Global Policy Forum

By R. Jeffrey Smith and Peter Finn

It was a heavily discounted loan for state property worth many times what Jovic paid. And it was just one of hundreds of such handouts that the leadership of the government used to reward those who did its bidding and help prolong former president Slobodan Milosevic's more than 11-year grip on power, according to newly uncovered government records.

Through artificial bank-loan rates, discounted sales of state-owned property, and in some cases outright transfers of public assets to private hands, the Yugoslav government purchased and rewarded the loyalty of an elite group of citizens.

In a country where the average monthly wage is about $35 a month, these benefits allowed the powerful and well-connected to live a separate, privileged life. "This is why Serbia is poor," said Milorad Savicevic, a respected businessman who is now heading the state-owned Genex and Zastava corporations. "We had low production, no investment and lots of corruption. The result is a nation with 4 million really poor people, and 10,000 really rich people" in a total population of 10 million, living on agriculturally fertile land.

Although many citizens knew about the corruption and their anger helped oust Milosevic in an election Sept. 24 and subsequent street protests, the depth of the official rot is just now becoming evident. In the past week, leading economists and members of the former political opposition have gained partial control of key bureaucracies--the customs bureau, national bank, Belgrade city hall, a few state-owned enterprises--after years of Socialist control.

What they found, according to more than a dozen interviews, is evidence of a complex web of illegal or unethical financial transactions. While the living standards of average citizens plummeted during the country's repeated wars, its leaders appear to have pirated hundreds of millions--and perhaps billions--of dollars worth of state-owned property or assets to enrich themselves.

"We are talking about the criminalization of the complete economy, pushing all economic activity toward the black market," said Milko Stimac, co-founder of the group G17, now overseeing the country's financial activities for the new president, Vojislav Kostunica. Milan Protic, a U.S.-educated historian who is Belgrade's newly elected mayor, said: "The things that we have found are pretty shocking." He said that officials of the Serbian Renewal Movement, which last controlled the city and for a time belonged to Milosevic's former coalition, had "donated 750 apartments which were the property of the city to relatives and friends, without any payment."

Protic said he had seen secret records associated with the 1995 transfer of an office building, valued at roughly $1 million, from the city to the Belgrade office of the Socialist Party--again without payment. The former government also allowed private businessmen to shift responsibility for their personal debts to the city, he said. And now the city has $75,000 in its bank accounts to face the winter.

The anger of many officials in the new government is fierce. Mladjan Dinkic, its top economic adviser, predicted that Milosevic would be prosecuted for corruption and said many Socialist politicians might wind up being banned by law from public life. At the heart of the Milosevic government's illicit profiteering was its decision to hold on to an official exchange rate for the nation's currency, the new dinar, that eclipsed its real value fivefold. By keeping the rate constant for years--despite an annual inflation rate approaching 50 percent--the government sought to enable its enterprises to hold down prices of basic commodities in order to buy social peace.

But the contrivance also created an easy method for the politically loyal, who were given exclusive access to the discounted rate, to reap instant profits. Most citizens had to trade at the unofficial market rate of roughly 60 dinars to the dollar, but a privileged few spent just 12 dinars for a dollar. Those given such discounted loans could immediately exchange the proceeds again for dinars on the unofficial market, realizing an instant 400 percent profit on everything they invested. "It was an amazing system of robbing people," said Rodoljub Sabic, a lawyer and adviser to the Social Democratic Party, which is part of Kostunica's coalition. "We are talking billions" of dollars obtained in this way.

Another scheme was to sell state-owned assets to insiders after artificially depressing their value, a stratagem used in corrupt privatization schemes throughout Eastern Europe in the past decade. According to Dragan Vucinic, an economist with the Social Democratic Party who says he has visited numerous banks and state-owned companies in the past week, one such enterprise was the Yugoslav Export-Import Credit Bank, which failed after the Serbian government failed to pay a huge debt. The government then became the liquidation manager, at once planning to clear its debt and realize fresh cash on the bank's property.

Many other corruption schemes were employed, according to officials in the new government. Trucks of goods imported by favored businessmen were assessed duties at a fraction of the required rate; patronage determined who received import-export licenses; Belgrade politicians were notorious for collecting under-the-table fees of $2,000 to $3,000 for licenses to open street kiosks and for skimming 40 to 50 percent of the value of city contracts in illegal fees.

Goran Vesic, an official of the Democratic Party, the largest of 18 parties in a coalition that backed Kostunica, said that most of the state-owned business space in downtown Belgrade was sold to favored customers at the extraordinarily low rate of one German mark per square meter; he said it should have been sold for at least 3,000 times more. "We have publicly said that we will re-examine all of these deals," Vesic said.

Officials in the new government say they suspect, but cannot prove, that billions of dollars in ill-gotten gains have been spirited out of the country to such destinations as Russia, Kazakhstan, China, Mongolia and the Middle East. Kostunica has told Western European governments that he is eager for assistance in tracking down some of the funds, but few experts anticipate any quick seizures.

The messy transfer of power from Milosevic to Kostunica has set off a scramble in dozens of towns and cities for access to potentially incriminating financial records. In one of the most dramatic incidents, Borka Vucic, Milosevic's 72-year-old personal banker, showed up alone at the main branch of Beogradska Bank in Belgrade shortly after midnight on Oct. 15. Until two days earlier, she had been president there. But security guards, acting on instructions from the new bank president, a temporary appointee, refused to let her in. About 15 minutes later, a group of armed men used scaffolding on the side of the building to climb up to the first floor, break some windows and enter. They quickly overpowered the security guards and let Vucic in. Vucic spent the next hour in her office and left with a small collection of documents in a bag carried by a member of her armed entourage, according to Jovan Vidojevic, then the bank's interim president.

Milosevic's opponents suspect she removed critical documents about his financial dealings at Beogradska Bank; they have nonetheless quietly hired her as a consultant to help make sense of the financial mess. Through Beogradska, Vucic was able to control roughly two-thirds of the country's financial market, according to Stimac; two other close Milosevic associates controlled the remaining one-third through other banks. The Yugoslav national bank was "turned into a passive administrator of the national oligarchy," Stimac said.

When he visited the national bank shortly after Kostunica took power to warn against the destruction of any documents, Stimac encountered deep anxiety in the office of its Milosevic-era governor, Dusan Vlatkovic. "For me, it was a new experience," Stimac said. "For 10 years, I was afraid. This time, they were trembling." Special correspondent Zoran Radjen in Belgrade contributed to this report.