Financial Times - Montenegro Report

Yugoslavia ceased to exist in February. After more than a decade of wars and secessions it was the tiny, mountainous republic of Montenegro , with a population of 660,000, that struck the finishing blow.

It was six years in the making. Milo Djukanovic, Montenegro's former communist premier, broke with Slobodan Milosevic's Serbia in 1997. The reward for siding against the strongman of Belgrade was western support which flowed in from Washington, Brussels and other European capitals at a rate of 300m a year. Emboldened, Mr Djukanovic soon began agitating for independence.

Yet the geopolitical configuration that has emerged in Yugoslavia's place is not the one initially envisaged by Mr Djukanovic and his close circle of allies in Podgorica, the capital.

The overthrow of Mr Milosevic's regime in 2000 found them suddenly isolated as western diplomats revelled in the fleeting euphoria of regime change and then in the former Yugoslav president's sensational arrest.

Eager to accommodate Belgrade's new elite and fearful that a new case of Balkan secession would encourage further political fracturing of the region, European Union diplomats last year cajoled Mr Djukanovic into dropping plans for a referendum on independence. Instead of an outright split, the premier agreed to compromise, accepting Belgrade's offer of a more decentralised arrangement.

Serbia and Montenegro is the name of the two republics' experimental, decentralised union. Egged on by the EU, horse-trading parliamentarians from the two republics took nearly a year to draft and sign the new constitutional charter that brought the world's newest state into being.

The charter gives the union a radically downsized government, a ceremonial president and a council of ministers elected by a common parliament. In practice, it grants Montenegro the de facto independence that Mr Djukanovic had already claimed for the republic in defiance of the now-defunct Yugoslav constitution.

The deal brought fundamental laws back into conformity with reality. Montenegro had already ditched the Yugoslav dinar when it "euroised" its economy in 2002, taking the euro as its official currency and thereby declaring a high degree of economic independence.

Among other things, leaders in Podgorica needed a legal basis for the central bank they had set up.

The economy, heavily reliant on tourism and aluminium production, is unlike Serbia's, so Mr Djukanovic's government also sought a legal basis for divergent policies.

This, the new union has not entirely provided. EU officials insisted, while the constitutional charter was being drafted, that the two republics' trade rules must be harmonised if the union is to qualify for eventual membership in the Brussels-based bloc. Both sides assented, but harmonisation of trade rules remains a significant sticking point.

It is not yet clear that Belgrade and Podgorica can agree on a full, shared, set of trade rules. Recent negotiations have yielded agreements on 80 per cent of tariff rates, and both sides say they anticipate a deal shortly.

European diplomats promise in return that the EU will launch a "feasibility study" on EU membership for Serbia and Montenegro, much coveted in the two capitals.

In an interview with the Financial Times, Mr Djukanovic promised imminent harmonisation, saying Montenegro will cave in and share some trade restrictions demanded by Belgrade.

"The average tariff rate in Montenegro following harmonisation will probably be 5.8 per cent. This is higher than we desire, higher than we need. If it were up to us, our average tariff would have remained at 3 per cent. But this is the price of last year's compromise."

No longer do Montenegro's practised champions of independence plead their case on passionate, political grounds.

Mr Djukanovic and Filip Vujanovic, his close ally the president, both say the republic will stand by Serbia for the minimum three years mandated by the union's constitution, after which referendums proposing independence are permitted in either republic. Until then, it is up to the union to prove its worth. Mr Vujanovic says the government will ultimately let voters decide if it should last.

A year ago, Montenegrins were divided almost 50-50 on the question of independence. Fresh opinion polls now show that more than 55 per cent are for it.

"The union was a really bad idea. We are small, and for the Serbs we ask too much. We are becoming a liability," says Milka Tadic, editor in chief of Monitor, Montenegro's most influential news magazine. This was bound to happen, she says: "The EU has never understood how to deal with the Balkans."

The union, welcomed with delight in Brussels, is off to an inauspicious start. It had existed for only five weeks when, on March 12, a sniper gunned down Zoran Djindjic, the former Serbian premier.

Mr Djindjic was Mr Djukanovic's counterpart in negotiations over the union's creation. Privately, he preached a policy of tolerance toward eventual Montenegrin independence.

His death shocked the region and invited a wave of new US and European support that would not otherwise have been expected. Serbia and Montenegro was swiftly inducted into the continent's largest human rights group, the Council of Europe and may, by 2004, stand a chance of joining Nato's club for non-member states, the Partnership for Peace.

The Montenegrin premier says he is developing good relations with Mr Djindjic's successor, Zoran Zivkovic. But the assassination set back development of the union's infant institutions.

Serbia and Montenegro showed signs of weakness in late June when the president of the union's constitutional court resigned, describing the court's authority as "illusory" and complaining that court employees' salaries were three months overdue. Serb central bankers later said that Montenegro, having refused to pay dues to the former Yugoslavia since 1999, has yet to pay anything into union coffers.

Money is scarce. "The uncertain constitutional status is affecting investment. Combine this with Montenegro's tiny market and it is hard to see how investors would seek opportunities there," says Declan Murphy, director of the Paris-based Organisation for Economic Co-operation and Development's investment programme for south east Europe.

Yet foreign direct investment is sorely needed to boost economic and political stability. Montenegro's privatisation process brought in a big European company this year, Greece's Hellenic Petroleum. Mr Djukanovic craves more deals. They will be hard won.