Despite defeats in wars in Croatia, Bosnia and Kosovo, international isolation and theimpoverishment of his people, Serbian strongman Slobodan Milosevic remained in power for morethan a decade. He did this by maintaining tight control over key institutions (such as the police,army, judiciary and most of the media) as well as much of the economy. He retained a reservoir ofsupport among some sectors of the population, such as the elderly and those living in rural areas, inpart by appealing to Serbian nationalism. His reign came to an end on October 5, 2000, when he wasdeposed from power by a popular revolt after he refused to concede defeat in an election for the postof President of the Federal Republic of Yugoslavia (FRY) won by his opponent, Vojislav Kostunicaon September 24, 2000. (1) Milosevic's party, the Socialist Party of Serbia (SPS) was also trounced in simultaneous electionsto the federal parliament and local governments. The victor in the election was a coalition of often-feuding opposition parties called theDemocratic Opposition of Serbia (DOS). The DOS agreed on a joint slate of candidates for thefederal parliament and local elections. They named Vojislav Kostunica as their joint candidate to runagainst Milosevic for the federal Presidency. Kostunica's main advantages, according to manyobservers, were a reputation for honesty and his long-standing, unwavering opposition to Milosevic. Kostunica, a former law professor, sharply criticized the Milosevic regime's cynical manipulationof the law and legal system, as well as the often lawless behavior of those close to the regime. Kostunica holds strongly nationalist views. He has been a fierce critic of United States and NATOpolicy in Kosovo and Bosnia. This may also have made him popular with many Serbs. After theirvictory in federal and local levels, the DOS swept to further victories in elections for the Serbianparliament on December 23, 2000. On January 25, 2001, the parliament approved a DOSgovernment led by Prime Minister Zoran Djindjic. However, soon after the DOS took power, tensions arose between supporters of FRYPresident Kostunica and Serbian Prime Minister Djindjic. These conflicts slowed reforms anddisillusioned many Serbs, who once had high hopes that Milosevic's overthrow would lead to adramatic improvement in their living standards. One key subject of dispute was cooperation withthe International Criminal Tribunal for the former Yugoslavia (ICTY). On June 28, 2001, theSerbian government transferred Milosevic to the ICTY to face war crimes charges. Serbian PrimeMinister Zoran Djindjic defended the transfer of Slobodan Milosevic and other indictees, saying theywere needed so that the FRY could receive vitally-needed international aid. Kostunica condemnedthe transfer of Milosevic as illegal and claimed that he had not been informed of the movebeforehand. The DSS left the Serbian government in August 2001, causing the effectivebreakup of the DOS. The DOS government received another blow on March 12, 2003, when Djindjic wasassassinated by two gunmen as he got out of his car in front of the Serbian cabinet office. MiloradUlemek (also known as "Legija"), a Serbian organized crime figure who once served in the Serbiansecurity apparatus, is on trial for ordering the murder. He has already been convicted of the 2000murder of an opposition leader on the order of the Milosevic regime and the attempted murder ofanother. Organized crime, extremists within the Serbian military and security apparatus, and thelinks between them continue to post a threat to Serbia's democratic development and Euro-Atlanticintegration. The instability of the ruling DOS coalition led the Serbian government to call earlyparliamentary elections on December 28, 2003. The results reflected public disillusionment with theperformance of the previous government and resurgent nationalism in Serbia. By far the largestparty in the 250-seat parliament is the Serbian Radical Party, which won 82 seats. Milosevic'sSocialist Party of Serbia won 22 seats. Democratically-oriented parties won the remaining seats. Kostunica's Democratic Party of Serbia (DSS) won 53 seats, the Democratic Party won 37 seats, andthe G-17 Plus party won 34 seats. The monarchist and moderate nationalist Serbian RenewalMovement, in coalition with the New Serbia party, won 22 seats. Kostunica assembled a minority government of democratic parties, consisting of the DSS,G17 Plus, and the SPO/NS. The DSS received the interior and justice ministry posts, which are keyin the fight against organized crime and corruption. G17 Plus plays an important role in economicaffairs. The parliament approved the new Serbian government on March 3, 2004. The mostcontroversial aspect of the Serbian government is its dependence on support from the SPS, whichdoes not have ministers in the government but provides it with a majority in parliament. In justifyinghis overtures to the Socialists, Kostunica asserted that they have reformed themselves since theywere in power under Milosevic, a claim that many analysts would dispute. Critics have charged thatthe government has had to make concessions to the Socialists on several issues in order to remainin power. On June 13, 2004, Serbia held a presidential election. Although the Serbian presidency is nota powerful post, analysts viewed the election as a key indication of Serbia's democratic developmentand orientation toward Euro-Atlantic institutions. A victory for the candidate of the extremenationalist Radical Party, Tomislav