The Federal Republic of Yugoslavia: U.S. Economic Assistance
Released: 2001-08-16T00:00:00

RS20737 -- The Federal Republic of Yugoslavia: U.S. Economic Assistance

Updated August 16, 2001

Introduction

As a result of the September 2000 election of Vojislav Kostunica to the Presidency of the Federal Republic of Yugoslavia (FRY) and the subsequent end of theMilosevic regime, the people of Yugoslavia have opened the door to dramatic political and economic change likethat already in progress in the rest of centralEurope and the former Soviet Union. (1)

The FRY, however, not only faces the daunting challenge of a transition to a free market economy anddemocratic systemafter decades of authoritarian rule, but the added burden of a devastated infrastructure from years of war with otherformer republics, the NATO bombing of 1999,and international sanctions. Responding to this situation, the United States and Europe have issued offers ofassistance. (See CRS Report RL30371 , Serbia andMontenegro: Political Situation and U.S. Policy by [author name scrubbed].)

Background: Previous U.S. Economic Assistance to the FRY

Due to the sanctions put in place by the international community, including the United States, as a result of the Bosnia conflict, there was only limited U.S.economic assistance to the FRY in the 1990s. All but humanitarian and democracy assistance were prohibited underU.S. law. A humanitarian aid program,mostly benefitting the vulnerable and elderly in Kosovo, began in 1993, and, in 1996, USAID launched a food aidprogram targeted mainly toward refugees fromBosnia and Croatia and the poor, and implemented through U.S. private charitable organizations and the WorldFood Program.

Democratization efforts, however, continued to be stymied by the lack of a U.S. monitoring presence on the ground. In the mid-1990s, some assistance wasnonetheless provided to Albanian language newspapers and a civic education program was initiated in Kosovo. But,following the lifting of Bosnia-relatedsanctions at the end of 1996, a USAID office was established in Belgrade, and it initiated a small program to helpbuild democracy, encourage economic growth,and improve the quality of life (health and education). Projects were mostly conducted through U.S. and localnon-governmental organizations (NGOs), focusingon the grassroots and local government. Democracy programs assisted the development of independent media,strengthened indigenous NGOs, and advisedpolitical parties. Economic growth-related projects were aimed at Montenegro, which, with the rise to power ofan anti-Milosevic government in 1997, hadshown some progress in adopting economic reforms. Among other activities, USAID helped the government ofMontenegro privatize its economy and providedbusiness services to entrepreneurs, including microcredit assistance.

The 1999 war in Kosovo significantly altered the U.S. assistance program in the Federal Republic of Yugoslavia. In the aftermath of the war, the province ofKosovo - now occupied by an international military force and administered by the United Nations - began to receivelarge-scale infusions of U.S. assistance. Aidwent to such items as the UN administrative budget, infrastructure repair, and law enforcement, in addition totraditional development activities. Kosovo iscurrently treated as a separate entity by the U.S. assistance program. (For discussion of U.S. and international aidprograms, see CRS Report RL30453 , Kosovo:Reconstruction and Development Assistance .)

Montenegro, as a bone fide opponent of Milosevic, also became the focus of greater attention, larger amounts of assistance, and separate treatment by the U.S. aidprogram. Following the Kosovo war, the United States provided $15 million in balance-of-payments support andtechnical assistance, aimed at helpingMontenegro survive the economic disruption and influx of Kosovar refugees caused by the war, as well as Serbianefforts to destabilize it.

Aid to Serbia, restricted by Congress to humanitarian and democracy assistance, was increased immediately after the war. In June 1999, President Clintonformally committed at least $10 million to democratization - $11.8 million was eventually used. In the months justbefore the FRY elections, most of another $25million commitment was used. These funds helped support the opposition parties, by providing equipment suchas computers, training organizers, and fundingvoter surveys. Assistance was also provided to independent media, labor unions, and opposition local governments,with a view toward strengthening opponentsto Milosevic's rule.

Post-Milosevic U.S. Assistance

Since the end of the Milosevic regime, both the Administration and Congress have taken steps to assure Serbia of U.S. support as it moves toward democracy andeconomic reform. In the first weeks after the change in government, the Administration ordered many financial andtrade sanctions lifted, including the oilembargo and flight ban. The Administration also notified Congress of its plan to provide Serbia immediately with$10 million in emergency energy support forelectricity to meet its energy deficit and $45 million in humanitarian food aid from the PL480 account.

U.S. Economic Aid to the FRY: FY1998-2002 (in $ millions)

Source: USAID

Note: Economic aid includes Development Assistance, SEED, and Economic Support Fundaccounts. Food, disaster, and peacekeeping aid are excluded from thetable.

