Country Commercial Guides can be ordered in hard copy or on diskette
from the National Technical Information Service (NTIS) at
1-800-553-NTIS. U.S. exporters seeking general export information and
assistance or country-specific commercial information should consult
with their nearest Export Assistance Center or the U.S. Department of
Commerce's Trade Information Center at (800) USA-TRADE, or go to one of
the following web sites: [www.buyusa.com](http://www.buyusa.com/),
[www.export.gov](http://www.export.gov/) or
[www.tradeinfo.doc.gov](http://www.tradeinfo.doc.gov/).

CROATIA COUNTRY COMMERCIAL GUIDE FY 2004

1\. EXECUTIVE SUMMARY

2\. ECONOMIC TRENDS AND OUTLOOK

A.  Major Trends and Outlook

B.  Principal Growth Sectors

C.  Government Role in the Economy

D.  Balance of Payments Situation

E.  Infrastructure Situation

3\. POLITICAL ENVIRONMENT

A.  Nature of Political Relationship with the United States

B.  Major Political Issues Affecting Business Climate

C.  Brief Synopsis of Political System

4\. MARKETING US PRODUCTS AND SERVICES

A.  Distribution and Sales Channels

B.  Use of Agents and Distributors; Finding a Partner

C.  Franchising

D.  Direct Marketing

E.  Joint Ventures/Licensing

F.  Steps for Establishing an Office

G.  Selling Factors/Techniques

H.  Advertising and Trade Promotion

I.  Pricing Product

J.  Sales Service/Customer Support

K.  Selling to the Government

L.  Need for a Local Attorney

5\. LEADING SECTORS FOR US EXPORTS AND INVESTMENT

A.  Best Prospects for Non-agricultural Goods and Services

B.  Best Prospects for Agricultural Products

### C. Doing Business with the Croatian Ministry of Defense and Defense Industry

6\. TRADE REGULATIONS, CUSTOMS AND STANDARDS

A.  Trade Barriers, Including Tariffs, Non-Tariff Barriers and Import
    Taxes

B.  Customs Valuation

C.  Import Licenses

D.  Export Controls

E.  Import/Export Documentation

F.  Temporary Entry

G.  Labeling, Marking Requirements

H.  Prohibited Imports

I.  Standards

J.  Free Trade Zones/Warehouses

K.  Special Import Provisions

L.  Membership in Free Trade Arrangements

7\. INVESTMENT CLIMATE STATEMENT

A. Openness to Foreign Investment

B. Conversion and Transfer Policies

## C. Expropriation and Compensation

D. Dispute Settlement

E. Performance Requirements/Incentives

F. Right to Private Ownership and Establishment

G. Protection of Property Rights

H.  Transparency of the Regulatory System

I.  Efficient Capital Markets and Portfolio Investments

J.  Political Violence

K.  Corruption

L.  Bilateral Investment Agreements

M.  Labor

N.  Foreign Trade Zones/Free Ports

O.  OPIC and Other Investment Insurance Programs

P.  Foreign Direct Investment Statistics

8\. TRADE AND PROJECT FINANCING

A.  Brief Description of Banking System

B.  Foreign Exchange Controls Affecting Trading

C.  General Financing Availability

D.  How to Finance Exports / Methods of Payment Required for Exports

E.  Available Trade and Project Financing

F.  List of the Largest Croatian Banks with Correspondent U.S. Banking
    Arrangements

9\. BUSINESS TRAVEL

A.  Business Customs

B.  Travel Advisory and Visas

C.  Holidays

D.  Business Infrastructure

10\. ECONOMIC AND TRADE STATISTICS

Appendix A: Country Data

Appendix B: Domestic Economy

Appendix C: Trade Statistics

Appendix D: Investment Statistics

11. US AND COUNTRY CONTACTS

12. MARKET RESEARCH

13. TRADE EVENT SCHEDULE

1\. EXECUTIVE SUMMARY

Since independence twelve years ago, Croatia has achieved significant
progress in developing a market economy and positioning itself
regionally. Major accomplishments are: membership in the Council of
Europe (October 1996), joining NATO\'s Partnership-for-Peace (May 2000),
accession to the World Trade Organization (November 2000), signing a
Stabilization and Association Agreement (SAA) with the European Union
(October 2001), entry into NATO's Membership Action Plan (May 2002), and
submitting a formal membership application to the European Union
(February 2003). Croatia's democratic coalition government, elected in
January 2000, has supported and played an active role in regional
initiatives such as the Stability Pact and Southeast Europe Cooperative
Initiative.

Prime Minister Racan's government has pursued a course of economic
reforms and a relatively transparent privatization program to restore
macroeconomic and financial stability. The government has made good
progress in reducing inflation, restraining the fiscal deficit,
increasing growth and \-- in the past year\-- reducing unemployment. An
unexpectedly high current account deficit and larger-than-expected GDP
growth in 2002 led the government to introduce measures to restrain
lending in an effort to prevent an overextension of credit and to slow
the growth of imports. Foreign direct investment has come mainly from
the privatization of state-owned utilities and enterprises. Further
reducing unemployment, controlling the government deficit and judiciary
reform remain pressing issues for the government.

Foreign direct investment for 2002 totaled \$ 980 million as compared
with \$1.4 billion for 2001 (which included \$500 million for a 15%
share of Croatian Telecom); total FDI between 1993-2002 amounted to
\$7.47 billion. While the U.S. share is 14.7%, Austria is the largest
investor with 28.6%. Partial privatization of the Croatian state oil and
gas company, INA, is expected in the second half of 2003.

Croatia's imports totaled \$10.7 billion in 2002, with \$5.97 billion
(55.8%) coming from the European Union (its major trading partner). In
2002, the U.S. ranked eighth on the list of individual countries
exporting to Croatia; U.S. exports of \$308 million, which was an
increase over \$297 million in 2001, represented only 2.9% of total
imports.

Best prospect sectors for U.S. exports are: telecommunications
equipment, energy services, medical equipment, port infrastructure,
environmental equipment and services, and consumer goods. A new sector
that may hold promise for U.S. firms is franchising. The Croatian market
for imported food products, currently dominated by European suppliers,
continues to grow, with high-value food items as the single largest
segment.

U.S. Government programs that support trade and investment -- OPIC, TDA
and ExIm Bank -- are all open and active in Croatia. The Commercial
Service provides counseling and advocacy for U.S. firms as well as
offering a full range of business facilitation services (Gold Key
Matching Service, Single Company Promotion, International Partner
Search, International Company Profile and Customized Market Analysis) to
assist U.S. companies interested in pursuing opportunities in the
Croatian market.

2\. ECONOMIC TRENDS AND OUTLOOK

A. [Major Trends and Outlook]{.underline}

Croatia\'s coalition government entered office in early 2000, facing a
fiscal crisis caused by the economic mismanagement and excessive
spending of the previous war-era government of Franjo Tudjman. The new
Racan government, with the support of the international community and
International Financial Institutions (IFIs), embarked on economic
reforms and a more transparent privatization program designed to restore
and maintain macroeconomic and financial stability. In the last three
and a half years, there has been considerable progress. Inflation and
the consolidated central government deficit have been reduced, the
exchange rate of the kuna is stable against the Euro, interest rates
have fallen, and bank lending boomed last year. Unemployment appears to
have peaked in 2001 and positive trends (lower unemployment, more
employment in private sector firms) emerged in 2002. GDP grew by 3.8
percent in 2001 and by 5.2 percent in 2002.

The main thrust of current economic policy is to establish Croatia as a
competitive market economy integrated into larger European and global
markets. The foundation for Croatia\'s integration into Europe is the
2001 Stabilization and Association Agreement (SAA) with the EU, which
will enter into effect once ratified by all EU countries' parliaments.
Under an interim agreement in effect since January 2001, Croatia has
established bilateral relations with the EU on trade, transportation and
certain legal matters. The EU has unilaterally opened its market to most
Croatian products. Under the SAA, Croatia lifted customs duties for EU
countries on 70 percent of the tariff base for industrial products as of
January 2002, and will continue to reduce tariffs progressively through
January 2007. In February 2003, Croatia formally presented its
application for EU membership.

*IMF Precautionary Stand-By Arrangement*

After coming into office in 2000, the government expanded cooperation
with the IMF and the IBRD (World Bank). In March 2001, Croatia signed a
precautionary Stand-By Arrangement (SBA) with the Fund, which it
successfully concluded in May 2002. The IMF reported that, \"although
policy implementation was mixed, particularly in the structural area,
performance ...was broadly satisfactory.\" The government met
performance criteria for the 2001 fiscal deficit and government
employment reduction, while it outperformed targets for growth,
inflation and international reserves. Areas of weakness included
slippages in early 2002 fiscal deficit targets, excessive bank credit to
the government and state enterprises, and arrears.

In February 2003, the IMF approved another 14-month Stand-By Arrangement
for SDR 105.9 million (about \$146 million) to support the country's
economic and financial program through April 2004. Even though the
Arrangement is once again only \"precautionary,\" the SBA is important,
since it underscores international support for the Racan government\'s
economic policies and boosts the country\'s international credit rating.
A major focus of this SBA is stabilization of the general government
debt ratio, keeping a lid on the government wage bill as well as
strengthening of the legislative framework (financial operations, labor
and competition policy).

*The World Bank\'s Structural Adjustment Loan (SAL)*

On December 5, 2001, the World Bank\'s Board of Executive Directors
approved a \$202 million SAL for Croatia. \$102 million was disbursed
soon after the SAL came into force. Disbursement of the second tranche
worth \$100 million is contingent upon the government fulfilling a
number of conditions, the deadline for which has been extended from
March 31 to July 31, 2003. The loan complements the macroeconomic
framework supported by the IMF\'s Stand-By Arrangement. The main
objectives of the SAL are to (a) increase flexibility and efficiency of
the economy to generate jobs and exports; (b) strengthen market
institutions and fiscal discipline; and (c) improve the framework for
increased competitiveness, especially by improving the environment for
small and medium enterprises. The SAL program will also assist the
government to improve coordination of economic policymaking, strengthen
market institutions, and enhance the flexibility of the labor market.
Another major focus will be on strengthening and better targeting social
protection programs to alleviate the social consequences of structural
reforms. In addition to the SAL, the World Bank currently has fourteen
active projects in Croatia worth over \$1.221 billion, including a \$156
million loan approved for the Rijeka Gateway project in July 2003.

*GDP Growth*

Under the Racan government\'s relatively tight fiscal and monetary
policies, macroeconomic growth recovered in 2000, 2001, and 2002, with
GDP reaching 2.9, 3.8, and 5.2 percent respectively, despite the
economic downturn in Europe, Croatia\'s major trading area. Structural
reforms have lagged behind fiscal and monetary reforms. The government
clearly understands the importance of increasing foreign direct
investment (FDI), especially greenfield investment, in order to create
jobs, but many bureaucratic and administrative barriers to investment
remain in Croatia. In the final year of the Racan government\'s mandate,
policymakers are continuing with fiscal austerity measures but need to
focus more intently on eliminating market barriers to improve the
Croatian business climate (passage of key legislation in June and July
2003 are important steps in the right direction).

*Inflation*

Inflation in 2002 fell to 2.3 percent from 4.9 percent the year before.
Principal factors behind the lower rate included lower world prices for
imported oil and raw materials and increasing competition in the
domestic market, which resulted from a greater openness to international
trade. Croatia became a full member of the WTO in November 2000. Under
the Stability and Association Agreement Croatia lifted customs duties
for EU countries on 70 percent of the tariff base for industrial
products as of January 2002. Budget restraint also contributed to lower
inflation as the government continued to hold the line on wage increases
in the public administration.

*Unemployment*

Reducing unemployment is one of the government\'s top political
priorities in preparation for the general election to be held, most
likely, at the end of November 2003. In a population of approximately
4.4 million (2001 census), and with an active labor force of over 1.7
million in June 2003, around 320,000 are registered as unemployed, while
1.05 million are pensioners. Using the standard definition of
unemployment used by the International Labor Organization (ILO),
unemployment averaged 14.8 percent in 2002, down from 15.8 in 2001.
Unemployment dropped to 14.4 percent over the last six month of 2002.
Through June 2003, the decline in unemployment continued, resulting in a
17 percent decrease in the number of unemployed persons registered with
the Croatian Bureau of Unemployment in comparison with June 2002. The
main sources of new employment in 2002 were in crafts, trades and
freelance work.

Understanding the true impact of unemployment in Croatia is difficult
because of the significant gray economy. The government has announced a
program to pull this sector into the formal economy, but it will be a
slow task given Croatia\'s high rate of taxation, the generous worker
benefits protected by labor laws, the high rates of social security and
other contributions required of workers and employers, and seasonal
employment activities, such as tourism.

During 2002, the government initiated a reform that created an
opportunity for private initiative in employment intermediation, so that
a number of independent, private \"head-hunting\" (employment) agencies
were registered over the past year. This contributed to positive trends
in reduction of unemployment. In July 2003, the government passed
changes to the Labor Code that should introduced more flexibility and
enhance the competitiveness of Croatian labor in the world market.
Necessary restructuring in several areas, including shipyards and
agriculture, will eventually result in increased layoffs and may slow
the decrease in unemployment.

Government plans call for a cut of approximately12,000 jobs in the armed
forces and Defense Ministry and, by mid-year 2003, the plan appears to
be more or less on target. The World Bank\'s SAL is attempting to
address labor market rigidities. Cultural factors, such as lack of
geographical mobility, overly specialized education and reluctance to
change tasks combine to prevent many Croatians from taking new jobs.

*Interest Rates*

In 2002, there were 46 banks operating in Croatia. Loan activities in
Croatia\'s rehabilitated banking sector, now 90.2 percent foreign-owned,
continued expanding in 2003. Lending to households resumed rapid growth
particularly in the last quarter of 2002, when it expanded at a faster
rate than lending to business entities. Loans approved by commercial
banks in 2002 increased by 30.5 percent in comparison with 2001. One
consequence of high bank liquidity, continued consolidation in banking,
and intensified competition was a decrease in average interest rates on
loans linked to foreign currency from 9.3 percent at the end of 2000 to
8.2 percent at the end of 2002. The Croatian National Bank cut the
annual discount rate in October 2002 to 4.5 percent. To curb excessive
expansion in lending, the Croatian National Bank passed a decree at the
beginning of 2003, which restricted growth in bank lending to 16
percent.

Some analysts believe that Croatian banks place disproportionate
emphasis on collateral versus potential business income when doing
cost-benefit and risk analyses of business loans, compared to western
counterparts. This could lead to a bias towards consumer loans over
business loans.

*Fiscal Factors*

The consolidated central government deficit on an accrual basis declined
sharply from 6.8 percent of GDP in 2001 to 4.8 percent of GDP in 2002.
Government spending amounted to 49.8 percent of GDP in 2002. Total
central government expenditures plus net borrowing amounted to HRK 74.9
billion. As a result of investments in infrastructure, there has been a
rapid increase in the share of capital expenditures from 5.9 percent in
2001 to 11.6 percent in 2002. Consolidated central government revenues
on a cash basis totaled HRK 70.9 billion. The biggest increase in
revenues came from profit taxes and customs duties. In 2002,
privatization receipts were HRK 2.3 billion, which came mainly from the
sale of banks and hotels. In 2002, revenues from Value Added Tax (VAT)
represented some 34 percent and social security contributions
represented over 31 percent of total revenue. Wages in the public sector
continued to decline on the average by 2.4 percent in the period
2000-2002. The consolidated central government budget for 2003 provided
for a nominal increase in the total wage bill of two percent. Budgetary
effects from downsizing in military are expected in 2003 due to payment
of severance and changes in wage structure within the Ministry of
Defense.

*Monetary Policy*

Relatively tight monetary policies and the Central Bank's interventions
kept the rate of the Croatian kuna stable against the euro. In 2002, the
kuna appreciated 14.5 percent against the U.S. dollar. The average
exchange rate in 2002 was HRK 7.86 to \$1.00. Depreciation of the U.S.
dollar continued in 2003 and in July the rate was about HRK 6.5 to
\$1.00.

The most significant recent event in the monetary area was the
conversion of the European Monetary Union (EMU) states\' currencies to
the euro during the fourth quarter of 2001. Croatian citizens converted
foreign exchange valued at EUR 2.1 billion before the end of 2001. Since
much of this currency had been out of circulation \"under the
mattress,\" there was a major increase in the banks\' deposit base.
According to the Croatian National Bank, Croatians did not immediately
withdraw their euros after January 2002, so bank liquidity was high in
2002. Due to this lingering positive effect of the conversion to the
euro, increased confidence in banking and revenues from tourism, the
Central Bank\'s international reserves reached \$5.8 billion at the end
of 2002, the highest level in eight years.

*External Debt*

Croatia\'s external debt exceeded \$15 billion in 2002, which represents
35 percent increase over 2001 and accounts for 68 percent of GDP (some
of this increase was related to depreciation of the dollar against the
kuna). The government\'s share in total external debt remained high, at
\$6.3 billion, or 41.2 percent, but bank borrowing contributed the most
(42.3 percent) to the increase in external debt. By the end of April
2003, external debt reached \$17.4 billion.

In February 2003, government-issued Eurobonds in the amount of EUR 500
million. Their maturity is in 2010 and interest rate is 4.625 percent.
In May 2003, the government issued for the first time long-term bonds on
the domestic market in the amount of one billion kuna (approximately
\$127 million) in bonds with maturity of 5 years and yielding 6.125
percent. In June 2003, Croatia placed 25 million yen worth of Samurai
bonds on the Japanese market, to mature in 2009 at an annual interest
rate of 1.23 percent.

Croatia has made steady progress in repaying the debt it inherited with
the dissolution of the Socialist Federal Republic of Yugoslavia (SFRY).
Total external debt for the SFRY stood at \$15.3 billion in 1991. This
amount was \"internally\" divided into \$12.2 billion allocated debt
among the successor states of Yugoslavia, with \$3.1 billion of total
non-allocated debt (no identifiable user.)

In 1995, Croatia and the Paris Club agreed on a standard rescheduling of
debt for reasonably well-off countries (over ten years with a five-year
grace period), with arrears of \$100 million to be repaid in ten
semi-annual installments beginning in 1996. In 1996, Croatia reached
agreement with the London Club regarding the treatment of Croatia\'s
share of approximately \$4.7 billion-worth of SFRY bank debt. Croatia
agreed to accept responsibility for 29.5 percent of the \$4.4 billion of
debt incurred by the SFRY under the New Financing Agreement (NFA) of
1988. Croatia also accepted 19.7 percent of \$300 million that was
incurred under the 1988 Trade and Deposit Facility Agreement. According
to the Ministry of Finance, at the end of June 2003, Croatia owed the
London Club a total of \$876.1 million. The total outstanding stock of
debt to the Paris Club was \$613.9 million.

B. [Principal Growth Sectors]{.underline}

-   [Tourism]{.underline} - Croatia, with a population of about 4.4
    million, hosted 6.9 million foreign tourists, who spent a total of
    \$3.8 billion in 2002. In 2002, revenues from Croatian tourism
    increased for a third year in a row; in nominal terms, revenues
    increased by 5 percent over 2001. Even though the capacity measured
    in number of beds increased by over 11 percent (804,436) in 2002
    compared to 2001 (722,525), Croatia continues to suffer from a
    shortage of capacity, particularly during the main season when
    demand is strongest. Using the production approach to measuring GDP,
    real gross value added in tourism increased by 7.5 percent in
    comparison with 2001 when the annual growth rate was 5.7 percent.
    Between 1993-2002, \$247.4 million was invested in Croatian hotels,
    restaurants and other tourism infrastructure. New construction and
    refurbishment of war-damaged or neglected existing hotels is
    evident, especially along the Dalmatian coast. In addition to the
    need to increase the number and quality of accommodations, the
    industry needs more modern managers with better marketing skills.
    The EBRD is assisting the government with a program to upgrade
    certain tourist facilities, and there are other programs in place to
    develop the industry to make Croatian tourism more competitive with
    other Mediterranean countries.

-   [Construction]{.underline} -- Along with tourism, construction is
    perhaps the sector with the highest potential for growth in 2003. In
    2002, as a result of large infrastructure projects, construction
    reached 13.9 percent in gross value added, which was the highest
    growth rate of any sector. Since the recession of 1998-1999 and the
    rehabilitation of Croatia\'s banking sector, loan financing has
    become more available, especially for tourism-related construction.
    There are also big infrastructure projects in place (road
    construction) or planned (ports and oil refinery reconstruction),
    most financed by International Financial Institutions like the World
    Bank, export-import banks, and the European Investment Bank. The
    U.S., along with European and other partners working together within
    the Balkan Stability Pact, have pledged assistance to repair the
    war-damaged and outdated Croatian infrastructure. Modernization and
    upgrading to European Union standards are also key components of the
    Stabilization and Association Process, which Croatia kicked off in
    November 2000, after concluding a Stabilization and Association
    Agreement with the EU.

-   [Energy sector]{.underline} - The Croatian energy sector is being
    reformed in three stages: enacting regulations, liberalizing the
    market, and privatization. Three large state-owned companies
    dominate the sector in 2003; however, in 2001 the Croatian
    government adopted privatization laws to regulate the sale of the
    parts of the Croatian power company (HEP) and the oil company, INA.
    The state is not expected to relinquish its majority ownership of
    the pipeline company, JANAF.

> Analysts predict that over the next decade Croatia will require an
> additional 1,500 megawatts of installed capacity from thermal and
> hydro power plants. Expansion will require an estimated \$4.4 billion
> (46 percent for generating capacity, 16 percent for transmission, and
> 38 percent for distribution). The program calls for a 60 percent
> foreign share, mainly in the new hydro power plants, which would be
> built under independent power producer (IPP) and single buyer schemes.
>
> In 2000 and 2001, the government passed decrees that deregulated
> price-setting policies, and adopted a national strategy for the
> development of the energy sector. Under the strategy, technology for
> renewable energy sources should receive more attention. Each of the
> three large, state-owned companies is preparing to undertake
> significant investments over the next few years. INA is planning
> considerable investment into reconstruction and upgrade of two of its
> refineries and it is exploring the feasibility of enhanced oil
> recovery, underground gas storage, and residual fuel oil reduction.
>
> Prospects are encouraging for the development of pipeline transport
> through Croatia. Government-private strategic partnerships are a
> possibility in this area. The company has already started with initial
> investments in pipeline reversal and upgrade needed for DruzbAdria
> project to export crude oil from Russia through the Adriatic port of
> Omisalj. The DruzbaAdria agreement sets the uniform transit tariff of
> \$0.64 per 100 ton-kilometers for the first phase, which envisages
> transport of five million tons per year of crude oil exports from
> Russia to the Adriatic coast.
>
> In addition to DruzhbAdria project, another major international
> pipeline, the SEEL (South East European Line), to export oil from
> Caspian Sea region over the Black Sea and through Romania, Serbia and
> Croatia, is being explored. A TDA-funded feasibility study will be
> completed in summer 2003.

-   [Transportation]{.underline} - In 2001 and 2002, real gross value
    added in transport increased by some 6.8 percent. In 2002, it
    contributed 9.6 percent to GDP in comparison with 9.1 percent
    in 2001. Three major highway routes intersect on Croatian territory:
    the highway from Zagreb to Belgrade; the highway from the Hungarian
    border to the port of Rijeka, and the highway from Bregana
    (Slovenian border) through Zagreb to Split and Dubrovnik. Because of
    geography and the new dynamic toward regional cooperation, road
    transport has been developing faster than other means of
    transportation, and this trend is expected to continue. The highway
    from Bregana to Split and Dubrovnik has the best prospects for
    heavier traffic. Several projects, many with financing from the
    IFIs, are ongoing. Over the period 2000 -- 2005, Croatian Motorways
    Agency (HAC) plans construction of 450 km of highways (most of it in
    2003 and 2004) and 81 km of roads. HAC is undertaking the
    construction of 400 km of highways, while the remaining 50 km are
    expected to be built as concessions, as well as 81 km of roads.
    After 2005, there are plans to construct another 373 km of highways.
    The cost of 2000-2005 highway construction program is around HRK
    16.2 billion (about \$2.5 billion). An additional HRK 1.2 billion is
    expected to be spent on regular road maintenance.

-   Civil aviation traffic has also experienced a recovery in the last
    several years, after being negatively affected by the Kosovo crisis
    in 1999. Significant increases in passenger traffic in 2000 and 2001
    slowed down in 2002, during which passenger traffic at Croatian
    airports reached 2.54 million, approximately 5 percent higher than
    in 2001. This is still less than half of a record, pre-war 1987
    figure of 5.45 million. Plans to expand/reconstruct several airports
    in Croatia have been postponed as a result of reduced passenger
    projections and until the government adopts a clear strategy. Air
    traffic control services will be modernized thanks to a \$40 million
    EBRD and EIB financed project to construct and equip the new air
    traffic control center in Zagreb.

-   Shipping/water transport is recovering at a slower rate,
    particularly along Croatia\'s four major rivers. After a troubled
    period from 1999-2000, sea transportation became much better
    organized in 2001 and is expanding, thanks to a better tourist
    season and the accompanying increased interest in travel to the
    Adriatic islands during the tourist season. This area of
    transportation is a high priority for the government not only
    because of the need to develop the tourism sector, but also because
    the current government pledged to improve the ties of their
    constituents on the islands with the mainland. In December 2002, the
    governments of Slovenia, Serbia and Montenegro, Bosnia and
    Herzegovina and Croatia signed an agreement on a navigation regime
    on the Sava river.

C. [Government Role in the Economy]{.underline}

On the demand side, government spending in 2002 reached 49.8 percent of
GDP after the Racan government initially succeeded in reducing
expenditures to 47.2 percent of GDP in 2000 and to 45 percent in 2001. A
major focus of the latest precautionary Stand-By Arrangement with the
IMF was stabilization of the general government debt ratio and reducing
the fiscal deficit.

In its three and a half years in office, the Racan government has
maintained a commitment to privatization of state enterprises as an
integral part of Croatia\'s transition to a market economy. Transparency
of the privatization process has been greatly improved since the crony
capitalism of the Tudjman era, but the pace is still slow. Among large
state enterprises, which are privatized individually under separate
laws, most of the banks and Croatian Telekom have been sold. Around a
dozen other large firms remain in government hands. MOL of Hungary was
declared winner of a 25 percent plus one share of the state oil
enterprise (INA) in July 2003. An attempt to sell Croatia Osiguranje,
the state-owned insurance company that controls over half of the market,
failed in 2002 because the bids were considered too low. Privatization
of the electric power utility company (HEP) has also been approved by
the parliament, but the company needs to be restructured and
\"unbundled\" prior to tendering, and thus privatization of the
generation and distribution businesses is not expected before 2004.

In May 2002, the Ministry of Defense formally handed over to the
Croatian Privatization Fund (CPF) ten military recreation properties for
eventual privatization. Although the Ministry puts the value of these
properties at just over \$1 billion (probably an inflated figure), the
facilities will require substantial renovation. In addition, the CPF is
only receiving title to the buildings, and not to the land.
Nevertheless, these attractive properties have the potential to lure
investors.

The other tier of privatization is the mix of smaller firms whose
state-owned shares were transferred to the CPF. The approximately 1,000
companies in the portfolio are in three general categories: tourist
facilities, agricultural enterprises (including the "self-management"
era \"agrokombinats\"), and other industrial and commercial firms.
Although buyers are difficult to find for these insolvent, debt-ridden
enterprises, the number in the CPF\'s portfolio has been reduced by
almost half since 1999. In addition to the poor financial condition of
these companies, land ownership problems \-- particularly for seacoast
tourist and agricultural properties \-- have hampered sales. As the
government approaches the end of its mandate, the momentum for
privatization appears to be stalling, in part because of political
concern over the job losses that privatization will likely bring and a
fear of losing control of economic assets to foreigners. Due to
intra-coalition and political infighting, the office of President of the
Fund has been vacant since spring 2002. A new Privatization Law is being
drafted.