Nikolic, would have been viewed as a serious setback forSerbia's path toward integration with Western institutions. Nikolic was opposed by DemocraticParty leader Boris Tadic and Dragan Marsicanin of the DSS. In the first round of the vote, Nikolicwon 30.6% of the vote. Tadic took second place with 27.37%. In a surprise result, wealthybusinessman Dragoljub Karic won 18.23%. Karic, a prominent business figure in the Milosevic era,ran on a populist program. In a blow to the DSS and the government, their candidate, DraganMarsicanin, received a mere 13.3% of the vote. In the June 27 runoff between the two topfirst-round finishers, Tadic beat Nikolic 53.53% to 45.1%. Tadic's victory was greeted with reliefby Western governments. These results confirmed the growing strength of Tadic's pro-WesternDemocratic Party but also continued strong support for the Radicals. New parliamentary elections must be held by the end of 2007, but many observers believeearly elections could take place this year. The current government is weak but continues to hang on,partly because smaller parties in it know that they may lose all of their seats in parliament when newelections are held. The weakness of the government also appears to suit the Radicals and Socialists,who have not yet sought to overturn it. However, events that may occur later this year maydestabilize the government. These could include a Kosovo settlement that results in Kosovo'sindependence; the transfer of indicted war criminal Ratko Mladic to the International CriminalTribunal for the Former Yugoslavia; or scandals over privatization or other issues. Experts disagree on their predictions for the outcome of possible early elections. Accordingto public opinion polls, the Radicals remain the most popular single party in Serbia by a widemargin. However, they may not be able to form a majority on their own or with the Socialists. Onthe other hand, a nationalist backlash over Kosovo or other issues could put the Radicals andSocialists over the top. The international community would likely strongly disapprove of theparticipation of the Radicals in a Serbian government. An alternative could be for the DS, DSS, andother democratic parties to form a government, but continuing animosities among their leaders couldmake this difficult. Since 1997, Montenegro has been controlled by an anti-Milosevic faction of the localSocialist Party led by Milo Djukanovic. In October 1997, Djukanovic was elected President ofMontenegro. As Djukanovic consolidated his grip on power in Montenegro, a cold war developedbetween Montenegrin leaders and the Milosevic regime. Milosevic did not allow Montenegro toparticipate in setting federal policies. For his part, Djukanovic moved to seize control of virtuallyall of the levers of power in Montenegro. Djukanovic successfully sought relief from Westernsanctions against the FRY and received Western aid to boost Montenegro's economy. After Milosevic's fall, efforts by Montenegrin leaders to push forward with independencefrom Yugoslavia were stalled by international opposition, particularly from the European Union. In addition to their concerns about the impact Montenegrin independence might have on the situationin Serbia and Montenegro, EU officials were also worried that the collapse of Yugoslavia could hurtthe chances of keeping Kosovo as part of the Serbia and Montenegro union. On March 14, 2002, EU foreign policy chief Javier Solana brokered an agreement betweenSerbia and Montenegro on restructuring the relationship between the two republics. The FRY wasformally abolished and the country was renamed "Serbia and Montenegro." The "union of states"would have a popularly elected parliament, a president chosen by the parliament, and a government. It would deal with foreign affairs, defense, international economic relations, economic relationsbetween the republics, and the protection of human and minority rights. The two republics wouldattempt to reform and harmonize their economies in line with EU standards. The agreement allowedeither state to declare independence after three years. The agreement asserts that Serbia wouldinherit the FRY's sovereignty over Kosovo as laid out in U.N. Security Council 1244. In February2003, the Federal Republic of Yugoslavia was formally dissolved and "Serbia and Montenegro"came into being as the new joint state. (2) On October 20, 2002, Montenegro held parliamentary elections. A DPS-led coalition wonan absolute majority of 39 of the 75 seats in the parliament. An SNP-led bloc won 30 seats, and theLiberals won 4. Presidential elections were scheduled for December 22, 2002. Fearing anopposition boycott which could depress turnout and therefore invalidate the vote, Djukanovic resigned as President on November 26, 2002 and was elected to the post of Prime Minister by theparliament. Djukanovic's concerns about the presidential vote proved correct when the results of theDecember 22 vote were invalidated due to low turnout. After a repeat presidential election failedfor the same reason in February 2003, former Prime Minister and Djukanovic supporter FilipVujanovic was elected as President when a third election was held in May 2003. Observers have noted that Montenegro is a small republic with few industries and resources,it is highly dependent on tourism, trade and, allegedly, crime. Since coming to power, Djukanovicand other Montenegrin leaders been accused of complicity with smuggling operations, traffickingin persons, and other organized crime activities, sometimes in