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Financial Times: Montenegro

Published date: 12.07.2005 18:47 | Author: Kliping inostranih medija

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Montenegro 12 July 2005


1.Introduction: Freedom is gateway to the future

2.Economy: Sale of slumbering, poisonous giant is key to awakening growth

3.Banking: State stake hangs over managers

4.Politics: Serb pressure taints relations

5.The North: Poor region gives its vote on independence to pragmatism

6.Tourism: Expected rapid growth tests infrastructure

7.Sveti Stefan: Flawed jewel that could still be pearl of Mediterranean

8.ProMonte: Bouncing back from disappointment


Freedom is gateway to the future

By Eric Jansson

Many Montenegrins wonder what kind of world they will wake up to if, as their political leaders expect, their small former Yugoslav republic next year declares full independence from neighbouring Serbia.
Milo Djukanovic, the prime minister who has masterminded Montenegros independence strategy since 1997, predicts that most of the 620,000 people living in this gem of natural beauty on the Adriatic coast will feel joyous and fulfilled.
He says: Independence will mean a safe future. All healthy human beings share a natural need to be in control of their future. It is human nature.
Coming five years after the putsch that toppled the regime of Slobodan Milosevic in Serbia, talk of another newly independent state in the western Balkans strikes some outsiders as anachronistic or even dangerous.
But local unfinished business is not confined to Serbias breakaway province of Kosovo, with which Montenegro shares a border.
Mr Djukanovic and his partners in a ruling coalition of political parties calling themselves For a European Montenegro say their country stopped short along the Balkanisation road travelled by Slovenia, Croatia, Macedonia and Bosnia-Herzegovina a decade ago.
This process of dissolution finally must be brought to an end, says Filip Vujanovic, Montenegros president, a close ally of Mr Djukanovic.
Neither in Podgorica, the capital, nor in Serbias capital Belgrade do leaders expect Montenegro to travel backwards toward a unitary state with Serbia. That is also the view in western foreign ministries.
Many Serbs would welcome such an idea but Montenegro already possesses too many accoutrements of independence to entertain it. Most obvious among these is the countrys euro-ised economy, using the euro as the official currency rather than the Serbian dinar. Montenegro also boasts independent taxation and customs regimes, border police, a foreign ministry and much else.
To be honest, my biggest worry is that if we do vote for independence, I will wake up the next morning and think, So what? Nothing has really changed, says one government worker.
No one predicts the uproar over independence seen elsewhere in the Balkans in the 1990s. We are not going to make trouble to win respect. We want to behave. We want to earn respect with patience and democratic resolve, says Miodrag Vlahovic, the foreign minister.
Montenegro is the only country in the region to have avoided the Balkan style of independence. The Balkan style is nationalist, nostalgic, romantic, in some ways very evil.
Some Montenegrins first experience of full independence therefore could prove anti-climactic. Many have grown accustomed to viewing their country as a victim and underdog in Serbias shadow. Some may comprehend only after a successful vote for independence how independent they already are.
Once independent, they will no longer have Serbia to blame for political and economic disappointments.
The average Montenegrin workers after-tax salary remains less than 200 per month, in spite of a recent upswing in wage growth. With official unemployment at about 20 per cent, many Montenegrins like to complain. But they find it difficult to know who to blame.
Upon Yugoslavias final collapse in 2003 and under heavy pressure from the European Union, Serbia and Montenegro formed a loose union. The arrangement postponed Mr Djukanovics plans for a referendum on independence. Since then, the two republics share only a union-level army, foreign ministry and a ceremonial presidency occupied by Svetozar Marovic, a pro-independence Montenegrin.
According to union rules, either republic may choose to break away after three years. Mr Djukanovic promises Montenegrins that his government will call their long-awaited referendum in April unless he can persuade Serbia to scrap the union and form a different union of independent states similar to the diffuse Commonwealth of Independent States in the former Soviet Union.
Mr Vujanovic, the president, says full independence is the only viable option. To be in any kind of state with Serbia can only jeopardise relations, whether it is a federal model or a union.
Many in Serbia also point to complications in the union model, a compromise brokered four years ago by Javier Solana, the EUs foreign policy chief. Like Mr Vujanovic, Serb critics reason that two republics that are so dissimilar - Serbia is the most populous former Yugoslav country, Montenegro the least populous - cannot pretend to be equals.
The rules of the fledgling union, mockingly nicknamed Solania in both Podgorica and Belgrade, stipulate that the two republics must share power equally. Blatantly they do not.
Gordana Djurovic, Montenegros minister for European integration, carries a list of complaints about the union. At the top is the 41m Montenegro pays annually into the union budget. This money is wasted on a union army and foreign ministry that serve Serbia first, she says.
Predrag Bulatovic, a fiery opposition leader in Montenegros parliament and the most senior anti-independence campaigner, admits that the union is dysfunctional but lays the blame at the prime ministers feet. Djukanovic is playing a cunning game of delay and obstruction, creating impatience within Serbia toward Montenegro, he says.
Mr Bulatovic contends that Mr Djukanovics star is fading, more than a decade after he rose to power. The prime minister, aged 43, admits he has grown very weary of politics.
The prime ministers allies acknowledge that, as standard-bearer for the independence movement, his career must enter a new phase once the independence question is answered decisively.
Ranko Krivokapic, speaker of the parliament and a key coalition partner of Mr Djukanovic, suggests that a broad national unity government might be formed immediately after a referendum. Mr Krivokapic said long-time rivals such as Mr Bulatovics opposition could be included to encourage stability and help us move faster with reforms.
Leaders across the political spectrum note the EUs magnetic effect. Polls show that at least 80 per cent of Montenegrins want to join the EU. Mr Vujanovic and Mr Krivokapic say they would go further and try to join Nato immediately after independence. The parliamentary speaker floats the idea of offering Montenegros ports to Nato vessels.
Such suggestions highlight the underlying reason why Serbia and Montenegro struggle to work together. The republics political cultures have diverged in the eight years since Mr Djukanovic split with Serbia.
Serbia went on to fight a losing war against Nato in 1999, over Kosovo, and consequently few Serbian leaders speak enthusiastically about the military alliance today. Montenegrin leaders take a different view. Faced with a choice between a winner and a loser, they prefer the former.