D. [Balance of Payments Situation]{.underline}

Croatia has made major strides in opening up the economy in recent
years, and currently over 85 percent-90 percent of Croatian trade is
conducted under Free Trade Agreements (FTAs) with 31 countries. An
interim FTA with the EU, negotiated within the framework of the
Stabilization and Association Agreement, has been in effect since
January 1, 2002. In February 2003, Croatia formally presented its
application for EU membership. Under the umbrella of the Balkan
Stability Pact\'s Memorandum of Understanding on Trade Facilitation and
Liberalization, the government signed and ratified an FTA with Serbia
and Montenegro in May 2003. It should go into effect once ratified by
the Serbia and Montenegrin government. On March 1, 2003, Croatia joined
the Central European Free Trade Area (CEFTA).

The slow restructuring of non-competitive industries, lagging
privatization of state-owned enterprises, and limited foreign direct
investment (FDI) are the major factors behind Croatia\'s trade deficit.
In 2002, Croatia exported goods worth \$4.89 billion, at an annual
growth rate of 4.7 percent. Imports in the same year were worth \$10.7
billion, having grown annually by 17 percent. The imbalance resulted in
a foreign trade deficit of \$5.8 billion, a 29.7 percent increase over
2001 (during which the annual growth rate of exports was 5.1 percent and
imports 15.2 percent). The growth of exports in 2002 was led by means of
transportation (shipbuilding), textiles, manufacture of chemicals and
chemical products, refined petroleum products, food and beverages and
communications equipment. Compared to 2001, exports related to
communications equipment declined. Other main exports were ships,
textiles and food and beverages. In 2002, the following products pushed
imports upward: refined petroleum products, food and beverages,
chemicals, means of transportation (for use in the shipbuilding),
textiles and electrical devices. Large trade imbalances are likely to
continue, although the Croatian National Bank's measures designed to
prevent an over-expansion of credit should help slow the growth of the
trade deficit.

Liberalization of trade with the EU has had a particularly marked
negative effect on the merchandise trade deficit in activities such as
agriculture and manufacturing of food products and beverages. Croatian
producers of these products suffer from lack of competitiveness and find
it difficult to compete with subsidized EU agriculture. In an effort to
assist these struggling industries, in mid-June 2002, the government
adopted a decree designed to curb imports. The legislation, which was
drafted to comply with the WTO\'s Agreement on Safeguards pursuant to
Article XIX of GATT 1994, sets up procedures for introducing temporary
measures such as increased duties or quotas for goods whose import
damages domestic industries. To date this mechanism has been little
used.

The drive to conclude FTAs also influenced the structure of Croatian
trade. Almost 53 percent of Croatia's exports went to EU and 58 percent
to all developed countries Italy, Germany and Bosnia and Herzegovina are
Croatia\'s largest trading partners, followed by Slovenia and Austria.
Imports from developed countries led by Italy and Germany, accounted for
around one-third of total imports. The United States is the eighth
largest exporter to Croatia (accounting for 2.9 percent of all Croatian
imports), while it is the ninth largest importer from Croatia (1.8
percent of Croatia\'s exports). In 2002, as much as 12.4 percent of
Croatia's exports and 16 percent of imports were with CEFTA countries.

The current account deficit, which includes tourism, reconstruction
activities and road construction, is in better shape than the foreign
trade deficit. Nevertheless, in 2002 it equaled an estimated 6.9 percent
of GDP, a surprising increase over the 3.6 percent registered during
2001, and the highest since 1997.

E. [Infrastructure Situation]{.underline}

Croatia\'s infrastructure is fairly well developed, especially when
compared to standards elsewhere in the region. However, war damage was
significant. Loans from the World Bank and the European Bank for
Reconstruction and Development (EBRD) target the repair, upgrade and
expansion of existing infrastructure in the transport, energy and
telecom sectors. Information and lists of projects are found on the
Internet websites of these two organizations: http://www.worldbank.org
and [http://www.ebrd.com](http://www.ebrd.com/), as well as at
[www.mjr.hr](http://www.mjr.hr/) (Ministry of Public Works and
Construction).

*Roads and Motorways*

Highway and housing construction are dominant sub-sectors, with housing
construction accounting to close to 40 percent of all work hours spent
in construction in 2002. The cost of the Zagreb-Split highway
construction is estimated at HRK 12.6 billion (\$2 billion). The highway
is supposed to be completed in June 2005, when work of the most
difficult section, the Mala Kapela tunnel, will be finished.

In 2001 (the latest available data), Croatia had 28,275 kilometers of
roads (expressways, regional and local roads) of which 429 kilometers
were highways and 197 kilometers were \"fast-roads.\" By July 2003, when
Croatia reached a mid-point in its road building program, another 138.5
kilometers of highways had been built. The improvement in road transport
has forced the local air carrier (Croatia Airlines) to reduce prices for
domestic flights to make them competitive with bus and train
transportation. In general, road transport has developed faster than
other forms of transport because of its relative importance. Due to
geography, in many parts of Croatia roads are the only viable means to
connect parts of the country and abroad. There is still a considerable
discrepancy between needs in this area and infrastructure capacity; road
construction is therefore one of the Racan government\'s highest
development priorities. In 2001 the government adopted amendments to the
basic Law on Transport in Road Traffic (1998) that aimed to harmonize
regulations on passenger transport, distribution of international
permits for transporting goods, and other areas with European Union
standards.

The former regime embarked on an ambitious program of highway
construction beginning in 1995 with a concession to the French company
Bouygues. The project on the Istrian peninsula got underway in 1997, but
after the Racan government assumed office, disputes developed concerning
contract provisions related to the amount of the road toll. The current
government cancelled a contract with Spie Batignolle to construct part
of the Zagreb-Rijeka highway, making it liable for significant
penalties. In 1998, the former government signed a contract worth nearly
\$1 billion with Bechtel Corporation to build part of the Bregana
(Slovene border)-Zagreb-Split-Dubrovnik motorway, a major north-south
artery. The Italian company Astaldi was working on completing the
motorway from Zagreb to the Hungarian border; however, work has been
intermittent because of payment problems.

In 2001, the Racan government established the Croatian Motorways Agency
(HAC) to guide development and find ways to finance road construction,
including by issuing concessions. The need for foreign investment in
this sector is being addressed by the European Bank for Reconstruction
and Development (EBRD) and the European Investment Bank (EIB). In
October 2001, the Rijeka-Zagreb motorway company and EBRD signed a
contract for a 60 million euro loan to settle commitments to the
contractors. As part of this deal, the government assumed the company\'s
long-term credit commitments amounting to 115 million euros, which
become due after the end of 2002. EIB and the company in mid-June 2002
signed a loan agreement worth 60 million euros for completion of the
project by June 2005. In June 2003, the road segment known as the
\"Bosiljevo 2 interchange\" was completed as planned, which connected
the Rijeka-Zagreb motorway to the Zagreb-Split-Dubrovnik motorway, thus
creating a modern north-south artery linking Croatia with neighboring
countries in both directions.

The reconstruction of communal infrastructure in war-affected regions is
still a priority of the government. According to the Ministry of Public
Works and Construction (www.mjr.hr), the government reconstructed
118,580 damaged housing units, spending HRK 13.3 billion (\$2.1 billion)
from the budget. Another 9,000 units, or 7 percent of reconstructed
properties, was financed by international donors (international donors
believe their share of the total reconstruction is higher than the
government figures indicate). The budget for reconstruction of
war-affected areas for 2003 is HRK 1.13 billion. The government expects
reconstruction will be officially completed in 2004.

In December 2001, the Ministry of Public Works and Construction started
a project aimed at enabling pre-qualified young families to buy flats at
a price no higher than EUR 910 per square meter (while the cost of newly
constructed flat in Zagreb is EUR 1,200/m2). Financing comes from the
budget, local authorities, and commercial banks, providing 30-year loans
to buyers. So far 86 cities have allocated 104 sites for this
construction; 191 flats have been constructed, and as of June 2003,
another 1440 are in different stages of construction. Construction of
additional 3287 flats is planned under this program. \"Socially
supported housing\" draws on budget support of HRK 113 million, and
employs 2000 people on construction works.

*Railways*

There are 2,726 kilometers of railways in Croatia, of which 36 percent
are electrified. Until the break-up of the SFRY, the major direction of
rail transport was east-west. This changed, however, because of the war
and reduction of intra-regional trade. Despite a 50 percent reduction in
railroad employees, the productivity of the remaining workers remains
low. Half the total income of Croatian Railways was provided from the
government budget in the last few years. The EBRD is providing a \$35
million loan for a \$219 million modernization and restructuring program
begun under the Tudjman government. This, along with a World Bank
project, aims at separating the rail infrastructure from transport
activities, re-training redundant workers, as well as privatizing
certain services connected with rail travel. At later stages of this
transformation, the operation of the modernized rail system will be made
compliant with EU directives.

At the beginning of 2003, the government initiated an ambitious
investment plan to help the railroad network damaged by the war.
Croatian Railways is to cover one third of HRK 15.3 billion of
investment costs for purchase of new railcars and construction of
pan-European corridor 5. Local governments should finance the
construction of local, suburban railroads. While the cargo business is
at a break-even point as of 2003, Croatian Railways is likely to reach a
break-even point in passenger traffic only in 2005. The World Bank
approved a EUR 85 million loan to Croatian Railways for reconstruction
and modernization of railroads. An annual growth of five percent for
cargo and two percent for passenger traffic is expected after the
investments. The World Bank approved a EUR 85 million loan to Croatian
Railways for reconstruction and modernization of railroads. Croatian
Railways ended the year 2002 with a HRK 220 million loss (about \$35
million).

*Harbors and Ports*

Because of Croatia\'s geography and the importance of the tourism
industry, the development of both maritime and river port infrastructure
is a high priority. Due to the unrest of the last decade, there was a
reduction in transport of goods and passengers through Croatian harbors
until recently. The government is seeking investors to modernize
harbors, and the plan is to privatize mainly through issuance of
concessions. The top priority is the port of Rijeka, which has an
excellent geographic position in the northern Adriatic and has the
necessary conditions for reloading all types of cargoes (general, bulk,
container, livestock, and liquid). The World Bank supports the
government\'s strategy, and has made available a \$156.5 million loan
for the Rijeka Gateway project. Next in priority are Ploce, Split,
Zadar, Dubrovnik, Sibenik, and Pula. The need to modernize harbor
infrastructure is felt especially in Dalmatia because of the increase in
tourist traffic in the last several years.

The condition of navigation on inland waterways (Danube, Sava, Drava and
Kupa rivers) is also not satisfactory. The total length of inland
waterways for ships up to 150 tons is 922 kilometers, of which 502
kilometers are usable for ships weighing up to 1,500 tons. Croatia is
included in the European Danube-Rhine navigable network, and is thus
connected to the Black and North Seas. The government and the
international community hope that modernizing Croatian waterway
infrastructure will result in an expansion of trade and tourism, which
will contribute to maintaining stability in the Southeast European
region.

*Civil Aviation*

There are ten airports in Croatia, of which seven (Zagreb, Split,
Dubrovnik, Pula, Zadar, Rijeka and Osijek) can accommodate medium to
large commercial aircraft. Three additional airports can accommodate
smaller commercial planes, while there are a number of smaller (sports)
airports scattered inland and among some of Croatia\'s 1,185 islands.
More than 1.8 million passengers were transported via regular flights,
and some 650 thousand via charter flights, with increasing number of
charters from Russia (Moscow to Pula, Split, Dubrovnik), Ireland, and
Serbia and Montenegro during the tourist season. Low-cost carrier
Ryanair is negotiating with smaller Croatian airports (Zadar, Rijeka,
Osijek) but commencement of operations is subject to Croatia signing an
Open Skies agreement.

Croatia Airlines
([www.croatiaairlines.hr](http://www.croatiaairlines.hr/)), a
state-owned carrier, transported 1.32 million passengers in 2002, with
increasing traffic in each month of 2003, despite the conflict in Iraq.
Seat utilization in March 2003 was 47 percent (seasonality has to be
taken into consideration; a large number of summer flights are
completely booked). Croatia Airlines' fleet consists of four Airbus A
319s, three Airbus A320s, three ATRs and one leased Bae 146 (90-seater
"jumbolino").

Modernizing the aviation infrastructure is an important priority for the
government, particularly in order to accommodate the growing number of
tourists. The government also wants to provide better connections
between the islands and the mainland for Croatia\'s island population.
However, since there is no government consensus and existing capacities
are sufficient to meet current traffic demands, several
construction/expansion projects have been postponed indefinitely or left
up to the airports to manage independently. The \$20 million contract to
modernize the air traffic control center in Zagreb, financed by the EBRD
and EIB, was awarded to France's Thales in 2002. Another \$20 million is
being spent on the construction of new facilities for the Croatian Air
Navigation Services Ltd. The project is supposed to modernize the air
traffic control and integrate the Croatian system with the pan-European
framework of Eurocontrol.

To meet increasing security requirements, the Croatian Ministry of
Maritime Affairs, Transport and Communications allocated \$1.5 million
in 2003 to procure metal and explosives detection system (EDS) for
airports. Some Croatian airports also plan to procure EDS systems
independently.

*Telecommunications*

Croatia\'s telecom network is quite advanced both in terms of
penetration and equipment (including optical cables, digital equipment,
and mobile telephones). There are over 2 million installed fixed
telephone lines, or 37 telephone subscriber lines per every 100
inhabitants. International and transit ATM switches are installed in
four main centers, which are connected among themselves and with
international networks via 7,000 kilometers of fiber optic cables. About
80 percent of switching capacity and about 90 percent of the
transmission capacity is digitized, with ISDN and DSL being introduced
to households.

In 2001, Deutsche Telekom became the majority owner of Croatian Telekom
(HT), enjoying a monopoly on voice and data transfer in the fixed line
telecommunications network. HT\'s exclusive right to build and operate
fixed line networks was set to expire in 2002, but the monopoly was
extended until early 2005 when the parliament, at a closed-door session,
amended the July 1999 Law on Telecommunications. Starting in early 2005,
HT will be required to allow access to its local loop to other operators
under the conditions and modalities defined in EU guidelines. The
government invited interested parties to express interest in the
concession for the second fixed telecommunications network, and the
tender is expected to be published in fall 2003.

The first digital mobile network (GSM) was launched in early 1996 and
today there are two competing mobile operators in Croatia. HT operates
two mobile telephone providers, Cronet (a GSM 900 digital network) and
Mobitel (an NMT 450 analog network), although the Mobitel network is
being phased out. In 1999, another GSM license was issued to an American
(Western Wireless)-Austrian-Croatian consortium \-- VIPnet. In 2002
Western Wireless sold its share to Austria Mobilkom, which now owns 99
percent. In May 2003, the Council for Telecommunications published a
preliminary call for tenders on concession for a third mobile phone
network (GSM, or DCS 1800 and UMTS concessions).

Mobile communications continues to be the leading growth sector in
communications in Croatia. In 2002, some 1.5 billion minutes of voice
communications were registered in mobile networks, a 38 percent increase
over 2001. Domestic calls accounted for 95.4 percent of the figure.
Growth continued in 2003, when 405 million minutes were registered in
the first quarter, a 24 percent increase compared to the first quarter
of 2002. In the first quarter of 2003, 2.5 billion minutes of calls were
registered, a 12 percent increase compared to the same period in 2002.

Internet development has been slowed by high interconnection costs for
Internet Service Providers (ISPs) and nontransparent regulations,
although some progress was made over the last year. The entire list of
legislation is available on line at
[www.telekom.hr](http://www.telekom.hr/) or www.mppv.hr. Thanks to the
financial backing of U.S. and Austrian investors, several ISPs managed
to become competitive to HT's HT Hinet internet provider. As of July
2003, there are ten commercial Internet service providers (ISPs) in
Croatia. According to industry estimates, by the end of 2003, some one
million citizens, or 22.9 percent (up from 18 percent in 2001) of the
population will have access to the Internet. However, the number of
paying subscribers is much lower: as of July 2003, 420,000 citizens and
28,000 businesses (out of which 1,000 access Internet via leased lines).

HT\'s Hinet dominates the market, while second place is held by Iskon,
owned by Adriatic Net Investors Ltd. and CALPers. All ISPs must use
HT\'s infrastructure for customers to access the Internet.

The most popular sites are Google, Yahoo, and two local ISP's sites,
Klik.hr and Hinet.hr. According to an on-line survey conducted by
www.monitor.hr, over 320,000 Croatians have purchased goods via the
Internet, and this figure does not include banking transactions (several
banks offer online banking services to individual customers). Most of
the purchases were made with tourist agencies, IT equipment
distributors, bookstores and electronic equipment stores.

One of the cable TV operators, U.S.-owned Digital City Media (DCM),
rolled out an alternative Internet access option, via cable TV
infrastructure. The offer first became available to 4,800 subscribers in
Osijek at a price of HRK 170 -- HRK 965 (\$27-150) per month depending
of the package plus a one--time fee of HRK 400 (\$63). Cable modems can
be purchased, rented or leased through DCM.

*Energy*

Croatia meets its energy needs by a combination of domestic and imported
sources. The trend for the foreseeable future is for domestic production
to decrease because of diminishing oil and gas reserves, as well as the
end of coal production in Istria due to the high cost of mining and
processing. Domestic production of liquid fuels meets around 30 percent
of demand, while domestic production of natural gas, including in the
northern Adriatic, covers 60 percent of need.

The exploration, production, transport and storage of natural gas and
crude oil, as well as the production of petroleum products and most
trading activities is organized by the state-owned INA company. With the
help of privatization and restructuring advisers, the Croatian
government is moving to partially privatize INA. In July 2003, the
Hungarian company "MOL" won a bid for a 25 percent plus one share of
ownership.

The Adriatic Oil Pipeline company, JANAF, is a state-owned company
responsible for an international pipeline system that delivers crude oil
to domestic and foreign refineries (in Central Europe as well as to
Bosnia and Herzegovina and Serbia and Montenegro). The company's sea
terminal in Omisalj can accommodate tankers up to 500,000 DWT year
round. The pipeline has the capacity to transport 20 million tons
annually through its 759-kilometer length (of which 610 km are in
Croatia), with storage facilities totaling 820,000 cubic meters at three
facilities in Omisalj, Sisak and Virje. Over the last decade JANAF has
been operating at 25 percent capacity. The total potential (designed)
capacity of JANAF is 34 million tons per year.

Croatia generates electricity by hydro power (46 percent), thermal power
plants (33 percent), by the Krsko nuclear power plant in Slovenia, 50
percent owned by Croatia (7 percent), and by a few industrial energy
plants. Around 14 percent of power comes from outside Croatia. The
Croatian Electricity Company (HEP) is responsible for electric power
generation, transmission and distribution of heat as well as for
managing the power system. It is still state-owned, but in 2001 the
Croatian Parliament adopted a law to privatize the company and the
government chose Norton Rose and Ernst and Young as advisers for
privatization and restructuring, respectively. Privatization will not
take place before 2004.

The Croatian laws covering the energy sector are being harmonized with
EU directives. Major laws include: the energy law, the law on the
electricity market, the law on the gas market, the law on the oil and
derivatives market, and the law on regulation of energy sector
activities.

In February 2003, under the framework of the Stability Pact, Croatia
signed the Athens Memorandum of Understanding on Regional Electricity
Market with which it embarked on actively participating in the creation
of a regional power market by 2005, which market will in turn be
incorporated into the European market model.

3\. POLITICAL ENVIRONMENT

A. [Nature of Political Relationship with the United States]{.underline}

Since independence, the framework of U.S.-Croatian cooperation has been
the effort to build a democratic, secure, and market-oriented society
within a stable Southeastern Europe region. Croatia's main political
objectives are integration into Western institutions such as NATO, the
European Union, the Central Free Trade Agreement (CEFTA) and the World
Trade Organization (WTO). The United States supports Croatia's movement
in these directions.

With the democratic election of a reform-minded government in early
2000, the United States has been steadily building solid ties with
Croatia. The U.S. Agency for International Development (USAID) has an
active assistance program in Croatia, providing technical assistance and
training to develop Croatia's democratic institutions and economy and to
help the government manage the social aspects of transition to a market
economy. As in other countries in the region, USAID is working to
alleviate the legacy of the war in Croatia with programs encouraging the
sustainable return and reintegration of refugees and displaced persons.
Croatia received U.S. humanitarian aid and technical assistance
amounting to nearly \$30 million in 2003. The U.S. government has
provided assistance to Croatia's military to support civilian control of
military forces and preparations for eventual NATO membership.

Croatia is already a member of the Council of Europe (October 1996),
signed a Stabilization and Association Agreement (SAA) with the EU in
October 2001 and formally presented its application for membership to
the EU in February 2003. The United States actively supported Croatia's
entry into NATO's Partnership-for-Peace (May 2000), entry into NATO's
Membership Action Plan (May 2002), and accession to the WTO (November
2000). In the context of the Stability Pact, the United States supports
Croatia's endeavors to increase intra-regional trade through the signing
of free trade agreements with other countries in Central and
Southeastern Europe.

The United States, along with its European allies, is working with
Croatia to help it to fulfill its commitments pursuant to the Dayton
Peace Accords and to play a positive role in regional cooperation. With
business-to-business contacts leading the way, Croatia has made
important progress toward normalizing its relations with Serbia and
Montenegro. Croatia has supported the policies and activities of the
international community in Bosnia and Herzegovina and is actively
encouraging Bosnian Croats to play a constructive role in building their
country together with other ethnic groups. The government's cooperation
with the International Criminal Tribunal on the Former Yugoslavia (ICTY)
at the Hague has been generally good, but uneven at times. Finally, the
new government vigorously supported and has played an active role in
regional initiatives such as the Stability Pact and the Southeast
European Cooperative Initiative (SECI), a major reversal of the policies
of the previous government that had rejected such regional initiatives.

Croatia's bid for EU membership has affected its relationship with the
U.S. The Croatian government did not join the U.S.-led coalition that
took military action in Iraq and has so far declined to sign a bilateral
agreement which would prevent the surrender of U.S. nationals to the
International Criminal Court. Croatia remains an active member of the
anti-terrorist coalition and has made important contributions to this
effort.

B. [Major Political Issues Affecting Business Climate]{.underline}

Reform of the Judiciary is a pressing issue facing the Croatian
government. While the Racan government has moved steadily ahead in other
areas, delays in this area have affected Croatia's economic growth. Huge
case backlogs mean that business disputes can go unresolved for years;
some investors have chosen to insist that contract arbitration take
place outside of Croatia. The Government of Croatia has made a
commitment to reinvigorate its efforts to reform the judiciary, but much
remains to be done.

Croatia's high unemployment rate, nearly 15 percent, remains a serious
political as well as economic issue. Employers and international
financial institutions like the World Bank are urging the government to
pass new labor legislation which will further restrict worker benefits,
increasing the labor market's flexibility. Labor unions object, saying
that they can no longer compromise. Macroeconomic reforms are only now
beginning to have a measurable effect on the pocketbook of the average
citizen, and the possibility of strikes and protests remain significant.

During 2002, tensions among the coalition parties resulted in several
changes to the party lineups within the government with PM Racan
remaining head of the government. The current parliament's mandate runs
until January 2004, but early elections are a possibility.

C. [Brief Synopsis of Political System]{.underline}

The Republic of Croatia is a constitutional parliamentary democracy. The
presidency has limited executive powers. After nearly a decade of
political dominance of President Franjo Tudjman and his HDZ party, the
victory of a six-party coalition committed to democracy and the rule of
law in January 2000 ushered in a new era for Croatia. Less than a month
later, Stipe Mesic was elected president to replace Tudjman, who died in
December 1999. Together Mesic and the government worked to reduce the
powers of the presidency in order to mitigate against the type of abuse
of power that was common during the Tudjman era. While the resulting
Constitutional changes transferred much of the president's authority to
parliament, the president remains the head of state and
commander-in-chief of the armed forces.

The government coalition is dominated by Prime Minister Ivica Racan's
Social Democratic Party (SDP), the successor to the reform wing of the
Croatian republic's communist party in the former Yugoslavia. The
moderately nationalist Croatian Social Liberal Party (HSLS) and the
traditionalist Croatian Peasant Party (HSS) have also been members of
the government coalition, but the HSLS left the government in July 2002.
Two smaller liberal parties --- the Croatian People's Party (HNS) and
the Liberal Party (LS) --- play a much smaller role in the government.
While the government has been relatively stable, friction between
coalition partners has prompted speculation about the possibility of
early elections.

The government's foreign policy has focused on ending Croatia's HDZ-era
isolation and integrating into Euro-Atlantic institutions. The
government has moved to implement policies on cooperation with ICTY at
The Hague, including the transfer of documents and one Croatian
indictee. Cooperation with ICTY remains controversial, and the initial
responses to the Court's requests by the government has been
inconsistent. Croatia's progress on defense reform was rewarded by
acceptance into NATO's Membership Action Plan (MAP) in May 2002. This
was an important step forward, but much work remains to be done before
Croatia can be considered for full NATO membership. Croatia became a
full member of the World Trade Organization in November 2000 and on
November 26, 2001, Croatia's parliament ratified the Stabilization and
Association Agreement (SAA) with the European Union. The SAA defines
Croatia's path of integration with the EU, leading to formal candidacy
for membership. Croatia submitted its application for membership in the
EU in February 2002.

Croatia has taken important steps toward improving relations with its
neighbors, most notably with Serbia and Montenegro. Resolution of a
long-standing border dispute made it possible to close the UN Observer
Mission in Prevlaka. A Free Trade Agreement was ratified by the Croatian
Parliament in May 2003. The Croatian government passed a temporary
measure lifting visa requirements for citizens of Serbia and Montenegro.
Relations with Slovenia remain close and cordial, although a
longstanding border dispute remains an irritant. Croatia continues to
support international community efforts to develop state institutions of
Bosnia and Herzegovina. The government has severed the country's illicit
ties with the Bosnian Croats, but has been slow to implement policies
encouraging the return to Croatia of refugees displaced by the war.

The opposition-leading HDZ party, displaced by the current coalition in
January 2000, has been undergoing internal reform. While this process is
incomplete, the HDZ consolidated its leadership following an April 2002
convention and could present a serious challenge to the government.