cooperation with the Italian Mafiafigures. Italian police investigated Djukanovic's possible role in a long-standing cigarette-smugglingoperation. Montenegrin leaders claim these charges of criminal conduct by top-ranking Europeanofficials have been fabricated by domestic opponents and some European countries to undermineMontenegrin efforts to secure independence. On May 21, 2006, Montenegro held a referendum on independence from the Serbia andMontenegro union. Voters opted by a majority of 55.5% for independence, just above the 55%threshold set by the government and the European Union for the referendum's success. Turnout forthe vote was 87%. International election observers from Organization for Security and Cooperationin Europe (OSCE) said that the vote was held in compliance with OSCE and other internationaldemocratic standards. In response, Serbia declared itself an independent state on June 5 and formallyrecognized Montenegro's independence on June 15. The two countries will now have to agree ona division of joint debts and property. Serbia inherits the union's membership in internationalorganizations, while Montenegro will have to apply for membership to them as a new country. Kosovo was an autonomous province within Serbia until 1990, when its autonomy waseliminated by Milosevic. The move provoked the province's ethnic Albanian majority to non-violentresistance then, by 1998, armed revolt. In order to put a halt to the conflict (including atrocities bySerbian forces) and restore the province's autonomy, the United States and other NATO countrieslaunched an campaign of air strikes against Serbia between March and June 1999. In June 1999,Milosevic agreed to withdraw his forces from Kosovo, permitting a NATO-led peacekeeping forceto be deployed. Under the terms of U.N. Security Council Resolution 1244, Kosovo is governed bya U.N. Mission in Kosovo (UNMIK), until an autonomous Kosovo government can run the provinceitself. UNSC 1244 does not say what Kosovo's final status should be, but supports the territorialintegrity of the FRY (which was replaced by the Serbia and Montenegro union in 2003). (3) U.N-brokered talks between the Kosovo and Serbian governments on the future status of theprovince began in early 2006, and the United States is strongly pushing for the talks to be concludedat the end of 2006. The largely ethnic Albanian Kosovo government is seeking independence for theprovince, which the Serbian government strongly rejects. This view is backed by an all-partyconsensus in the Serbian parliament. Serbian leaders have encapsulated their current position onstatus with the phrase "more than autonomy, but less than independence." Serbia has also putforward a decentralization plan for Kosovo. The plan would set up autonomous Serb regions innorthern Kosovo and other Serbian-majority enclaves. Serbian-majority areas in Kosovo would becontrolled by local Serb authorities, with their own police, and would be linked with each other andwith Serbia. Ethnic Albanian authorities would control the rest of the province. Such a plan wouldhave the benefit, from Belgrade's point of view, of consolidating its control over northern Kosovo,where most Serbs in the province now live, and where important economic assets, such as the Trepcamining complex, are found. Ethnic Albanian leaders strongly oppose the idea for these very reasons. To a certain extent, the Serbian plan seeks to strengthen and ratify the existing situation innorthern Kosovo. International officials and ethnic Albanians have criticized Serbia for supporting"parallel structures" that cement its control over Serb-majority areas at the expense of UNMIK'sauthority. International officials have also criticized the Serbian government for (successfully)calling on Kosovo Serbs to boycott Kosovo government institutions. They have noted that such amove isolates Kosovo Serbs at a time when UNMIK is devolving many of its powers to the Kosovogovernment and Kosovo's future status is being determined. Some observers have speculated that Serbia's hard-line stance may be a negotiating tactic,with a possible fall-back position that would try to secure a partition of Kosovo, with northernKosovo formally becoming part of Serbia and the rest becoming independent. However, the UnitedStates and other members of the Contact Group have ruled out a partition of Kosovo. Serbianleaders may also seek or be offered other forms of compensation, such as easier terms for NATO andEU membership, or at least increased aid from these institutions and their member countries. Serbian experts realize that such concessions, even if offered by the international community, maylack credibility due to "enlargement fatigue" in many European Union countries, among otherfactors. (4) Moreover,Serbian experts warn that the current political situation in Serbia may make any public concessionson its part difficult, given the weakness of the Serbian government and continued strength of theRadicals. There are concerns among Western observers that if the international communityrecognizes Kosovo's independence at the end of this year, Serbia, acting overtly or covertly, couldassist Serbs in northern Kosovo in breaking away from the new state, perhaps resulting in violence. With the help of the international community, Serbia had success in defusing an insurgencyin ethnic-Albanian inhabited areas of southern Serbia comprising the of municipalities of Presevo,Medvedja and Bujanovac. In March-May 2001, NATO troops in Kosovo permitted the phasedreintroduction