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A Year Has Passed

This Monday marked a year since the last election in Croatia, when the HDZ beat the SDP against all odds to win another mandate after its Karamarko government imploded in a series of inexplicable self-goals. And an anniversary is always a good moment for stock taking, so let’s see where Croatia is today, compared to a year ago.

Before the 2016 elections, the HDZ held a government in coalition with the Most (“The Bridge of Independent Lists”). Most burst into the political scene as a bit of a surprise, promising to hold both major parties to account and only cooperate with the one (or both) that would agree to their program of reforms. As, to everyone’s surprise, they took 17 seats in the parliament, they could and did hold both major parties hostage for a week or two.  But then, whether for reasons given or because of the similarities of general outlook, they hitched their wagon to the HDZ and, true to form, held the Oreskovic government at gunpoint until the then-HDZ leader Karamarko collapsed his own cabinet. HDZ ratings went through the floor and its arch-rival SDP got a second lease on life.

After HDZ elected the new leadership and made the usual public promises to fight corruption, clean up the government, reform taxes and local administration and above all be a completely different, centrist conservative party, it won a surprising victory over SDP and formed a new government with the Most. This time there was much less courting between the two, as the SDP could not even pretend it could put up a fight to woo Most away from HDZ.

The new cabinet came in with a major project of reforming the tax system, and while that was in the making, trouble again started brewing quietly between HDZ and Most. Several months into the new mandate, the largest Croatian conglomerate Agrokor collapsed. Since Minister of Finance Marić was, in his previous life, Agrokor’s VP for international finances, Most accused him of being compromised and unfit for office. PM Plenković threw the Most ministers calmly out, and a short parliamentary battle ensued while HDZ was cementing its power. This was done with the support of a few disgruntled individuals from other parties, but ultimately HDZ secured its government by luring over several deputies of its traditional enemy the HNS. The HNS got the posts of DPM and Minister of Education, and apparently a promise that the government would get rid of the Nazi iconography that had started gripping the country again. It also got a pledge from the SDP never to work with it again, and the separation of five of its most prominent MPs into a new party. Bearing in mind the HNS’ dismal numbers lately, this may well be their swan song unless they find a new sponsor.

In the meantime the self-assessed biggest achievement of the Plenkovic government, the tax reform, suffered a blow when the property tax part started getting closer to actual implementation. A combination of communication errors, poor preparations, and popular resistance led Plenkovic to back down from starting the new tax on January 01, 2018, ostensibly to “better communicate” but quite possibly to avoid a voter backlash in case of early elections. In terms of the budget, the postponement should have no visible effects anyway, if one is to trust the Government’s public projections which claim it is basically a reorganization of existing local taxes. Interestingly enough, the main campaign was led by a former advisor to Plenkovic’s predecessor Oreskovic, who prepared the tax reform together with Finance Minister Maric. It is not clear if that indicates an organized rebellion of the former cabinet or if it is just a display of common opportunism.

But a more serious blow must be a recent announcement of Valamar Resorts, one of the biggest investors in tourism in Croatia, who cancelled its various investments worth an estimated Kn 2 billion because of the “uncertain tax environment” (probably referring to introduction of the full 25% VAT rate on tourism). This prompted the normally calm Minister of Finance to publicly vent his frustration, but apart from the impact of the cancelled projects, it might have more reaching consequences if other investors of that size decide to follow Valamar’s suit.

For now, the Ministry of Finance claims the budget is being filled at a satisfactory rate, thanks in part to the stabilizing effect of the new government which enabled it to refinance some of its debt at a more favorable rate. But the overall budget deficit seems to hover around the same mark, together with unemployment and other macroeconomic figures.

On the day it received a negative ruling from a Swiss arbitration court in its complaint against the Hungarian MOL, the government announced it intends to renationalize the state oil company INA. Of course, the budget for 2017 (and the Budget Guidelines for 2018 and 2019) include no provision for such a major purchase. The Government promptly found the money in a planned IPO of the national electricity provider HEP. Critics pointed out that the 25% IPO estimated at EUR 500-700 million would bring nowhere near enough cash to buy INA (estimated at around EUR 2-3 billion), and that the money eventually raised would be needed by the HEP for investment and modernization without which the company might fall into disrepair. Other critics asked why the Government thought it a good idea to buy INA, which had visibly deteriorated over the past six or seven years, pointing out that energy security can be achieved in many other ways. In the meantime, the European Commission put the issue of the INA privatization law to the European Court of Justice since Croatia failed to amend the law in accordance with Commission recommendations. And another arbitration, worth apparently somewhere around Kn 1.2 billion, is yet to end in Washington. It is possible that the Government was motivated by a combination of the two factors, where the perceived losses that might come from two lost arbitrations could well offset the monies needed to buy INA outright. Of course, the issue of what to do with a decrepit oil behemoth would remain on the table.