Economy: Sale of slumbering, poisonous giant is key to awakening growth
By Eric Jansson
As soon as Montenegro made clear its intention to turn from socialism to capitalism, the future of Kombinat Aluminijuma Podgorica became the countrys biggest economic dilemma.
A working monument to Yugoslav economic planning, the giant aluminium complex stimulates more than half of Montenegros industrial production, taking into account its own operations as well as its heavy reliance on mining, electricity and transport.
Hold on to KAP and the state would retain a valuable asset but the deteriorating complexs thirst for reinvestment might never be quenched. Sell it and half of the economy would in effect be privatised.
The government in 1999 tried leasing KAP to Switzerlands Glencor but managers continued to run it into the ground. Vektra, a domestic investor, succeeded in modernising the anode plant but the complex suffers badly from under-investment.
Churning out 120,000 tonnes of aluminium per year, 20 per cent over maximum capacity, helps pay off debts, currently standing at $105m, down from $138m a year ago. But it also accelerates physical deterioration inside the complex while poisoning surrounding areas.
State officials last year admitted they needed a way out and made plans for KAPs privatisation by tender. Four bidders showed interest, but one held out to the end - Russias Rusal, which through Cyprus-based Salamon Enterprises, last month reached a $235m deal. Russian managers await installation in September.
News of Rusals purchase provoked a mixed reaction among KAPs current management. Government officials had promised publicly to secure a western strategic investor, not a Russian one.
I was wondering whether they would change the industrial management culture here. That was the most important reason why I wanted a western company here, says Branislav Radonjic, KAPs development chief. Nonetheless, he is tentatively encouraged by the price Rusal is willing to pay. Critics who predicted a $1 sale were wrong. In my opinion, this is big money.
Along with a 48.5m base purchase price and an additional $27m owed to the state, Rusal must pay for a 55m investment plan, to be matched by $20m from KAPs budget. Rusal also assumes responsibility for KAPs debts.
Milo Djukanovic, the prime minister, acknowledges that the government tried hard to court Alcoa of the US and Canadas Alcan, without success, and he expresses concern about Rusals view toward environmental clean-up, an urgent necessity for KAP.
Unfortunately their priorities did not include environmental investment, he says. This has sent the government scrambling to find a bank willing to lend money for KAPs environmental programme.
But Mr Djukanovic defends the deal, promising we will not be let down by Rusal or Salamon Enterprises, whose representatives in Podgorica declined to comment.
Both Mr Djukanovic and Mr Radonjic point to tough break-up clauses in the contract, holding the buyer to high standards. The contract could be dissolved if Rusal fails to raise KAP to European Union operating standards within five years, if production drops below 50 per cent of capacity or it accumulates debts of 5m to workers or 10m to Montenegros power company.
Rusal must also reckon with falling aluminium prices. When negotiations began, the market price was $2,000 per tonne, and KAPs operating costs per tonne stood at $1,750. When the deal was agreed, aluminium sold for $1,500 per tonne, while KAPs operating costs had fallen to $1,650.
KAPs major creditors hint they could disrupt the sale. Dragan Brkovic, president of Vektra, accuses Salamon Enterprises of failing to consult creditors, a tactic he calls most upsetting.
Together with other privatisations and the steady growth of smaller industries, the sale of KAP could help Montenegros gross domestic product to grow faster than last year, at 3.0 per cent.
In another big sale this year, Hungarys Magyar Telecom paid 114m for the states 51.1 per cent share in Telekom Crne Gore, the fixed line telecommunications company the revenues of which last year equalled 6.6 per cent of Montenegros economic activity. Magyar then raised its overall stake to 73 per cent, paying 22.9m to minority shareholders.
Magyar Telecoms acquisition completes the privatisation process for telecommunications in Montenegro.
Ivar Sliper, chief executive of ProMonte, a mobile operator owned by Norways Telenor, Montenegros oldest big foreign investor, says: Personal deals are important here and direct connections are still very important. But there is a deliberate willingness among authorities to align their regulations with western standards and especially EU standards.
Other big investors include Belgiums Interbrew, Greeces Hellenic Petroleum and Japans Daido Metal.
Petar Ivanovic, director of the Montenegrin Investment Promotion Agency, says he hopes the lowest corporate tax in Europe at 9 per cent will attract more.