of Yugoslav forces into a demilitarized zone bordering Kosovo that ethnic Albanianguerrillas had used as a springboard for attacks on Serbian territory. Under pressure from theinternational community, the guerrillas disbanded in May 2001. Western countries pressed Serbiato seek a peaceful settlement to the conflict by dealing with some of its underlying causes, includingthe ethnic balance of local police and the economic situation in the area. In February 2001, Serbian put forward a peace plan for the region. The plan called forboosting the participation of ethnic Albanians in local government and police, with help from theOrganization for Security and Cooperation in Europe. Local elections were held in July 2002 in theregion. Ethnic Albanian parties now control the local governments of Presevo and Bujanovac, whileSerb groups control Medvedja. However, the problems in the area are not completely solved. Someethnic Albanians complain of discrimination, and occasional violence continues. In response to aboycott call by local ethnic Albanian leaders, almost no ethnic Albanians voted in the Serbianparliamentary elections in December 2003. Local leaders said that the Serbian election law madeno provision for setting aside seats for ethnic minorities who cannot meet the requirement of winning5% of the vote to enter the parliament. Final status talks in Kosovo could have an impact on thestability of southern Serbia. Some local ethnic Albanian leaders have called for their region to bejoined to Kosovo, if Kosovo becomes an independent state. The democratic leadership in Belgrade faced daunting economic challenges when it took overfrom the Milosevic regime in 2000. The FRY's economy suffered from years of economicmismanagement, economic isolation and the lingering effects of NATO air strikes in 1999. Manykey enterprises and banks were controlled by regime cronies who managed them poorly and stolelarge sums from them. According to FRY officials, Serbia's Gross Domestic Product (GDP) in 1999was only 45% of its 1990 level. Unemployment was about 35% in 2000. Conflicts in the formerYugoslavia left the FRY with over 800,000 refugees and displaced persons to care for, or about 10%of the country's population. In the final year of his rule, Milosevic increased the money supply inorder to fund reconstruction projects after the Kosovo war, fueling inflation and the depreciation ofthe dinar, Serbia's currency. The inflation rate for 2000 was 70%. The country suffered from highlevels of internal and external indebtedness. Budget deficits at all levels of government, includingpension and other social welfare arrears, amounted to 8-10% of GDP. There was a tangle of bad bankdebts and interenterprise arrears, amounting to 80% of GDP. There was also an external debt of$11.6 billion, or about 140% of GDP. (5) Since 2001, the Serbian government embarked on a comprehensive economic reformprogram. They have conducted prudent fiscal and monetary policies that reduced inflation. Thefiscal and budgetary systems are being overhauled to make them fairer and more transparent. Thegovernment ran a consolidated budget surplus of 1.6% of GDP in 2005. The country's foreign traderegime has been liberalized. Reform of the banking sector has begun, and foreign investment inSerbian banks is growing rapidly. Serbia has moved to privatize some "socially-owned" firms, butmany still need to be restructured and sold off. A particularly important and difficult example is theSerbian state oil firm NIS. A series of corruption scandals have marred privatization efforts. Nevertheless, foreign direct investment (FDI) has increased rapidly. Serbia and Montenegro tookin $1.48 billion in net FDI in 2005, a 50% increase when compared to the previous year. Serbia and Montenegro has experienced rapid economic growth in recent years. GrossDomestic Product rose by 6.2% in 2005 and is expected to grow by 5.0% in 2006. Real monthlywages increased 11.5% year-on-year in February 2006. On the other hand, consumer price inflationremains substantial, at 16.6% year-on-year at the end of 2005. Unemployment remains very high,at 32.6% of the workforce in 2005. As large companies are restructured, more people are losing theirjobs, although the government has made progress in decreasing regulatory red tape and simplifyinglabor laws in order to stimulate job growth among small and medium-sized businesses. Povertyremains a problem. In 2003, the World Bank estimated that 10% of the population of Serbia andMontenegro was under the poverty line, defined as 60 Euros (about $73) a month. Serbia and Montenegro's economic policies have been supported by the InternationalMonetary Fund and other international financial institutions. In May 2002, the IMF extended athree-year, $889 million loan to Serbia and Montenegro, after disbursing the final part of a $249million standby loan offered in 2001. The IMF has urged Serbia and Montenegro to push forwardwith the restructuring and privatization of "socially-owned" firms, cut public spending, and reversethe recent spike in inflation. The loan program was completed in early 2006. It is unclear whetherSerbia will seek another IMF loan, given the improved state of its external finances, although it maydo so to secure an international imprimatur for its reforms so as to encourage foreign investment. Serbia and Montenegro has made substantial progress in reducing its foreign debt, due in part to debtforgiveness deals with the Paris Club in 2002 and the London Club in 2004. Under