Financial Shock Waves

The National Bank of Yugoslavia reveals financial scams by private and state-run companies since 1989

Companies and individuals who have to pay a new tax on Milosevic-era extra profit are shocked and angry. The total taxable amount has reached DM8.3 billion, of which DM4.5 billion has been identified. Commercial banks have yet to provide data on the recipients of loans accounting for the remaining DM3.8 billion

AIM Belgrade, July 20, 2001

National Bank of Yugoslavia governor Mladjan Dinkic's disclosure of the names of companies that are obliged to pay a one-time tax on profit acquired thanks to privileges they enjoyed during the former regime sent shockwaves through Serbia. Journalists immediately began besieging the companies in question, most of which had learned of the amounts they would have to pay from the press. Their reaction is hard to describe in simple words: some were outraged, others shocked and numb, while others still hardly expected anything like that to happen to them; there were even some harsh verbal exchanges. All this, however, is still unconfirmed, because no one was willing to make official statements.

The crux of the matter is the following: a commission investigating potential financial scams spent several months examining about a ton of documents to determine what companies enjoyed privileges enabling them to amass property and money in the period form 1989 to the day the tax bill was passed. "Privileges" mean one of the five following things (or a combination): obtaining loans from the primary issue of money (which is legal, but very detrimental to the economy), and from the so-called grey issue (which is both illegal and detrimental to the economy), purchasing hard currency from the National Bank of Yugoslavia at an official exchange rate several times lower than the real rate, payment for fictitious imports that never entered the country (at least there is no documentation that they did), and using funds from the Serbian Economic Recovery Loan.

It turned out that the last item, contrary to widespread belief, made very few people rich. Not including the primary issue, which everybody is familiar with (the process of printing money and causing inflation), the grey issue, which was occasionally resorted to ever since 1990, was a phenomenon not recorded anywhere else in the world, as governor Dinkic put it. In the period from September, 1990, to November, 1993 alone, (when inflation rendered both the primary and grey money issue completely senseless) money worth DM4.7 billion was put in circulation. Of this, DM2.2 billion was paid back. The rest is now being registered as extra profit.

This is how it worked: the Serbian payment authority, though there was no money on its accounts, registered deposits to the accounts of banks and companies, which were used to purchase hard currency from the population, and create secret national foreign currency reserves. Reserves amounting to DM570 million were created in this way, and via five banks taken out of the country. Of this, DM199 million was distributed to companies in the form of loans, but the fate of the remaining DM375 million is entirely undocumented.

This was the period of Serbia's illegal tapping into the national monetary system (Slovenia and Croatia did the same, though to a lesser extent), which undermined the economic plans of then Yugoslav prime minister Ante Markovic. This is how the former Yugoslavia's destruction was financially prepared. The bill was footed by all citizens of Serbia, through record inflation.

According to Dinkic, the total amount to be taxed is DM8.3 billion, of which DM4.5 billion has been identified. Commercial banks have yet to provide data on loans that account for the remaining DM3.8 billion. Though officials were not specific, it can be assumed that the banks in question will be "helped" to remember what they did with these funds. The governor can play a role in that as well, giving him the opportunity to score more political points.

Speaking of points, the governor's appearance didn't exactly thrill senior state officials. The commission for investigating financial scams had already delivered the list of companies to the Serbian government. Finance Minister Bozidar Djelic said debtors had begun reporting in to the Serbian Public Revenue Administration, and then Dinkic went public with his entire file.

The first to respond was number one on Dinkic's list: the Naftna Industrija Srbija (NIS) oil company, whose representatives said that instead of having made any extra profit (NIS was listed as having about DM165 million in taxable extra funds), it, in fact, had DM976 million in losses. The losses exceeds the NIS's total capital, and measures have been taken for its financial consolidation. The announcement recalled that the company, otherwise state-run, "for the purpose of preserving social stability," sold its products at extremely depreciated prices, much below the market level, so that no profit, not to mention any extra profit, was made. The company's losses are proof that it is indeed so.

Serbian Energy Minister Goran Novakovic reacted immediately by saying that steps will be taken to determine how much NIS profited from purchasing foreign currency from the National Bank of Yugoslavia at a hefty discount.