4\. MARKETING US PRODUCTS AND SERVICES\
\
A. [Distribution and Sales Channels]{.underline}\
\
Croatia\'s distribution system is formalized by the Law on Trade which
regulates the activities of wholesalers and retailers. Stringent
application of customs and tax administration regulations reduced
illegal imports and unlicensed business activities which previously
flourished. Wholesalers operate as a distribution intermediary to
retailers. For the most part, the wholesale sector is completely
privatized. Some wholesalers specialize in particular sectors such as
pharmaceuticals or medical supplies/equipment. Restructuring of the
retail segment also occurred as retail chains were privatized and
acquired by larger groups and new private retailers emerged on the
market. Retail is now dominated by private companies such as Getro,
Konzum (Agrokor), Diona (Globus Holding) and Prehrana (Brodokomerc).
Foreign retailers (Bila, DM, Merkator, Mercatone, Metro, Ikea, etc.)
have started to enter the market as well, creating more competition.
Some wholesalers have also ventured into the retail sector. Including
kiosks, small shops and open markets, Croatia's total retail market
numbers an estimated 7,500 retail outlets.\
\
Capital goods are normally sold directly to manufacturers and
businesses. When selling capital goods or machinery to businesses, a
good agent is essential.\
\
B. [Use of Agents and Distributors; Finding a Partner]{.underline}\
\
A carefully chosen local agent or distributor is the most effective
method for entering this market. Reliable and capable representatives
can be found. Some firms may lack sufficient capital to handle product
marketing and wide distribution. It is recommended that a confirmed
letter-of-credit be used in conducting business with a new local partner
since some firms may have payment problems.\
\
The Financial Agency (FINA), the successor of the Croatian Bureau of
Payments (ZAP), provides information on the creditworthiness of local
companies. U.S. companies can contact FINA to request a copy of a
Croatian firm\'s BON-IN, a credit report prepared in English that
provides information on the local firm\'s credit history. The report
costs \$60.00 and can be obtained by writing to:

FINA\
Podruznica Zagreb\
Odjel Analiza\
Ulica Grada Vukovara, 70\
10000 Zagreb Croatia

or by contacting:\
Ms. Nevenka Brkic Tel: (385) (1) 612-7422\
or Ms. Mirjana Mrcela Tel: (385)(1) 612-7426

Fax: (385)(1) 612-7063

The Financial Agency (FINA) can also provide a copy of financial reports
of the registered companies but only in Croatian language.

The Commercial Service can provide International Company Profiles (ICPs)
that encompass a thorough background check on potential clients and
representatives. Reports include up-to-date information on potential
partners, such as: bank and trade references, principals, key officer
and managers, product lines, number of employees, financial data, sales
volume, reputation and market outlook.\
\
The following local organizations may also be useful in verifying
credibility of a potential local partner:\
\
BONLINE d.o.o.

The representative of Dun & Bradstreet

Ms. Nina Krznaric

Tel: (385)(1) 3707-009

Fax: (385)(1) 3776-415

Email: <bonline@bonline.hr>

[www.bonline.hr](http://www.bonline.hr/)

Chamber of Economy:

Attn: Ms. Vesna Pap

Tel: (385)(1) 4606-770; 4606-700;\
Fax: (385)(1) 4606-782

E-mail: <vpap@hgk.hr>

The Chamber of Economy also has available a business opportunity
exchange database of local companies interested in working with US
partners. The database is available from:

Attn: Ms. Andrijana Rakaric

Tel: (385)(1) 4606-778;

Fax: (385)(1) 4606-782

E-mail: <arakaric@hgk.hr>

C. [Franchising]{.underline}\
\
American Express Privredna Banka and Diners Club Adriatic are the two
best known U.S. franchisees in Croatia. McDonald\'s opened three
restaurants in 1996, initially as a direct investment and not under
franchise. By 2001, the company opened an additional sixteen
restaurants. In 2001 Subway opened its first franchise in downtown
Zagreb. Hertz and Budget rental car agencies are also in Croatia.\
\
Franchising is an optimal method for the transfer of technology and
know-how. The business climate in Croatia is inviting for franchises.
Best prospects for franchising opportunities are likely in the following
sectors: restaurant, catering, automobile servicing/equipment and
apparel.\
\
D. [Direct Marketing]{.underline}\
\
Since direct marketing is not common, the sale of mailing lists is very
limited. Mail-order houses are relatively rare compared with other
Western countries. There are several Croatian business directories
available on diskettes or CD-ROMs, so target customers can be selected
by product, type, size, sales, location, and/or year of establishment.\
\
E. [Joint Ventures/Licensing]{.underline}\
\
*Joint Ventures*\
\
The Law on Companies regulates the establishment of joint-ventures,
investment in companies with mixed ownership, as well as other types of
foreign or domestic investment. This law, adopted in 1994, is very
similar to the German Company Law. Establishment procedures require a
Croatian lawyer, a notary public, and registration with the local
Commercial Court.\
\
*Licensing*\
\
There are no specific laws regulating licensing other than the Law on
Obligations (\"Commercial Code\") which addresses contract law. The
licensing contract should also cover intellectual property rights issues
(trademark, model, patent or copyright), payments/royalties, the term of
the contract, restrictions on using trademarks, etc. (See Chapter 7 for
more information on intellectual property rights.) A Croatian lawyer
should be consulted to ensure that provisions of the contract do not
contravene Croatian law, making the agreement null and void.\
\
American companies have established licensees in Croatia such as
Eurocard/Mastercard and Zagrebacka Banka, Croatia\'s largest bank; Levi
Strauss and Varteks, a leading local textile manufacturer; and Phillip
Morris with Rovinj Tobacco Company.\
\
F. [Steps to Establishing an Office]{.underline}\
\
The Law on Trade (Article 53) regulates establishing a representative
office. A representative office is not considered a legal entity under
Croatian law. Rep offices are not permitted to conclude contracts in
their names, but only in the name of the parent company and must have
their own local bank accounts. Rep office activities are limited to
market research, contract or investment preparations, technical
cooperation and similar business facilitation activities.\
\
Prior to opening, the rep office must be recorded with the Registry of
Representative Offices, maintained by the Ministry of Economy.
Registration procedures and establishment are regulated by the
governmental Decree on Conditions for Establishment & Operation of
Foreign Representative Offices (1996). Updated instructions for
registering a representative office were published in the Official
Gazette in January 1997 (number 7/97). The following documentation must
be submitted to the Ministry of Economy:\
\
1) An application must be submitted to the Ministry which contains the
following information:

\-- name and address of the founder;\
\-- address of the office (in Croatia);\
\-- scope of activities of the office;\
\-- names of persons managing the office;

2\) A certified document proving registration of the parent company in
the home country;\
\
3) Decision of the founder (parent company) to establish the rep
office;\
\
4) Appointment of the person in charge of the office (in Croatia);\
\
5) Photocopy of passports of designated person(s) in charge;\
\
6) Copy of payment slip documenting that a tax amounting to KN 300 has
been paid on the account of the Ministry:

Payee: Drzavni Proracun\
Purpose of Payment: Upravna Pristojba\
Account Number: 1001005-1863000160

"Poziv na broj": 5002-(company's registration number)\
\
Accompanying the documentation should be the last annual financial
statement (not more than 6 months old) certified by a public notary. All
documents must be originals or copies certified by a notary public.
Also, an authorized court translator must translate the documents into
Croatian. If documentation is complete and correct, the registration
procedure can be finished within a few weeks.\
\
More information on the registration process can be obtained from:\
\
Ministry of Economy\
Ulica grada Vukovara 78\
10000 Zagreb, Croatia\
Ms. Djema Bartulovic\
Tel: (385)(1) 610-6979\
Fax: (385)(1) 610-9112\
\
A rep office is permitted to hold both foreign exchange and domestic
currency accounts with authorized Croatian banks. Office equipment can
be imported free of customs duties, on the basis of a temporary permit
with the possibility for extensions. Office vehicles may be similarly
imported but only for the foreign employees. Foreign employees at a
representative office are not required to pay local income taxes and
contributions. Residence and work permits are required for foreign
employees.\
\
G. [Selling Factors/Techniques]{.underline}\
\
Due to the tight credit situation, the ability to provide financing is a
key factor in selling both industrial and consumer goods. Most Croatian
buyers prefer to pay monthly installments, even for low-cost goods.
Other factors/techniques critical to success are close and frequent
contact with buyers, motivated and trained middlemen, and aggressive
market promotion.\
\
Selling to state-owned companies and other state entities depends on
establishing your company or product creditability. Internationally
financed public procurements offer the best opportunity for transparent
purchasing decisions.\
\
Croatia\'s private sector should be targeted. Private sector growth
augers well for western businesses that are accustomed to selling
products based on pricing, product quality and servicing ability. The
government states that the private sector accounts for more than 50% of
GDP. Marketing techniques will not vary greatly with this business
segment. Some techniques for developing greater product awareness are
discussed in the next section.\
\
H. [Advertising and Trade Promotion]{.underline}\
\
*Advertising*\
\
Advertising is a key marketing tool in Croatia. Nearly all companies
engage in some form of advertising. While the number of publications is
growing, television is the most important media in Croatia. Outdoor
advertising is also expanding. In fact, 59 % of advertising expenditure
went to TV, 14 % on newspapers, 10 % on magazines, and 7 % to outdoor
billboards. Radio is experiencing growing interest, currently receiving
10 % of advertising expenditure.\
\
Television, which reaches 90 % of the market, has the broadest reach of
all media. Croatia has two state-owned and two private TV channels as
well as five regional and six local channels. The law restricts
advertising on state television to nine minutes per hour for the first
two national channels. Advertising on privately-owned (regional and
local) television stations can not exceed 25 percent of total program
length.\
\
The advertising sector experienced 12 % growth because of the extensive
advertising campaigns of the mobile telecommunications firms. The most
advertised products are telecommunications, vehicles, financial
institutions, beverages and newspapers. Croatian regulations prohibit
television advertisement of tobacco, alcohol, and spirits.\
\
Magazines, particularly specialized magazines, are growing in
circulation. The six national daily newspapers account for 62 % of
advertising expenditures for print periodicals. The balance of the
revenue is shared among the sixteen high circulation periodicals and
over 45 other specialized magazines.\
\
More than 6,000 billboards populate Croatia. Prices range from \$150 per
month to \$250 per month depending on frequency and category. It is
recommended that 15-200 billboards be used for a nationwide launch
campaign.\
\
Currently, there are five foreign advertising firms with offices in
Croatia: BBDO, DDB (Futura-DDB), McCann-Erikson, Ogilvy & Mather and
Gray.\
\
There are a substantial number of domestic agencies, but most are very
small. Also 90 % of international agencies are in partnership with
domestic agencies. (i.e. McCann is 50 % local and 50 % international).
Typically, domestic agencies are too small to have enough clients for
the biggest discounts on media buying.\
\
Croatian television:\
\
HTV -- Marketing\
Prisavlje 3\
10 000 Zagreb, Croatia\
Tel:(385)(1)634-3785; (385)(1)634-2322\
Fax:(385)(1)634-3791

E-mail: <nives.skara@hrt.hr> ; <jelena.runjic@hrt.hr>

Web site: [www.hrt.hr](http://www.hrt.hr/)

List of Newspapers and Business Journals:

Vecernji List\
Slavonska avenija 4\
10000 Zagreb, Croatia\
Tel: (385)(1)630-0600\
Fax: (385)(1)630-0675

E-mail: <vecernji@vecernji.net>

Web site: [www.vecernji-list.hr](http://www.vecernji-list.hr/)\
\
Jutarnji list

Odranska 1/I

10000 Zagreb, Croatia

Tel: (385)(1) 610-3100; 610-3101

Fax: (385)(1) 610-3148; 610-3115

E-mail: <jutarnji_list@eph.hr>

Vjesnik\
Slavonska avenija 4\
10000 Zagreb, Croatia\
Tel: (385)(1) 616-6666; 364-1111\
Fax: (385)(1) 616 1650; 616 1602\
E-mail: <vijesnik@vijesnik.hr>

Web site: [www.vijesnik.com](http://www.vijesnik.com/) or
[www.vijesnik.hr](http://www.vijesnik.hr/)

Slobodna Dalmacija\
Hrvatske mornarice 4\
21000 Split, Croatia\
Tel: (385)(21)352-888\
Fax: (385)(21)383-102

E-mail: <glavniurednik@slobodnadalmacija.hr>

Web site: [www.slobodnadalmacija.com](http://www.slobodnadalmacija.com/)
or [www.slobodnadalmacija.hr](http://www.slobodnadalmacija.hr/)\
\
Novi List\
Zvonimirova 20a

p.p.130\
51000 Rijeka, Croatia\
Tel: (385)(51)650-011\
Fax: (385)(51) 672-114; 672-118

E-mail: <nl-redakcija@novi-list.tel.hr>

Web site: [www.novilist.hr](http://www.novilist.hr/)\
\
Banka\
MZB d.o.o.\
Savska 28\
10000 Zagreb\
Tel: (385)(1) 488-2600\
Fax: (385)(1) 484-3083

E-mail: <vlatka.tomasevic@bankamagazine.hr>\
Web site: [www.bankamagazine.hr](http://www.bankamagazine.hr/)

Privredni Vjesnik\
Kaciceva 9\
10000 Zagreb\
Tel: (385)(1) 4846-665\
Fax: (385)(1) 4846-656

E-mail: <redakcija@privredni-vjesnik.hr>

Web site: [www.privredni-vjesnik.hr](http://www.privredni-vjesnik.hr/)\
\
*Trade Promotion*\
\
Trade events and fairs continue to be popular in Croatia. The single
largest event in Croatia is the annual Zagreb Fall Fair (September)
which attracts nationwide attention and includes numerous foreign
exhibitors.\
\
The Zagreb Fair Authority also organizes a number of industry-focused or
specialty exhibitions during the year in sectors such as consumer goods,
food processing, environmental technology, medical equipment,
pharmaceuticals, automobiles and automotive parts, information
technology, textiles and apparel, wine, etc. For more information on
these events:\
\
Zagreb Fair\
Avenija Dubrovnik 15\
10 020 Zagreb, Croatia\
Tel: (385)(1) 650-3111\
Fax: (385)(1) 652-0643

E-mail: <zagvel@zv.hr>\
Internet: [http://www.zv.hr](http://www.zv.hr/)\
\
I. [Pricing Product]{.underline}\
\
Consumer demand is price elastic in Croatia. With nearly 30% of gross
wages being transferred to the government in the form of taxes,
disposable income is limited. However, quality appears to be an equally
important selling factor, especially among the more upscale consumers.\
\
Liberalization of the market has put pressure on domestic producers to
bring pricing down and more in line with costs. The level of prices in
Croatia is generally high, even compared to prices of similar
products/services in Western European countries and the United States
thus making imported products price competitive.\
\
Price supports and subsidies have been stripped away and, as mentioned
above, price competition has intensified. Although prices are generally
determined by the market, certain necessities are still subject to
government control. For example, price changes for milk and bread must
be notified two weeks in advance to the Ministry of Economy. Price
alterations on approximately 30 products must be reported to the
Ministry of Economy within three days of modifications. The government
retains the right to disapprove price changes although in practice this
has been rare during the last few years. The government has the ability
to influence pricing policy at companies under its direct or indirect
control.\
\
J. [Sales Service/Customer Support]{.underline}\
\
Sales service and customer support is developing as a marketing tool in
Croatia. Emphasis on customer support is an initial step in developing
consumer loyalty.\
\
K. [Selling to the Government]{.underline}\
\
The Law on Procurement, which was published in the Official Gazette (No.
142/97) on December 31, 1997, regulates public procurements.\
\
The Law on Procurement is applied to all purchases made by government
bodies including those of the local government and majority state-owned
legal entities (e.g., state-owned companies). The law applies to all
investments financed by the central budget, payments guaranteed by the
government, or funds secured by loans taken out by the government.
Procurements above the threshold amount of HRK 200,000 are subject to
the requirements of the law. According to the decree, such purchases
should be done via public tender published in the local press or in the
Official Gazette. Public tenders for purchases over HRK 6 million for
services and HRK 12 million for goods and works should be published also
in the international press. For large purchases, foreign competitors
compete on an equal footing with local firms. The Ministry of Finance is
responsible for ensuring that procurement is done in conformity with the
legislation. The decree does not apply to procurement based on loans
obtained from multilateral development banks, when procurement
procedures are a part of the contract.\
\
The law provides for \"national preference.\" An official preference may
be given to companies that are registered in Croatia. However, this
clause stipulates that the bid prices include 50 % of locally
value-added for procurement of goods, or that the bidder use at least 50
% of locally procured goods and services for procurement of works. If
the bidder qualifies for national preference, the other bidders\' offers
will be increased by 7.5 % (in the case of goods) or 5 % (for
services).\
\
The law defines the \"best offer\" as the offer with the lowest price
which complies with the tendering specifications. The best offer may be
defined using price and other criteria, but these other criteria must be
prescribed in the bidding documents.\
\
The law provides for several types of procurement. The basic type of
procurement is public bidding. A pre-qualification procedure may be used
in order to establish qualified bidders. Other types of procurement for
goods and works include two-stage bidding, bidding upon invitation,
collection of bids with prices, and direct negotiations.\
\
Several ministries and other state-owned entities have received funding
from various international donor agencies and financial institutions.
Pursuant to general loan guidelines, tenders must be open and
transparent. Results of the evaluation process are typically subject to
the approval of the financial institution.\
\
\
L. [Need for a Local Attorney]{.underline}\
\
Foreign lawyers are not permitted to practice in Croatia. Croatian law
mandates that representation in court or any official work requiring a
legal review/opinion must be performed by a duly licensed member of the
Croatian Bar Association. There are no American law firms with
representative offices in Croatia. A list of local attorneys can be
obtained from the U.S. Embassy in Zagreb (www.usembassy.hr).

5\. LEADING SECTORS FOR US EXPORTS AND INVESTMENTS

Croatia imported \$10.71 billion of goods in 2002, with \$ 5.98 billion
of goods or 55.81% coming from the European Union. The United States
ranks only 8^th^ among the countries exporting to Croatia with \$308.7
million (up from \$296.9 million in 2001) representing only 2.88% of
total Croatian imports. Information and communications technology,
pharmaceuticals, radio-navigation equipment and personal vehicles are
the leading categories of U.S. exports to Croatia.

Croatia exported \$86.48 million to the United States in 2002. Total
exports from Croatia in 2002 were \$4.89 billion, while Croatia imported
\$10.71 billion, resulting in a trade deficit of \$5.82 billion*.*

A. [Best Trade Prospects: Industry Sector]{.underline}\
\
**Rank = 1**\
**Telecommunications (TEL)**\
\
Croatian Telecom (HT), 51% owned by Deutsche Telekom, is the incumbent
telecommunications operator in Croatia. HT had a monopoly in the field
of fixed network voice telephony until the end of 2002. The
Telecommunications Act allows HT to deny other operators access to its
local loop until 2005. In early 2002, the Telecommunications Institute
([www.telekom.hr](http://www.telekom.hr/)), an independent regulatory
agency, formed a separate seven-member council to decide on licensing
and settle disputes between operators. As the Institute and its council
have their own source of funding, they are now completely separate from
the Ministry of Maritime Affairs, Transportation and Communications.
Under a new Telecommunications Act (proposed to the Parliament in 2003)
these two agencies would be transformed into a single entity, the
Telecommunications Agency.

The GOC announced plans to issue a tender for the 3^rd^ national GSM
network in fall 2003, and issue three UMTS licenses -- two to the
existing operators, and a third one for the new mobile operator. In
spring 2003, the GOC invited interested parties for the expression of
interest in the second fixed telecommunications concession, since HT's
monopoly expired in the beginning of 2003.

Cable TV operators still offer the best opportunities for US telecom
exports. With a dominant player on the market (U.S. owned Digital City
Media, [www.dcm.hr)](), it is easier to assess market opportunities.
There are now three cable TV citywide concessions, one of them involving
the city of Zagreb (770,000 inhabitants), and two countrywide
concessions (DCM and Adriatic Kabel, both with U.S. ownership).
Providers have shifted priority from network reconstruction and roll-out
to acquiring new subscribers. DCM started to offer Internet access to
its subscribers in Osijek and is preparing to offer the service in
Zagreb in fall 2003. The cost is \$ 27-150, depending on the program
package and desired speed, plus a one-time fee of HRK 400 (\$ 63).

Independent researchers estimate that some 1.4 million Croatian
citizens, or 32% of the population, have access to the Internet (2003
estimate). The number of paying subscribers is much lower. In 2002 ISPs,
competitive to HT's Hinet, reached or came close to break-even. They
still rely heavily on their investors for financial support, since high
interconnection costs and unfavorable split in revenue structure (HT
collects revenue for the last mile access to customers), as well as high
licensing costs continue to put heavy burden on competitive ISPs.

E-commerce is on the rise, with a surging number of Internet
transactions registered by travel agencies, bookstores, IT equipment
distributors. Banking is still the leading sector for Internet
transactions, as several banks offer online banking to private and legal
entities.

Independent market research firms calculate that 32,739 PCs and 36,142
printers were purchased in Croatia in the first quarter of 2003 alone,
representing an increase of 15.8% and 23.7% over the same period in
2002, respectively. Hewlett Packard is the market leader with 18% market
share in PC market and 53.4% in printer sales.

It is also estimated that the number of PCs in Croatia is over 700,000.
This figure will increase because of the government's program to
introduce IT in primary and high schools, for which HRK 110 million (\$
17.5m) is allocated in 2003. HT is joining this project as a sponsor,
offering 10 hours of free Internet access per day for each school and
discounts for Internet access from home for students.

Although the software piracy rate has decreased from the 1996 level of
79% to today's estimated rate of 67%, it is still a big issue in
Croatia. According to market research firm IDC, a decrease in piracy
rate of 10% would result in an IT market increase from the current \$440
million per year to \$730 million per year.

Most of the switching equipment deployed in the incumbent carrier's
network is of EU origin (Siemens and Ericsson), but with the development
of the cable TV and Internet markets, more U.S. manufactured equipment
is being imported into Croatia. The focus of service providers is
shifting from infrastructure to services, thus offering an opportunity
for U.S. engineering and software firms. The telecommunications industry
in Croatia attracted significant U.S. investments.

Following is a list of the leading operators and their sectors:

+--------------+---------------+--------------------+--------+--------+
| Major        |               |                    |        |        |
| stakeholders |               |                    |        |        |
| in the       |               |                    |        |        |
| Croatian     |               |                    |        |        |
| telecom      |               |                    |        |        |
| market       |               |                    |        |        |
+--------------+---------------+--------------------+--------+--------+
|              | Sector        | Ownership          | rev    | number |
|              |               |                    | enues, | of     |
|              |               |                    | \$m    |        |
|              |               |                    | illion | subsc  |
|              |               |                    |        | ribers |
|              |               |                    | (for   |        |
|              |               |                    | 2000   |        |
|              |               |                    | if not |        |
|              |               |                    | stated |        |
|              |               |                    | othe   |        |
|              |               |                    | rwise) |        |
+--------------+---------------+--------------------+--------+--------+
| Croatian     | fixed         | 51% Deutsche       | 520    | 1,7    |
| Telekom (HT) | voice/data    | Telekom,           |        | 21,139 |
|              |               |                    |        |        |
|              | telec         | Government of      |        |        |
|              | ommunications | Croatia            |        |        |
+--------------+---------------+--------------------+--------+--------+
| Cron         | Mobile        | Part of HT         | 150    | 1,0    |
| et(GSM)/Mobi | telec         |                    |        | 00,000 |
| tel(analogue | ommunications |                    |        |        |
| )/Bip(pager) |               |                    |        |        |
+--------------+---------------+--------------------+--------+--------+
| VIPNET GSM   | mobile        | Mobilkom Austria,  | 140    | 1,0    |
| Ltd.         | telec         |                    |        | 00,000 |
|              | ommunications |                    |        |        |
+--------------+---------------+--------------------+--------+--------+
| HT Hinet     | Internet      | part of HT         | 40     | 2      |
|              |               |                    | (2001) | 55,000 |
+--------------+---------------+--------------------+--------+--------+
| Iskon Ltd.   | Internet      | Adriatic Net       | 5      | 68,000 |
|              |               | Investors Ltd.,    |        |        |
|              |               | CALPers            |        |        |
+--------------+---------------+--------------------+--------+--------+
| VIP online   | Internet      | VIPNET GSM Ltd.    | \-     | 22,000 |
+--------------+---------------+--------------------+--------+--------+
| Digital City | Cable TV      | SEAF, SEAF Growth  | \-     | 45,000 |
| Media Ltd.   |               | Fund, SEEF         |        |        |
+--------------+---------------+--------------------+--------+--------+
| Adriatic     | Cable TV      | Copernicus Capital | \-     | 30     |
| Kabel Ltd.   |               | Partners           |        | ,000\* |
|              |               |                    |        |        |
|              |               | Investment fund    |        |        |
+--------------+---------------+--------------------+--------+--------+
|              |               |                    |        |        |
+--------------+---------------+--------------------+--------+--------+
| \*-including |               |                    |        |        |
| a 30% stake  |               |                    |        |        |
| in           |               |                    |        |        |
| Electronic   |               |                    |        |        |
| CATV from    |               |                    |        |        |
| Rijeka on a  |               |                    |        |        |
| pro-rata     |               |                    |        |        |
| basis        |               |                    |        |        |
+--------------+---------------+--------------------+--------+--------+

**Rank = 2\
Energy (ELP, OGM, OGS, TRN)**

Each of the three large, state-owned companies that dominate Croatia's
energy sector is preparing to undertake significant investments during
the next few years. Oil & gas company INA
([www.ina.hr](http://www.ina.hr/)) is preparing for a \$600 million
project for reconstructing and upgrading its two refineries. INA is also
exploring the feasibility of three other projects: enhanced oil
recovery, underground gas storage, and residual fuel oil reduction. Oil
pipeline JANAF ([www.janaf.hr](http://www.janaf.hr/)) has already
started with initial investments in a \$70 million pipeline reversal and
upgrade needed for the DruzbAdria project to export crude oil from
Russia to the Adriatic coast. Additionally, a TDA-funded feasibility
study will be completed in Summer 2003 for the South East European Line
(SEEL) project for exporting crude oil from the Caspian Sea region over
the Black Sea and through Romania and Serbia. The electricity company
HEP ([www.hep.hr](http://www.hep.hr/)) is examining the feasibility of
constructing an additional 100MW gas-fired combined-cycle cogeneration
unit at its thermal TE-TO power plant in Zagreb, and is exploring
possibility of reconstruction of two larger plants.

Since these companies are still (and will remain for the foreseeable
future) majority state-owned, they are obliged by law to perform most of
their procurement by public tenders (Public Procurement Law, Official
Gazette No. 117/01; the unofficial English translation is available from
the Commercial Service of the American Embassy Zagreb). According to the
law, tenders for regular, small-scale procurement of equipment, spare
parts, supplies, and services with a value not exceeding HRK 200,000
(about \$30,000) in the fiscal year do not have to be published in the
Official Gazette, but the purchaser is required to request offers from
at least five vendors, except when the value is less than HRK 20,000
(about \$3,000). For procurements of a value exceeding HRK 200,000,
tenders have to be published in the Official Gazette, and usually (but
not always) they are also published in local newspapers and on the
companies' websites (sometimes also in English language). Tenders for
procurements of over EUR 400,000 by companies operating in the energy
sector have to be published in the Official Journal of the European
Communities.

Because the Croatian energy sector basically comprises just the three
state-owned companies that are obliged to handle procurement as
described above, the best way for U.S. exporters to enter this market is
through a carefully chosen local representative who has local contacts
and a good understanding of local procurement practices. Simply sending
catalogs and offers to executives at these Croatian companies will not
produce much in the way of results. The Commercial Service of the
American Embassy Zagreb stands ready to assist U.S. exporters with
finding a local representative. Also, its Industry Sector Analysis \--
Energy contains a more detailed description of the market and the major
projects.

The Ministry of Economy, which is the lead government agency for
developing and implementing Croatia's energy policy, is currently
undertaking substantial reform of the sector. The goal is to enable and
regulate competition according to European Union directives and to
provide the basis for privatization of the three companies. Reform of
the energy sector formally started in July 2001, when the Croatian
Parliament passed five laws (on Energy, on Electricity Market, on Energy
Regulatory Agency, on Oil and Oil Derivatives Market, and on Gas
Market).

The annual energy sector statistical report, prepared by the Ministry of
Economy, is a useful source of information. For a copy of the latest
energy sector statistical report or for unofficial English translations
of the energy sector laws, contact the Commercial Service of the
American Embassy Zagreb or download the files from the website of the
Ministry of Economy ([www.mingo.hr](http://www.mingo.hr/)).