Djukanovic, Montenegro pursued a separate economic policy from Serbia during theMilosevic period. Its switch to the Deutschmark (and later the Euro) as its currency limited thedamage of Milosevic's lax monetary policies. It has pursued sound fiscal and monetary policies. Inflation remains lower than in Serbia, at 1.8% in 2005. Montenegro's real GDP grew by 4.1% in2005. However, the republic's few industries need extensive restructuring, and its economy isheavily dependent on tourism and on trade with Serbia and foreign countries. Privatization hasaccelerated in the past year, spurring large inflows of foreign direct investment. Nevertheless, a fewbig firms remain to be sold off. Some have complained about corruption in the privatizationprocess. (6) Eventual membership in the European Union is a key objective of the foreign policies ofSerbia and Montenegro. The EU has committed itself to admitting Serbia and Montenegro whenthey are ready. However, the path to membership may be a long and difficult one. In October 2005,the EU announced that it would begin negotiations with Serbia and Montenegro on a Stabilizationand Association Agreement (SAA). The agreement would provide a framework for enhancedcooperation between the EU and Serbia and Montenegro in a variety of fields, including theharmonization of local laws with EU standards, with the perspective of EU membership. Although the European Union has not conditioned its aid to Serbia on war crimescooperation, EU officials have made clear to Serbian leaders that a closer relationship with the EU,including concluding an SAA, requires Serbian cooperation with the ICTY. Other conditionsinclude progress in political and economic reforms, especially rule of law and reform of the militaryand security sector. Although it is not a formal condition for an SAA, the talks could be stalled ifSerbia strongly opposes a possible EU-supported solution to the Kosovo status issue. In May 2006,the EU suspended SAA talks because of Serbia's failure to turn indicted war criminal Ratko Mladicover to the ICTY. Serbia and Montenegro have enjoyed preferential trading status with the EU since 2001. For2005 and 2006 combined, the EU has budgeted 89 million Euro in aid for Serbia, 100 million forMontenegro, and 90 million for the Serbia and Montenegro union government. (7) EU foreign policy chief Javier Solana brokered the March 2002 agreement to set up the union of Serbia and Montenegro. Although the agreement permits either republic to leave the unionwithin three years, EU officials at first pressed the two republics to stay together and to more closelyalign their economic policies, warning that such integration would be necessary if Serbia andMontenegro wished to secure an SAA in the near future or join the European Union in the longerterm. When Montenegrin leaders remained firm in their intention to hold a referendum onindependence, the EU pushed for the threshold for the success of the referendum to be higher thana simple majority. Montenegro agreed to a 55% threshold, and when the referendum was approvedon May 21, 2006, the EU pledged to respect the result. EU officials say they will open separate SAAtalks with Montenegro, which they say could be concluded by the end of 2006. In June 2003, Serbia and Montenegro made a formal request to join NATO's Partnership forPeace (PFP) program. The United States and NATO have set the arrest of Ratko Mladic as theremaining obstacle to PFP membership for Serbia and Montenegro. Leaders in Serbia andMontenegro say they want to join PFP in order to secure Western aid and advice in reforming theirarmed forces, including the establishment of full civilian control. Since 2003, Serbia and Montenegro has taken steps to reform its armed forces, including byputting the General Staff and intelligence and security agencies under the control of the civilianMinister of Defense. Hundreds of high-ranking officers from the Milosevic era were retired ordismissed. Other needed changes include redrafting defense and national security strategies, andrestructuring and reducing the size of the armed forces along lines suggested for NATO candidatestates. Efforts must also be made to reform the country's intelligence agencies. Serbia andMontenegro does not have troops deployed to Iraq as part of the U.S.-led coalition there or inAfghanistan. As a result of Montenegro's independence in May 2006, Serbia and Montenegro'sarmed forces will be divided between the two republics, and each will seek to join PFPindependently. In its policy toward Serbia and Montenegro, the Administration has supported the country'sdemocratic transition and integration into Euro-Atlantic institutions. However, the United States hascontinued to insist that Belgrade meet its international obligations, including to the InternationalCriminal Tribunal for the Former Yugoslavia (ICTY). The Administration has advocated Serbia andMontenegro's membership in NATO's Partnership for Peace, if it delivers ICTY indictee RatkoMladic to the Tribunal. On May 7, 2003, President Bush signed a presidential determination thatpermits Serbia and Montenegro to receive U.S. defense articles, services, and assistance. The United States backed EU efforts that produced the Serbia and Montenegro union in 2003that replaced the Federal Republic of Yugoslavia. In testimony before the Senate Foreign RelationsCommittee on November 8, 2005, Undersecretary of State Nicholas Burns said that the United Statesdid not oppose the Montenegrin government's efforts to hold an independence