Banking: State stake hangs over managers
By Eric Jansson
Visitors to the office of Mladen Rabrenovic, general manager of Montenegros Podgoricka Bank, cannot miss the giant Japanese fir in the corner.
The enormous trees branches hover over part of the managers desk, and now that the stem has reached the ceiling it bends awkwardly at the top.
I hated that tree when I took this job but my predecessor made me promise to keep it. Now theres no getting rid of it. Its too big to get out of the door. I suppose we might lower it out the window somehow, Mr Rabrenovic says.
The Japanese fir is not the only thing in Podgoricka Bank that obviously has to go. The Montenegrin state has a majority share in the bank and Mr Rabrenovic says it is high time for a more capable owner to take its place.
We need a reputable buyer, a serious strategic partner to bring in long-term funds and provide technical assistance.
The state wants to sell this year, in line with pledges to the International Monetary Fund. It has already excused itself from most former state banks, bringing the share of private capital in the sector to near 70 per cent.
The state already in April sold 10 per cent of Podgoricka Bank to the International Finance Corporation in a debt-swap deal that the IFC sugared with a $5m credit line for the banks development. But finding a buyer for the states remaining 54 per cent share could be difficult.
The answer we usually get is yes its a good small bank but the market is too small, Mr Rabrenovic says.
Montenegrin officials say they aim to attract foreign investors who will use the country as a regional base for the Balkans.
But in banking this is a stretch. The countrys monetary break with Serbia during the late 1990s led to the comprehensive euro-isation of its economy and the establishment of an independent banking system. Montenegrin banks inhabit a minuscule market.
In spite of this - and fortunately for Podgoricka Bank - market conditions are more favourable for attracting a foreign investor than they have been for many years.
Total assets in the banking sector grew 21 per cent last year to 450m, including 60m within Podgoricka Bank.
Leading European banks have noticed. Descending upon Serbia as that country undergoes a round of banking privatisations this year, some are expressing interest even in small acquisitions. These may be coaxed across the border while the state union remains intact.
Moreover, the banking environment looks healthier than before. Bankers who once warned that Montenegros euro-isation policy was jeopardised by the countrys imbalance of payments have stopped complaining, believing the policy to be sustainable. The long wait for swift growth in available credit is also over, after lending volume in the sector rose 42 per cent to 284m last year.
However, depositors instinctive distrust of banks still hinders development.
People tell me they want to see more long-term credit. How can I create a 25-year mortgage loan when 60 per cent of the money I sit on is short-term deposits? says Branimir Pajkovic, general director of Euromarket Bank, a bank purchased earlier this year by Slovenias Nova Ljubljanska Bank.
Likewise Mr Rabrenovic says that, of the 60m in total assets controlled by Podgoricka Bank, just 10m consists of long-term funds.
Difficulties confirming the credibility of loan applicants can also pose a problem.
The chain of internal debts is enormous. We can estimate it is maybe 50m to 60m. Compare that with the banking sectors total assets of 450m, Mr Pajkovic says.
A burst of new investment would help ease the pressure. Nova Ljubljanska Banks purchase of Euromarket Bank, combined with its ownership of Montenegrobank since 2003, is considered a hopeful sign for Podgoricka Bank. So is the registration of a leasing company by Austrias Hypo Alpe-Adria.


