Thursday, August 19, 2010

Excess and corruption keeping Montenegro afloat

TIVAT, Montenegro — “This is better than St. Tropez,” Milo Djukanovic, the prime minister of Montenegro, exclaimed as he took in a display of yachts berthed in this mountain-shrouded bay on the eastern shore of the Adriatic Sea.

Hardly. But if Mr. Djukanovic and a group of foreign businessmen supporting him have their way, the port of Tivat, now just 20 percent complete, could become a new playground for the super-rich and the centerpiece of tiny Montenegro’s audacious effort to clean up its image of corruption and gain entry to the European Union.

As part of the plan to lure investors from around the globe, Mr. Djukanovic, who is also chairman of Montenegro’s investment promotion agency, said last week that any person willing to invest 500,000 euros or more could become a citizen of Montenegro.

In 2009, the prime minister invited Thaksin Shinawatra, the deposed former prime minister of Thailand who faces jail for his conviction on corruption charges in his native country, to make his home here.

Meanwhile, the billionaire who dreamed up the idea of transforming this former Yugoslav navy base into the new Monaco could not be happier. Seated behind Mr. Djukanovic (pronounced ju-KAHN-oh-vitch) as he sped through the marina in a golf cart was Peter Munk, the 82-year-old Canadian gold magnate who is the lead investor in the 200-million-euro ($256 million) Porto Montenegro project.

No doubt about it: Montenegro is open for business.

“This is not a place for mediocre investment projects,” Mr. Djukanovic, speaking in Montenegrin, told a Champagne-sipping crowd of business and political leaders, along with their wives and girlfriends, at a ceremony Saturday night to celebrate the completion of the first major phase of construction in the port project.

“Montenegro,” he said, “will become one of the most elite tourist destinations in the world.”

Montenegro, with a population of about 670,000, is a country roughly the size of Connecticut that achieved independence only in 2006. With its boundless mountains that drop straight into the Adriatic, Montenegro is, as Lord Byron once declared, very much the “most beautiful merging of land and sea.”

But Mr. Djukanovic’s ambitious plan to leverage these stunning natural assets to attract foreign investment has drawn plenty of criticism.

“This country is for sale,” said Vanja Calovic, who leads Mans, a corruption watchdog affiliated with Transparency International. “Montenegro is selling everything it has, and I am just not sure what the country is getting out of all this.”

There is no question that the Djukanovic government is investment-friendly.

The corporate and income tax rates of 9 percent are among the lowest in Europe. And in a bid to pave the way for the Tivat project, Parliament cut the VAT tax for port-related items to 7 percent from 17 percent — a move that drew a rebuke from the European Commission as being anticompetitive.

Its largest company, KAP, an aluminum factory that produces about half of the country’s exports, was sold to the billionaire Russian investor Oleg Deripaska — himself a minority investor in Porto Montenegro — in a 2005 deal that remains controversial.

The government’s supporters say that in a competitive investment world, small countries like Montenegro need to pull out all the stops to attract foreign capital.

But many say that Mr. Djukanovic’s pell-mell salesmanship is itself a reflection of an unseemly mix of business and politics here that highlights the potential for corruption and shady dealings.

Mr. Djukanovic, for example, has a 2.8 percent stake in First Bank, the country’s second-largest bank. His brother, Aco, has a 46 percent position.

The bank was saved from collapse in 2008 by an emergency government loan of 44 million euros. It was the only bank in Montenegro to require such a rescue.

Many of the bank’s aggressive lending practices were called into question, not just by outside watchdogs but also by Montenegro’s own central bank.

Mr. Djukanovic’s pay, public records show, is only 1,256 euros a month, but critics have long claimed that the prime minister and other parliamentarians supplement their low salaries via a web of outside business interests. In 2006, when Mr. Djukanovic stepped down temporarily as prime minister but remained in Parliament, he started a real estate investment company, though he no longer manages its business affairs.

A spokeswoman for the prime minister said that Mr. Djukanovic “was indeed involved in private business after he stepped down, but now that he is the prime minister again, he is completely committed to his public role and has suspended all his business activities and relinquished his managerial powers.”