**Rank = 3**\
**Medical Equipment (MED)**

Croatia's \$112 million medical equipment market is dominated by imports
because there is almost no domestic production of medical equipment.
Exporters to Croatia in this field are: Germany, United States, Italy,
Austria, Great Britain, Japan and Switzerland. The market has been
rather stagnant in recent years. However, experts and government
officials suggest that because of the poor state of medical equipment in
most Croatian hospitals, and with the economy improving, the market
might increase in upcoming years.

The Ministry of Health is the major player in the Croatian medical
equipment market. The Ministry develops a health policy establishing
fundamental objectives for health care, proposes the health care budget
and the investment program for the sector, and monitors the work of
state-owned health institutions.

The Croatian Institute of Health Insurance (HZZO) administers Croatia's
healthcare system that is based on compulsory payroll contributions from
both employers and employees. Croatia has opted to retain a
predominantly publicly-funded health system, with an increasing degree
of private service provision.

The ministry has embarked on a program of reform in the health care
system in an attempt to modernize it and bring it closer to Western
standards. These ongoing and future reforms offer U.S. medical device
manufacturers opportunities to increase their market share in Croatia.

U.S.-manufactured medical equipment enjoys an excellent reputation in
Croatia for its state-of-the-art technology, quality and reliability.
However, medical equipment importers and specialists emphasize the real
and perceived lack of technical assistance and service support as one of
the main obstacles to further growth of US imports on the market. One
should also take into account that the Croatian market for medical
equipment is still very price-sensitive because of limited resources.

There are good opportunities in the Croatian market for US manufacturers
of sophisticated diagnostic equipment such as electrocardiographs,
endoscopes, scanners, computer tomograph imaging equipment, pace makers,
digitalized x-ray equipment, nuclear medical instruments and clinical
laboratory equipment.

The reforms that the Ministry of Health has already implemented, and
still plans to undertake, as well as current state of medical equipment
in Croatian hospitals suggest that several sub-sectors will be
especially prominent in the near future. Therefore the highest sales
potential for the coming years is expected to be in the following
medical equipment sectors:

• Health informatics equipment

• Home health care and rehabilitation equipment

• Pathology equipment and services

• Diagnostic imaging equipment, especially ultrasonic diagnostic
equipment

• Patient monitoring systems including intensive care units

• Dialysis equipment

• Day hospital and day surgery concepts

In Croatia, there are 65 public (owned by the state or by the županijas,
Croatian administrative units) and two privately owned hospitals. One of
the main goals of the health reform plan is to decentralize the Croatian
health system, as well as its decision making process which will also
affect methods of procurement. Some smaller changes have already taken
place. Next year, each županija will have an increased budget totaling
approximately \$ 1 million for medical equipment, renovation and
procurement.

In a recent interview, the Croatian Minister of Health, Dr. Andro
Vlahušić, announced a budget increase for investment in new medical
equipment. Medical equipment in most Croatian hospitals is outdated, and
often inadequate, so the Ministry intends to allocate additional
resources to address this problem. Dr. Vlahušić stressed that the
short-term priorities for purchase of new equipment will be the
following: anesthesiological apparatus and monitoring equipment,
angiography equipment, instruments for day surgery and various
diagnostic and endoscopic equipment.

There are several major hospital reconstruction tenders planned for the
second half of 2003 and 2004. The Clinical Hospital Center Zagreb (KBC
Zagreb) is planning a major expansion that includes building 36 new
operation theaters, as well as new auxiliary services such as a hotel
and parking, and improving the state of KBC's medical equipment. The
hospital is planning to issue a tender for supervising the project, and
for the purchase of the equipment. The value of KBC Zagreb's project is
approximately \$60 million (without VAT). Second, the city of Zagreb,
the Ministry of Health, and the government were also discussing the
possibility of finishing the University Hospital, the project they
evaluated at \$200 mil (\$156 million has already been spent). In a
recent meeting, city and government officials pledged their support for
this project. According to most recent reports, tenders for the project
should be issued by the end of 2003.

The Ministry of Health is also looking for innovative ways to work with
medical equipment suppliers. They are considering the option of
public-private partnerships in which a company would equip and
administer a certain medical center or hospital unit. At this early
phase of this project the Ministry is willing to listen to different
proposals.

At the moment, an extensive anti-smoking campaign is taking place in
Croatia. This campaign, organized by Andrija Štampar School of Public
Health, received substantial support from professional organizations and
also significant local publicity. Among other things, a free telephone
line was established where smokers intending to quit can seek support
and encouragement, as well as professional advice. This campaign
revealed that the Croatian market lacks a variety of anti-smoking
products (gums, patches, medicines). Therefore, there is a demand from
both customers and doctors/professionals for such products. This
includes not only the above mentioned medical products, but also others
that could be considered as supplementary elements of an anti-smoking
campaign such as instruments measuring the level of smoke, etc.

Local distributors of medical products and equipment claim that there is
a large demand for diagnostic tests for drugs, pregnancy and various
illnesses as well as for vitamins and dietary supplements. The market
for natural medicines expanded significantly in recent years. Local
distributors also expressed willingness to import what they refer to as
"hit" products, new US products for which equivalents do not exist in
Europe. "New-ness" of the products is very important for the Croatian
market that is otherwise very price-sensitive: if the main competitors
do not have such products, local distributors are willing to accept the
relatively higher prices of American products.

Finally, OTC market is increasingly developing in Croatia, and
therefore, importers are looking for quality OTC drugs and products.

  ------------------------------ ---------- ---------- -------------------
  Estimates in \$ millions       2001       2002       2003 (est)

  total market size              110        112        112

  total local product.           2          2          2

  total exports                  N/A        N/A        N/A

  Total imports                  108        108        108

  imports from the US            N/A        N/A        N/A
  ------------------------------ ---------- ---------- -------------------

**Rank = 4**\
**Port Infrastructure (TRN, CON):**

Reconstruction of port facilities on the Adriatic is a priority of the
Croatian government. It has the backing of the World Bank, which
approved a \$150 million loan for the reconstruction of the port of
Rijeka. Part of this loan will be applied to the construction of
infrastructure (road and railway links, approximately \$100m), while the
rest will be used to purchase cargo handling and storage equipment
(mobile cranes, refrigerators). The Rotterdam Maritime Group performed
the feasibility study for this project, and design work is already under
way. The loan should be disbursed in summer 2003. Luka Rijeka Inc., the
principal concessionaire for the port of Rijeka, will have to undertake
an investment plan of its own, since the reconstruction financed by the
World Bank doesn't meet the needs of infrastructure development
(construction of scattered cargo terminals, mobile cranes etc.).

The Port of Omisalj, located on the island of Krk, has been transferred
to the port of Rijeka Authority and ceased to operate as a special
purpose port (until now operated by the Adriatic Pipeline for transport
and storage of oil). Unique because of its depth, which allows the
biggest tankers to dock, the port of Omisalj will now offer concessions
to other operators. The port will also require some reconstruction.

Feasibility studies for the development of the ports of Dubrovnik, Ploce
and Zadar were completed in 2002 and 2003. U.S. Trade and Development
Agency (TDA, [www.tda.gov](http://www.tda.gov/), see contact information
under Trade and Project Financing section) financed a definitional
mission to the Croatian seaports to determine the potential for U.S.
exports.

**Rank = 5**\
**Environmental Equipment (ENV):**

Following Croatia\'s independence, the Parliament passed two
environmental protection laws: The Declaration of Environmental
Protection, approved in 1992; and the Law on Environmental Protection,
approved in 1994. Both established environmental protection as a
government priority. Sectors affected by this legislation are tourism,
textiles, shipbuilding, food and beverage manufacturing, chemicals, wood
processing, mining and energy.\
\
The National Environmental Action Plan (NEAP) identified the following
priorities: to improve the level of treatment and coverage for municipal
and industrial wastewater, to eliminate uncontrolled dumping of solid
and hazardous wastes by implementing proper disposal sites and to
control air pollution emissions in industrial areas to meet the current
legal limits.

The government encourages local authorities to grant concessions for
wastewater facilities that will meet European standards. Zagreb,
Croatia\'s largest city, currently has no wastewater facility, although
a contract has been signed for the first BOT wastewater project in
Croatia. If the project is successfully implemented, future wastewater
treatment projects with a BOT structure may be feasible. Twenty
facilities are planned to be built by the year 2010, and there are plans
for additional wastewater facilities for towns of 2,000-15,000
inhabitants by the year 2025. However, due to the lack of financing
sources, very few of these projects are currently under development.
Another problem is that many municipalities are too small to undertake
commercial financing.\
\
Similar to wastewater treatment, proper disposal of municipal and
industrial solid waste is an environmental priority for Croatia. The
Ministry of Environmental Protection and Physical Planning (MEEP)
recently stated that waste management is one of the most critical
environmental problems. Key issues are: increase in solid waste; very
limited recycling; unreliable data concerning waste flows and
quantities; and lack of organized disposal sites.

In April 2003, MEEP developed the Waste Management Strategy, a document
presenting options on how to organize future municipal waste management,
harmonize legislation with EU directives and organize general waste
management. The strategy proposes the following targets:

  ------------------------------------------------ ------ ------ ------ ------
  TARGET                                           2000   2005   2010   2015

  Collection Coverage                                                   

  \% of the population covered by organized        80     90     98     99
  municipal waste management                                            

  Waste Quantity                                                        

  a\) % of municipal waste separated at the source 4.5    7      15     30

  b\) % waste disposed at landfills (% of quantity 100    105    80     60
  disposed in 2000)                                                     

  c\) Recycled (% of the total amount)             3.5    5      10     15

  d\) Reduction at originating site (% of the      0      2      5      10
  total amount)                                                         

  e\) Thermally treated for energy recovery (% of  0      0      10     25
  the total amount)                                                     

  f\) Disposed organic waste (% of the total       100    95     85     70
  amount disposed in 2000)                                              

  Landfills                                                             

  a\) Regional (with operational permit)           0      2      10     10

  b\) for hazardous waste                          0      0      1      1

  c\) Closed and sanitized (% from total number in 0      25     50     75
  2000)                                                                 
  ------------------------------------------------ ------ ------ ------ ------

It is unlikely that small municipalities will have the financial ability
to undertake these projects. Companies that want to bid on such projects
need to offer financing options. EU companies have generally been more
successful because they have more regional experience.\
\
MEEP stated that, in order to enter the EU, Croatia will have to invest
up to \$10 billion to solve waste and wastewater disposal problems.
However, money for these investments is generally not yet available. To
try to solve this problem, the government is in the process of
establishing a new environmental fund. Until this fund is available, the
best prospects for US environmental equipment will be smaller
measurement and monitoring equipment and water purification
technologies. To be successful in selling to Croatia, it is crucial to
have a good local representative or distributor.

**Rank = 6**\
**Miscellaneous consumer goods (APP, COS, FOT, SPT, TOY)**

The consumer goods sector is definitely one of the sectors most
well-disposed towards US products. Croatian customers are prepared to
pay even a higher price for a product that is either superior in quality
in comparison to other substitutes on the market or simply because such
products cannot be found on the market. The rise of large mega-stores
such Metro, Mercatone and Mercator additionally contributed to the
attractiveness of the consumer goods sector.

Several sub-sectors within consumer goods are especially interesting for
potential US suppliers: sporting goods, professional sports gear and
apparel, apparel (footwear and accessories), personal care products, and
toys, games and other recreational goods.

Sporting goods, professional sports gear and apparel: Croatians are
active sports enthusiasts, and spend much time playing amateur and/or
professional level sports. Soccer, basketball, tennis, skiing, handball,
and water-polo are the most popular sports. Increasing awareness about
necessity of physical exercise in everyday life led to a surging
popularity of gyms and recreational centers. Major manufacturers of
footwear, apparel and equipment such as Nike and Reebok are already
present on the market. US has enjoyed a dominant share of professional
sports gear and apparel market in Croatia. However, there is still a
strong demand for such products so even smaller, specialized companies
-- especially producing various accessories -- could find their place on
the Croatian market. US producers of bicycles, motorcycles, and other
"mobile" products would be of interest to local distributors.
Furthermore, Croatia's famous coast and resort sites create an
increasing demand for beach and water sports apparatus and consumer
products/accessories.

Apparel (clothing, footwear and accessories): Croatia's consumers are
fashion-conscious and there is a significant demand for designer labels.
Upper to middle income consumers are not overly concerned with price.
This group appears to be more conscious of image and appearance. They
are looking for the best and will buy well-known brand names. Therefore,
top US brands could position themselves well to this market segment. The
lower income group of end-users is most comfortable in the mass market,
which offers lower-price clothing and footwear, both imported and
locally produced. But even in this group, customers may decide to
purchase more expensive and prestigious products of higher quality.
Moreover, there is room on the market for quality producers of hiking
footwear and footwear for children and teenagers.

Personal care products: Personal care and cosmetics sector in Croatia is
dominated by imports from big companies such as Unilever,
Procter&Gamble, Henkel, Lorebel and Beiersdorf. Price is an important
consideration in determining the market for an individual cosmetic or
toiletry product in Croatia. However, increasing fashion-consciousness,
and consumers' interest in new products and product launches \-- which
is especially true for some sub-sectors such as hair-care, skin-care and
baby care -- make this sector very interesting for US suppliers.

Toys, games and other recreational goods: Croatia is also a promising
market for toys and games. With very little domestic production, the
demand still outweighs the supply, and especially in the sub-sector of
puzzles and table and parlor games. Stuffed toys, toys with electric
motors, electronic toys and games, and computer games are other products
with good sales potential. The key competitive factors for suppliers are
price, quality and design. Upper to middle income consumers are less
concerned with price and prepared to pay a higher price for quality, new
and imaginative products.

**Rank = 7**

**Franchising (FRA)**

While some franchises already operate in Croatia, this business concept
is relatively new and is attracting interest among local entrepreneurs
and opportunities for U.S. companies in this sector will be rapidly
increasing in the years to come.

In addition to the well-established franchises of American Express,
Diners Club, Coca-Cola, and McDonalds, some newly opened operations
include the first two Subway restaurants, City Express (courier mail),
Fornetti (rolls), OMV -- Istrabenz (gas pump stations), BHS (car
repair), Body Creator (beauty centers) and a number of retail shops
which specialize in products from a single supplier under a franchise
agreement (such as Palmers underwear, candies of the local producer
Kras, and electrical appliances by the local distributor Plana Promet).

The first ever Franchise Industry Fair, organized by the newly organized
Croatian Franchise Industry Association, was held in Zagreb, March
20-22, 2003. Concurrent with the fair, the Croatian Chamber of Commerce
organized the first international workshop on franchising that included
representatives of franchise associations from Italy and Germany, as
well as a number of local experts and entrepreneurs. It was clear at
these events that the franchise industry is at a very early stage in
Croatia. But it also was apparent that there are several institutions
and individuals that independently and simultaneously recognized the
importance of this business concept and started exploring and promoting
it diligently.

Potential buyers of U.S. franchises can be found among the successful
entrepreneurs that have gained their business experience and some
capital (perhaps up to \$500,000) during the past decade of a market
economy in Croatia. A number of these entrepreneurs are considering
expanding or changing their business and recognize the value of a proven
business concept. Local banks, now almost completely owned by foreign
banks, are likely to provide the needed additional capital to an
experienced businessperson with a sound business plan and personal
capital, as well as a real estate property that can be used as
collateral.

Best prospects for franchising opportunities are likely in the sectors
connected with travel and tourism such as food and beverages, automobile
servicing/equipment, transportation services, marine services,
recreation services, hotels and motels, maintenance services, etc. The
Industry Sector Analysis -- Franchising, a report prepared by the
Commercial Service of the American Embassy Zagreb contains more detailed
description of the market and the prospects.

**B. Best Trade Prospects: Agricultural Sector**

The Croatian market for imported food continues to grow. The single
largest segment, high-value food items, is dominated by European
suppliers. Due to the return of tourism as a source of revenue,
opportunities exist for seafood and fish products. In addition to
targeting the Adriatic coast with restaurant and food service products
(including seafood), Croatia's role as a major seaport gateway to inland
destinations should also not be overlooked. While there has been a
decline in the livestock sector over the past ten years, Croatia is
rebuilding its livestock herds and is interested in imported genetics.
These products were supplied by German, Dutch and Hungarian sources but
because of BSE and FMD outbreaks there is an import ban for cattle
products from all affected countries. Croatia is currently working on
new biotechnology legislation that would be in line with Western
European legislation and consequently negatively impact US food imports.
Legislation requiring the labeling of foods and feeds derived from
biotechnology may well be enacted by the end of 2003.

  ----------------- ----------------- ----------------- -----------------
                    2001 actual       2002 actual       2003 estimate

  Total exports     \$470 million\*\* \$558 million\*\* \$600 million

  Total imports     \$845 million\*\* \$1000            \$1100 million
                                      million\*\*       

  Imports from U.S. \$15 million\*    estimate 15       \$15 million
                                      million           
  ----------------- ----------------- ----------------- -----------------

Rank = 1

Miscellaneous Consumer Foods

Croatia's total imports in this category almost doubled from \$267
million in 1993 to \$498 million in 2001\* as the country recovered from
war. The return of tourism to the Dalmatian coast and rebounding
consumer demand in urban areas are fueling demand for consumer foods
which is underlined by the increasing number of supermarkets.

Trade statistics on American exports to Croatia in this category are
severely understated due to transshipment via the EU. Demand for medium
to high quality consumer foods will continue to rise and should be a
boon for American companies, provided they can overcome less than
competitive high ocean freight rates into the Adriatic Sea from U.S.
ports. U.S. companies can take advantage of America's reputation for
quality foods and weak dollar.

  ----------------- ----------------- ----------------- -----------------
                    2001 actual       2002 estimate     2003 estimate

  Total market      \$5,100 million   \$5,300 million   \$5,600 million

  Total local       N/A               N/A               N/A
  production                                            

  Total exports     \$203 million\*   \$205 million     \$207 million

  Total imports     \$498 million\*   \$500 million     \$502 million

  Imports from U.S. \$8 million\*     \$8 milion        \$8 million
  ----------------- ----------------- ----------------- -----------------

Rank = 2

Fish & Seafood

The Adriatic seacoast is the seat of Croatia's tourism industry, and
seafood is in greater demand for tourist catering than local supplies
can meet. Due largely to a recovery in tourism since the end of the war,
Croatian imports of fish and seafood have jumped from \$12.7 million in
1993 to over \$66 million in 2002\*\*. A large proportion of the seafood
and fish consumed on the Adriatic Coast is in fact imported and not
caught locally (though most tourists do not realize this). Demand is
particularly strong for medium-quality products, as tourists tend to be
'mid-budget' travelers. Consumption should continue to grow along with
tourism for the next several years, as the country remains a somewhat
lower-cost alternative to Italy for beach-bound tourists and thus
attracts visitors. Domestic fish consumption in 2001 was about 10.4kg
per capita (including all types of seafood), but the Croatian government
has made increasing fish consumption a strategic goal.

  ----------------- ----------------- ----------------- -----------------
                    2001 actual       2002 actual       2003 estimate

  Total market      44,720 metric     estimate 46,000   47,000 metric
                    tons              metric tons       tons

  Total local       25,698 metric     estimate 23,000   23,000 metric
  production and    tons\*\*          metric tons       tons
  catches                                               

  Total exports     \$64 million\*    \$62 million\*\*  \$61 million

  Total imports     \$57 million\*    \$66 million\*\*  \$68 million

  Imports from U.S. \$2 million\*     estimate \$2.5    \$3 million
                                      million           
  ----------------- ----------------- ----------------- -----------------

Rank = 3

Soybeans and Soybean Products

The post-war resurgence of Croatia's poultry and swine industries has
stimulated demand for soybeans and soybean meal. Soybeans are imported
into the port of Zadar where the largest soybean crushing facility in
Southern Europe is located (capacity is about 250,000 MT annually) and
the port of Rijeka. After they are crushed, the soybeans are shipped
throughout the western portion of the Balkans. Price and credit
availability are the major determinants for sourcing.

Brazil provides most of the soybeans imported into Croatia and Brazilian
traders regularly use GMO-free certificates to gain a marketing
advantage over U.S. origin beans. Brazilian beans are also lower priced
than U.S. soybeans. Little verification of these certificates is done by
either importers or the government. Domestic soybeans tend to produce
lower quality meal having a protein content between 34 to 38 percent.

  ----------------- ----------------- ----------------- -----------------
                    2001 actual       2002 actual       2003 estimate

  Total market      160,000 metric    160,000 metric    160,000 metric
                    tons              tons              tons

  Total local       91,841 metric     129,470 metric    90,000 metric
  production        tons              tons\*\*          tons

  Total exports     \$9 million\*     \$15 million\*\*  \$15 million

  Total imports     \$43 million\*    \$55 million\*\*  \$70 million

  Imports from U.S. \$2 million\*     \$ 18 million\*\* Depends on GMO
                                                        issue
  ----------------- ----------------- ----------------- -----------------

Rank = 4

Livestock Genetics

In its effort to boost livestock herds, Croatia currently imports live
cattle and bovine semen. This is of particular interest due to Croatia's
status as a net importer of milk and dairy products. The current ban on
import of cattle and cattle products from BSE-reported countries gives
the United States an opportunity to increase exports of Holstein semen.
The import ban resulted in major decline in import of livestock
genetics. Currently there are no tariffs for import of bovine semen.

  ----------------- ----------------- ----------------- -----------------
                    2001 actual       2002 actual       2003 estimate

  Total market      N/A               N/A               N/A

  Total local       N/A               N/A               N/A
  production                                            

  Total exports     0\*\*             0\*\*             0

  Total imports     \$3.5 million\*\* \$0,8 million\*\* \$1 million

  Imports from U.S. 0\*\*             0\*\*             Good prospects
                                                        for export
  ----------------- ----------------- ----------------- -----------------

\*UN trade data base

\*\*DZS Croatian Statistics

C. Doing Business with the Croatian Ministry of Defense and Defense
Industry

**Overview:**

Croatia is now in the process of transforming its military to a modern,
western trained and equipped force tied to the security institutions of
the West. This transition process includes reorganization of the armed
forces towards NATO compatible doctrine and interoperability, reduction
of active duty personnel and modernization of the armed forces. To
accomplish its modernization goals, the Croatian Ministry of Defense
(MOD) developed a modernization plan. In general, equipping and
modernization will be accomplished by first upgrading existing equipment
(as long as it can meet NATO standards) and secondly through domestic
production of arms and equipment. What the MOD cannot acquire from
domestic sources they will seek to acquire through foreign purchase.
Funding for the MOD modernization plan remains very limited. The defense
budget for FY 03 is approximately \$550 million USD with a very small
amount, roughly \$25 million USD, allocated to modernization for all
three services.

Croatian Defense Industry:

During the Croatian War for Independence (Homeland War) between
1991-1995, a UN arms embargo prevented Croatia from buying western
technology, equipment, and arms. As a result during the war, Croatia was
required to supply its forces by two primary means:

Domestic arms production.

Acquisition on the open market.

The Homeland War and UN arms embargo resulted in Croatia developing a
relatively capable and innovative domestic defense industry which has
proven itself in wartime, and which is capable of producing good
land-based defense systems. In particular, Croatian defense industry has
the capability to produce tanks, armored vehicles, mortars and mortar
shells, artillery shells, small naval vessels, and various small arms.
Some of these capabilities were inherited from the former Yugoslavia
after the break-up, but most were developed once war broke out.

Buying on the open market through surreptitious means led to the
acquisition of a bewildering array of non-standard arms and equipment,
most of which was eastern block in origin and of questionable quality.
This has created a major logistical problem for the Armed Forces in
trying to maintain and train with so many diverse weapon systems.

Today, Croatian Defense Industry, which was heavily subsidized during
the war, is struggling to stay viable and many companies have
diversified to include producing commercial products.

**Croatian Armed Forces acquisitions:**

In the last few years, Croatia has started the modernization process of
their Armed Forces in the following areas:

-   TRAINING: For training purposes, the MOD created a Training
    Simulation Center as a part of Croatian Military Academy's Training
    Command. The Simulation Center is currently running the JANUS and
    SPECTRUM simulation programs purchased from the U.S. through the
    Foreign Military Sales Program (FMS). The MOD also has an FMS case
    established for purchase of the Multiple Integrated Laser Engagement
    System (MILES 2000) tactical training equipment that should be
    delivered during the next year.

-   COMMUNICATION EQUPMENT: The Croatian MOD recently accepted \$ 7.1
    million U.S. Government Letter of Offer and Acceptance (LOA) for the
    Combat Net Radio VHF System. US Government is currently in the
    process of adding the amendment on the existing LOA by which the
    original contract will be increase for additional \$ 5.25 million.
    This contract is fully financed by the US Government FMF granted
    funds. Also, US Army CECOM is in the process of developing a Letter
    of Offer and Acceptance (LOA) for the Night Vision Equipment
    requested by Croatian MOD. During September 2003 delivery of ITT
    Mercury Wideband Network Radio (RT-1812) is expected. Those radios
    are also purchased through the US Foreign Military Sale program

-   AIR AND COASTAL SURVEILLANCE RADARS: Croatia has purchased the air
    surveillance FPS-117 radars from Lockheed Martin, and Peregrine
    coastal surveillance radars from Metrix System Corp through direct
    commercial sales. These radars should become operational during this
    year.

-   AIR FORCE MODERNIZATION: In the beginning of 2002, the MOD signed a
    contract with Romania for the upgrade and modernization of a MIG 21
    fleet. In April 2003, the MOD accepted a US Letter of Offer and
    Acceptance (LOA) for communication, navigation and identification
    friend or foe (COM/NAV/IFF) equipment, upgrading services support
    and training support for two Mi-8 helicopters. Contract is fully
    financed by the US Government FMF granted funds.

Acquisition priorities:

As stated above, the Armed Forces modernization process has already
begun. Acquisition priorities that could be expected to happen in the
near future include:

1\. Further modernization of the army communication systems with both
High Frequency (HF), and Very High Frequency (VHF) Radio Equipment.

2\. Medium range Air Defense system acquisition.

3\. Upgrading the Croatian helicopter fleet.