referendum butwarned that the referendum must be held peacefully and as the result of a process that "all sides"accept as legitimate. He added that the main U.S. goal in the region is "reform and progress towardEurope for both Serbia and Montenegro, in or outside the state union." On May 23, a StateDepartment spokesman said the United States applauded "the peaceful, democratic and transparentmanner"in which the May 21 independence referendum was conducted. On June 13, 2006, theUnited States recognized Montenegro as an independent country. The fate of Milosevic and other persons indicted by ICTY has been a controversial issue inSerbia's relations with the United States. In each of the past six fiscal years (FY2001-FY2006),Congress has conditioned U.S. aid to Serbia after a certain date in the Spring of that year on apresidential certification that Serbia has met certain conditions, especially cooperation with theICTY. The provisions also recommended that U.S. support for loans to the FRY be conditioned onthe certification. U.S. conditions on aid to Serbia may have had a significant impact on Serbiancooperation with the Tribunal. Since the coming to power of Serbian democrats in late 2000,Serbian cooperation with the ICTY has followed a similar pattern each year: Serbia delivers severalindictees to the Tribunal just before or, at most, a few weeks after the certification deadline. TheAdministration makes the certification as required by the legislation, and urges Serbia to do more. However, Serbian cooperation then slows, with Serbian leaders claiming that political and legalobstacles preclude greater efforts. Nevertheless, more indictees are delivered as the next deadlinefor certification approaches, and so on. Of the six remaining fugitives sought by the ICTY, Tribunal chief prosecutor Del Ponte hassaid that Mladic and three others are in Serbia. Del Ponte added that Serbia also has mainresponsibility to transfer Karadzic, whose current whereabouts are unknown, and another indicteewho has fled to Russia, due to Serbia's links with both persons. (8) In January 2006, the Serbiangovernment admitted that Mladic had been drawing a Serbian Army pension as late asmid-November 2005. Due to U.S. and international sanctions on the FRY, the United States provided little aid toSerbia and Montenegro before FY1999. From FY1999 through FY2001, the United States obligated$136.8 million in aid to Serbia and $137.9 million in aid to Montenegro. An addition $133.5 millionwas allocated to the FRY as a whole for the same period. (9) The Administration provided $106.7 million in SEED funding forSerbia in FY2002 and $60 million for Montenegro. The Administration allocated $110 million forSerbia for FY2003 and $25 million for Montenegro. It budgeted $95 million in aid for Serbia inFY2004 and $18 million for Montenegro. The FY2005 foreign aid measure ( P.L. 108-447 ) provided$73.6 million for Serbia and $20 million for Montenegro. The FY2006 foreign aid bill contains $70million in aid for Serbia and $15 million for Montenegro. The committee report for theHouse-passed version of the FY2007 foreign aid bill ( H.R. 5522 ) recommended $60million in funding for Serbia and $10 million for Montenegro. SEED aid is being used to help Serbia and Montenegro establish a free market economy. U.S. aid provides advice on restructuring the banking sector, privatization, tax reform, WTOaccession, fighting financial crime, and providing credit facilities to help small business and developa mortgage market. Other SEED aid is aimed at strengthening democratic institutions and civilsociety in the two republics, including by supporting the development of effective localgovernments. (10) OtherU.S. aid is targeted at strengthening Serbia and Montenegro's exports and border controls. During Milosevic's reign, congressional action on the FRY focused on codifying andtightening sanctions against Serbia and denying it most aid, while providing significant assistanceto Montenegro and some democratization assistance for Serbia. As in previous years, the House andSenate-passed versions of the FY2001 foreign operations appropriations bills included provisionsthat would have implemented these objectives. However, Milosevic's removal from powerintervened during conference deliberations on the bill ( H.R. 4811 ). The measure,signed by the President on November 6, 2000 ( P.L. 106-429 ), provided $600 million for central andeastern Europe in Support for East European Democracy Act (SEED) funds. An additional $75.825million in emergency supplemental funding was earmarked for Serbia, Montenegro and Croatiacombined. From the funds in the bill, the Administration was permitted to provide up to $100 millionfor Serbia. The bill did not include an earmark for Montenegro, but the conference report says thatMontenegro "should" receive $89 million. Section 594 of the measure added the condition that nofunds from the bill can be made available for Serbia after March 31, 2001 unless the Presidentcertifies that Serbia is "(1) cooperating with the International Criminal Tribunal for Yugoslaviaincluding access for investigators, the provision of documents, and the surrender and transfer ofindictees or assistance in their apprehension; (2) taking steps that are consistent with the DaytonAccords to end Serbian financial, political, security and other support which has served to maintainseparate Republika Srpska institutions; and (3) taking steps to implement policies which reflect arespect for minority rights and the rule