Politics: Serb pressure taints relations
By Eric Jansson
A deafening roar filled the air at Podgorica airport on April 19 as Olli Rehn, the European Unions commissioner for enlargement, stepped on to the tarmac.
The roar came neither from a waiting crowd nor from the delegation of Montenegrin government officials there to greet the first European commissioner ever to visit the country on official business.
It came from six Serbia-Montenegro military jets taking off from the runway. No one could hear each other. I was totally confused. I had to tell Mr Rehn that, really, we are a peaceful country. It was absurd, says a senior member of the delegation.
Montenegrin government officials say they blame Serb commanders from local barracks for scrambling the jets to spoil Mr Rehns arrival - a claim confirmed unofficially by local army personnel. The Serbian government calls this ridiculous.
Montenegrin officials readiness to cry foul over the incident, as well as Serbias denial, carry a whiff of the conspiracy-mongering that taints Balkan politics.
But there is no doubting the ire among Serb officials resulting from the EUs decision to handle Montenegros anticipated application for membership separately from Serbias.
Political crisis in the EU means the blocs enlargement into the Balkans could be delayed by a decade. But unless crisis derails enlargement the European Commission foresees a novel twin-track approach toward Serbia and Montenegro.
Each republic is asked individually to harmonise its legislation with EU regulations but unless Montenegro declares full independence - a real possibility next year - Brussels expects the two republics to accede together.
With its adoption of this approach, the EU last October handed a major victory to Milo Djukanovic, Montenegros pro-independence prime minister, who aims to pry his small republic out of Serbias awkward embrace.
Mr Djukanovic says it is high time the EU amends its inconsistent, superficial attitude toward the Balkans, which he says fuels Brussels enthusiasm for the dysfunctional state union.
He says Montenegrins deserve independence if they will it, because they succeeded in peacefully sustaining a fragile, multi-ethnic democracy during the Balkan wars when other countries descended into disastrous conflict.
One need not be an expert on Balkan history to see what was the cause of Yugoslavias collapse and the wars. It was Serb nationalism, he says.
Serbias continued proclivity for bullying in the region supports the prime ministers warning that malignant nationalism is still alive and influential in Serbia. Although Slobodan Milosevic, the former Yugoslav president, is imprisoned in the Netherlands during his war crimes trial, his successors echo his gruff tone.
Vojislav Kostunica, the Serbian prime minister scoffs openly at the idea of Montenegrin independence.
How can Montenegro be independent? Its entire population is smaller than Belgrades, Mr Kostunica says. He also insists that more than 260,000 Montenegrin nationals resident in Serbia - including many who have lived there for decades - be invited to vote in Montenegros anticipated referendum, a standard that would contravene union rules and almost certainly tilt the poll in Belgrades favour.
Mr Djukanovic calls Mr Kostunicas demand an outrage. It is only fair that the future of Montenegro be decided by those who truly link their fate to this country, he says.
The only difference between Milosevic and Kostunica is that Kostunica would not and indeed could not use force to achieve his goals. But he will do everything he can to thwart Montenegros independence, and he will do so in a craftier way than Milosevic ever did, Mr Djukanovic says.
This could include use of Serbias intelligence resources in Montenegro, officials in Podgorica warn.
Mr Djukanovic promises a referendum on independence by next April if he cannot negotiate a break with Serbia before then. The coming months will be interesting.