4\. Continuous modernization of information technology equipment

5\. Engineer equipment

6\. NBC equipment

7\. Tactical transportation

**Doing business:**

Various U.S. defense companies have already established good contacts
with the MOD or with Croatian companies, and some of them even signed
multimillion dollar contracts. Through business dealings with the U.S.,
the Croatian MOD uses both options, Direct Commercial Sale (DCS) and
Foreign Military Sale (FMS). The basic difference between the two
programs are that FMS is a government to government contract, and DCS is
a contract between the purchaser and contractor without US government
involvement. In Direct Commercial Sales, the Office of Defense
Cooperation (ODC) can assist U.S. companies in establishing contacts
with MOD officials and Croatian defense industry, organizing meetings
and presentations and can provide an assessment of the situation within
the MOD. We recommend that any U.S. defense company interested in doing
business with the Croatian MOD contact the ODC first. During last two
years, the ODC staff also visited various Croatian defense industry
companies and has a good understanding of their capabilities as well as
having contact with the senior management. The Ministry of Defense
recently published Croatian Defense Industry Catalog in which all
Croatian companies involved in defense production could be found. This
Catalog could easily be ordered directly by contacting MOD Department
for Material Resources or through the ODC channels. The ODC has also
established good cooperation with ALAN Agency, a limited liability
government-owned company established for import and export of defense
equipment and additional supervision of the defense equipment production
for export. ALAN Agency activities are based on the Code on production,
overhaul and trade of weapons and military equipment and includes:

-   Supervision of weapon and military equipment production

-   Import and export of weapons and military equipment for Armed Forces
    and Police Department

-   Sale of Armed Forces surpluses

-   Central data base of import and export of weapons and military
    equipment

-   Controlling the production of weapons and military equipment for
    export, by issuing the approval for production to the Croatian
    producers

-   Negotiating and stipulating contracts with foreign buyers for export
    deliveries

-   Import and export of weapons and military equipment for commercial
    purposes

-   Consulting, marketing and market research of production and trade of
    defense equipment

-   Offset arrangements specialist for production and trade of defense
    equipment

Below is a list of Croatian defense companies visited by the ODC:

**Shipyards/Naval Equipment:** [Kraljevica Shipyard Ltd]{.underline}.,
[Sibenik Shipyard]{.underline}, [Greben Shipyard]{.underline},
[Brodosplit Shipyard]{.underline}, [Viktor Lenac Shipyard]{.underline},
[PCE Split (Naval Center for Electronics)]{.underline}

**Radio Equipment**: [RIZ-Transmitters Co]{.underline}

**Research and Development:** [Institute Rudjer Boskovic]{.underline},
[Brodarski Institute]{.underline}

**Small Arms/Equipment:** [Elmech Razvoj]{.underline}, [IM
Metal]{.underline}, [Sestan Bush]{.underline}

**Tanks/Heavy Weapons:** [Djuro Djakovic]{.underline}

**Uniforms and Equipment:** [Varteks]{.underline}

Detailed information about these companies can be found on the ODC
website [www.usembassy.hr/odc](http://www.usembassy.hr/odc).

6\. TRADE REGULATIONS, CUSTOMS AND STANDARDS

A. [Trade Barriers, Including Tariffs, Non-Tariff Barriers and Import
Taxes]{.underline}

Croatia has undertaken significant liberalization of the trade regime
and deregulation of trading activities. The Law on Trade permits all
legal persons, duly registered in accordance with the Law on Companies,
to engage in export and import activities. Croatia became a full member
of WTO in November 2000. In this context, Croatia has committed to
implementing additional trade liberalizing measures over the transition
period.\
\
The Law on Customs Tariffs, implemented on July 1, 2000, authorizes the
Government of Croatia to adjust tariffs annually. Customs tariffs
currently range between 0 and 17.6% for industrial products with the
majority subject to rates of 0 to 10%. Average tariff for industrial
goods is about 3% and for agricultural goods 22-24%. Compound duties (ad
valorem plus specific custom duty) are applied to a number of
agricultural and food products. Maximum ad valorem duty is 64% and,
where compound duty is applied, maximum ad valorem component is 15%.
Under the WTO umbrella, Croatia is a signatory of International
Technology Agreement that provides for free import of information
technology equipment. Import quotas have been phased-out.\
\
Imported products are subject to quality control by market inspection
officials. These officials are employed by the State Inspectorate to
ensure that imported goods comply with Croatian standards, whether they
are appropriately labeled and packed, and whether they have required
documentation or quality certificates. The products subject to quality
control are those in which improper quality may not be obvious or may be
dangerous for the consumer (and include most food and agricultural
products, furniture, cement, textile, electric and gas appliances,
agricultural equipment, etc. -- the detailed list is published in Decree
Specifying Goods for Which a Quality Certificate is Required, Official
Gazette No. 127/99; available on www.nn.hr). These products must pass
quality control testing before they are put on the market (i.e. at
manufacturer's or importer's warehouse). When applicable, products also
have to pass sanitary, phytopathologic, or veterinary control.
Information on sanitary requirements can be obtained from the Ministry
of Health, and information on phytopathologic and veterinary
requirements from the Ministry of Agriculture and Forestry (see
addresses in the Appendix). State Inspectorate officials are also in
charge of implementing the important, newly adopted Law on Protection of
Consumers, Official Gazette No. 96/03; available on www.nn.hr).\
\
Croatia does not automatically recognize mandatory technical/quality
tests (concerning safety, environmental protection, etc.) conducted in
other countries. The Croatian State Office for Standards and Metrology
has the authority to fully or partially recognize some foreign tests on
a case by case basis, according to relevant legislation (for details see
www.dznm.hr -- Product Certification: Products and Regulations;
Recognition of Test Reports Issued Abroad).

Most import regulations were translated into English during the WTO
accession process and are available from the Ministry of Economy.
However, to learn about the customs duties, taxes, and quality
requirements for a specific product, U.S. exporters should contact a
Croatian freight forwarder or a business consultant. The list of
Croatian freight forwarders is available from the U.S. Embassy Zagreb
(www.usembassy.hr); for business consultants see the Appendix.\
\
B. [Customs Valuation]{.underline}\
\
The primary basis for customs valuation is the contracted price
(transaction value) of the goods \-- the price paid or the price that is
to be paid for the imported good. This value includes all duties,
transport costs (as well as loading/unloading charges), insurance,
agent\'s commission, packaging and taxes outside Croatia \-- pursuant to
GATT Article VII.\
\
C. [Import Licenses]{.underline}\
\
Import licenses are required for arms/ammunition, military and police
equipment, mobile radio sets, drugs, narcotics, antiquities, precious
metals, waste, nuclear technology, chemical weapons' ingredients, and
substances harmful to the ozone layer (a detailed list with HS codes is
published in a Decree Specifying Goods Subject to Export and Import
Licenses, Official Gazette No. 67/03; available on www.nn.hr). Import
licenses are required for a few products originating in countries which
are not members of the WTO (for iron tubes and bars, and fertilizers).
Import licenses are issued by the Ministry of Economy.\
\
D. [Export Controls]{.underline}\
\
Exporters from the U.S. must be aware that most technology can be
exported from the United States to Croatia under general export
licenses. Some equipment (e.g., dual-use technology) still requires
validated export licenses from the Bureau of Export Administration (U.S.
Department of Commerce) and/or Department of State.\
\
On April 8, 1999, President Clinton signed a Presidential Determination
permitting the supply of defense items and services to the Government of
the Republic of Croatia.\
\
Croatia maintains no restrictions on exports of goods or services from
Croatia, except for weapons, nuclear technology, chemical weapons'
ingredients, substances harmful to the ozone layer drugs, gold, works of
art, etc (a detailed list with HS codes is published in a Decree
Specifying Goods Subject to Export and Import Licenses, Official Gazette
No. 67/03; available on www.nn.hr). For these products, an export
license, issued by the Ministry of Economy, is required.\
\
E. [Import/Export Documentation]{.underline}\
\
A Croatian importer/exporter is responsible for providing the required
import/export documentation, which consists of common trade, transport,
and customs documents, as well as certificates required for quality
control and licenses where appropriate. Single Administrative Document
(SAD) that is used by EU and most other countries is the key customs
document in Croatia as well.\
\
F. [Temporary Entry]{.underline}\
\
Temporary entry of products into Croatia is regulated in accordance with
the EU Customs Code and international customs conventions. Croatia is a
party to the Customs Convention on Carnet ATA for Temporary Import of
Goods. Presentation of an ATA carnet or TIT carnet facilitates the
process. An entry carnet can be obtained from a local chamber of
commerce in the United States. Carnets are usually valid for one year
and list the products to be entered on a duty-free basis. The carnet
must be presented upon entry. Customs will stamp the carnet thereby
validating it. Upon departure, the carnet must again be presented for
validation, confirming that the product is being transported out of the
country. Failure to re-export the goods results in application of the
duties.\
\
G. [Labeling, Marking Requirements]{.underline}\
\
Labels must contain the following information: name of the product, full
address of the importer and the country of origin, net
quantity/weight/volume, ingredients, manner of storage (transport, use
or maintenance), and pertinent consumer warnings. Newly passed consumer
protection legislation requires identification of "transformed"
products; the definition of "transformed" will be determined by future
regulation. Technically complicated products must be accompanied by
instructions on usage, the manufacturer\'s specifications, a list of
authorized maintenance offices, warranty information, warranty period,
and other applicable data. All information must be in Croatian and
affixed to (or accompanying) each product before it is put on the
market.\
\
H. [Prohibited Imports]{.underline}\
\
None.\
\
I. [Standards]{.underline}\
\
Croatia initially adopted standards used in the former Yugoslavia. The
system comprises about 350 regulations and about 13,000 standards. The
Law on Standards (Zakon o normizaciji) adopted on June 28, 1996,
modified the Croatian system of standards to the European and
international systems. This law will be changed so that it better
conforms to WTO requirements regarding technical barriers to trade.\
\
The standards are generally not mandatory, but some could be made so by
a government agency or additional regulations. Accreditation of
laboratories and certification bodies is performed according to the
series of standards EN 45000 (European standards) and to ISO/IEC 17025.
For the time being, about 600 Croatian companies have obtained ISO
9000FF certificates for their quality management systems and 41 have
obtained ISO 14001 certificates for environmental management.
Information on particular Croatian standards as well as testing and
certification and accreditation can be obtained from the Croatian State
Office for Standards and Metrology (www.dznm.hr).\
\
J. [Free Trade Zones/Warehouses]{.underline}\
\
According to the Law on Free Trade Zones, adopted in June 1996, a
company in a free trade zone may engage in manufacturing, wholesale but
not retail trade, foreign trade, banking and other financial activities.
Free trade zone users are eligible for the following benefits: waiver of
tariff on imported products; a user of the zone who constructs or
participates in construction of infrastructure projects in the zone
worth KN 1 million (about \$120,000) or more, is exempted from paying
corporate tax during the first five years of operation in the zone;
other users in the zone pay corporate tax in the amount of 50% of the
regular rate (i.e., 12.5% instead of 25%); zones are exempted from any
Croatian emergency measures or other restrictions pertaining to foreign
trade or hard currency transactions. Users of the zones may freely store
their goods and production equipment in the zones. Goods which are not
intended for trade on the Croatian market or for domestic consumption
are fully exempt from custom duties or taxes. The Investment Promotion
Department within the Ministry of the Economy is the regulatory agency
for administration of the free trade zones (www.mingo.hr).\
\
K. [Special Import Provisions]{.underline}\
\
None.\
\
L. [Membership in Free Trade Arrangements]{.underline}\
\
*Free Trade Agreements*\
\
Croatia has free trade agreements with EU, EFTA countries (Norway,
Iceland, Liechtenstein, and Switzerland), CEFTA countries (Slovenia,
Poland, Czech Republic, Slovakia, Hungary, Romania, and Bulgaria), and
with Albania, Bosnia and Herzegovina, Serbia and Montenegro, Lithuania,
Macedonia, and Turkey. Negotiations are underway with Moldova.

*Trade Relations with the European Union*\
\
In October 2001, the European Union and Croatia signed a Stabilization
and Association Agreement (SAA). The SAA is to be ratified by all EU
member states within 18 months. Related to the SAA, an Interim Agreement
concerning trade and transport became effective on January 1, 2002. This
agreement includes the Autonomous Trade Preferences that the EU
previously extended to Croatia, providing all Croatian industrial and
most agricultural products with free access to the EU market. On January
1, 2002, Croatia also started to extend gradually tariff preferences to
the EU, providing free access to 70% of the value of EU industrial and
agricultural products currently exported to the Croatian market. In
February 2003, Croatia submitted a formal application for EU membership
and is now working diligently on adjusting its entire legislative and
administrative system in accordance with EU requirements.

7\. INVESTMENT CLIMATE STATEMENT

A. [Openness to Foreign Investment]{.underline}

Compared to other advanced transitional economies in the region, Croatia
is in the middle group in terms of foreign direct investment (FDI),
though greenfield investment has been slow to arrive. The former regime
under Franjo Tudjman went out of its way to obstruct foreign investors
and award the spoils of industry to political cronies. In contrast,
since coming to power in January 2000, the Racan government has taken
measures to welcome foreign investors, privatize state monopolies, and
improve the Croatian business environment. The government has:

\-- Established an Agency for Trade and Investment Promotion;

\-- Expanded Croatia's export market potential by entering into free
trade agreements;

\-- Introduced greater transparency in the privatization process.

\-- Passed legislation on investment incentives;

\-- Reduced some payroll taxes and adopted new legislation on taxation
that lowered the corporate income tax;

\-- Adopted anti-corruption measures;

\-- Revised banking and foreign exchange legislation;

\-- Liberalized the payment system by allowing commercial banks to make
payments.

The government established the Agency for Trade and Investment Promotion
in January 2003, but as of July, the Agency is still in the process of
hiring staff and not operating. The Agency will integrate the former
Investment Information Center, which published a 2002 Investment Guide
in English, and an Export Promotion Unit. The updated Investment Guide
should be finalized and put on the Agency's web page in September 2003.
In the meantime, the 2002 report can be obtained from the Investment
Promotion Department at the Ministry of Economy. The Internet website of
the Croatian Chamber of Economy (www.hgk.hr) is another good source,
especially for information about basic legislation in investment-related
fields. The macroeconomic data on this site, however, is not updated
regularly. The Zagreb Stock Exchange\'s website (www.zse.hr) posts
English-language translations of key laws in force.

The ruling coalition recognizes that Croatia\'s overriding political
imperative \-- membership in the European Union by 2007 \-- cannot be
realized without economic restructuring. But the coalition partners have
failed to reach agreement on how and how fast to introduce changes that
would accelerate the transition to a market economy. While all parties
acknowledge the need to attract foreign investment to stimulate
production and GDP growth, many in the government and most of the public
still believe that Croatian industries like shipbuilding, as well as the
inefficient agricultural sector, should be protected from foreign
competition. The coalition has not had the vision or consensus needed to
persuade the Croatian population that painful economic and social
reforms need to be implemented.

The foundation for Croatia\'s integration into Europe is the
Stabilization and Association Agreement (SAA) with the EU, signed in
October 2001. Under an interim agreement in effect since January 2001,
Croatia has established bilateral relations with the EU on trade,
transportation and certain legal matters. The EU has unilaterally opened
its market to most Croatian products. Under the SAA, Croatia lifted
customs duties for EU countries on 70 percent of the tariff base for
industrial products as of January 2002, and will continue to reduce
tariffs progressively through January 2007. The SAA text is available on
the EU internet website at:
www.europa.eu.int/eur-lex/en/com/pdf/2001/com2001_0371en01.pdf. The EU
Delegation in Croatia maintains a website at www.delhrv.cec.eu.int.

In December 2002, the Croatian Parliament passed the Resolution on
Croatia's Accession to the European Union in which all political parties
pledged to give full and continuous support to adopting legislation
harmonizing Croatia\'s laws with the EU's. In February 2003, Croatia
formally presented its application for EU membership.

After coming into office in 2000, the government expanded cooperation
with the IMF and the IBRD (World Bank). In March 2001, Croatia concluded
a Precautionary Stand-By Arrangement (SBA) with the Fund, which
successfully closed in May 2002. The IMF reported that, \"although
policy implementation was mixed, particularly in the structural area,
performance ...was broadly satisfactory.\" The government met
performance criteria for the 2001 fiscal deficit and government
employment reduction, while it outperformed targets for growth,
inflation and international reserves. Areas of weakness included
slippages in early 2002 fiscal deficit targets, bank credit to the
government and state enterprises, and arrears.

In February 2003 the IMF approved another 14-month Stand-By Arrangement
for SDR 105.9 million (about \$146 million) to support the country's
economic and financial program through April 2004. Even though the
Arrangement is only \"precautionary\", the SBA is important, since it
underscores international support for the Racan government\'s economic
policies and boosts the country\'s international credit rating. The
ambitious goals of the current SBA include:

\-- Stabilization of the general government debt ratio, key to which is
reducing the government fiscal deficit to below 5 percent of GDP;

\-- Increasing reliance on domestic capital markets;

\-- Keeping inflation to below an average rate of 3.5 percent;

\-- Strengthening the legislative framework, specifically in the areas
of financial operations, labor and competition policy;

\-- Keeping a lid on the government wage bill through a general wage
freeze and downsizing by at least 12,000 employees in the defense
sector;

\-- Continued restructuring and privatization of enterprises.

The World Bank has maintained a supportive relationship with the
Croatian government. (For a list of ongoing projects, visit the Bank\'s
website at www.worldbank.hr.) In addition to the Structural Adjustment
Loan (SAL \--see below), the Bank currently has fourteen active projects
in Croatia worth over \$1.2 billion, including a \$156.5 million loan
for the Rijeka Gateway project in July 2003.

In December 2001, the government and the Bank reached agreement on a
Structural Adjustment Loan (SAL) worth \$202 million. The first
installment of \$102 million was disbursed soon after the SAL came into
force. The Government received an extension until July 31, 2003 to
fulfill some conditions for drawing on the second tranche, worth \$100
million. The goals of the SAL are to help create a dynamic,
employment-generating economy and to help support Croatia\'s integration
into the EU. The loan supports government programs designed to improve
the competitiveness of the Croatian economy, to strengthen the
government\'s institutions and coordination, and to create favorable
conditions for small and medium enterprises to flourish in a competitive
market economy. Major objectives include passage of legislation to make
the labor market more flexible and the economy more attractive for
investment.

In January 2001, the Bank\'s Foreign Investment Advisory Service (FIAS)
delivered to the government a comprehensive report on administrative
barriers to investment. This analysis spurred the government to increase
its reform efforts and focus not only on legislation, but also on how
regulations are applied in practice. In June 2001 the government
established a high-level coordinating group to address how to eliminate
the administrative barriers and bottlenecks identified in the FIAS
study, and designated the Ministry of Economy to work with foreign
investors to make it easier to set up investments.

Despite the government\'s adoption of an \"action plan\" and a tracking
matrix for addressing the problems identified by FIAS, 2002 and 2003
have been disappointing; few concrete steps to eliminate the many
remaining barriers to investment in Croatia have been introduced. The
government is striving to pass key legislation, such as changes to the
Labor Law, a new company law and an organic budget law, by the end of
July 2003. The government has made very little progress in reforming a
key bottleneck, the judicial system.

The FIAS report is a \"must-read\" for prospective investors. It is
available in English on the Internet website:
www.mingo.hr/Aplikacije/Fias/English/fias.asp as well as on the World
Bank Croatia office\'s website: www.worldbank.hr.

The return of political stability to the region is steadily improving
the climate for economic development. As part of its commitment to
bolster stability, Croatia participates actively in the regional
Stability Pact. In June 2001, Croatia and the other five governments of
the region signed a Memorandum of Understanding on Trade Liberalization
and Facilitation in Southeast Europe. Under the MOU, Croatia has
expanded its network of bilateral free trade agreements (FTAs) with all
the countries of Southeast Europe. As part of the EU Association
Process, Croatia is entering into FTAs with the Central European states
as well. A free trade agreement with Serbia and Montenegro was ratified
by the Croatian Parliament in May 2003. The agreement will go into force
once the Serbia and Montenegrin government ratifies it. In March 2003
Croatia became a member of CEFTA (the Central European Free Trade
Association). Overall, the government has signed FTAs with 31 countries,
covering 85-90 percent of current trade.

Also within the framework of the Stability Pact, Croatia has signed on
to the Investment Compact. The monitoring instrument developed to chart
progress in this area allows Croatia to compare achievements with other
countries in the region, which should stimulate the government to keep
up the momentum for moving from enacting legislation to fair and
transparent implementation. The 2002 monitoring instrument can be viewed
at: http://www.investmentcompact.org/pdf/MONITORING_2002.pdf

Thanks to the strong support of the IMF and World Bank, regional
cooperation under the Stability Pact\'s Working Table II (Economics), as
well as specifically-targeted bilateral assistance from the U.S. and the
EU, the Croatian government\'s program to improve the climate for
investment has a clearer focus. But the consensus within the
International Community is that the government needs to do more to
implement structural reforms and improve the judicial system.

[\-- THE U.S.-CROATIAN BILATERAL INVESTMENT TREATY]{.underline}

Croatia does not have a foreign investment law. Therefore foreigners
receive national treatment under existing legislation. Investments by
American citizens are in addition covered by the U.S.-Croatian Bilateral
Investment Treaty, which entered into force in June 2001. The treaty
fulfills the principal U.S. objectives for agreements of this type:

\-- All forms of U.S. investment in the territory of Croatia are
covered;

\-- Covered investments receive the better of national treatment or
most-favored-nation (MFN) treatment, both while they are being
established and thereafter, subject to certain specified exceptions;

\-- Specified performance requirements may not be imposed upon or
enforced against covered investments;

\-- Expropriation is permitted only in accordance with customary
international law standards;

\-- Parties are obligated to permit the transfer, in a freely usable
currency, of all funds related to a covered investment, subject to
exceptions for specified purposes;

\-- Investment disputes with the host government may be brought by
investors, or by their covered investments, to binding international
arbitration as an alternative to domestic courts.

For further information about BITs contact the Department of State\'s
Bilateral Investment Treaty Coordinators at 202/736-4906 or the Office
of the U.S. Trade Representative at 202/395-7271. The text of the BIT is
available on the following two Internet websites:

www.state.gov/www/issues/economic/bit_croatia.pdf or

www.mac.doc.gov/Tcc/e-guides/eg_bits.html (under \"Croatia\").

Croatia has no unified commercial code. Laws that govern investments
apply equally to domestic and foreign investors. See the Croatian
Chamber of Economy\'s site (www.hgk.hr) for basic information. A law on
commercial companies (Company Act of 1993, amended in 1999) is based on
German and Austrian company laws and defines the forms of legal
organization for domestic and foreign investors. The following are
permitted for foreigners: general partnerships, limited partnerships,
branches, limited liability companies, and joint stock companies. The
law on property (Law on Ownership and Other Property Rights of 1996,
amended in 2000) permits acquisition/ownership by foreigners (with the
approval of the Ministry of Foreign Affairs), although not of certain
types of land or not in certain geographically-designated areas due to
national security concerns. However, a foreign investor, incorporated as
a Croatian legal entity, may acquire/own property without restrictions.

There is still some lingering confusion over the key issue of land
rights that has emerged as the government\'s privatization of assets has
proceeded, and it may require parliamentary or constitutional court
action to clarify property rights within the meaning of ownership.
Potential investors need to research this legal area carefully. See a
fuller explanation in section 6 (\"The Right to Private Ownership and
Establishment\"). As part of the EU association process, Croatia will
adapt property ownership laws to conform to European legislation, but
the extent of changes and the timeframe for adoption have not yet been
established.

The cornerstone of the Racan government\'s effort to attract FDI was the
Investment Promotion Law adopted in July 2000. The law, which covers new
investments only, offers potentially significant relief (even tax
holidays in some cases). It provides for limited employee subsidies and
for assistance with re-training, as well as customs relief for import of
capital equipment. The law also offers investor access to
government-owned real estate and construction rights on preferential
terms (for more details, see section 5. \"Performance
Requirements/Incentives\").

Other laws affecting foreign investments include a package of five tax
laws adopted in December 2000. The package includes: the General Tax
Law; the Law on Tax Advising; the Law on Corporate Profit Tax; and the
Income Tax Law. The laws resulted in an expanded tax base, but in some
cases tax rates were reduced. Tax on corporate profits was reduced from
35 to 20 percent. The legislation introduced a 15 percent tax on
interest revenue, dividends and royalties. The Institute of Public
Finance maintains a useful table of Croatian taxes at
http://www.ijf.hr/eng/taxguide/taxtable.pdf. Please see section 8 for
additional information on taxation.

B. [Conversion and Transfer Policies]{.underline}

The Croatian constitution guarantees the free transfer and repatriation
of profits and invested capital for foreign investments. Article VI of
the BIT establishes protection for American investors from government
exchange controls that limit current and capital account transfers, as
well as limits on inward transfers made by screening authorities. The
BIT obliges both countries to permit all transfers relating to a covered
investment to be made freely and without delay into and out of each
other\'s territory. The Croatian foreign exchange law permits foreigners
to maintain foreign currency accounts and to make external payments.

In June 2003, the GOC passed a new foreign exchange law. One of the main
new features is that the Croatian National Bank and/or the Cabinet of
Ministers are granted authority to impose capital restrictions
(restrictions on repatriation of profits, capital etc.) if they assess
that outflows or inflows of capital could cause significant problems to
conducting monetary policy or carrying out foreign exchange policy. This
is described under articles 47 and 48 of the new law, an English
translation of which is available at the National Bank website at
www.hnb.hr. Also, under article 9 the law defines FDIs. For example, use
of retained earnings for new investments/acquisitions is considered FDI,
whereas investments made by institutional investors such as insurance,
pension and investment funds are not considered FDIs. The law also
liberalizes foreign exchange transactions for Croatian entities and
individuals allowing them to invest abroad. Generally, this law
liberalized foreign exchange transactions but it also introduced
criteria for impositions of capital restrictions. The full potential
impact of this law and its consistency with investment protection
treaties, including the U.S. BIT, is still being evaluated, and the
legislation should be reviewed carefully by prospective investors.

The U.S. Embassy has not received any complaints from American companies
regarding transfers and remittances.

C. [Expropriation and Compensation]{.underline}

Article III of the BIT covers both direct and indirect expropriations.
The BIT bars all expropriations or nationalizations except those that
are for a public purpose, carried out in a non-discriminatory manner,
are in accordance with due process of law, and are subject to prompt,
adequate and effective compensation.

Croatian law gives the government broad authority to expropriate
property under various economic- and security-related circumstances. The
law provides for an appellate mechanism to challenge expropriation
decisions by means of a complaint to the Ministry of Justice within 15
days of the expropriation order. The law, however, does not describe the
Ministry\'s adjudication process and the fact that the Ministry of
Justice represents the government, which initiates expropriations, is an
area of potential concern for investors. That said, investors should
note that there have been no cases of expropriation of foreign
investments by the government since Croatia became independent.

D. [Dispute Settlement]{.underline}

[\-- BANKRUPTCY LAW]{.underline}

The Law on Bankruptcy became effective January 1, 1997, and was further
amended in December 2000. The government is currently preparing new
amendments. In addition to introducing the concept of company
restructuring, the current law establishes deadlines that force
companies to enter bankruptcy proceedings. Since Croatia\'s mild
recession in 1999 and 2000, well over a thousand state-owned companies
have been placed into bankruptcy proceedings. The judicial process for
liquidating assets has proven to be extremely slow, however, and the
World Bank is assisting a government working-group to improve the
efficiency of the courts.

The commercial court has exclusive jurisdiction over bankruptcy matters.
A bankruptcy tribunal decides on initiating formal bankruptcy
proceedings; appoints the trustee; reviews creditor complaints; approves
the settlement for creditors; and decides on the closing of proceedings.
The bankruptcy judge supervises the trustee and the operations of the
creditors\' committee. The trustee represents the debtor.

A creditors\' committee is convened to protect the interests of all
creditors during the proceedings, to oversee the trustee\'s work and to
report back to the creditors. The law establishes the priority of
creditor claims, assigning higher priority to those related to taxes and
revenues of state/local/administration budgets.

The law also allows for a debtor or the trustee to petition to
reorganize the firm, an alternative aimed at maximizing asset recovery
and providing for fair and equitable distribution among all creditors.

[\-- ARBITRATION]{.underline}

Within the Croatian Chamber of Economy, there is a permanent arbitration
court that has been in existence since 1965. Arbitration is voluntary
and conforms to United Nations Commission on International Trade Law
(UNCITRAL) model procedures. The court reviews 30 to 40 cases per year
of which 40 percent are international cases. There have been five cases
of a U.S. company submitting to arbitration in this venue (1992, 1995,
1998, 2001 and 2002).

The Croatian Parliament passed a new Law on Arbitration that became
effective on October 18, 2001. The English-language text can be found on
the website of the Croatian Chamber of Economy (www.hgk.hr). The law
covers domestic arbitration, recognition and enforcement of arbitration
rulings, jurisdictional matters, and procedures. It considerably
liberalizes arbitration practices compared to previous legislation.