The final blow related to INA came from Hungarian Government last week, when Hungary refused to back Croatia’s bid for membership of the OECD. That being neither here nor there, as Croatia doesn’t really stand to gain or lose much by this, we were more concerned by surprise voiced by the Croatian Government and the President. As it is highly unlikely that diplomatic and other services of both countries failed to communicate such a decision, which among the EU member states could be seen as almost open hostility, we wonder very much what prompted surprise at the top level of Croatian government.

Another major legislative achievement was to be the overhaul of the veterans’ related legislative package. The stated intent was to consolidate various rules related to the veteran population, and help those who could not obtain full benefits. In addition, the Government stated that it wished to clean up the status of veterans who fought in Bosnia and Herzegovina. This, according to Government’s figures, concerns around 505,000 people, slightly over 12% of the total population of Croatia, plus an unknown number of HVO veterans. Although the Government claims these benefits will cost no more than half a billion per year, this figure seems somewhat light as it would allow for only about 1,000 Kuna per veteran in total expenditure. Since this is clearly impossible, the question of actual cost for now remains unanswered. In addition, the Government figures are somewhat confusing as various reports and officials quote different numbers at various occasions, oscillating by more than 10%. The move is mostly seen as payback to the veterans who camped outside SDP ministries while the SDP was in power. The veterans sieged the SDP government for almost two years. In addition, one of the critical votes that got the Plenkovic government through belongs to a retired HVO general known for his hard line rhetoric. He made it clear up front that he demanded back payments to HVO soldiers in exchange for his vote. Of course the issue of Croatian soldiers in Bosnia and Herzegovina remains politically sensitive for obvious reasons, especially now that the court case of Prlic et al. is still open at the ICTY.

Along the same lines, towards the end of 2016 and just a few months into the new mandate, a group of right wing veterans installed a commemorative plaque with a Nazi salute in the inscription. The opposition, at that time including the HNS, demanded its immediate removal, and the government responded by establishing a committee.

But as more and more black shirts appeared in public, and more and more of the public got restless (including several major embassies, US among them), parties supporting the government, including those representing the ethnic minorities, started asking for the removal of the plaque more aggressively. As the government could not hold its seats without support of the right wing groups within its own ranks, PM Plenkovic came up with an interim solution – the plaque with the offensive salute was moved from the site of the former Jasenovac concentration camp to another memorial site in the vicinity. The issue prompted yet another round of discussions on whether the salute is related to the 1941-45 Nazi regime (it is, according to the Constitutional Court) and whether police should act and how. The church also got involved proposing introduction of the salute as an official salute of the armed forces, civil society organized anti-fascist marches, and the issue once again became highly political showing inability (some claim unwillingness, which would be worse) of the government to get a grip on the mainstream political narrative.

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At the same time, the health system slid back in terms of waiting lists which grew by more than 300% in just under two years, going from 380,000 to 1.2 million (more than a quarter of total population), and financing, where the total debt of the health sector is now estimated at around Kn 7 billion with arrears reaching Kn 4.5 billion (almost 3.5% of the budget, and two times as much as in 2015). In conjunction with general lack of initiative and investment cost projections rising several times on unclear grounds, the sector seems to be sliding backwards too fast to stop the crash. It also seems indicative of other sectors, where one cannot really see much happening apart from a few public blunders.

One such blunder was the Ministry of Agriculture attempt to control imports of agricultural goods from neighboring countries (Serbia and Bosnia primarily, it would seem). Although SAA’s the EU signed with both countries ban new barriers to trade, Croatia apparently thought it could slide some new levies under the radar. This did not work and the new rules had to be rolled back within a week as the countries of the region teamed up on Croatia and Bruxelles understandably refused to back the move.

The most dangerous event of the current Government was, however, the collapse of the retail giant Agrokor. Although the Government continued to back it well into the first quarter, it seems that Agrokor could not be saved. The demise was, strangely enough, announced first by the Russian Ambassador to Zagreb, who apparently out of the blue appeared in full military regalia to announce that “We backed Agrokor long enough, and will not continue to do so”. It was all downhill from there, and the Government responded by introducing Lex Agrokor, publicly justifying the move by “saving 60,000 jobs and those depending on it” (the figure itself is slightly exaggerated as Agrokor’s own reports quote 27,000 jobs in Croatia, and a lot of them in highly profitable companies).

The law seems like basic Chapter 11 protection well known in the UK and the US, but with one strange addition – instead of the company choosing its administrator, it is the Government who proposes the administrator to the court, receives reports and advises on further moves. Many are wondering if this direct involvement might lead to direct liabilities for the budget. For now, the Government is firmly rejecting any liabilities, but as lawsuits just started coming in, the full extent of potential liabilities is yet to be seen. And those liabilities might bring the budget to its knees, as apparently Agrokor’s outstanding debt reaches over Kn 40 billion, and the full amount is yet to be determined. Since Agrokor owns significant assets in the region, it remains to be seen how regional governments will handle the matters once it comes to serious litigations. So far, it seems that Slovenian courts accepted at least parts of Lex Agrokor, while there might be difficulties ahead in Serbia.