of law." The law said that the United States should support the membership of the FRY to regionaland international organizations subject to a certification by the President that the FRY has appliedfor membership on the same basis of other former Yugoslav republics, and has taken steps to settleissues related to state liabilities, assets and property. It also said that after March 31, 2001, theUnited States should instruct its representatives to international financial institutions to support loansto the FRY subject to the conditions in the Presidential certification on aid to outlined above (Section594). The section did not apply to Kosovo, Montenegro, humanitarian aid or assistance to promotedemocracy in municipalities. Another section of the law also prohibited any aid to countries that harbor war criminals,although this provision could be waived by the Secretary of State if he provides a determination toCongress that such aid supports the implementation of the Bosnian peace accords (Section 563). Members of Congress hailed the transfer of Milosevic to the ICTY on June 28, 2001. OnJune 29, Senators McConnell and Leahy introduced S.Res. 122 . The resolution praisedPrime Minister Djindjic and other Serbian leaders for their "courage" in transferring Milosevic andcalled on them to continue to transfer indictees to the ICTY and to release all political prisoners fromSerbian jails. It expressed the sense of the Senate that the United States should continue to provideaid to the FRY to support economic, political and legal reforms there. The resolution was adoptedby unanimous consent on July 18, 2001. FY2002 foreign appropriations legislation ( P.L. 107-115 ) contained the same conditions onaid to Serbia as in FY2001. The Administration made the certification on May 21, 2002. Secretaryof State Colin Powell pointed to the passage of the war crimes cooperation law and the surrender ofseveral indictees over the previous few weeks, as well as the release of ethnic Albanian prisonersfrom Serbia in March 2002 as justification for the move. Secretary Powell also said that, in the wakeof the certification, the Administration favored working with Congress to restore Normal TradeRelations (NTR) status for the FRY. The FY2003 foreign aid appropriations measure was included as part of the ConsolidatedAppropriations Resolution for FY2003 ( P.L. 108-7 ). The bill contained certification provisions onaid to Serbia similar to the FY2001 and FY2002 bills, and required the President to make thecertification by June 15, 2003. Secretary of State Powell made the certification on June 15, but notedthat Serbia and Montenegro still need to give their full cooperation to the ICTY, including thetransfer of Mladic and Karadzic. On March 5, 2003, the House passed H.R. 1047 , which, among other provisions,would permit the President to restore Normal Trade Relations (NTR) status to Serbia andMontenegro, notwithstanding the provisions of P.L. 102-420 . P.L. 102-420 imposed conditions onrestoring NTR to the FRY, including a Presidential certification that the FRY had ceased armedconflict with other peoples of the former Yugoslavia, agreed to respect the borders of the formerYugoslav states, and ended support to Bosnian Serb forces. In 2002, the House passed a similarmeasure in H.R. 5385 , but the Senate did not consider a companion version before theadjournment of the 107th Congress. The House passed H.Res. 149 on April 9, 2003. The resolution offeredcondolences to the people of Serbia and the family of Zoran Djindjic; noted that implementing reforms and cooperating with the International Criminal Tribunal for the former Yugoslavia mustcontinue despite the "significant risks" they pose for the leadership of Serbia and Montenegro; andthat the United States should continue to support the reforms started by Djindjic, including the fightagainst organized crime and corruption. On November 4, 2003, the Administration restored Serbia and Montenegro's Normal TradeRelations (NTR) with the United States. The FRY's NTR status was suspended in 1992, in responseto its role in the war in Bosnia, according to the terms of P.L. 102-420 (106 Stat. 2149). Thelegislation permits the Administration to restore NTR to Serbia and Montenegro if the Presidentcertifies that the FRY had ceased armed conflict with other peoples of the former Yugoslavia, agreedto respect the borders of the former Yugoslav states, and ended support to Bosnian Serb forces. Administration officials say the move was made in response to the improved situation in Serbia,especially in defense reform and cutting links between the Serbian and Bosnian Serb armed forces. In June 2005, the Administration granted duty-free treatment to some products from Serbia andMontenegro under the Generalized System of Preferences (GSP). The FY2004 foreign aid appropriations bill was added to an omnibus appropriations bill( H.R. 2673 ). The bill contains the certification process as in FY2001-FY2003, buttightens the provisions by specifically naming the transfer of Ratko Mladic as one of the steps Serbiamust take to cooperate with the ICTY. The deadline for the certification was March 31, 2004. TheAdministration declined to make the certification, resulting in the suspension of about $16 millionin U.S. aid to Serbia. The FY2005 foreign aid appropriations were incorporated into an omnibusspending bill ( P.L. 107-447 ). It contains the same certification process as the FY2004 bill, but witha certification deadline of May 31, 2005. The conference report