In legal disputes of an international character, parties to a contract
may under the new law agree on arbitration held outside the territory of
Croatia, unless by law a dispute may be settled only by a Croatian
court. The law allows either an arbitration clause within a contract or
a separate arbitration agreement by two companies. Another provision of
the law stipulates that the arbitration court should consist of three
members, and that no one can be prevented from acting as an arbiter on
the grounds of citizenship. Croatian is established as the language to
be used in arbitration, unless the parties to a dispute agree on another
language. Depending on the nature of a case, either the commercial court
or the Zagreb county court has the authorization to rule on jurisdiction
of the arbitration tribunal. Rulings of the arbitration court have the
force of a final judgment, but can be appealed within three months.

Once a dispute has been arbitrated the decision is executed upon notice
from the court to the obligatory party. If no payment is made by the
established deadline, then the party benefiting from the decision
notifies the commercial court and the commercial court becomes
responsible for enforcing compliance.

Article X of the BIT sets forth several means for resolution of
investment disputes, defined as any dispute arising out of or relating
to an investment authorization, an investment agreement, or an alleged
breach of rights conferred, created, or recognized by the Treaty with
respect to a covered investment. The BIT provides that the parties to
the dispute should first seek resolution through consultation and
negotiation. With one exception, Article X provides for three
options: 1) submitting the dispute to the courts or administrative
tribunals; 2) invoking dispute-resolution procedures previously agreed
upon by the company and the host country government; and 3) invoking
paragraph 3(a) of the Treaty. Under this paragraph the investor can
submit the investment dispute to binding arbitration three months after
the dispute arises, provided that the investor has not submitted the
claim to a court or invoked a dispute resolution procedure previously
agreed upon. The investor may choose among the International Center for
Settlement of Investment Disputes (ICSID) (Convention Arbitration), the
Additional Facility of ICSID (if Convention Arbitration is not
available), ad hoc arbitration using the Arbitration Rules of UNCITRAL,
or any other arbitral institution or rules agreed upon by both parties
to the dispute.

Croatia is a signatory to the following international conventions
regulating the mutual acceptance and enforcement of foreign arbitration:
the 1923 Geneva Protocol on Arbitration Clauses, the 1927 Geneva
Convention on the Execution of Foreign Arbitration Decisions, the 1958
New York Convention on the Acceptance and Execution of Foreign
Arbitration Decisions, and the 1961 European Convention on International
Business Arbitration. In 1998 Croatia ratified the Washington
Convention - the International Center for the Settlement of Investment
Disputes (ICSID), and it became effective on October 22, 1998.

[\-- THE CROATIAN LEGAL SYSTEM]{.underline}

The European Union, in a recent stabilization and association process
review of Croatia\'s progress toward adapting institutions to EU models,
identified the judiciary as Croatia\'s Achilles heel. The Racan
government inherited many problems in this area, including: antiquated
land and company registries, lack of modern case management practices
and court administration, as well as politicized, inadequately trained
and inexperienced lawyers and judges. Weak appointments to leadership
positions, entrenchment of holdovers from the Tudjman regime, and a
general lack of budgetary funds have all exacerbated the problems. In
June 2002, during his visit to the United States, PM Racan announced an
overhaul of the justice sector. In May 2002, he appointed a four-member
Blue Ribbon panel to prepare a comprehensive strategy for reform. More
recently, the Government proposed and in March 2003 the Sabor adopted
the general justice reform plan. It primarily calls for increased
funding and targets 2007 as the year by which Croatian case-backlogs
should be reduced to acceptable levels. We have seen little, thus far,
in terms of concrete reform that would suggest that the GOC would meet
the targets it laid out in its reform plan.

The paragraphs that follow provide a description of the present legal
system.

The constitution is the foundation of the legal system, which is carried
out by an independent judiciary. The judicial system consists of courts
of general and specialized jurisdictions, whose core structure are:
Supreme Court, County Courts, Municipal Courts, and the Magistrate/Petty
Crimes Courts. Courts below the Supreme Court level are generally
organized to conform to the political subdivisions in the country.
Specialized courts include the Administrative Court and High Commercial
and lower Commercial Courts. Outside of this above system is the
Constitutional Court that occupies a special position within the system.
Its primary functions are to determine the constitutionality of laws and
government actions and to protect and enforce constitutional rights. Its
decisions are binding for the regular courts.

Municipal courts exercise original jurisdiction over primarily civil and
juvenile/criminal cases (involving penalties consisting of prison
sentences less than ten years). There are 104 functioning municipal
courts. There are 20 county courts that have original jurisdiction in
serious criminal cases. These courts also have appellate review of
municipal court decisions and individual judge\'s decisions on
military-related matters. County courts also decide on jurisdictional
conflicts between the municipal courts.

Commercial courts have jurisdiction over: shipping, navigation, aircraft
(except passenger transport), intellectual property rights, bankruptcy,
and unfair trade practices. There are eleven Commercial plus the High
Commercial Court in Croatia. Panels consisting of judges plus lay
assessors (experts) hear cases.

The High Commercial Court is located in Zagreb and has appellate review
of lower commercial court decisions. Modification of lower court
decisions by the high commercial court may be appealed to the Supreme
Court. Currently, the commercial and even more so the municipal courts
face immense backlog of cases, and settlement of commercial disputes can
take a year or more in some cases.

The World Bank and the U.S. Government through the U.S. Agency for
International Development (USAID) is providing technical assistance and
equipment to the Croatian Ministry of Justice and the courts, including
in the area of commercial law reform and court case flow management
system improvements. The commercial-related assistance focuses on
improving the land and company registration process, assisting legal
experts to draft a law on secured transactions, and establishing a
collateral registry. USAID also works in cooperation with the World
Bank, the European Commission and the Ministry of Justice in the design
and development of a national automated case flow management system to
improve court management and administration and ultimately impact the
courts\' backlog. Other elements focus on developing alternative dispute
resolution mechanisms and training judges, lawyers and others involved
in the general civil and commercial cases. Other USG assistance is
focused on improving the functioning of Croatia's criminal justice
sector.

The Administrative Court has jurisdiction over the decisions of
administrative bodies from all levels from local to central government.
A three-judge panel reviews cases. A five-judge panel in the same court
hears appeals. The Supreme Court under certain circumstances may review
decisions. The high court has 14 judges and is organized into three
departments: finance, construction and social property.

The Supreme Court is the highest court in the country and as such enjoys
jurisdiction over all civil, including commercial, and criminal cases.
The court is charged with guaranteeing uniform application of law and
equal protection of all citizens before the courts; decides on questions
of judiciary practice, extraordinary legal remedies against final
decisions of all other courts, court jurisdictional issues, and
provisions of judicial professional development training. It hears
appeals from County, High Commercial, and Administrative Courts.

The Constitutional Court, established by the constitution, issues
binding interpretations on the constitutionality of laws.

[\-- EXECUTION OF JUDGMENTS]{.underline}

Because of the inefficiency and other weaknesses in the judiciary,
execution of judgments has been problematic. The basic law dates from
1996 (the Law on Enforcement). According to its provisions, there must
be a final judgment in order for a judge or panel of judges to order
payment or direct actions to be taken or ceased. Current practice delays
enforcement until all appeals are decided, although the law calls for
enforcement during appeal. The court distrainer (the court employee who
executes action on behalf of the court) possesses the authority to seek
police assistance in executing judgments but normally faces extensive
delays. Article 17 of the Law on Enforcement states that foreign
judgments may be executed only if the \"judgment fulfills the conditions
for recognition and execution as prescribed by an international
agreement or the law.\" Controversial amendments that would transfer
some enforcement responsibilities to non-judicial actors have recently
been proposed by the Ministry of Justice. USAID assistance is
emphasizing changes in practice under existing law as the first
effective step to improvement.

E. [Performance Requirements/Incentives]{.underline}

Croatian law does not impose any performance requirements on foreign
investors. Article VII of the BIT prohibits either party to the treaty
from mandating or enforcing specified performance requirements as a
condition for the establishment, acquisition, expansion, management,
conduct, or operation of a covered investment. The list of prohibited
requirements is exhaustive and covers domestic content requirements and
domestic purchase preferences, the \"balancing\" of imports or sales in
relation to exports or foreign exchange earnings, requirements to export
products or services, technology transfer requirements, and requirements
relating to the conduct of research and development in the host country.
Article VII makes clear, however, that a party may impose conditions for
the receipt or continued receipt of benefits and incentives.

The July 2000 Investment Promotion Law provides for a number of
incentives, which apply only to investments in new companies. The law
applies to both domestic and foreign investors if they meet certain
criteria. Incentives include:

\-- 7 percent corporate tax for ten years for companies that invest HRK
10 million (approximately \$1.2 million) and create 30 new jobs;

\-- 3 percent corporate tax for ten years for companies that invest HRK
20 million (approximately \$2.7 million) and create 50 new jobs;

\-- 0 percent corporate tax for ten years for companies that invest HRK
60 million (approximately \$8 million) and create at least 75 new jobs.

The Law also provides a one-time lump sum subsidy of HRK 15,000
(approximately \$2,250) to the new investment for each new employee.
Investors may also be eligible to receive assistance from the government
to offset costs of employee re-training. However, we understand that a
lack of implementing regulations has delayed implementation of this
incentive.) Meanwhile, a new Law on Investment Promotion awaits
consideration by the Parliament.

The government may offer real estate (or permits or infrastructure) to
an investment either cost-free or on a preferential basis. Finally, the
government will allow the duty-free importation of capital equipment for
the investment.

The Croatian government also offers concessions for business activity
carried out in \"areas of special state concern\" (war-affected areas).
Activities in customs free zones are taxed at a lower corporate tax
rate, and concessions are awarded under the current Law on Free Zones. A
new Law on Free Zones is currently in the Parliament. A new Law on
Technology and Industrial Parks is in the drafting stage.

F. [The Right to Private Ownership and Establishment]{.underline}

The constitution (article 48) guarantees the right to ownership. A
foreign physical or legal person incorporated under Croatian law is
considered to be a Croatian legal person. Pursuant to the Law on
Ownership and Other Property Rights (1996), foreign legal persons may
acquire property subject to the approval of the Ministry of Foreign
Affairs. Foreign investors, incorporated as a Croatian legal entity, may
acquire and own property without restriction.

Some aspects of land ownership, as distinct from ownership of objects,
are not clear, however. Investors interested in acquiring companies from
the Croatian Privatization Fund should seek expert legal advice to
determine whether any deal also includes the right to ownership of the
land on which an object is located, or merely the right to lease the
land through a concession. The various Croatian laws on privatization
are not clear on this point, and different views on the extent of
privatization exist within the governing coalition itself. Confusion
centered in particular on a draft law on privatization that was
withdrawn from parliamentary procedure in late July 2001. This draft for
the first time defined ownership of land and the way in which a
purchaser could obtain ownership of the land. Earlier laws on
privatization dating back to 1991 and 1996/7 did not confer ownership of
land to a private purchaser. Prospective investors should also be aware
that if an object for sale is situated on coastal property (including
islands in the Adriatic Sea), then provisions of Croatian Maritime Law
may also restrict the right to ownership of beachfront land. Until the
legal interpretation of land ownership is clarified either by the
Croatian Parliament or possibly even by the Constitutional Court itself,
potential investors should be sure to seek a full explanation of land
ownership rights before bidding on property.

According to the new Banking Law, which has been in effect since July
2002, a foreign bank may provide banking and other financial services in
Croatia only through a branch office or through registered subsidiary
(with minimum equity being HRK 40 million up from HRK 20 million).
English translation of this law, decrees and instructions tied to it are
available on www.hnb.hr/propisi/epropisi.htm

Article 49 of the constitution provides assurances that all
entrepreneurs have equal legal status and that monopolies are forbidden.
This is reinforced through the Law on Protection of Market Competition,
which addresses the elimination of unfair trading practices, including
market concentration. A new draft Law on market competition aimed at
harmonization with EU standards is being finalized as of mid-2003. In
theory, competitive equality is the standard applied to private
enterprises in competition with public enterprises with respect to
access to markets, credit and other business operations, such as
licenses and supplies. But in practice, state-owned enterprises have
sometimes enjoyed preferential treatment, since influential politicians
hold seats on supervisory boards of the major industries, and state
enterprises have received repeated bailouts and subsidies. Additionally,
periodically there are calls for government business to be directed at
government-owned enterprises. A draft Law on conflict of interest was
reintroduced into the Parliament in January 2003, since the statute of
limitation for its adoption by the Parliament in 2002 expired.

G. [Protection of Property Rights]{.underline}

[\-- MORTGAGES/SECURED TRANSACTIONS]{.underline}

Both Croatian and foreign citizens may mortgage property and pledge real
and tangible property. The Law on Ownership and Other Property Rights as
well as the Law on Enforcement (1996, updated in 1999) make the
procedures for mortgaging property more user-friendly to creditors and
investors.

Under the U.S. Government\'s ongoing commercial law development program,
the U.S. Agency for International Development (USAID) has assisted the
government to draft a new collateral law that would establish a central
collateral registry. Although there has been little progress in that
direction to date, FINA, the national payment agency, reportedly will
head the centralized registry which should be established sometime in
late 2004. USAID provided assistance to the largest municipal court
(Zagreb) to modernize the Zagreb land registry system. The World Bank
launched a \$25.7 million Real Property Registration and Cadastre
Project in September 2002.

[\-- INTELLECTUAL PROPERTY RIGHTS]{.underline}

In May 1998, the United States and Croatia signed a comprehensive
bilateral IPR agreement, which addresses patents (product and process),
copyrights and related rights, encrypted program-carrying satellite
signals, trademarks, semiconductor layout designs, trade secrets,
industrial designs, enforcement-specific procedural and remedial aspects
of civil and administrative procedures, provisional measures, and
criminal procedures/penalties. The Croatian government in June 2002
informed the U.S. that it was not ready to submit the MOU for
parliamentary ratification because of doubts about the appropriateness
of including data exclusivity protection in the MOU. Current Croatia law
allows a drug manufacturer, when registering a generic drug, to use the
existence of a submission of test data by another company to fulfill
registration requirements, in violation of the TRIPS requirement to
protect undisclosed test data from unfair commercial use. Croatia was
named to the Special 301 Watch List during April 2003 review. The
bilateral MOU has not entered into effect as of mid-2003.

Prior to entering the World Trade Organization (Croatia\'s membership
became effective as of November 2000), the Croatian Parliament adopted
six laws that have been in effect since January 1, 2000. They are:

\-- Patent Law

\-- Trademark Law

\-- Industrial Design Law

\-- Law on the Geographical Indications of Products and Services

\-- Law on the Protection of Layout Design of Integrated Circuits

As a full WTO member, Croatia is considered to be party to the Uruguay
Round Agreement on Trade-Related Intellectual Property (TRIPS). In
confirmation, a WTO/TRIPS Working Group in June 2001 accepted Croatia\'s
IPR legislation. English-language texts of these laws are available on
the Internet website of the State Intellectual Property Office:
www.dziv.hr.

Croatia is a member of the World Intellectual Property Organization
(WIPO). For a list of international conventions to which Croatia is a
signatory, consult the State Intellectual Property Office\'s website
noted above.

H. [Transparency of the Regulatory System]{.underline}

Under the Tudjman regime, certain cronies of those in power were allowed
to acquire businesses in a very non-transparent process. Many engaged in
asset stripping and others ran their companies into the ground by poor
management. The Racan government promised voters that it would go after
wrongdoers, but to date there have been only a few successful
prosecutions, since the laws of the time differed, or the statute of
limitations had run out. Thus, many Croatians who lost money or their
jobs during that time are still wary of privatization.

The requirements of WTO membership, the IMF and World Bank programs, and
the Association Process for harmonizing Croatian laws and practices with
EU norms are all encouraging the establishment of more transparent laws
and their equitable application to both domestic and foreign
competitors. In three and a half years the Parliament has enacted and
amended an impressive number of commercial laws. But the government has
more to do in order to eliminate the administrative barriers that were
identified in the World Bank\'s FIAS report in early 2001.

The Croatian government websites describe in detail the visa and entry
requirements for foreign workers and entrepreneurs. Anecdotal evidence
shows that the process for obtaining business visas goes relatively
quickly. But in the case of work permits, the Investment Information
website states that procedures can take three and a half months, on
average. Croatian Parliament passed the Aliens Act in July 2003. The law
(in Croatian) can be found at the National Gazette website at
www.nn.hr/sluzbeni-list/sluzbeni/index.asp. This Law, which will be
applied beginning on January 1, 2004, should liberalize the labor market
for foreigners, especially for some kinds of professionals,

In November 2002, the Parliament passed the Decision on Court Fees,
which cut the administrative fees by fifty percent in some cases. These
cuts would affect registering businesses as well as fees for certain
court activities (where the highest fee is currently HRK 5,000,
equivalent to approximately \$750, down from \$1,350 last year).

A general law, the Law on Protection of Market Competition, is a
comprehensive law intended to foster the establishment and maintenance
of a competitive market by forbidding: contractual arrangements,
implicit agreements or collusion that restrict market competition;
monopolistic practices; and consolidation of market position that
results in more market concentration. The law also requires advance
notification to and approval by the Agency of Mergers/Acquisitions.

The law established the Agency for the Protection of Market Competition
\-- an independent agency responsible for investigating complaints and
executing the law. The director of the agency is appointed for a 4-year
term by the government. A 9-member Council for the Protection of Market
Competition provides advice to the Agency on the existence of
anti-competitive activities and assesses their effects.

In cases where there is a determination of trade-restrictive practices
(as defined in article 1 of the law), the Director must issue a decision
ordering discontinuation of such practices. Agency decisions can be
appealed to the administrative court. The Agency also has the authority
to assess fines for violators of the law or for non-compliance with
Agency rulings. One of the main changes that would be introduced by the
a draft law on Protection of Market Competition is a provision
regulating that future decisions of the Agency would be made by a
seven-member expert council rather than by the Director General.

Taxation in Croatia is relatively high, but not far out of line with
other transitioning countries in the region. There is a corporate income
tax of 20 percent. The taxable base is the profit earned in Croatia and
abroad. The tax base for resident branch offices, representative offices
and non-resident entrepreneurs is only the profits earned in Croatia.
For information on tax incentives included in the Investment Incentives
Law (July 2000), see section 5. \"Performance Requirements/Incentives.\"

On January 1, 1998, the government of Croatia imposed a Value Added Tax
(VAT) of 22 percent. There is a limited list of products exempt from
VAT: bread, milk, books and medicines. Starting in 2000, the government
eliminated the VAT on package tourist arrangements, provided the booking
is made outside of Croatia.

The texts of selected tax legislation are available on the Ministry of
Finance\'s Internet site at: www.mfin.hr. For a general listing of taxes
in Croatia see the Institute of Public Finance\'s site at:
www.nn.hr/sluzbeni-list/sluzbeni/index.asp

(See section M., \"Labor,\" for information regarding payroll taxes.)

I. [Efficient Capital Markets and Portfolio Investments]{.underline}

The Law on Issuance and Sale of Securities (\"Securities Law\") of 1995
established the Croatian Securities Commission (\"CROSEC\") which
supervises the primary and secondary markets and has enforcement powers.
A law that strengthens the role of CROSEC and further regulates issuance
of market securities and operation of the stock exchange was adopted by
the Parliament on July 5, 2002. The 1995 the Law on Investment Funds
regulates the establishment and operations of investment funds.

The government uses the market to finance government expenditure.
T-bills are tradable at the Exchange. Foreign entities, however, cannot
buy them directly, but must go through an intermediary such as a
commercial bank.

Currently, securities are traded on the Zagreb Stock Exchange (ZSE),
established in 1991, and to a lesser extent on the Varazdin Stock
Exchange (VSE), which was established in 1993 as an over-the-counter
(OTC) market and registered as the Stock Exchange on July 16, 2002. All
funds but Pleter are traded on VSE.

Forty-five shareholders and a six-member Board of Directors control the
ZSE. There are currently 41 members. One Director heads the VSE and
there are 39 members.

The Securities Law (Official National Gazette 84/2002) requires that all
companies with more than 100 shareholders and with share capital of at
least HRK 30 million (about \$4.3 million) must list on the newly
established quotation for public stock companies (JDD) on one of the two
stock exchanges in-country, Zagreb or Varazdin. The intention was to
increase transparency and encourage companies to obtain low cost equity
financing, which should result in increased turnover and traded volumes.
Expectations are that by the deadline of July 25, 2003 at least 200
companies would be traded in this quotation. Pursuant to the Law on
Privatization Investment Funds (Official National Gazette 109/1997), all
eight funds operating in Croatia have been transformed into closed-end
funds over the last year.

Croatia\'s mechanism for raising long-term capital received a big boost
following the government\'s introduction of Pillar II pension reform on
January 1, 2002. All Croatian workers under age 40 are required to pay
five percent of their gross salary into a pension fund of their choice.
At some future point, Pillar III (additional voluntary savings with
government matching of 25 percent) will be introduced. Croatian
financial markets are benefiting from the infusion of capital, which
also contributed to increase in the availability of low cost financing
resources for SMEs.

Transactions in 2002 totaled HRK 5.87 billion (\$746 million) on the
ZSE. The turnover more than tripled compared to HRK 1.68 billion (or
then \$224 million) in 2001, mainly as a result of the increase in
transactions involving bonds.

Transactions in 2002 totaled HRK 1.363 million on the VSE and another
216 million were realized from auctions published by the Croatian
Privatization Fund.

There are three tiers of securities traded on the ZSE. Companies must
meet high disclosure and operating requirements to be fully listed
(quotation I). Detailed explanation of all requirements is provided at
[www.zse.hr](http://www.zse.hr/) in English. Only three companies are
fully listed:

Pliva (pharmaceuticals)

Podravka (food processing)

Viktor Lenac Shipyard

There are no companies partially listed in the category of quotation II.
Sixty-four companies are partially listed in a category known as \"TN\"
(equivalent to OTC trading). As of June 2003 there were 14 companies
enlisted on JDD quotation.

On the Varazdin Stock Exchange (web page: www.otc.hr) there are no
companies traded in quotation I, one fund is listed in quotation II,
four are in JDD category and seven on PIF quotation. Some three hundred
securities are traded on the OTC market.

Foreign investors can purchase GDR (global depository receipts) issued
by Pliva (pharmaceutical company).

J. [Political Violence]{.underline}

In late 1995, the conclusion of the Erdut Agreement and the Dayton Peace
Accords ended the wars on Croatian territory. The Croatian government
and the Croatian public have broadly supported U.S. peacekeeping efforts
in the region. In May 2002, Croatia was accepted into NATO\'s Membership
Action Plan, underscoring the improved relationship between Croatia and
the international community.

There is little domestic anti-American sentiment. However, recently
opposition to U.S.-led Coalition action in Iraq led to peaceful
demonstrations. There have been no incidents involving politically
motivated damage to American projects and/or installations in Croatia.

K. [Corruption]{.underline}

The Croatian government has made modest efforts to eliminate corruption,
particularly by establishing a specialized anti-organized crime,
anti-corruption unit within the Office of the Prosecutor. However,
bribery and corruption are still perceived to be widespread. The
Berlin-based Transparency International (TI), the international watchdog
organization on corruption, has assessed the government\'s
anti-corruption program positively, but still considers Croatia a \"very
corrupt\" country on all levels. TI\'s rating of public perception for
Croatia improved from 74th (during the Tudjman regime) on its
rank-ordered list of corrupt countries to 51st in 2000 and 47th out of
91 countries in 2001. In 2002, TI expanded the number of countries
surveyed and Croatia ranked 51st of 102 and remained in the same
grouping as the previous year.

In September 2000, the Croatian government ratified the Council of
Europe Criminal Law Convention on Corruption. In 2001 the Parliament
ratified the Council of Europe Civil Law Convention on Corruption, as
well as two related protocols and United Nations anticorruption and
transnational criminal conventions. In December 2000, Croatia joined
GRECO (the Group of States Against Corruption), a peer monitoring
organization that allows members to assess anticorruption efforts on a
continuing basis. A GRECO commission visited Croatia in December 2001 on
a monitoring mission, which consequently assessed the government\'s
efforts positively at the GRECO assembly in May 2002.

Regionally, the Racan government cooperates within the Stability Pact\'s
Anti-Corruption Initiative (SPAI), which is administered jointly by the
Organization for Economic Cooperation and Development (OECD) and the
Council of Europe.

In 2001, the government set up the Office for the Prevention of
Corruption and Organized Crime (\"USKOK\"). The GOC failed to fund or
assign personnel to USKOK, leading to a delay of over a year in USKOK's
functioning. Now almost fully staffed, USKOK is demonstrating increased
effectiveness. However, because of overall weakness in the Croatian law
enforcement sector, Croatian prosecutors have not yet won a single
significant corruption or financial crimes conviction.

In March 2002, the Croatian Parliament adopted an action plan and
national program for combating corruption. The program will be
implemented by a special department within the USKOK. The EU in its
Stabilization and Association Report for 2003
(www.delhrv.cec.eu.int/en/eu_and_country/SAP_2003_CROATIA.pdf)
recognized progress, yet urged the GOC to appoint special prosecutors
for corruption cases and to improve interagency coordination.

The anti-corruption plan also involves reform of the judiciary, one of
the areas most in need of reform, according to the Prime Minister. U.S.
Department of Justice training programs and other bilateral assistance
are ongoing and complement SPAI activities in this area.

The Parliament passed the Public Procurement Act on December 14, 2001.
This law requires public tenders for any government procurement above
HRK 200,000 (around \$30,000). Amendments to bring anti-money laundering
legislation into line with EU legislation has been approved by the
Cabinet and sent to the Parliament. The government has drafted a law on
witness and informant protection to support anti-corruption programs
which should be adopted by the end of 2003.

For more information on the importance of the problem of corruption in
Southeast Europe, visit the website of the Stability Pact
Anti-corruption Initiative (www1.oecd.org/daf/SPAIcom) or review the
survey produced by the organization known as SEEDS - South East Europe
Democracy Support (www.idea.int/balkans/survey/cfm).

L. [Bilateral Investment Agreements]{.underline}

Croatia has signed investment protection treaties/agreements with the
following countries, however, not all have entered into force:

  ----------------------------------- -----------------------------------
  Albania                             Jordan

  Argentina                           Kuwait

  Austria                             Luxembourg (//)

  Belarus (//)                        Libya (//)

  Belgium (//)                        Macedonia (/)

  Bosnia Herzegovina (\*)             Malaysia (/)

  Bulgaria                            Malta (//)

  Cambodia (/)                        Moldova (//)

  Canada                              Netherlands

  Chile                               Poland

  China (/))                          Portugal

  Cuba (//)                           Qatar (//)

  Czech Republic (/)                  Romania

  Denmark                             Russian Federation (/)

  Egypt                               Slovakia

  France                              Slovenia (//)

  Finland (in force as of September   Spain
  6,2002)                             

  Germany                             Sweden (/)

  Greece                              Switzerland (/)

  Hungary (in force as of March 1,    Thailand (/)
  2002)                               

  India (/)                           Turkey

  Indonesia (//)                      Ukraine (/)

  Iran (/)                            United Kingdom

  Israel (/)                          UNITED STATES (effective 6/20/01)

  Italy                               Yugoslavia (now Serbia and
                                      Montenegro)

                                      Zimbabwe (/)
  ----------------------------------- -----------------------------------

\-- (/) not yet in force

\-- (//) signed but not yet ratified in Croatia

\-- (\*) changes and amendments

\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--

M. [Labor]{.underline}

Croatia has a highly educated and skilled labor force. The average net
wage in Croatia in Croatia (after all income and other taxes and
contributions are paid) was HRK 3,328 (about \$470) per month. Reducing
unemployment, measured over 2002 at 14.8 percent (down from 15.8 percent
in 2001) using the methodology of the International Labor Organization,
remains one of the government\'s highest priorities. The positive trends
in employment are continuing in 2003.