Mr. Djukanovic, 48, is a crafty political survivor of the breakup of Yugoslavia who steered Montenegro to independence after years of aligning himself with Serbia and its former president, Slobodan Milosevic.

A forceful physical presence at 6 feet 3, Mr. Djukanovic has a viselike grip on this place dating to 1991, long before it was an independent country. He has been in one top position or another for most of that time and is serving his sixth term as prime minister.

The Montenegrin government has also attracted criticism for allowing controversial figures like Stanko Subotic, a Serbian who faces tobacco smuggling charges in his home country, to conduct business openly here. (Mr. Subotic denies the claim.)

According to the Organized Crime and Corruption Reporting Project, Mr. Djukanovic admitted to being involved in running a cigarette trading company in the 1990s, during the war that followed the breakup of Yugoslavia, but he has persistently denied charges of any illegality.

Italian prosecutors in Naples issued an order for his arrest in 2005, accusing him of being at the center of a conspiracy by Montenegrin officials and the Italian Mafia to smuggle huge quantities of cigarettes. The charges were eventually dropped after Montenegro became independent from Serbia and Italian courts granted Mr. Djukanovic diplomatic immunity.

In its 2009 report on Montenegro’s status for entry to the European Union, the European Commission, the E.U.’s executive arm, said, “corruption remains prevalent in many areas and continues to be a serious problem.”

Igor Luksic, the deputy prime minister, said the government had made progress in its fight against corruption and that it had recently adopted an action plan in a bid to address E.U. concerns.

And government officials say that the new applicants under the citizenship program will be thoroughly vetted by outsiders like Kroll, the risk consulting company.

Mr. Munk — who immigrated to Canada from Hungary in the 1940s and now controls Barrick Gold, the largest gold mining company in the world — said that Mr. Djukanovic, whatever his past activities, had done nothing wrong in his current dealings.

Mr. Munk hailed the port project as “transformational” for Montenegro when it was his turn to address the audience here. He then turned to Mr. Djukanovic: “None of this would have been possible,” he said, “without the prime minister and his cabinet, who have acted with the utmost integrity, honesty and supreme credibility.”

In a subsequent interview aboard his yacht, Mr. Munk said that in the five years he had worked with the Djukanovic government he had observed no improprieties.

“Not once have any of us been approached for anything,” he said. (Other members of the investment consortium include the entrepreneur Nathaniel Rothschild and Bernard Arnault, the French business executive who founded the luxury-goods conglomerate LMVH.)

In a brief interview, Mr. Djukanovic said the government would take extra care to insure that foreign investors “would be of the same quality as Mr. Munk.”

With its palm trees, yacht-filled quay and newly completed row of tasteful apartments and shops, Porto Montenegro has all the hallmarks of an understated but classy marina.

What Tivat lacks — but perhaps not for long — is the brassy flavor that has come to define some of the more popular European ports of call. This sleepy town has none of the high-end casinos, over-the-top nightclubs and multistar restaurants that lure pleasure-seeking oligarchs and sheiks in places like Portofino and Porto Cervo in Italy.

There is also a dearth of hotel rooms. And while Mr. Munk and his team say that a number of boutique hotels have expressed interest, the Four Seasons group recently backed out of the Porto Montenegro project.

Despite the red carpet rolled out for wealthy foreigners, Montenegro is not an easy place to make money. Besides the risks associated with most emerging markets in Europe, the country can give investors pause because of its small size and tight group of insiders.

Another investment vehicle in which Mr. Munk has a stake, TriGranit, had to cancel a development project in the capital city of Podgorica.

And earlier this month, OTP Bank in Hungary took a charge of 15 billion forints ($70 million) to cover delinquent loans at CKB Bank, its subsidiary in Montenegro.

All of which makes Mr. Munk’s Porto Montenegro project even more crucial to Mr. Djukanovic, not so much as proof that money can be made in Montenegro but that it can be done honestly.

“It’s going to take a long time,” Mr. Munk said. “We are building a community and we are doing it for the good of Montenegro and our investors.”