The shock resignation last July of prime minister Ivo
Sanader and his replacement by Jadranka Kosor was a watershed
moment in Croatias development.
With it, hopes were raised that the country would shed its
legacy of shady business deals and haphazard economic
management for a more transparent, sustainable economic model
based within the European Union, which Croatia hopes to join in
Kosor has won plaudits at home and abroad for her strong
anti-corruption stance since she came to power, and her
catchphrase nobody is untouchable is already
But her one-time boss Sanader continues to be linked
rightly or wrongly, as the case is unproven with
scandals at power company HEP, postal savings bank HPB,
motorway firm HAC, oil and gas outfit INA, and food company
Podravka, which have undermined the Croatian publics
confidence in the countrys governance and tarnished the
countrys international image.
Media reports, again unproven, suggest Sanader has been
connected with shenanigans surrounding the emergency
nationalization of Austrias Hypo AlpeAdria, with
allegations that he benefited from the banks entry into
Croatia in the 2000s and canvassed for the granting of a
banking licence for Bayerische Landesbank when it acquired Hypo
Alpe Adria in 2007.
A series of revelations in the Austrian and German press
about Hypo Alpe Adrias business dealings in Croatia with
a host of dubious figures, including arms dealers, jewel
thieves, war criminals and shady politicians, has led to the
coining of the phrase K und K Kroatien und
Stung by these foreign press allegations, Kosor has
established a special task force aimed at purging Croatia of
such charges of corruption. At stake is the countrys
reputation and its membership of the EU, its economic
future in general and its attractiveness as a destination for
foreign direct investment in particular.
The anti-corruption drive comes against a backdrop of a
sharp fall in GDP last year of 6%, with the contribution of
construction and consumption the drivers of the modest
45% growth in the pre-credit crunch period, both falling
by around 20%.
In the meantime, the countrys debt/GDP ratio is set to
pass the 100% mark this year pushing Croatia into the highly
indebted country class, while unemployment hit a five-year peak
in March of around 320,000 (7.1% of the population) and
continues to climb, albeit at a slower pace. Foreign investment
meanwhile dropped by 55% in 2009 to E1.8 billion, from E4.1
billion in 2008.
Kosor, who has been widely praised by the likes of US
foreign secretary Hillary Clinton and German chancellor Angela
Merkel for her rooting out of institutionalized corruption in
Croatia, will no doubt be hoping that, by taking action against
former members of her own government and political party, she
will be able to convince the EU finally to agree to admitting
Croatia as a member.
Croatia has made remarkable progress on fighting
corruption progress that no one, including myself, would
have predicted even 18 months ago. But a lot still needs to be
done. Luckily, both Croatia and the EU recognize this,
says Michael Glazer, chairman of investment banking boutique
Aucris in Zagreb.
It has long been an open secret at home and abroad that the
problem of cronyism and corruption runs deep in Croatia, but
recent months have highlighted the fact that it could extend to
the very highest levels.
At the end of March Croatian police arrested former deputy
prime minister Damir Polancec on suspicion of corruption at the
countrys leading food company Podravka. Until his
resignation last October, Polancec was also minister of
economy. He resigned after being publicly linked with financial
misdemeanours at Podravka, but has repeatedly denied
allegations of his involvement in the affair.
INVESTIGATIONS AND ARRESTS
Croatian police launched an investigation into the Podravka
case last September, after it was revealed that the food giant
was giving loans to other Croatian companies under suspicious
circumstances. Several top Podravka officials were detained on
suspicion of attempting to acquire a 25% stake in the company
using Podravkas own money, which they channelled through
another food company and a brokerage firm.
Polancec was a senior manager at Podravka and a member of
its supervisory board for a number of years before taking up
his government posts in 2005. He has been linked to the affair
during his time as economy minister, which so it is
alleged would have required him to know what was
happening in the company. Podravka was privatized in 1993, but
the government still owns a 26% stake in the firm.
Polancec is the most senior official to be arrested on
suspicion of corruption in Croatia since Kosor replaced Sanader
last summer. Croatian media have alleged that Sanader also knew
what was happening in Podravka but kept quiet about it. Sanader
for his part in a letter to local daily Jutarnji List following
Polancecs arrest has dismissed the allegations as
While Prime Minister Kosors anti-corruption crusade
has been universally praised as a welcome development and is
beginning to bear fruit, the widespread losses from, and
perception of, corruption in Croatia are estimated at E30
billion roughly equivalent to the cost of the
countrys battle for independence in 199195, known
locally as the Homeland War.