Employees are responsible for paying the following compulsory
contributions calculated on gross wages: 10.75 percent to the pension
and disability fund, 9 percent for medical insurance, and .85 percent as
an unemployment contribution (total: 20.60 percent). On top of the
salary, employers must pay the following contributions: 8.75 percent to
the pension and disability fund, 7 percent for medical insurance, and
.85 percent as an unemployment contribution (total: 16.60 percent).
Croatia has been a relatively high-cost labor country but the current
government has tried to reduce costs by reducing contributions and
freezing government salaries.

In December 2002 the Government amended the personal income tax law
(Official National Gazette 150/2002) by introducing tax allowances for
various expenses while at the same time it increased the tax rate on
earnings of over HRK 21,000 per month to 45 percent tax.

The Croatian government controls wage levels in government
agencies/institutions and in the remaining state-owned enterprises,
affecting around half of all workers. The wages in privately owned
companies are freely determined by contracts between employer and
employee. There are no restrictions, except for the minimum wage, which
is about HRK 1,800 (equivalent to approximately \$260 net per month).

The Law on Labor regulates employee and employer relations through
\"employment contracts.\" Fulltime employment must not amount to more
than 40 hours per week and employees are entitled to at least 18 working
days of paid annual leave. Additional days of leave are required for
employees performing dangerous tasks and for minors. Employees are also
entitled to seven days of personal leave.

Employees have the right to participate in decision-making about their
economic and social rights through representation on \"employee
councils.\" Labor law in Croatia also covers collective agreements.
Employees have the right to strike, but trade unions must inform
employers in advance about the time and place of strikes and the reasons
for calling them.

N. [Foreign Trade Zones/Free Ports]{.underline}

A Law on Free Trade Zones was adopted in June 1996. According to this
law, a company in a foreign trade zone (FTZs) may engage in
manufacturing, wholesale but not retail trade, foreign trade, banking
and other financial activities. FTZ users are eligible for the following
benefits: waiver of tariff on imported products; a user of the zone who
constructs or participates in construction of infrastructure projects in
the zone worth HRK 1 million (about \$1350,000) or more, is exempted
from paying corporate tax during the first five years of operation in
the zone; other users in the zone pay corporate tax in the amount of 50
percent of the regular rate (i.e., 10 percent instead of 20 percent);
zones are exempted from any Croatian emergency measures or other
restrictions pertaining to foreign trade or hard currency transactions.
Users of the zones may freely store their goods and production equipment
in the zones. Goods, which are not intended for trade on the Croatian
market or for domestic consumption, are fully exempt from custom duties
or taxes. The following seventeen locations are currently FTZS: Buje,
Krapina-Zagorje, Osijek, Rijeka, Sibenik, Slavonski Brod, Split,
Splitsko-Dalmatinska County, Obrovac, Ploce, Pula, Kukuljanovo,
Varazdin, Zagreb, Bjelovar, Podunavlje - Vukovar, Vukovarsko-Srijemska
County.

As noted in Section E, a new Law on Free Zones is currently in the
Parliament, and a new Law on Technology and Industrial Parks is in the
drafting stage.

O. [OPIC and Other Investment Insurance Programs]{.underline}

Croatia is eligible for assistance from the U.S. Overseas Private
Investment Corporation (OPIC). OPIC\'s insurance activities include: (1)
insurance for U.S. investors against political risks of expropriation of
assets, political violence, and currency convertibility; (2) insurance
coverage for U.S. businesses involved in certain contracting, exporting,
licensing and leasing transactions. For certain projects, OPIC now also
can provide Non-Honoring of a Sovereign Guarantee coverage (in countries
like Croatia) to protect U.S. companies, where the country is at or near
investment-grade rating and if the country refuses to honor its
sovereign guarantee.

OPIC also can provide debt and equity financing for American investors
in Croatia. Additionally, the OPIC-supported \$200 million Soros
Investment Capital Management Fund, which covers the region of the
Southeast Europe and the Caucasus region, has invested in the Croatian
banking sector (as part of the consortium that purchased Dubrovacka
Banka) and the Croatian communications sector (by investing in Digital
City Media, a broadband cable TV network in Croatia).

In the event that OPIC should pay an inconvertibility claim under its
political risk coverage, the local currency accepted by OPIC in any
subsequent recovery would be made available to the Embassy on a priority
basis for U.S. Government expenses. The estimated annual U.S. dollar
value of local currency used by the Embassy is \$4 million. The Embassy
currently purchases local currency from the national bank at the
official rate. The Croatian kuna (HRK) has been appreciating during the
first six months of 2003 but usually depreciates slightly after the end
of the tourist season.

Political risk insurance is also available from the Multilateral
Investment Guarantee Agency (MIGA), which is a World Bank affiliate.

P. [Foreign Direct Investment Statistics]{.underline}

Privatization of strategic government-owned assets has been the main
source of FDI since Croatian independence. State-owned utilities and
enterprises are being sold by the government itself through
international tenders. In 2002 the government sold a 100 percent stake
in Dubrovacka Banka as well as a 25 percent state in Splitska and
Privredna Banks, respectively. In November 2002 the Government adopted
the Operational Plan for privatization of \"non-strategic\" state
portfolio assets according to which companies with majority State
ownership would be privatized via public invitations for bids and
government minority shares of other companies would be sold through the
Zagreb and Varazdin Stock Exchanges over the course of 18 months.
Nevertheless, implementation in 2002-2003 has been slow due to political
disputes over the privatization program and a subsequent reorganization
of the Privatization Fund, which is currently under way. The Croatian
Privatization Fund (website: www.hfp.hr), the agency responsible for
offering other assets for sale, has listed the privatization portfolio
at Internet website:
http://kenny2.globalnet.hr/www.hfp.hr/UserDocsImages/TABLICA.xls).

The privatization of the government-owned insurance company Croatia
Osiguranje failed in 2002 because the submitted bids were considered too
low. In 2003, the government offered a 25 percent stake to the Catholic
Church as compensation for expropriation claims and has plans to
privatize 30 percent through local stock exchanges in 2003. In addition,
the government plans to sell 25 percent plus one share of INA, the
petroleum company in 2003, and received binding bids from two
international companies, Austrian OMV and Hungarian MOL, in mid-July
2003. It has unbundled and will continue with plans to privatize some
parts of HEP, the Croatian electrical company in 2004.

Foreign Direct Investments between 1993-2002 amounted to \$7.47 billion,
with over \$980 million (approximately 4.3 percent of GDP) in 2002
alone. Austria, with 28.6 percent of total FDI, is the largest investor,
followed by Germany (22.8 percent) and the United States (14.7 percent).
Most of the investment flowing into Croatia over the last decade has
been concentrated in telecommunications (26.3 percent), banking (21.4
percent) and pharmaceuticals (14.7 percent).

Croatian firms invested \$668.2 million abroad between 1993 and 2002. In
2002 alone, Croatian foreign investment exceeded \$94 million. Most
investment in the last ten years has been in the pharmaceutical
industry, followed by maritime and coastal transport (shipbuilding),
telecommunications, financial transactions, cellulose production, and
services in the oil and gas industry. In 2002, investment in Slovenia
accounted for 24.5 percent of Croatian foreign investment, followed by
Netherlands, Bosnia Herzegovina, Switzerland, Liberia, the United
Kingdom, India, Serbia and Montenegro, Austria and Macedonia. In July
2002, Pliva (the major Croatian investor abroad) acquired a Dutch
company's stake in the U.S. pharmaceutical company Sidmak Laboratories,
Inc. for \$152.9 million. However, this investment does not show up in
the FDI numbers above, since Pliva is making the acquisition through a
Hungarian subsidiary. Croatian National Bank provides information about
foreign investments in aggregate form only. Therefore, some of the
information about major foreign investments is based on media reports.
The following is a list of some of the major (\$20 million and above)
foreign investments in Croatia to date.

Foreign investor: Deutsche Telekom (Germany)

Sector: telecommunications

Croatian Company: Croatian Telecom (51 percent of shares)

Value: \$1.272 billion

Banca Commerciale Italiana (Italy)

Banking/financial services

Privredna Banka (66.66 percent of shares in 1999+ 10 percent in 2002)

Value: \$300 million + approximately \$50 million, according to media
reports

Erste und Steiermarkische Bank (Austria)

Banking/financial services

Rijecka Banka (85 percent share)

Value: \$155 million

Unicredito Italiano (Italy)

Banking/financial services

Zagrebacka Banka (96 percent ownership)

Value: \$230 million (estimate)

Austria Creditanstalt Group (HVB Group) (Austria)

Banking/financial services

Splitska Banka (88 percent ownership)

Value: \$132 million

Heineken N.V. (Netherlands)

Brewery

Karlovacka Pivovara company (94.42 percent)

Value: approximately \$125 million (Euro 115 million)

Sutivan Investment and Excelsa Anstalt (Lichtenstein)

Hotels and tourism

Plava Laguna (81.5 percent)\
Value: \$70 million (approximately)

Ericsson (Sweden)

Telecommunications

Tesla company

\$48 million

Hofmann and Pankl Betelligungasse (Austria)

Minerals processing

Straza company

\$39 million

Societe Suisse de Cemment Portland (Switzerland)

Cement

Tvornica Cementa Koromacno company

\$38 million

Interbrew (Belgium)

Brewery

Zagrebacka Pivovara company

\$27 million

Coca Cola Amatil (Australia)

Non-alcoholic beverages

Croatian company: n/a

\$20 million

8\. TRADE AND PROJECT FINANCING

A. [Brief Description of Banking System]{.underline}

**Regulatory framework**

The Croatian National Bank (CNB) is the Croatian monetary authority with
the primary task of maintaining price stability. It also defines and
executes monetary and foreign exchange policy, manages international
reserves, maintains banks\' accounts, and is the regulator and
policymaker for the banking sector. It is independent from the
government and reports to the Croatian Parliament. The Government of
Croatia (GOC) enacted the new Croatian National Bank Act in April 2001,
emphasizing the independent role of the institution.

The CNB grants operating licenses to banks, branch offices and
representative offices of foreign banks. Three years must pass after the
CNB has granted a license before a bank can begin to accept local and
foreign currency deposits from citizens.

Foreign legal entities and physical persons may establish new banks or
make investments in existing banks provided reciprocity is met. This
reciprocity requirement does not apply to foreign legal entities or
individuals from WTO member countries. The new Banking Act of July 2002
raised the minimum capital required to establish a bank from HRK 20m to
HRK 40m. The CNB has the authority to supervise legal entities acting
jointly with a bank. The CNB will impose case-specific provisioning
requirements for banks that fail to adhere to what CNB considers sound
business practices.\
\
The 2002 Banking Act superceded the 1993 Law on Bank & Savings Banks and
the 1998 Banking Act, and has set forth the regulatory requirements for
the commercial banking sector. The 1998 and 2002 Banking Acts redefined
the conditions for registering a commercial bank, supervision and
control of banking transactions, and liquidation of a bank. The 1998
Banking Act, implemented in January 1999, provided greater authority to
the CNB to supervise and enforce banks\' performance. Some of the main
features of this act are:

the concept of personal liability for bank management;

the establishment of an independent internal audit responsible directly
to the supervisory board of a bank;

the capital adequacy ratio was set at 10% of risk-weighted assets;

if at any time potential losses are estimated to be larger than the
bank\'s liable capital, the CNB can impose an administrator or initiate
bankruptcy proceedings;

firmer guidelines and clearer definitions related to exposure towards
related parties were also set forth;

The 1998-2000 banking crisis, along with the privatization of
state-owned (and rehabilitated) banks, led to the introduction of new
banking regulations. Banks no longer could engage in debt-for-equity
swaps which had led to insolvency.

Recent developments

After the 2002 takeover of Zagrebacka Banka by UniCredito, the sale of
UniCredito's stake in Splitska Banka to Bank Austria (now
HypoVereinsbank Croatia), takeover of Rijecka Banka by Erste &
Steiermarkische Bank and acquisition of Dubrovacka Banka by Dalmatinska
Banka (which then formed the Nova Banka Group), the first half of 2003
witnessed little activity in the banking sector. More than 90% of
Croatian bank assets are now foreign-owned.

The total number of banks in Croatia has increased from 41 in 2001 to 46
in 2003 (plus 10 licensed savings banks, four licensed housing savings
banks and the Croatian Bank for Reconstruction and Development). A high
degree of concentration still exists with the top five banks controlling
64.6% of total bank assets. The top five banks are Zagrebacka (26.45% of
total Croatian banks' assets), Privredna (17.63%), Raiffeisenbank
Austria (8.10%), Splitska banka (6.42%) and Hypo-Alpe-Adria bank
(5.96%). Zagrebacka and Privredna slowed their asset growth in 2002 to
around 12%, below the average 17.3% growth.

+----------------+-----------------------------+--------------+-------+
| [Ban           | [Strategic                  | [Country]    | [Ye   |
| k]{.underline} | Partner]{.underline}        | {.underline} | ar]{. |
|                |                             |              | under |
|                |                             |              | line} |
+----------------+-----------------------------+--------------+-------+
| Zagrebacka     | 1\. consortium              | I            | 2002  |
|                | Unicredito/Allianz          | taly/Germany |       |
+----------------+-----------------------------+--------------+-------+
| Slavonska      | 1\. Hypo Alpe Adria Bank    | Austria      | 1999  |
|                | AG\                         |              |       |
|                | 2. EBRD                     |              |       |
+----------------+-----------------------------+--------------+-------+
| Privredna      | Banca Commerciale Italiana  | Italy        | 1999  |
|                | (BCI)                       |              |       |
+----------------+-----------------------------+--------------+-------+
| Splitska       | Bank Austria                | Austria      | 2002  |
+----------------+-----------------------------+--------------+-------+
| Rijecka        | Erste Bank                  | Austria      | 2002  |
+----------------+-----------------------------+--------------+-------+
| Bjelovarska    | Erste & Steiermarkische     | Austria      | 1999  |
| Cakovecka\     |                             |              |       |
| Trgovacka      |                             |              |       |
+----------------+-----------------------------+--------------+-------+
| Varazdinska    | Zagrebacka                  | Croatia      | 2000  |
+----------------+-----------------------------+--------------+-------+
| Dalmatinska    | Regent Fund (Charlemagne    | UK           | 2000  |
|                | Capital Ltd.) and SEEF      |              |       |
+----------------+-----------------------------+--------------+-------+
| Istarska       | Dalmatinska (CCL)           | Croatia (UK) | 2000  |
|                |                             |              |       |
| Sisacka        |                             |              |       |
+----------------+-----------------------------+--------------+-------+
| Dubrovacka     | Dalmatinska (CCL)           | Croatia (UK) | 2001  |
+----------------+-----------------------------+--------------+-------+

The Croatian banking sector employed some 16,000 people in 2002. Assets
per employee were at EUR 1.31million, well above the reference figure of
EUR 1million per employee, putting Croatia above Hungary and Slovakia,
but below Slovenia in terms of management efficiency.

Authority over local currency payments has shifted from the payments
institution, FINA (Financijska Agencija, formerly ZAP), to commercial
banks. The first phase involved shifting of the banks' accounts from
FINA to the CNB; the second phase enables banks to clear the payments
between legal entities in Croatia. FINA will still have the
responsibility to physically supply cash to the system. In the next few
years, FINA will reduce the number of its operational centers from
current 22 to 7.

While the banking sector was able to establish a positive image rather
quickly following the banking crisis, deposit insurance regulations will
continue to burden the budget for some time, with rehabilitation bonds
maturing between 2003 and 2012. At one point in 2000, the total cost of
rehabilitation of Croatia's troubled banks was HRK 6.3 billion (4% of
the 2000 GDP). The recent crisis at Rijecka Banka was solved through an
intervention credit facility from the CNB, which was later replaced by a
syndicated loan from domestic banks.

B. [Foreign Exchange Controls Affecting Trading]{.underline}\
\
Croatia\'s currency, the kuna (HRK), floats freely, but the Croatian
National Bank intervenes in the market from time-to-time to ensure
stability of the currency, effectively ensuring the crawling peg (to the
Euro) performance, disrupted by the seasonal impacts of tourism revenues
and irregular privatization receipts.\
\
The domestic currency exchange rate has remained stable for four years
in a row, with the CNB\'s foreign exchange reserves estimated at over \$
6.8 billion (sharp rise caused by the Euro/\$ exchange rate). Local
companies are allowed to hold foreign exchange accounts even for
speculative purposes according to the Foreign Currency Act.

C. [General Financing Availability]{.underline}

Total bank assets at the end of 2002 were HRK 174 billion, up 17.3%
compared to the 2001 figure (HRK 138 billion). Zagrebacka Bank and
Privredna Bank still have a noticeable lead over the rest of the banks,
jointly holding 44% market share.\
\
A 43% growth in lending to citizens (to HRK 42.9bn) again outpaced
corporate lending growth of 18.2% (to HRK 36.7bn). Within the category
of citizen lending, housing loans represented 28.7% with HRK 12.36bn,
growing at a rate of 31% compared to 2001.

Continuing high growth rates led the Croatian National Bank to introduce
the 16% limit on asset growth. Any bank that exceeds this growth rate
has to subscribe to CNB T-bills for twice the amount of excess asset
growth. Those T-bills, yielding only 0.5% per year, could not be used as
collateral and would be non-tradable.

The requirement for any bank to have at least 53% of its foreign
currency (FC) liabilities covered by FC assets at the end of each month
has been changed to a new 35% ratio of FC assets to FC liabilities
maintained daily.

CNB reduced passive interest rates paid on HRK mandatory reserves from
1.75% to 1.5 percent. This reduction was motivated by falling interest
rates paid by banks on HRK deposits and the reduction of interest rates
on the money market. The CNB discount rate was reduced from 5.9% to 4.5%
and applies to the reserve requirement balance held by commercial banks
with the CNB.

Several regulations have been enacted to loosen monetary policy, and
some to deal with the local currency exchange rate. One of the major
changes introduced by the CNB in 2001 was the matching of mandatory
reserves for short-term local currency deposits with reserves for short
term foreign currency deposits (22% of the monthly average balance for
local and foreign currency liabilities, with some exceptions). The banks
are allowed to maintain up to 60% of the required reserves as an average
balance on their accounts; the rest has to be held with the CNB, paying
1.5% per year on the kuna balance and the prevailing market rate for the
FC balance.

Corporate lending rates for short-term pure Kuna financing in March 2003
were at an average of 7.52% per year, down from 8.86% a year before. For
Euro-indexed short-term loans the rates stood at an average of 6.69%,
down from 7.03% in 2002. Inter-bank money market rates in March 2003 for
local currency were 2.48%, unchanged from the year before. Overnight
trades are performed with interest rates of around 1.6%.

In June 2003, the balance of 35-day local currency CNB T-bills was at
HRK 3.6 billion yielding 2.41% per year. EUR and \$ CNB T-bills are
issued with maturities of 35 and 63 days, yielding 1.99% for both EUR
maturities and 1.1% for both \$ maturities. The balance of EUR and \$
T-bills was EUR 113.5m and \$ 219.6m. Banks subscribed for most of the
outstanding HRK 5.8 billion Ministry of Finance treasury bills, which
yield between 1.99% and 3.56% (maturities of 91, 182 and 364 days).

"Equity lending" strategy (lending against tangible collateral with a
value in excess of the loan amount, most often real estate) is still
dominant because of the demand for housing loans and financing of
construction. This presents an obstacle for the development of trade
financing. Lending to citizens remains the fastest-growing and most
developed market segment, together with credit card business. Internet
banking has taken off and contributed to more efficiency in banks.
Secondary products like investment funds are being marketed extensively,
and are even sometimes combined into a hybrid loan offer -- for example,
a housing loan with annuities repaid to an investment fund
(HypoVereinsbank and Hypo-Alpe-Adria Bank). Some banks even guarantee
the principal amount and a minimum yield invested into an investment
fund.

For the first time, local currency non-government bonds were issued in
2003. Hypo-Alpe-Adria bank floated HRK 150m for a period of 5 years,
yielding 60 bps over benchmark RHMF 08 bonds (6.125%).

D. [How to Finance Exports / Methods of Payment Required for
Exports]{.underline}\
\
As noted in chapter 4, paragraph G, about 75% of the larger Croatian
importers regularly receive goods under a short term (about 3 months)
supplier credits. Croatian importers are free to arrange payments by
long-term supplier loans as well, and such financing is usually sought
by Croatian importers for larger purchases. The following instruments
are used in Croatia for payments abroad: remittances, documentary
collections, checks, and letters of credit.\
\
E. [Available Trade & Project Financing]{.underline}\
\
**U.S. Trade and Development Agency (TDA):\
**\
TDA is an independent U.S. Government agency, which promotes American
private sector participation in developing and middle-income countries,
with special emphasis on economic sectors that represent significant
U.S. export potential. Through funding of feasibility studies,
orientation visits, specialized training grants, and various forms of
technical assistance, TDA helps U.S. businesses compete for
infrastructure projects in emerging markets. TDA assists in building
mutually beneficial partnerships between American companies and local
project sponsors, which result in increased U.S. exports, and the
completion of high quality, successful projects in host countries. In
Croatia, TDA has recently financed projects in the sectors of oil and
gas, telecommunications and transportation as well as increased
activities in supporting private sector projects. Additional information
regarding access to TDA support as well as a full list of TDA sponsored
activities by country or sector can be found on the TDA website:
www.tda.gov.\
\
Contacts:

Mr. Ned Cabot, Regional Director

1000 Wilson Boulevard, Suite 1600\
Arlington, VA 22209, USA\
E-mail: <info@tda.gov>

Tel: (703) 875-4357\
Fax: (703) 875-4009

**Overseas Private Investment Corporation (OPIC):**\
\
OPIC is a self-sustaining U.S. Government agency that sells investment
services to small, medium and large American businesses expanding into
emerging markets around the world. OPIC\'s three main activities are
risk insurance, project finance and investment funds. OPIC financing
through the investment guaranty program and the direct loan program is
limited to \$200 million. The OPIC sponsored equity funds make their
own, commercially-based investment decisions while fulfilling OPIC\'s
policy mandates. The most important fund for the region is the \$150
million Southeast Europe Equity Fund (SEEF) managed by Soros Private
Funds Management.\
\
Mr. James Gale, OPIC Investment Development Manager\
1100 New York Avenue, N.W.

Washington, DC 20527, USA\
Tel: 202-336-8629\
Fax: 202-408-5145

**Southeast Europe Equity Fund (SEEF):**\
\
SEEF, an OPIC initiative, was organized to accelerate private sector
investment in the SEE region. Following a competitive tender process,
OPIC selected Soros Private Funds Management, LLC (\"SPFM\") to sponsor
and manage the fund. SEEF makes direct equity and equity-related
investments in attractive privately-owned or privately-managed companies
operating in nine countries and territories in the region (Albania,
Bulgaria, Bosnia and Herzegovina, Croatia, FYR Macedonia, Montenegro,
Romania, Slovenia and Turkey). The total capital of the fund is \$150
million, including a \$100 million loan commitment from OPIC. The fund
seeks to liquidate its holdings within 3 to 5 years through sales to
strategic or financial buyers or through public offerings.\
\
Contact:\
\
Mr. David L. Mathewson, SEEF Manager\
888 Seventh Avenue\
New York, NY 10106, USA\
Tel: 212-333-9727\
Fax: 212-397-0139

**World Bank (IBRD)**\
\
Since Croatia joined the World Bank in 1993, World Bank commitments to
Croatia have totaled US\$809 million, out of which approximately US\$507
million of the commitments have been disbursed. The range of projects
included: Istria Water Supply/Sewage, Emergency Reconstruction, Highway
Sector Project, Farmer Support Services, Emergency Transport/Mine
Clearing, Coastal Forest Reconstruction, Reconstruction Project for
Eastern Slavonija. Other projects included: Municipal Environmental
Infrastructure Project and a Railway Modernization/Restructuring.

Contact information:\
\
World Bank -- Zagreb\
Trg John F. Kennedy 6b\
Zagreb 10000\
Tel: (385)(1) 238-7230\
Fax: (385)(1) 238-7200\
Resident Rep: Vladimir Skenderovic

**International Finance Corporation (IFC):**\
\
IFC, a member of the World Bank Group**,** offers a full array of
financial products and services to companies in its developing member
countries: long-term loans, equity investments, quasi-equity instruments
(subordinated loans, preferred stock, income notes), guarantees and
standby financing, and risk management (intermediation of currency and
interest rate swaps, provision of hedging facilities). In 2003, IFC
moved from Zagreb to Belgrade as a part of its Southern Europe and
Central Asia Department (SECA). In Croatia, IFC has committed to eight
projects with total financing of US\$123 million equivalent, including
US\$33 million in equity and US\$90 million in loans.

**European Bank for Reconstruction and Development (EBRD):**

EBRD assists 27 countries to implement structural and sectoral economic
reforms, promoting competition, privatization and entrepreneurship,
taking into account the particular needs of countries at different
stages of transition. As a guideline, the standard minimum involvement
for the Bank is Euro 5 million, though this may be reduced if the
project has fundamental benefits for the country. The EBRD has
established links with a variety of financial intermediaries to provide
financing for projects that are too small to be funded directly. This
allows the bank to support SMEs, which are vital for generating a strong
private sector. In Croatia the EBRD has approved Euro 905 million of
loans, Euro 220.7 million of equity, and Euro 36 million of guarantees.

Contact:

EBRD -- Zagreb

Petrinjska 59 -- 5th Floor\
Zagreb, Croatia\
Tel: 385-1-481-2400\
Fax: 385-1-429-521

**The Croatian Bank for Reconstruction and Development (HBOR):**\
\
HBOR is a state-owned development bank, founded in 1992 by a resolution
of the Parliament of the Republic of Croatia to facilitate the State\'s
policies on the reconstruction and development of the Croatian economy.
The Bank\'s activities include promoting small and medium sized
businesses, shipbuilding, promoting development of the tourist industry,
credit financing for development projects, and construction and
rebuilding of housing, infrastructure financing, as well as the
financing and insuring of export transactions. In addition to the state
capital contribution of HRK 3.7 billion, HBOR seeks alternative funding
from international capital markets as well as from special financial
institutions such as EBRD, IBRD, CEB, EIB and KfW. HBOR obtained an
investment grade credit rating from Standard & Poor\'s (BBB-) and
Moody\'s (Baa3) in line with the sovereign ceiling, based on the sound
banking operations and strong institutional support from the Croatian
Government.\
\
Contact:

HBOR -- Zagreb\
Strossmayerov trg 9\
Zagreb, Croatia\
Tel: 385-1-459-1706\
Fax: 385-1-459-1708

**Export Import Bank (ExIm Bank)**:\
\
ExIm Bank is an independent U.S. Government agency that helps finance
the overseas sale of U.S. goods and services. ExIm Bank will finance the
export of all types of goods or services, including commodities, as long
as they are not military-related (certain exceptions exist). Major
programs of the ExIm Bank are: working capital guarantees that cover 90%
of the principal and interest on commercial loans to creditworthy small
and medium-sized companies that need funds to buy or produce U.S. goods
or services for export; export credit insurance policies to protect
against the political and commercial risks of a foreign buyer defaulting
on payment; guarantees of commercial loans to foreign buyers of U.S.
goods or services that cover 100% of principal and interest against both
political and commercial risks of nonpayment; direct loans that provide
foreign buyers with competitive, fixed-rate financing for their
purchases from the U.S. In over 60 years, ExIm Bank has supported more
than \$300 billion in U.S. exports. In Croatia, ExIm has an exposure of
close to \$500 million, and is currently negotiating several private
projects.

