Serbia: Sugar Industry Hopes Turn Sour

Monday, 21 February, 2005

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Jelica Putnikovic

The European Union’s decision to extend its ban on sugar imports from Serbia and Montenegro is expected to have a major impact on the country’s agriculture sector.

Worst hit will be the 100,000 farmers who grow sugar beet – the blameless victims of a scam involving illegal trading in sugar bought from other countries.

The decision will come as a blow to plans to build the refining industry into a mainstay of the Serbian economy, because as it stands, it is in no condition to compete with imports.

The European Commission, EC, delegation in Belgrade announced on February 8 that the suspension of trade concessions for the sugar industry– effectively a ban on imports – would run for another six months, until August.

The ban was first imposed in May last year, when the EC decided to act to stop a scam in which Serbian exporters had been importing sugar on the cheap from third countries, repackaging it as the domestic product, and fraudulently selling it on to the European market – making millions in the process.

In 2000, the European Union, EU, opened up its market to sugar produced in western Balkan countries by dropping customs duties and quotas. The measure was intended to help Serbia in particular, by giving local refineries a new lease of life after the economic depression of the Milosevic years, thus providing sugar-beet growers with greater demand.

The sugar industry had been dying because years of chronic under-investment in both farming and refineries meant Serbian sugar was – and still is – undercut by legally imported and smuggled sugar.

The EU concession was intended to allow the industry to invest enough to create a competitive and much more productive industry.

Exports to the EU immediately rocketed from zero in 2000, to reach a total of 350,000 tons before the special deal was withdrawn last year.

It all went wrong fairly quickly. By May 2002, EU officials were warning the then Yugoslav customs service that the preferential trade terms were being abused by unscrupulous traders – who it was believed were making profits as high as 70 per cent at the expense of the European taxpayer.

Meanwhile, the EU’s anti-fraud office OLAF noted that the intended beneficiaries – local farmers – were being sidelined by the illegal trade in imported sugar.

The original three-month ban, and the half-year extension which followed in August 2003, came after EU requests for Belgrade to name and shame the companies involved went unheeded.

The latest suspension of the trade concession was accompanied by an EC call to "quickly take decisive action in order to restore confidence in the origin of [Serbia and Montenegro’s] goods” – a clear sign that nine months on, not enough has been done.

Yet only a week before the February 8 ruling, Serbian officials were suggesting that the problem had been more or less resolved.

On January 20,EC commissioner Chris Patten gave Serbian prime minister Zoran Zivkovic what amounted to a final warning to tackle all the problems “immediately, promptly and decisively". The letter said that joint investigations conducted by OLAF and the Serbian interior ministry had provided “clear evidence of large-scale abuses".

Zivkovic wrote back saying the shortcomings in the customs service which had led to the system being abused would fixed within a week. And deputy interior minister Nenad Milic said police had not discovered any fresh cases of export irregularities.

Some progress has certainly been made – new legislation has been passed bringing local tariffs into line with EU standards, and Serbia and Montenegro have established a joint customs office which will issue certificates of origin on goods. The Serbian foreign ministry has also provided OLAF with information on 150 “phantom” trading companies.

But little action has been taken to identify those responsible for the sugar scam.

In early February the head of the interior ministry’s corporate crime department, Vuksan Stojanovic, said that checks on 54 sugar trading firms had revealed only one case of fraudulent repackaging.

The impasse means the eight refineries still working are likely to grind to a halt. Without the EU trade concessions, the refined sugar has no foreign market, and cannot even sell at home as imports are cheaper. Since much of the money they expected to earn from lucrative exports went instead to the illegal traders, they have not been able to invest in making their product more competitive.

Economists fear the plants could face permanent closure. Some private owners are now looking to sell.

With no one to buy their product, beet farmers – concentrated in the northern province of Vojvodina – will have to leave their fields unsown. In any case, they cannot start planting because they traditionally depend on advances from the refineries to buy the seed they need.

The refineries had been holding off on signing contracts with growers for 2004 to see what the EU would decide to do. As a result, says Milan Prostran, secretary of the Serbian Chamber of Commerce’s Agricultural Association, the contracts agreed to date cover a maximum of 50,000 hectares, half the area sown last year.

"The sugar plant owners will say they cannot export sugar, and that they have no funds to finance the growing of beet," said Prostran, who is predicting a significant fall in production this year.

Most farmers have not even been paid for last year, and with no prospect of income they will simply leave the fields fallow. The loss is particularly hard for them as many were already sliding into impoverishment.

"I’m not going to sow beet this year because it doesn't pay,” Petar Milovanovic from the Vojvodina village of Boljevci, told IWPR. “I haven’t yet received the money for the beet I delivered to the sugar plant last season.”

“I don't know what I should grow this year because I haven't got any savings to buy the seed and fertilizers for spring sowing, and the state is not providing favourable credit arrangements."

The expected fall in production will also affect other parts of the economy. Serbia’s sweet industry – considered one of the more successful sectors – may have to import sugar. And that will cost foreign currency that the sweet companies do not earn, because they mostly sell to the domestic market.

Ratomir Vasiljevic, former director of the Jugosecer, the sugar industry’s business association, warns that Serbia, which used to export its surplus, may now be unable to meet its domestic needs.

This will come as bad news to producers who, only two years ago, received a report written jointly by Jugosecer and the French sugar association ERSUC which forecast that Serbia could raise annual production to one million tons of refined product, leaving a huge surplus available for export after domestic needs of about 300,000 tons are satisfied.

The export scandal and the ensuing EU ban have put paid to such hopes for the moment. And if the government fails to deliver some culprits in the next six months, the damage to the sugar industry could be permanent.

Jelica Putnikovic is a journalist on the Belgrade daily Vesti.