deleted a Senate provision to deductfrom U.S. aid to Serbia an amount equal to Serbian government aid to indicted war criminals. The FY2006 foreign operations appropriations bill ( H.R. 3057 ) was approvedby the House on November 4 and the Senate on November 10. It was signed by the President onNovember 14, 2006 ( P.L. 109-102 ). Section 563 contains the Serbian aid conditions. The provisionconditioned U.S. aid to Serbia after May 31, 2006, on "(1) cooperating with the InternationalCriminal Tribunal for Yugoslavia, including access for investigators, the provision of documents,and the surrender and transfer of indictees or assistance in their apprehension, including making allpracticable efforts to apprehend and transfer Ratko Mladic and Radovan Karadzic, unless theSecretary of State determines and reports to the Committees on Appropriations that these individualsare no longer residing in Serbia; (2) taking steps that are consistent with the Dayton Accords to endSerbian financial, political, security and other support which has served to maintain separateRepublika Srpska institutions; and (3) taking steps to implement policies which reflect a respect forminority rights and the rule of law." It says the Administration "should" vote for loans and aid forSerbia and Montenegro from international financial institutions after May 31, 2006, if thecertification is made. The aid conditions do not apply to Montenegro, Kosovo, humanitarian aid,or assistance to promote democracy. The provision specifically names Karadzic as well as Mladic as persons Serbia shoulddetain. Second, it allows the Administration to issue a certification even if the two men are nottransferred, if it determines that the two are not living in Serbia. (The exact whereabouts of the twomen are uncertain. The Serbian government has admitted that Mladic was living in Serbia until veryrecently, but claims it does not know where he is now. Most observers believe that Mladic has beenassisted in hiding by former and serving military and security officials. Most speculation onKaradzic's location, at least in the past, placed him in Bosnia.) On May 31, 2006, the Administration, in compliance with the certification provision in theFY2006 foreign operations appropriations bill, suspended $7 million in U.S. aid to Serbia, due toits failure to cooperate with the ICTY. On June 9, 2006, the House passed H.R. 5522 , the FY2007 foreign operationsappropriations bill. The bill contains the same certification provisions as the FY2006 bill. However,it no longer specifically names Karadzic as a person Serbia should detain but retains the mention ofMladic. Figure 1. Map of Region

Summary: Serbian strongman Slobodan Milosevic's long reign came to an end in October 2000, whenhe was deposed from power by a popular revolt after he refused to concede defeat in an election forthe post of President of the Federal Republic of Yugoslavia (FRY) won by his opponent, VojislavKostunica. The new government suffered a great blow in March 2003, when Serbian Prime MinisterZoran Djindjic was murdered by organized crime figures linked to the Serbian security apparatus. Organized crime, extremists within the Serbian military and security apparatus, and the linksbetween them continue to pose a threat to Serbia's democratic development. On December 28, 2003, the extreme nationalist Serbian Radical Party won a stunning victoryin early Serbian parliamentary elections, but fell short of a majority. In March 2004, a minoritygovernment of democratic parties formed a government without the Radicals. However, thegovernment depends on the parliamentary support of the Socialists (Milosevic's former party), whoare not in the government but are in a position to extract concessions from it. Democratic forces inSerbia received a boost from Serbian presidential elections in June 2004, which resulted in a victoryfor Boris Tadic, a pro-Western, pro-reform figure over a Radical Party candidate. In a years-long confrontation with Milosevic, Montenegrin leader Milo Djukanovic seizedcontrol of virtually all levers of federal power on the republic's territory. He sought to rapidlyachieve an independent Montenegro, but opposition from the United States, European Union andRussia stymied these efforts. After a largely unsuccessful three-year decentralized union with Serbia,Montenegro voted for independence in a referendum held on May 21, 2006. Montenegro'sindependence has been recognized by Serbia, the United States, the European Union, and othercountries. The United States and other Western countries have sought to encourage Serbia andMontenegro's integration into Euro-Atlantic institutions. However, these efforts have been hamperedby controversy over the future status of Serbia's Kosovo province, Serbia's failure to fully cooperatewith the Yugoslavia war crimes tribunal (in particular its failure to arrest former Bosnian Serb armychief Ratko Mladic), and Serbia's fitful progress in such areas as rule of law and military and securitysector reform. Since Milosevic's downfall, Congress has appropriated significant amounts of aid to Serbiaand Montenegro to promote reforms. In each fiscal year from FY2001 through FY2006, Congressconditioned U.S. aid to Serbia on a certification by the President that a series of conditions had beenmet by Serbia, above all cooperation with the Yugoslav war crimes tribunal. The House has passedsuch a certification provision in its version of the FY2007 foreign aid bill ( H.R. 5522 ).This report will be updated as events warrant.