The Ex-Im Bank and HBOR signed a Memorandum of Understanding in February
2002, to cooperate in financing the sale of U.S. exports for
infrastructure and other projects in Croatia, and to cooperate in
financing the sale of U.S. and Croatian goods and services for projects
in other countries. Both banks anticipate providing credit, guarantee
and insurance products to help U.S. and Croatian firms to jointly start
projects in third countries.

Contact:\
Ms. Margaret Kostic, Director-SEE Initiative

Structured & Trade Finance Division\
Ex-Im Bank\
U.S. Embassy\
Ulica Thomasa Jeffersona 2\
Zagreb, Croatia

E-mail: Margaret.Kostic@exim.gov\
Tel: 385-1-661 2477

Mr. Efe Cummings

Export-Import Bank of the United States

811 Vermont Avenue, N.W.

Washington, DC 20571

Tel: (202) 565-3556

Efe.Cummings@exim.gov

F. [List of the Largest Croatian Banks with Correspondent U.S. Banking
Arrangements]{.underline}

ZAGREBAČKA BANKA d.d.\
10 000 Zagreb, Paromlinska 2\
Tel.: + 385 1/6104-000\
Fax: + 385 1/6110-555\
Telex: 21462 zaba rh\
SWIFT: ZABA HR 2X\
Reuters: ZBZH

www.zaba.hr

PRIVREDNA BANKA ZAGREB d.d.\
10 000 Zagreb, Račkoga 6 / p.p. 1032\
Tel.: + 385 1/4723-464 \
Fax: + 385 1/4723-460\
Telex: 21120 pbz rh\
SWIFT: PBZG HR 2X\
Reuters: PBZH

www.pbz.hr\
\
RAIFFEISENBANK AUSTRIA d.d.\
10 000 Zagreb, Petrinjska 59\
Tel. + 385 1/4566-466\
Fax: + 385 1/4566-481\
Telex: 21137 rba zg rh\
SWIFT: RZBH HR 2X\
www.rba.hr

SPLITSKA BANKA d.d.\
21 000 Split, Ruđera Boškovića 16\
Tel.: + 385 21/312-777\
Fax: + 385 21/312-586\
Telex:  26161; 26252 st bank rh\
SWIFT: SPLI HR 2X

www.splitskabanka.hr

HYPO ALPE-ADRIA-BANK d.d.\
10 000 Zagreb, Koturaška 47\
Tel.: + 385 1/6103-666\
Fax: + 385 1/6103-555\
SWIFT: KLHB HR 22

www.hypo-alpe-adria.hr

RIJEČKA BANKA d.d.\
51 000 Rijeka, Jadranski trg 3a\
Tel.: + 385 51/208-211\
Fax: + 385 51/330-525\
Telex: 24143 bankom rh\
SWIFT: RBRI HR 2X\
Reuters: RBRH

www.rbri.hr\
\
ERSTE STEIERMÄRKISCHE BANK d.d.\
10 000 Zagreb, Varšavska 3-5,\
Tel.: + 385 1/4561-900\
Fax: + 385 1/4561-999\
SWIFT ESBC HR 22

www.esb.hr

HRVATSKA POŠTANSKA BANKA d.d.\
10 000 Zagreb, Jurišićeva 4\
Tel.: + 385 1/4804-539\
Fax: + 385 1/4804-528\
SWIFT: HPBZ HR 2X

www.hpb.hr

NOVA BANKA d.d.\
10000 Zagreb Divka Budaka 1d\
Tel.: +385 1/23 52 810\
Telefax: +385 1 23 52 805\
SWIFT DBZDHR2X

www.novabanka.hr

HVB BANK CROATIA d.d.\
10 000 Zagreb, Jurišićeva 2\
Tel.: + 385 1/4800-786\
Fax: + 385 1/4800-890\
SWIFT: BACX HR 22

www.hvb.hr

The Croatian Bank for Reconstruction & Development (HBOR)\
Strossmayerov trg 9\
10000 Zagreb, Croatia\
Tel: (385)(1) 459-1666\
Fax: (385)(1) 459-1721

S.W.I.F.T. HKBOHR2X

Telex: 21149 HBOR RH

Reuters/Dealing: HBOR

A complete list of banks with contact info is available on the web site
of the Croatian National Bank -- www.hnb.hr.

9\. BUSINESS TRAVEL

A. [Business Customs]{.underline}\
\
Croatia benefited from the previous \"self-management\" economic system
by developing a cadre of managers familiar with market principles. But
decision-making has tended to be centralized resting in the hands of a
managing director or general manager. Before assuming that a negotiation
is completed, U.S. firms should establish contact and get confirmation
from top management at a Croatian firm. A newer and more innovative
managerial class is emerging with extensive Western business
experience.\
\
Croatian firms tend to rely on their traditional suppliers and are
frequently reluctant to change supply sources without prior knowledge
and references. Thus price and technology may not be deciding factors in
the decision process if experience with one supplier has been
satisfactory over a period of time. U.S. firms should be prepared to
invest the time and travel expense to develop relationships with
potential customers.\
\
Most Croatian executives know English and many young managers are fluent
in it. Computer usage among major Croatian companies, many of which have
their own websites, is extensive and most utilize email and Internet.\
\
As is true in other European countries, summer holidays stretch
throughout July and August and it is frequently difficult to reach
company management during this period.\
\
\
B. [Travel Advisory and Visas]{.underline}\
\
Before traveling to Croatia, U.S. citizens should contact the Bureau of
Consular Affairs in Washington D.C. for the latest Consular information
(www.travel.state.gov). U.S. citizens do not require a visa to enter
Croatia for purposes of tourism or business. An entrance visa for the
purpose of work, education, training, scientific research or other
professional activities must be obtained from a Croatian Embassy prior
to entry into the country. Processing of these requests is approximately
two months given that an approval is needed from the Croatian Ministry
of Internal Affairs. For more information, contact the Croatian Embassy
in Washington, D.C.:\
\
Telephone: (202) 588-5899\
Fax: (202) 588-8936\
\
\
C. [Holidays]{.underline}\
\
January 1 \-- New Year\'s Day\
January 6 \-- Epiphany\
April 12 \-- Easter Monday\
May 1 \-- Labor Day\
June 10 -- Corpus Christi\
June 22 -- Antifascist Struggle Day\
June 25 Croatian State Day August 5 \-- Patriotic Gratitude Day\
August 15 \-- Assumption Day\
November 1 \-- All Saints Day\
December 25 \-- Christmas Day\
December 26 \-- St. Stephen\'s Day\
\
The following holidays may be observed by Croatian citizens of a
particular religion: January 7 (Orthodox Christmas), Ramadan Bairam
(Muslim), Yom Kippur and Rosh Hashanah (Jewish).

D. [Business Infrastructure]{.underline}\
\
Many business people in Croatia speak foreign languages, mostly English,
German, and Italian (along the coast). When necessary, a translator can
be hired at the Croatian Translators Society \-- tel: (385)(1) 4847565;
fax: (385)(1) 481-7658.\
\
Travelling To and Around Croatia\
\
There are five major airports in Croatia. The country\'s largest, Zagreb
International Airport, has service to most European capitals. Besides
the national carrier, Croatia Airlines, Zagreb is serviced by Alitalia,
Austrian Airlines, British Airlines, Air France, Lufthansa, Czech
Airlines, Turkish Airlines, and LOT. International flights also service
Dubrovnik and Split airports. Croatia Airlines operates internal flights
\-- Zagreb-Split, Zagreb-Zadar, Zagreb-Pula and Zagreb-Dubrovnik,
Zagreb-Rijeka, Zagreb-Osijek, and Osijek-Dubrovnik. Malev, Slovak
Airlines, as well as a number of Russian airliners, operate charter
flights to Dubrovnik, Split and Pula. One can also travel within Croatia
by rental car or railway (Croatian Railways operates trains to most
larger cities throughout the country).\
\
In Zagreb, there is a comprehensive tram/bus transport system which make
all parts of the city accessible. Taxis are more expensive and can be
obtained at a taxi stand or by calling (970). Cabs from the airport to
the center of Zagreb cost on average \$30. There is also a bus from the
airport to the city center at a lower cost.\
\
Zagreb has two five-star hotels: the Opera and the Sheraton. There are
also a variety of lower rated hotels in the city including the
three-star Dubrovnik Hotel, which has been renovated, on the city\'s
main square. Major hotels in Zagreb maintain fully equipped business
centers.\
\
Outside Zagreb, a range of hotels are found in most cities and
especially the coastal areas (e.g., Dalmatia and Istria). The only
five-star hotels outside of Zagreb are Excelsior and Argentina in
Dubrovnik. The Villa Dubrovnik is a smaller hotel in Dubrovnik which is
popular with international travelers and business people for its high
quality service and atmosphere.\
\
Restaurants in Zagreb range from the moderate to the more expensive.
Selections generally range from national dishes to international cuisine
(Chinese, Indian, Italian, Mexican, Japanese). Elsewhere in the country,
restaurants generally emphasize local dishes and seafood. In coastal
tourist areas, prices might run slightly higher during peak season.\
\
Credit cards (Amex, Diner\'s Club, Eurocard/Mastercard, and Visa) are
widely accepted in Croatia. Travelers checks and foreign currency can be
exchanged in banks or exchange offices and at the airport.\
\
Telephoning\
\
To telephone internationally from Croatia, local direct access numbers
of major telephone calling services are:\
\
AT&T 0-800-220-111\
MCI 0-800-220-112\
SPRINT 0-800-220-113\
\
\
Office: Rental/Leasing\
\
Office space or housing can be rented through a specialized local agency
or by placing an advertisement in a local daily newspaper. A list of
Croatian real estate agencies is available from the American Embassy
Zagreb home page as well as a list of English-speaking physicians.

10\. ECONOMIC AND TRADE STATISTICS

**[A. Country Data]{.underline}**

  ---------------------------------- ------------------------------------
  Population                         4.437 million (Census 2001)

  Population Growth Rate             (-6.1 percent)\*

  Religion                           Roman Catholic (mostly)

  Government System                  Parliamentary Democracy

  Language                           Croatian

  Work Week                          Monday-Friday
  ---------------------------------- ------------------------------------

\*Estimated population growth rate between censuses if methodology used
in 1991 applies.

**[B. Domestic Economy]{.underline}**

+-------------------------+----------+---------+-----------+-----------+
|                         | 2000     | 2001    | 2002      | 2003      |
+-------------------------+----------+---------+-----------+-----------+
| GDP (current prices,    | 18.42    | 19.53   | 22.43     | 24.79\*   |
| \$billion)              |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| Real GDP Growth Rate    | 2.9      | 3.8     | 5.2       | 4.2\*     |
| (percent)               |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| GDP Per Capita (current | 4,206    | 4,403   | 5,057     | 5,634     |
| prices, \$)             |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| Government Spending     | 45.2     | 44.20   | 49.8      | 49.6\*    |
| (percent of GDP)        |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| Inflation (percent)     | 7.4      | 2.6     | 2.3       | 2.3\*     |
+-------------------------+----------+---------+-----------+-----------+
| Unemployment (percent)  | 21.10    | 21.80   | 21.5      | 20.4      |
| ^(1)^ local methodology |          |         |           |           |
|                         | 16.1     | 15.8    | 14.8^(3)^ | N/A       |
| Unemployment (percent)  |          |         |           |           |
| ^(2)^ ILO methodology   |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| Foreign Exchange        | 4.4      | 5.2     | 5.6       | N/A       |
| Reserves (\$ billion)   |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| Average Exch. Rate for  | 8.28     | 8.34    | 7.86      | 7.03^(4)^ |
| \$1.00                  |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+
| U.S. Econ/Military      | 41.2     | 50.1    | 49.9      | 36.4      |
| \\Assistance            |          |         |           |           |
| (\$million)             |          |         |           |           |
+-------------------------+----------+---------+-----------+-----------+

\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--
\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\
Note:

Croatian Bureau of Unemployment, administrative method takes into
account all unemployed persons in Croatia that are registered with the
Unemployment Bureau. The unemployment was 20.4 % as of April, 2003.

Croatian Bureau of Unemployment, ILO method (survey method) counts
someone as unemployed only if the person has not done any work at all
for a week, has been seeking employment over the four weeks and is
available to start working within two weeks.

For the first six months of 2002 unemployment was 15.2%, while for the
period June - December it was 14.4%. Croatian Bureau of Unemployment.

Croatian National Bank reported average exchange rate for the period
January -- April 2003.

\* Croatian Bureau of Statistics and Institute of Economics projection
for 2003.

\* Ministry of Finance Macroeconomic Department's projection (GDP
calculated at the exchange rate \$1=HRK7.07)

Sources: CNB, Ministry of Finance, Bureau of Statistics

**[C. Trade Statistics]{.underline}**

  ------------------------- ----------- ----------- ---------- ----------
                            (Million                           
                            \$)                                

                            2000        2001        2002       2003

  Total Croatian Exports    4,432       4,659       4,898      1,879\*

  Total Croatian Imports    7,923       9,043       10,713     4,131\*

  U.S. Exports              239         297         308        109\*

  U.S. Imports              90          107         86         61\*

                                                               
  ------------------------- ----------- ----------- ---------- ----------

\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--
\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\
\* Preliminary data (for the first four months of 2003, Bureau of
Statistics)

Source: Bureau of Statistics

**[D. Investment Statistics]{.underline}**

**Foreign Investments Grouped by Countries (1993-2002):**

  ---------------------- ----------------------------- -------------------
  Country                Total Value (\$ milion)       Share of total
                         Investments                   (percent)

                                                       

  Austria                2,136.93                      28.59

  Germany                1,700.42                      22.75

  United States          1,097.98                      14.69

  Luxembourg             488.07                        6.53

  Italy                  325.88                        4.36

  Netherlands            268.33                        3.59

  Slovenia               236.93                        3.17

  United Kingdom         206.29                        2.76

  France                 173.40                        2.32

  Other countries\*      839.37                        11.23

  TOTAL                  7,474.40                      100.00
  ---------------------- ----------------------------- -------------------

Source: Croatian National Bank,

\* According to Croatian National Bank EBRD invested USD 163.69 million
or 2.19 percent as of December of 2002.

**Foreign Equity Investments grouped by Sector (1993-2002):**

  -------------------------------------------- --------------------------
  Sector of Investment                         Share (percent)

  Telecommunications                           26.25

  Other monetary intermediation                21.35

  Pharmaceuticals                              13.99

  Cement production                            4.49

  Hotels, motels, with restaurants             3.31

  Crude oil and gas extraction                 2.93

  Other wholesale                              1.70

  Beer production                              1.35

  Brick and tile production                    1.19

  Other Retail in non-specialized stores       1.06

  Other                                        22.38
  -------------------------------------------- --------------------------

\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--
\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\--\
Source: Croatian National Bank

11\. U.S. AND COUNTRY CONTACTS

U.S. Government:\
\
Embassy of the United States of America\
Ms. Beryl C. Blecher, Senior Commercial Officer\
Mr. Damjan Bencic, Senior Commercial Specialist

Thomasa Jeffersona 2, 10010 Zagreb, Croatia\
Phone: 385/1/661-2224; Fax: 385/1/661-2446\
E-mail: Damjan.Bencic@mail.doc.gov\
Home Page: [http://www.buyusa.gov](http://www.buyusa.gov/),
[http://www.export.gov](http://www.export.gov/)

Embassy of the United States of America\
LTC Ron Stephens, Office of Defense Cooperation

Thomasa Jeffersona 2, 10010 Zagreb, Croatia

Phone: 385/1/661-2223; Fax: 385/1/378-6535

E-mail: [rstephens@san.osd.mil](mailto:rliebl@san.osd.mil)

[www.usembassy/odc.hr](http://www.usembassy.hr/)

Embassy of the United States of America

USDA/FAS

Ms. Andreja Misir, Agricultural Specialist

Thomasa Jeffersona 2, 10010 Zagreb, Croatia

Phone: 385/1/661-2467; Fax: 385/1/665-8950

E-mail: <amisir@inet.hr>

U.S. Department of Agriculture\
Foreign Agricultural Service\
Trade Assistance and Promotion Office\
Phone: 202/720-7420\
E-mail: TAPO@fas.usda.gov

[www.fas.usda.gov](http://www.fas.usda.gov/)

The Multilateral Development Bank Office\
U.S. Department of Commerce\
14th and Constitution, NW, Washington, D.C. 20007\
Phone: 202/482-3399; Fax: 202/482-3914\
\
TPCC Trade Information Center in Washington\
Phone: 1-800-USA-TRADE

Business Associations:\
\
American Chamber of Commerce in Croatia (AmCham Croatia)\
Ms. Tatjana Divjak, President\
Ms. Stanka Andrakovic, Executive Director\
Hotel Opera\
Krsnjavoga 1, 10000 Zagreb, Croatia\
Phone: 385/1/4836-777; Fax: 385/1/4836-776\
E-mail: <info@amcham.hr>

[www.amcham.hr](http://www.amcham.hr/)

Croatian Chamber of Economy\
Mr. Nadan Vidosevic, President\
Rooseveltov trg 2, 10000 Zagreb, Croatia\
Phone: 385/1/456-1555; Fax: 385/1/4828-380\
Statistics and Information Office:\
Phone: 385/1/456-1513; Fax: 385/1/4828-380\
E-mail: <hgk@hgk.jr>

[www.hgk.hr](http://www.hgk.hr/)

Croatian Government (as of July 15, 2003):

**\
**Embassy of the Republic of Croatia\
Mr. Ivan Grdesic, Ambassador

Mr. Zivko Guberina, Economic Counselor\
2343 Massachusetts Ave., N.W., Washington, D.C. 20008\
Phone: 202/588-5899; Fax: 202/588-8937\
E-mail: <webmaster@croatiaemb.org>

[www.croatiaemb.org](http://www.croatiaemb.org/)

Ministry of Foreign Affairs\
Mr. Tonino Picula, Minister\
Trg Nikole Subica Zrinskog 7-8, 10000 Zagreb, Croatia\
Phone: 385/1/456-9964; Fax: 385/1/4920-149\
E-mail: <mvp@mvp.hr>

[www.mvp.hr](http://www.mvp.hr/)

Ministry of Internal Affairs\
Mr. Sime Lucin, Minister\
Savska 39, 10000 Zagreb, Croatia\
Phone: 385/1/612-2111; Fax: 385/1/612-2452\
E-mail: <pitanja@mup.hr>

[www.mup.hr](http://www.mup.hr/)

Ministry of Defense\
Ms. Zeljka Antunovic, Minister\
Trg kralja P. Kresimira IV br. 1, 10000 Zagreb, Croatia\
Phone: 385/1/456-7111; Fax: 385/1/461-3310\
E-mail: <infor@morh.hr>

[www.morh.hr](http://www.morh.hr/)

Ministry of Finance\
Mr. Mato Crkvenac, Minister\
Katanciceva 5, 10000 Zagreb, Croatia\
Phone: 385/1/459-1333; Fax: 385/1/4922-583\
E-mail: <kabinet@mfin.hr>

[www.mfin.hr](http://www.mfin.hr/)

Ministry for Public Works, Reconstruction and Building\
Mr. Radimir Cacic, Minister\
Nazorova 61, 10000 Zagreb, Croatia\
Phone: 385/1/3784-500; Fax: 385/1/3784-550\
E-mail: <bosiljko.domazet@mjr.hr>

[www.mjr.hr](http://www.mjr.hr/)

Ministry of Economy\
Mr. Ljubo Jurcic, Minister\
Ulica grada Vukovara 78, 10000 Zagreb, Croatia\
Phone: 385/1/610-6111; Fax: 385/1/610-9110\
E-mail: <info@mingo.hr>

[www.mingo.hr](http://www.mingo.hr/)

Ministry of Maritime Affairs, Transport, and Communications\
Mr. Roland Zuvanic, Minister\
Prisavlje 14, 10000 Zagreb, Croatia\
Phone: 385/1/616-9111; Fax: 385/1/619-6519\
[www.mppv.hr](http://www.mppv.hr/)

Ministry of Environmental Protection and Urban Planning\
Mr. Bozo Kovacevic, Minister\
Ulica Republike Austrije 20, 10000 Zagreb, Croatia\
Phone: 385/1/378-2444; Fax: 385/1/3772-555\
[www.mzopu.hr](http://www.mzopu.hr/)

Ministry of Agriculture and Forestry\
Mr. Bozidar Pankretic, Minister\
Ulica grada Vukovara 78, 10000 Zagreb, Croatia\
Phone: 385/1/610-6111; Fax: 385/1/610-9200\
E-mail: <office@mps.hr>

[www.mps.hr](http://www.mps.hr/)

Ministry of Tourism\
Ms. Pave Zupan-Ruskovic, Minister\
Ulica grada Vukovara 78, 10000 Zagreb, Croatia\
Phone: 385/1/610-6111; Fax: 385/1/610-9300\
E-mail: <ministarstvo-turizma@zg.tel.hr>

[www.mint.hr](http://www.mint.hr/)

Ministry of Health\
Mr. Andro Vlahusic, Minister\
Ksaver 200a, 10000 Zagreb, Croatia\
Phone: 385/1/4607-555; Fax: 385/1/4677-091\
[www.miz.hr](http://www.miz.hr/)

Ministry of Science and Technology\
Mr. Gvozden Flego, Minister\
Strossmayerov trg 4, 10000 Zagreb, Croatia\
Phone: 385/1/459-4444; Fax: 385/1/459-4469;\
E-mail: <office@mzt.hr>

[www.mzt.hr](http://www.mzt.hr/)

State Intellectual Property Office

Mr. Hrvoje Junasevic, Director General\
Ulica grada Vukovara 78, 10000 Zagreb, Croatia\
Phone: 385/1/6106-100; Fax: 385/1/6112-017\
E-mail: <ipo.croatia@patent.tel.hr>

[www.dziv.hr](http://www.dziv.hr/)

State Office of Standardization and Metrology\
Mr. Jaksa Topic, Managing Director\
Ulica grada Vukovar 78, 10000 Zagreb, Croatia\
Phone: 385/1/610-6320; Fax: 385/1/610-9320\
E-mail: <pisarnica@dznm.hr>

[www.dzmn.hr](http://www.dzmn.hr/)

Central Bureau of Statistics\
Mr. Marijan Gredelj, Director General\
Ilica 3, 10000 Zagreb, Croatia\
Phone: 385/1/4806-111, 4812-745; Fax: 385/1/4812-740\
[www.dzs.hr](http://www.dzs.hr/)

National Bank of Croatia\
Mr. Zeljko Rohatinski, Governor\
Hrvatskih Velikana 3, 10002 Zagreb, Croatia\
Phone: 385/1/456-4555; Fax: 385/1/460-1551

E-mail: webmaster@hnb.hr

[www.hnb.hr](http://www.hnb.hr/)

HIDRA - Croatian Information Documentation Referral Agency\
Ms. Neda Erceg, Managing Director\
Trg Marsala Tita 3/III, 10000 Zagreb, Croatia\
Phone: 385/1/485-5827; Fax: 385/1/485-5655\
E-mail: <ured@hidra.hr>

[www.hidra.hr](http://www.hidra.hr/)

12\. MARKET RESEARCH

Commercial Service (CS) Croatia offers Customized Market Analysis
designed to provide a customer with the precise information on how to
best access the market. The CMA provides key market details, including
market potential in Croatia, competition, distribution channels,
marketing trends and pricing. (The fee for this service ranges from
\$1,000-3,000 with delivery up to 40 business days -- both are
determined through post-client negotiation.)

CS Croatia plans to complete the following Industry Sector Analysis
(ISA) reports in the fiscal year 2003:

Fashion Apparel

Sea Port Infrastructure

Vitamins & Health Supplements

Franchising

Energy

Solid Waste Management

Cable TV

A complete list of market research is available on the CS website
([www.export.gov](http://www.export.gov/)).

Following are a few Croatian market research agencies:\
\
Accent\
Ms. Sandra Vranesevic, Managing Director\
Gradisce 9a, Zagreb, 10000\
Tel: 385/1/458-6280; Fax: 385/1/458-6280\
\
GFK, d.o.o.\
Mr. Igor Matutinovic, Managing Director\
Draskoviceva 54, Zagreb, 10000\
Tel: 385/1/492-1222 Fax: 385/1/492-1223

13\. TRADE EVENT SCHEDULE

The single largest event in Croatia is the annual Zagreb Fall Fair
(September) which attracts attention countrywide and includes numerous
foreign exhibitors.

Contact info:

Zagreb Fair

Mr. Davorin Spevec, General Director

Avenija Dubrovnik 15,

10020 Zagreb

Tel: 385/1/655-4322; Fax: 6528-433

E-mail: <dspevec@zv.hr>

Zagreb Fair is the key trade event organizer in Croatia. The following
is the list of their events. For more detailed information, please visit
their web site www.zv.hr.\
\
Year - 2003\
\
Sep 16-21 ZAGREB INTERNATIONAL AUTUMN FAIR\
Sep 16-21 INTERTEKSTIL, LEATHER, FOOTWEAR and CLOTHING - International
Fair\
Sep 16-21 CRO-MONEY - Finance & Business Opportunities Fair

Sep 16-21 International LEATHER, FOOTWEAR and CLOTHING Week

Sep 16-21 MODERNPAK -- International Packing Materials and Packing
Technology Fair

Oct 01-04 EMAT -- International Fair of Environment Protection &
Eco-Technology

Oct 01-04 INTERPROTEX -- International Fair for Properties and Persons
Security/Protection

Oct 15-19 AMBIENTA - International Furniture, Interior Decoration and
Supporting Industry Fair\
Nov 11-15 INFO - International Information Technology Fair\
Nov 12-15 INTERLIBER-EDUCA - International Fair of Books and Teaching
Supplies

Year - 2004\
Jan 29-31 PRIME, 1^st^ International Marketing Days

Feb 06-08 INTERTEKSTIL -- International Fair of Textile and Ancillary
Industry

Feb 06-08 BEAUTY ZAGREB - International Cosmetics Fair\
Feb 06-08 International Week of LEATHER, FOOTWEAR and CLOTHING

Feb 06-08 HAIR FASHION, Cosmetics & Equipment

Feb 18-22 SPORTS AND NAUTICAL FAIR\
Mar 03-07 VINOVITA -- International Fair of Wine and Equipment

Mar 03-07 GASTRONOMY -- International Food Fair

Mar 03-07 International AGRICULTURAL FAIR

Mar 03-07 International HOME AND GARDEN FAIR\
Mar 03-07 International Fair of TOURISM

Mar International PETS FAIR

Mar 19-28 ZAGREB AUTO SHOW - International Salon of Automobiles,
Motorcycles, and Supporting Industry

Apr 20-24 International BUILDING Fair (ELCRO)

Apr 20-24 BIAM -- International Fair of TOOLS

Apr 20-24 ANTI-CORROSION -- International Fair of Materials Protection

Apr 20-24 HOME AND TECHNOLOGY - International Consumer Goods Fair

Apr 20-24 CRAFTS FAIR - International Crafts Fair

May 19-22 MEDICAL TECHNOLOGY & DENTAL - International Fair of Medical,
Laboratory,

Dental Equipment and Pharmacy

Note: Exchange rate used in this report is \$ 1.00 = HRK 6.39.