The North: Poor region gives its vote on independence to pragmatism
By Eric Jansson
Ruzica Vojinovic, a loan officer for Podgorica-based Opportunity Bank, straddles two very different worlds.
Most weekdays, she works in the mirrored, air-conditioned offices of the bank, a US owned micro-finance specialist that dares to offer credit where other banks fear to tread. But Ms Vojinovics grittier fieldwork also takes her three hours north along serpentine roads into Montenegros soaring Dinaric Alps.
Twenty of her clients live in and around Zabljak, a small town beset by poverty like most of the north, in spite of being the countrys leading playground for skiers and mountaineers.
She describes it as a journey into near total economic isolation.
If ever Ms Vojinovic feels tempted to take for granted the comforts of a life in finance a visit to the Stevovic family will bring her down to earth.
The three - mother Lenka, father Trifun and adult son Ljubisa - live in a rustic cabin on a pristine highland meadow. As dairy farmers and beekeepers, they eke out a living by keeping two cows, a calf and 30 hives.
Twelve months after Ms Vojinovic granted them an 18-month, 5,000 loan at 1.8 per cent monthly interest, to help them grow their business, Ljubisa says they will need all six remaining months to pay it off.
Opportunity Bank? They should call it Mosquito Bank, such bloodsuckers they are, he jokes, winking at Ms Vojinovic, who giggles.
Of course we are happy with the loan, he adds, it is the only credit available of its kind.
But the Stevovices express deep dissatisfaction with the overall economy. Trifun says that it is nearly impossible to sell milk, because Montenegros small farmers operate entirely without state help while competing against European importers who are cushioned by subsidies. We need protection, he says.
Help remains scarce. Most private investments in the north go to tourism, the perennial high-yield favourite, instead of traditional industries such as farming and forestry.
Policy makers in Podgorica likewise tend to overlook low-yield industries in the sparsely-populated north. For them, the north is a hard nut to crack, and the benefit of trying is minimal. Only a quarter of the countrys population lives there, and because of ancestral origin many northerners consider themselves more Serb than Montenegrin.
Milan Popovic, chairman of Zabljaks city council, says: We were even cut off from Podgorica by snow last winter. To get there we had to travel to Serbia and down a different way.
Leaders in Belgrade aiming to derail Montenegros independence movement view local politicians such as Mr Popovic as natural allies.
Mr Popovic says leaders in Podgorica wrongly blame Belgrade for home-made failures at the same time as he belittles every constructive step Montenegros government takes in Zabljak.
For example, he writes off as a Potemkin village farce the arrival of state funds for renovating the battered central area. The effort only diverts attention from Podgoricas effort to suffocate us and take everything, he says.
Such complaints resonate with many northern families, including some supporters of independence from Serbia such as the Stevovices. Trifun, the father, an ardent anti-communist, still blames Podgorica for failing to decentralise power.
Economic power has just been centralised in a new way, with new victims, he says.
But fears that Montenegrin independence could pit the north against the south were eased by a surprise victory for a pro-independence candidate last year in Zabljaks local elections.
Isailo Sljivancanin, Zabljaks new mayor and a keen political rival of Mr Popovic, campaigned successfully by redirecting blame for the norths woes, reminding voters that their poverty began under communism, not under Montenegros current leadership.
Ironically, Mr Sljivancanin enjoys Serb nationalist sympathy. Serbs know him best as a close relative of Veselin Sljivancanin, a former Yugoslav colonel detained in The Hague while facing international war crimes charges over alleged Serb atrocities committed a decade ago in Vukovar, Croatia.
Mr Sljivancanin insists there will be no trouble if Montenegro votes for independence. Democracy is maturing. I do not believe in the potential for disturbances in the north. People these days are most interested in how they will live, not which country they live in. Its the economy, not politics, that counts.
Unfortunately for Belgrade, Mr Popovic hints that he agrees. If they really help us out economically, we will work with the government in Podgorica.
Therein lies the real price of Montenegros unity.