Congressional action on the annual foreign operations legislation in October 2000 offered an opportunity for Congress to make its views known on the dramaticchanges in Serbia. The FY2001 Foreign Operations Appropriations, signed into law on November 6 ( H.R. 4811 , P.L. 106-429 ), removed previousappropriations language prohibiting all but democracy assistance for Serbia. It approved the use of up to $100million for Serbia aid (an across-the-boardrescission reduced that amount to $99.780 million) and, in the conferee report, recommended expenditure of notless than $89 million in Montenegro. Congressalso encouraged Administration efforts to support FRY membership in international organizations and internationalfinancial institutions (sec. 594).

FY2001 SEED appropriations for Serbia are funding the following activities:

$24.9 million for electricity supply and $9.8 million to improve the heating system and meet basic needs of the poorest people immediatelyafter the 2000 election;

$22.1 million aimed at municipal communities to encourage citizen participation, restore essentialservices, and generatejobs;

$14.3 million for technical experts to assist economic policy reform of the banking system and publicfinance and fiscal reform; efforts tostrengthen bank supervision and international accounting standards; emergency assistance to the National Bank ofYugoslavia to prevent a collapse of the bankingsystem; and microfinance activities, and

$18.7 million to support democratic systems, including NGOs, an independent media, the politicalprocess, and the rule of law. Providestechnical assistance to local governments.

For Montenegro, the United States was expected to provide $12.9 million in food aid and more than $72 million in SEED funds in FY2001. Of the latter, $30.0million are being used for emergency pension and energy costs, $26.7 million for private sector development andmacro-economic reform technical assistance, $7million for technical assistance to municipal governments, and $5 million for democracy and civil society support.

In its FY2002 budget request, the Bush Administration requested $145 million for the FRY (Serbia and Montenegro). On July 24, the House approved H.R. 2506 , the FY2002 foreign operations appropriations. While the legislation does not earmark funds forthe FRY, Appropriations Committeereport language ( H.Rept. 107-142 ) "directs" that $60 million be provided to Montenegro. On July 26, the SenateAppropriations Committee approved its versionof the bill. While it has not released a report or introduced legislation, a press release notes that $115 million isprovided for Serbia in the bill.

At the June 2001 international donor conference, the United States pledged $181.6 million for calendar year 2001, $75 million of which are FY2002 funds not yetappropriated.

Issues for Congress

Constraints on U.S. Assistance. Two legislative provisions contained in the FY2001 appropriations threatenedto limit aid. Under section 594, any unobligated amounts of the $100 million provided as FY2001 bilateral aid toSerbia, except humanitarian and democracy aid,could not be obligated after March 31, 2001, unless the President certified that the FRY is cooperating with theInternational Criminal Tribunal for the FRY(ICTY), taking steps to abide by the Bosnia peace accords, or implementing policies respecting minority rights andthe rule of law. On April 2, the Administrationprovided the certification required by section 594, with the qualification that the United States would be watchingclosely to see if the FRY continued to meet theconditions.

Section 594 also applied conditions to the U.S. position on entry of the FRY into international organizations, including the World Bank and the European Bank(EBRD) which is expected to supply the bulk of large-scale development assistance. While Montenegro has beenexempted from most bilateral aid restrictions, it,too, stands to benefit from international loans to the FRY. The bill instructed U.S. representatives to theseinstitutions to support membership, once the Presidentcertified that the FRY has taken steps to resolve issues related to debts and other liabilities. Responsibility for debtsand assets of the pre-1991 former Yugoslaviaremained in dispute among the former constituent republics until May 25 when the FRY and the four other successorstates reached an agreement on the divisionof assets, a step toward resolution of liability issues with donor nations. U.S. support for individual loans and otherassistance from international institutions afterMarch 31, 2001, also rested on the same presidential determination governing the $100 million in bilateral aid, andmay now occur

Under section 564, no assistance, with the exception of humanitarian, democracy, cross border physical infrastructure and some other categories, could beprovided to countries that give sanctuary to indicted war criminals, such as Milosevic in the FRY. This sectioncould be waived for specific programs if a writtendetermination was provided to Congress. Because SEED appropriations are provided "notwithstanding" any otherprovision of law, both conditions could beignored as they apply to SEED funds. However, the Administration did not intend to utilize that provision.

Despite the April certification, Members of Congress, including the authors of section 594, Senators Leahy and McConnell, indicated that the FRY's record ofcooperation with the Tribunal must be taken into account by the Administration if aid notifications and future aidrequests were to go forward. During his visit tothe White House on May 9, President Kostunica was, reportedly, reminded of U.S. interest in seeing Milosevichanded over to the Tribunal. The BushAdministration threatened to skip the international donors conference if no further steps were taken. As Milosevicwas being extradited on June 28, theAdministration announced that it would attend the June 29 conference, but it has indicated that disbursement ofpledges would continue to be dependent on FRYcooperation with the Tribunal.