It is beyond dispute that NIS, much like the Elektroprivreda power company and other enterprises, mostly from the food processing sector, were the chief allies that helped the former regime in its attempts to prevent social unrest over the past decade. Because of that, they were forced to drastically cut prices, which in turn led to their ruin. NIS has gone public with how much this policy has cost it.

If we assume that other state-run and socially-owned companies (or at least, most of them) were granted loans from the primary issue, or money from the grey issue, or hard currency at rock-bottom prices for the same reason (to prevent social unrest), the question is what happened to the private companies that emerged from the past decade with vast fortunes, to say the least. Thus, for example, the Braca Karic company is second on the list, with a taxable property of DM114 million. The head of the company, Bogoljub Karic, has been publicly denying for some time that he profited from his links to the former regime, and, particularly, the Milosevic family. On several occasions Karic explained that not only was he never close to the ruling family, but also suffered at its hands. He stressed that this did not include the mental pain they inflicted on him. After the list was made public, the Karic company did not react.

The Delta M company is also angry; executives declined any statements at this point, and marketing director Milka Forcan said the company was listed among the greatest debtors tendentiously, even though its taxable extra profit was "only" DM4.3 million. And true, Delta M is ranked 128th of a total of 246 companies. Some companies owe more than it, such as, the IMT Machine and Tractors factory, ICN Galenika medicine factory, Zastava car industry, Beopetrol oil company, Sartid metal industry, Hemofarm medicine factory, Yuco, Zorka, EI Nis, and many others, including Dafiment Banka, the notorious pyramid investment scheme.

But all of this begs the question -- if the Karic company, Delta, ICN, Yuco, and other private enterprises have to, even unwillingly, pay the extra profit tax, whatever the amount (the taxable sum will serve to determine the tax payable in every individual case, based on a progressive rate), what will the large state-run and socially-owned companies do, given that they cannot even pay their employees' salaries. To accuse them of making extra profit seems almost comical. And this is where a legal problem arises -- if the law is to be applied, it should be applied to all, says Danijel Cvjeticanin, from the Belgrade-based Economics Institute: "The state-run and socially-owned companies which used their privileged position and now cannot pay the tax will serve as a good excuse for private companies that made a great deal of extra profit to avoid paying the tax. This is why the effects of this law in practice will be much lesser than expected," says Cvjeticanin. He believes that in this way the state had, in fact, subsidized the socially-owned and state-run companies, because it lacked real money. Also it is a big question whether the private companies took all the profit for themselves, or were obliged to set aside a portion to finance some state operations of which we know nothing.

Governor Dinkic agrees that certain taxable sums are enormous, but says: "The people have asked for that, the Serbian Legislature has acted on their wishes, and the commission operated strictly in accordance with the law." In the event a company cannot pay the tax, there are others who can be held responsible -- guarantors, company directors, members of the administrative boards, people who profited from the transactions now subject to the tax, and the relatives of the debtors. Among those are their children, adopted children and members of their families, parents or adopted parents, brothers, sisters, and members of their families, spouses, even former spouses, and twice remote in-laws, including relatives of former spouses.

If the articles of the law are applied (namely Articles 6 and 7) literally, that could mean one of two things. First, that would leave an impression that the state is seriously bent on taxing everybody who took advantage of the ordinary people in the past decade. That it won't allow anyone to get away with robbery by claiming not to possess any property, that their companies are insolvent, and that they don't know anything "about any apartments; my wife used to buy them," as Yugoslav army Chief of Staff Gen. Nebojsa Pavkovic once said.

On the other hand, to prevent another major injustice -- a mass confiscation of property from innocent people -- it should be precisely determined whether the relatives of the people involved indeed profited in any way from their connections. And this will be a slow and enormous job. Governor Dinkic came up with a rather original solution -- if, he said, Karic could not pay, Delta M and Miroslav Miskovic will be asked to pay instead, as in-laws (a son of one of the Karic brothers is married to Miskovic's daughter). The Delta M marketing director described this as a stance "unbecoming a national bank governor."

It is impossible to say how much money will ultimately be collected by the extra profit tax, claims Slobodan Lalovic, secretary of the commission investigating financial scams. This will be known once detailed calculations have been made for each individual case. The Serbian Public Revenue Administration is on the move, with which companies have to file tax forms within the next 30 days. If their fail to file personally, forced debt collection will follow, says Lalovic. There is reason to believe that the real complications are yet to follow.

Biljana Stepanovic

(AIM)