Tourism: Expected rapid growth tests infrastructure
By Eric Jansson
Drive south from Podgorica, the sleepy Montenegrin capital, and within minutes you plunge into a gorgeous landscape of strange mountain peaks, blue-green lakes blanketed with lily pads, medieval ruins and Eastern Orthodox monasteries.
With its spectacular vistas and quiet villages, the Lake Skadar region just outside the capital has immense tourism potential in its own right.
But in Montenegro, a country spoiled by a surplus of natural beauty, most holidaymakers treat such underdeveloped regions as drive-through territory.
The mountains have always been an obstacle for day-trippers heading for the Adriatic shore. Travellers frequently spend 90 minutes or longer negotiating the high-altitude route, frustrated by blind curves, fallen rocks, dangerous traffic and sometimes low visibility in the clouds.
But a motorway tunnel through the mountains will soon change this.
The tunnel, due to open later this month, cuts travel time to as little as 40 minutes and makes the journey smooth and simple. Built by Spanish and Slovenian engineers, it promises to alter the dynamics of coastal tourism, the main engine of Montenegros 360m tourism industry.
After the 20 minute journey past Lake Skadar, drivers branch off the old road and enter the tunnel. Ten km later, they emerge from the concrete on the other side of the mountains overlooking the Adriatic sea.
The coast will become almost a suburb of Podgorica, says Miran Curin, manager of the Hotel Maestral, a resort owned by Slovenias HIT hospitality chain.
Mr Curin, like many seaside hoteliers, says he expects the tunnel to bring a year-round boost in business.
Along with obvious benefits during the high season, winter visits could also increase because the underground road bypasses seasonally icy areas.
But his quip about a coastal suburb exaggerates the tunnels likely impact.
The prime beneficiaries of quicker transport to the shore lie between Bar, the commercial seaport, and Budva, the tourist hub centred on an ornate 15th century fortified city.
Few workers in Podgorica are likely to commute on a daily basis to these parts and destinations farther away are less likely to feel an immediate impact.
Montenegro brands itself a wild beauty in its state-sponsored tourism promotions - emphasising peace, tranquillity and unspoiled nature.
The hope is that the tunnel, while boosting business, will not make access to the shore so easy that crowds drown out the quiet that still distinguishes the countrys offerings from that of busy Dubrovnik, across the border in Croatia.
State tourism authorities say foreign visits are set to boom, on the strength of the countrys political stabilisation and the recent return of British, European and Russian enthusiasts.
Analysts at the London based World Travel Tourism Council concur. They say that tourism already accounts for 14.8 per cent of gross domestic product, providing more than 22,000 jobs.
The WTTC predicts that the sector will triple in real terms during the next decade, making Montenegro the worlds fastest growing tourism market as measured by the sectors share in the overall economy.
It is forecast to grow twice as fast as tourism in Turkey or Greece and three times faster than Italy, just across the water.
To absorb the impact, the state must scramble to prepare its infrastructure.
The tunnel will ease some of the strain felt by the countrys small road network, which is crumbling in places and ill equipped to cope with many more tourists.
It will also make Podgoricas inland airport a viable alternative for foreign tourists bound for the coast, many of whom have until now preferred the seaside airport at Tivat. It may also help neglected areas near the sea, including Skadar Lake, to attract more guests.
But beyond the tunnel, investment in luxury hotels, restaurants and the countrys leaky water supply network remains key to the future of Montenegrin tourism.
Mr Curic says HITs successful 32m investment in Hotel Maestral, the sectors most important privatisation to date, shows the way.
We are pioneers in terms of foreign investment in tourism here and our experience proves that this is a place worthy of investment, he says.
HIT is on track to receive a return on its investment within 15 years but could do so faster if the WTTCs forecast proves accurate.
An important test comes in August 4, when the state plans to open a tender on three prized hotels in the resort town of Sveti Stefan.
The Hotel Sveti Stefan, perched on a picturesque island and linked to the shore by two exquisite beaches, is the main attraction.
The elegant Hotel Milocer, a former summer residence of the Yugoslav royal family, and the Queens Beach Hotel are included in the anticipated deal.
Petar Ivanovic, director of the Montenegrin Investment Promotion Agency, says that the state will offer a long term lease of the three hotels in a single package.
In advance of the tender, Mr Ivanovic says he is courting the Four Seasons company and Singapore based Amanresorts International, a luxury boutique hotelier.
The successful bidder will automatically become a major player on the coast. But the successful bidder will also be accepting a daunting challenge, renovating properties long starved of investment.