Role of Other Donors. Apart from the United States, the chief potential aid donors to Serbia are the EuropeanUnion (EU), its members, and the multilateral financial institutions. The latter, especially the World Bank andEBRD, could be expected to supply the bulk oflarge-scale development assistance. A key factor hindering assistance from these quarters had been the state of theFRY's debts and other liabilities.

The IMF and World Bank cannot provide assistance to countries that are not members, and the FRY could not become a member until it settled its arrears withthese institutions (the FRY had no arrears to the EBRD and joined on December 15, 2000). On December 20,following a $129 million payment to the IMF, theFRY was granted IMF membership and provided with a $151 million loan. The loan allowed it to reimburseSwitzerland and Norway which had advanced it thefunds that enabled it to pay off its IMF arrears. On June 11, the IMF approved a stand-by loan for the FRY of about$249 million through March 2002.

Although the FRY currently owes the World Bank $1.7 billion in arrears, its membership in the Bank was announced on May 10, when the FRY met Bankrequirements, including agreement to resolve the arrears issue. Prior to membership, the Bank had beeninstrumental in organizing a donor coordination meetingand helping to assess FRY needs. In March 2001, the Bank set up a $30 million Trust Fund for the FRY to providesome short-term grant assistance prior tomembership.

European donors launched assistance initiatives soon after the election results in Yugoslavia were known. The EU approved nearly $190 million in aid - forurgent needs such as heating oil, and supply of medicines and basic foodstuffs - for the winter of 2000-2001. It alsopromised up to $21 million for restoration ofnavigation on the Danube, which will benefit the entire region. Together EU members, the European Commission,and the European Investment Bank pledgednearly $637 million at the June donor conference. As they did for Kosovo and the southeast Europe region, theEuropean Union and the World Bank organizedboth the December 2000 donor coordination meeting, which clarified the FRY's priority needs, and the June donorpledging conference.

In most parts of the world, the extent of other bilateral donor assistance has little impact in determining the size of the U.S. aid program. However, with acongressional limitation on U.S. aid to Kosovo at 15% of total donor contributions, the role of other donors couldbecome a factor in the U.S. program in the restof the FRY, especially because the United States has expressed the view that Europe should take the lead in Balkandevelopment. A potential drawback tolimiting U.S. assistance is that it may also lessen U.S. influence on events in the region. At the June donorconference, a total of $1.3 billion was pledged, ofwhich the U.S. pledge accounts for 13.5%. EU members and institutions represent 47.4% of the total.

U.S. Aid and Relations Between Kosovo, Montenegro, and Serbia. Cooperation with the International CriminalTribunal is not the only major issue that remains as a possible obstruction affecting U.S. assistance to Serbia. Serbia's treatment of its sister republic,Montenegro, and the province of Kosovo are likely to influence the quality and quantity of future U.S. aid to Serbia,and moves by Montenegro towardindependence from the FRY may affect assistance to it.

Although the United States does not formally support the independence movements of either Kosovo or Montenegro, U.S. aid has been employed in ways thatworked to strengthen the independence of each vis-a-vis the FRY. U.S. assistance to Montenegro grew in tandemwith Montenegrin policies at variance withMilosevic. U.S. aid projects fostered economic and political reform, facilitating Montenegrin separateness fromits sister entity. In Kosovo, U.S. and allied aidhas, in effect, created the framework of an independent state, despite the formal UN - and U.S. - position inResolution 1244 that the FRY maintains sovereigntyover the province.

With the change of regime in Belgrade, new possibilities have arisen for a peaceful settlement of both relationships. Montenegrin officials have postponed plansfor an independence referendum until, perhaps, early 2002. Although FRY leaders currently say they would not actto stop Montenegrin independence, the UnitedStates and EU countries oppose independence and have indicated that aid might be cut off as a consequence. Duringthe past year, however, members of Congresshave indicated strong support for Montenegro. The Appropriations committee report on H.R. 2506 supportsa specific funding level for Montenegroand pointedly directs that it be identified as a separate line item in the Administration aid report, demonstratingCommittee "disappointment" with theAdministration for combining the Serbia and Montenegro budget requests into one figure.

In Kosovo, U.S. assistance would likely support any peaceful and mutually cooperative outcome. But such an outcome may not be possible, and how U.S.assistance would be used in that eventuality is unclear at this time.