In Transparency Internationals 2009
Corruption Perception Index report, Croatias score
deteriorated from 4.4 to 4.1, placing it 66th out of 170
countries some 39 places below neighbour and EU member
Independent watchdog Freedom House says in its 2009 Freedom
in the World Report: Corruption remains a problem in
Croatia, often driven by a nexus of security institutions and
businesspeople... Moreover, intimidation of journalists working
on corruption issues has gained prominence.
In 2008, Dusan Miljus, a leading investigative journalist
for Jutarnji List, who covers the corruption and organized
crime beat, was almost beaten to death with a baseball bat by
two assailants who have never been caught.
Then a car bomb in Zagreb killed Ivo Pukanic, publisher of
popular weekly Nacional, which specializes in investigating
political corruption and organized crime, and which has run
regular exposés on Croatian politicians
The Heritage Foundation, a US think tank, places Croatia
37th out of 43 European countries in its 2010 Index of Economic
Freedom rankings. Corruption and political interference,
especially with regard to the judiciary, restrict economic
freedom, says the foundation. Croatias
overall weakness stems from excessive government interference
that erodes the economys efficiency and
Local NGOs which dared to raise their voices against the
tide of corruption that threatened to swamp Croatia have faced
The Adriatic Institute for Public Policy (AIP), for
instance, whose president Natasha Srdoc has been one of the
harshest critics of former prime minister Sanaders
alleged unexplained wealth and his failure to carry out
meaningful economic reforms, has been subjected to threats and
harassment from HDZ party officials, and the government has
ordered audits of the AIPs activities, members and
sources of funding.
It is increasingly likely that the European Union will
insist on Croatia submitting to being subject to the
Co-operation and Verification Mechanism (CVM) as a condition
for its entry to the EU in 2012. Under the CVM regime, the EU
Commission reports twice a year on progress made in judicial
reform, the fight against corruption and against organized
The regime has already been applied to EU members Bulgaria
and Romania. Although many Croatians are sceptical about the
overall benefits of joining the EU, Damir Grubisa, professor at
the Faculty of Political Sciences in Zagreb, thinks otherwise.
He says there is increasing public recognition in Croatia that
the introduction of EU standards and cooperation with the
EUs anti-fraud and corruption unit, Olaf, will play an
increasingly positive role in weeding out domestic
Meanwhile, according to the World Economic Forums
latest Global Competitiveness Report 2009-2010, Croatia ranked
72nd out of 133 countries surveyed, dropping 11 places versus
the previous survey and the countrys worst result for
Whats more, tax and excise hikes mean that
theres unlikely to be any improvement.
In the near term, according to members of Croatias
National Competitiveness Council (NCC), composed of trade
union, employers and academic community representatives,
Croatian competitiveness has worsened, with the largest
efficiency decreases registered in the labour market (down 24
points) and trade of goods (down 18 points).
NCC member Mladen Vedris, a former deputy prime minister,
says the survey shows a sharp decline in Croatias
competitiveness, especially compared to neighbouring countries,
which are becoming increasingly competitive. While a top 50
position is the stated goal of the country, Croatia is moving
in the opposite direction. Observers say this should be a
clarion call for urgently needed reforms if the country is to
be competitive in a globalized economy.
Vedriss call for change is echoed by other NCC members
such as phone company T-Coms chief executive Ivica
Mudrinic. A one-time HDZ minister, in recent months Mudrinic
has been increasingly vocal in his criticism of the hapless
response to the global economic downturn by his former party
colleagues. He says economic policy has failed to move on from
the 1990s, with ministers in denial about the need for change
and reluctant to cut the bloated bureaucratic framework in
Croatia down to size.
Amid the short-term gloom about Croatias weakening
economic credentials, however, there is some longer-term
optimism that the country will ultimately effect the necessary
changes needed to put the country on a much firmer footing.
Glazer at Aucris says that, despite the recent political
dithering, Croatia is likely to work out its problems.
There seems to be the will to do so. In another six to 12
months, the country will be very different, probably a much
better place. Including for investors. Now is a good time to
get in to take advantage of that.
He says Aucris is seeing interest from portfolio and
strategic investors on the back of improving sentiment towards
the country as is it seeks to clean up its act.