On the bright side, Croatia did experience its best tourist season ever, and it is not over yet. For the first time in its independent history, Croatia grossed over EUR 10 billion, and in spite of tourism companies warning that the increase of the VAT from 12 to 25% is going to cause serious losses.

But on the economic side, Agrokor was estimated to be responsible for between 15-20% of the GDP, INA for another 15% or so, and tourism at another 18-20%. So the three account for roughly half of the GDP of a small country that has no serious reserves to cushion any blows to the tourist market, and the two other main components are apparently collapsing. Croatia also lost one of its biggest publishers, which was also its biggest bookstore chain. Although lighter in terms of economic impact, this might have Agrokor-level consequences for the Croatian independent publishing industry, and leave a number of smaller towns without their only bookstore.

On the international side, although led by former diplomats, Croatia seems to be at an all-time low in international relations. Relations with Slovenia are spoilt by the Piran Bay arbitration scandal (where Croatia refuses the ruling of the arbitration court because Slovenian side was caught on tape trying to influence the arbiters), and possibly Agrokor’s long shadow. Relations with Bosnia are traditionally difficult, in particular as HDZ is constantly seen as pushing the “third entity” option and in addition getting into a difficult fight with Sarajevo over the Peljesac bridge. Relations with Hungary are difficult because of the MOL scandal, and relations with Serbia are traditionally complicated and now apparently even more. It seems that the diplomatic skill amassed at the top of the pyramid (the President, the Prime Minister and the Speaker are all former diplomats) is not sufficient to improve this situation. In addition, PM Plenkovic was criticized because of his visit to Ukraine earlier this year, where he offered to share Croatian experience in reintegration of territories held by rebels. This offer predictably angered Moscow and Plenkovic took some beating on the issue. However, we believe this was not a blind move. Plenkovic served as a Chair of the EP Ukraine Committee, and is one of best informed diplomats in EU on the matters at stake. It is unthinkable that he would undertake any such moves without coordinating with other EU colleagues, especially those from conservative parties. So we expect him to have at least some backing in that regard. For now, cooperation with other EU partners on Ukraine does not seem to be enough for Croatia not to be seen as a problem child of the Balkans who cannot play with others.

On the internal side, the current Government is still plagued by ghosts of World War II, and its own inability to put a stop to it. In addition, the country is ridden by corruption and white-collar crime scandals involving important names from politics, sport and business. But proceedings seem slow and perfunctory, and almost always collapsing to zero at some point in the proceedings, so the public seems to have little hope of progress. And Croatia still sports an extremely slow and inefficient judiciary with a backlog of cases that could stop Irma in its track.

So altogether, it seems that the HDZ Government has achieved its initial purpose of stabilizing the country (and in particular its finances) after the horrid mess of the Karamarko-Oreskovic government. But lack of political experience (all three heads of institutions are first-time election winners on this level, although highly experienced top level bureaucrats) and initiative seems to be showing through the cracks. The President is by now generally seen as a fringe figure bringing some mild embarrassment, and the Government seems unable to sort out some of the basic issues without tripping over itself repeatedly. Ministers are plagued by accusations of conflict of interest, but as the institutions that should deal with it seem less than fully efficient, nothing is likely to come out of any proceedings on that issue any time soon, certainly not soon enough to have any kind of reassuring effect

But the Government is stable, and held in place more by lack of any opposition than by its own merits. The main opposition party, the SDP, does not seem able to recover from the election loss and changes to its leadership. The party itself seems to be aware of it, and attacks on the current head of the party have started intensifying lately. The grounds chosen are irrelevant, as it seems that at least a part of SDP leadership is determined to get rid of Bernardic at any cost and under any excuse. Apparently they see this as a last-ditch attempt to save the party from demise before next elections.

Other opposition parties are close to non-existent apart from Most, Zivi Zid, and the eternal mayor of Zagreb, Mr Bandic. But Most seems to be spending its credit with the voters at an alarming rate, Zivi Zid, although apparently sporting a clear neo-liberal agenda with conservative overtones, seems unwilling to join any of the major parties in forming a coalition. And the minorities currently seem to be examining their theory that they should support the Plenkovic government and give it time to reform the right side of the political landscape.

So with ten points advantage over its closest rival, no real opposition, several small partners to choose from and almost a third of the popular vote, it is not clear why PM Plenkovic does not go for elections to solidify his position in the the Parliament and his grip on the executive. This could help his personal position in the party as it would make it harder for his own hardliners to attack him if he wins again, and would make his government less dependent on whims of smaller partners who can bring it down at any moment (they, of course, know that doing that would see them out of their chairs probably for good). But for some reason or reasons, he seems reluctant to do so, at least for now. That decision might in the end be taken out of his hands by any of the partners supporting the government, such as the minorities who have been complaining recently of his inability to control the Nazi sympathizers in and around his party. But for now the government remains in place, even if for lack of any better alternative.


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