Sveti Stefan: Flawed jewel that could still be pearl of Mediterranean
By Eric Jansson
The marketing wizards behind Montenegros tourism campaigns always splash photographs of Sveti Stefan all over their literature. Why shouldnt they, when the images all but sing luxury, rest and relaxation?
The island resort, a former fishermens village of rugged stone houses, crowns a jagged rock jutting out of an azure sea. A thin pedestrian causeway of shining white stone links it to the shore, framed by two symmetrical crescent beaches lined with palms.
Bikini-clad women and bronzing men sprawl next to gently lapping waters. Before them the deep blue sea extends to the horizon while, behind, tall mountains dotted with rustic chapels rise heavenward.
The pictures do not lie. Sunbathers inhabiting this scene in the flesh know it is even better to be there.
But if you spend a night on the rock you discover the problems. Known as the Hotel Sveti Stefan since the Yugoslav communist era when Party apparatchiks chased the local fishermen and their families out of their houses and on to the hills opposite the hotel is a prime example of both Montenegros history of cruelty to its citizens and its underinvestment in tourist infrastructure.
Open the door to your suite and hope the previous guests rubbish has been taken away. It may not have been. Take a shower and pray the drainage in your bathroom works. In too many of them it does not, and the bathwater floods the floor. Pour yourself an evening drink, but first scrub the rust and mould off the caps topping the liquor in your mini bar.
Finally, read the in-house telephone directory for a sad dose of the time warp this island fell into along with the much of the former Yugoslavia during the 1990s. As the summer season opened in 2005, the directory still listed two Germanys East and West with distinct dialling codes.
The Hotel Sveti Stefan bears five stars on all its promotional literature. But apart from its fine patio restaurant staffed by fastidious, multi-lingual waiters and blessed with a jaw-dropping view of the coast, it would be more appropriately rated a two-star hotel in a five-star location.
Sipping a coffee on a stone patio bathed in glorious sunlight and surrounded by the sound of the surf, Pero Radjenovic, the laidback hotel manager, openly admits all these flaws.
To be honest, a state-owned company is not a great host. The state should get rid of this hotel as soon as it can and place it in more capable hands. We are at breaking point, he says.
Mr Radjenovic does not share the glossier views advanced by his bosses at Budvanska Rivijera, the state-owned holding company that owns the hotel along with a string of other choice properties along the coast. The companys assets include the neighbouring Hotel Milocer, which along with the Hotel Sveti Stefan and the nearby Queens Beach hotel will be offered this August in a tender for private management and refurbishment.
It sounds ludicrous, but sometimes the board of directors prefers to fund repairs at Slovenska Plaza, a lower-budget resort down the coast, Mr Radjenovic says.
I am sick of these headaches, he adds. In which he includes having to request the permission of the board for even minor repairs. One difficulty he faces is that repairs at the hotel, whose reputation as a luxury destination remains untarnished among most Montenegrins, cost more. Whenever you hire someone, as soon as they cross the causeway they charge you 20-30 per cent more to fix something, Mr Radjenovic says.
State officials say they are courting the Four Seasons franchise as well as Singapore-based Amanresorts International, seeking top-class managers with pockets deep enough to restore the glory days of the 1970s and 1980s, when the trio of attractive properties played host to royals, film stars and literati, and 70 per cent of guests were British or American.
They rarely come now, though Mr Radjenovic says Jeremy Irons, the British film star who paid a visit in 2003, the Hotel Sveti Stefans most recent high-profile guest, ran up a £60,000 bill in the best suite.
British visits are revived, back up to 35 per cent of the hotels guests. But Russians and Serbs together fill up more of the rooms.
Other hoteliers along the shore say they badly want Hotel Sveti Stefan to get its act together, so the whole coast can benefit from its magnetism.
In terms of location, Sveti Stefan means a lot for Montenegrin tourism. Most of us in the industry can hardly wait to see investment in Sveti Stefan. Then we could really say this place is the pearl of the Mediterranean, says Miran Curin, manager of the nearby Hotel Maestral, a Slovenian-owned resort.
Mr Radjenovic, a local who started his work at the hotel as an adolescent lifeguard, believes it is possible. Despite its woes, the Hotel Sveti Stefan still makes a profit on each of its 125 rooms and suites, with guests paying around 200 per night. Evidence from the competition indicates that they would be willing to pay more if the hotel were up to standard. Opposite the rock, onshore, villas go for up to 1,500 per night, apartments for up to 500.
But the manager also expresses scepticism. The Yugoslav communist land-grab in 1953 that led to the fishing villages conversion into a hotel in 1960 still haunts Sveti Stefan.
Of course people are still resentful Thats why they (state authorities) are planning to lease, not to sell. At least thats what I think. If we sold now, there would be a conflict for sure. The fact that this is still state-owned keeps everyone calm.
Everyone, that is, except for the guest whose faulty drainage system has just flooded his room.

