a 5-tonne truck replace an old 3-tonne vehicle?

The UK, and more recently the Austrian presidency, argued that only investments which would create a 'lasting economic link' should be covered, excluding day-to-day commercial activity.

The Commission resisted this, proposing instead a system allowing case-by-case flexibility, and a 'Community interest' clause to avoid any action hitting the EU harder than Serbia. Commission officials added that this flexibility would also make it easier to avoid penalising Montenegro.

Following a flurry of meetings this week, it appears that EU governments have won the argument, although foreign ministers will need to finalise the deal when they meet later in the month.

There are still concerns, however, over a commercial flight ban recently imposed on Serbia which contravenes a network of existing bilateral contracts. Officials also say Finland appears to be the only EU member state which has established mechanisms to punish sanction-busters.

The dispute highlights the difficulties faced by the Union and the US in using economic sanctions against Belgrade effectively. With the United Nations and NATO still divided over the use of force, the West's only bargaining tools are economic. But national trade ministries often strongly resist efforts by foreign ministries to impose sanctions, fearing adverse consequences for domestic industries.