ProMonte: Bouncing back from disappointment
By Eric Jansson
More than any other foreign investor, Norways Telenor has learned the hard way the dangers of placing blind trust in Montenegros state officials.
When Telenor reached a deal with Montenegrin authorities in 1996 allowing the company to establish ProMonte, the countrys first commercial mobile operator, company chiefs at the headquarters in Oslo celebrated the states promise of a 20-year monopoly - a highly valuable asset in the fast-evolving mobile sector at a moment when western operators were descending in force upon eastern Europe.
But in 2000, Telenor executives were shocked to learn that the same state officials had changed their minds and granted Telekom Crne Gore, the countrys fixed-line monopolist, then state-owned, a licence to launch a rival mobile operator, Monet.
Telekom Crne Gore held a 9 per cent stake in ProMonte, so its surprise decision to compete directly with ProMonte further startled Telenors executives. ProMonte immediately found its market dominance and prices undercut by Monet, and a bitter legal dispute erupted after state officials refusal to adhere to their previous agreement.
Ivar Sliper, ProMontes chief executive officer, was at the time a new arrival on the board of directors, having come in from Telenors operation in Greece. He took the companys reins in 2001, anticipating a difficult court battle.
When I came in 2001 it was my main challenge to sort this out, Mr Sliper says.
Telenor faced a classic switcheroo of a kind many foreign investors have stumbled into in eastern Europe, where some state officials invite private investment but, once they arrive, view them above all as easy targets for taxation. The companys position was unenviable. It had invested heavily in Montenegros new mobile communications infrastructure, so total withdrawal from the market was unattractive.
At the end of 2001, Mr Sliper sued for peace, reaching an out-of-court settlement with the state. In the deal, ProMonte agreed that Monet would be allowed to continue operating, but Telekom Crne Gore would sell off its 9 percent stake in ProMonte, which would receive a new operating licence from the state authorities.
In the wake of the deal, ProMonte now controls a 58 percent market share in Montenegro, a country where 80 percent of the population uses a mobile telephone.
Having lost its monopoly status, ProMonte has 280,000 regular customers, most of whom use its pre-paid service. Mr Sliper says the company bounced back from the disappointments of 2000-01 and is now satisfied with decent profitability that does not change very much.
As an indication of its satisfaction, Telenor built on its large majority share in ProMonte last year and now holds a 100 percent stake.
Competition with Monet remains very, very tough but Mr Sliper says the market benefits from the new operators presence. Every monopolist is afraid of losing his position, but when it happens everyone profits from the competition.
He adds that the lesson of ProMontes recent dispute with state officials is that personal deals are the key to smooth business operations in Montenegro, a country where some investors find the rule of law to be disappointingly weak.
But if ProMontes executives have learned how to deal effectively with leaders and bureaucrats at the state level in Montenegro, anti-business attitudes and methods still sometimes prevail at the local level.
Municipal taxes that increase on a monthly basis and differ from town to town increasingly eat into the companys profits, Mr Sliper says.
They issue taxes just to balance their budgets, and there is no fairness in it. They tax those who they know can pay.
This is hardly a stirring endorsement of Montenegros climate for new investment. But Mr Sliper predicts that the positive influence of investors will win out in the long term over bureaucratic obstructionism, making this an easier place to do business.
He downplays the political risk frequently cited by analysts as a reason to stay out of Montenegro until the countrys relationship with Serbia gets sorted out.
Telenor has not seen Montenegro as politically risky, and I do not think that political risk should prevent any foreign investment here.
Such optimism does not mask the fact that politically related risks still dog investors - including Telenor.Download