March 13, 1995 Vreme News Digest Agency No 180
The Great Robbery
by Zoran Jelicic
"An Economy of Destruction - The Great Robbery of the People" (edition VIN - Belgrade) a book by Fellow of the Belgrade Faculty of Economics Mladjan Dinkic (1964) was promoted on Wednesday. The author offers numerous convincing arguments, from practical ones to general theory, which justify the title of the book. Perhaps it would have been more appropriate, since the matter concerns this regime's continual policy, if the title had been: The Constant Robbing of the People
A defence of the profession, i.e. economics, was the main motive in writing this book, said Mladjan Dinkic, adding that it didn't make much sense now to discuss economic models when it is obvious that economic phenomena were not caused by economic reasons. It would also be wrong to keep silent and leave the impression that economists don't know what has happened in the past few years and why.
In other words, hyperinflation is not the result of economic circumstances, but the will of the authorities; parastate banks did not pop out of the sky or were the result of an irregular economy, but because the authorities assessed that it was the best way of milking the citizens of their foreign currency: Jezdimir Vasiljevic (a Yugoslav financial wheeler-dealer, owner of Jugoskandik bank) did what he did unhindered, and without any competencies, while Dafina Milanovic (owner of Dafiment bank) went into business straight out of court, i.e. three months after a series of sentences over various cases of embezzlement. Dinkic believes that this road was chosen after the disaster with the Loan for the Economic Renaissance of Serbia. The loan was launched in mid 1989, at the peak of national euphoria in Serbia; the dinar part brought in 225 million DEM at the rate at the time, and the foreign currency reached one billion US dollars. The loan was followed by an unprecedented media campaign, and the taxing of certain firms. The planned dinar part was collected but it devalued thanks to the growing inflation, while the foreign currency part, after five months had not reached even 3% of the planned sum. The deadline for subscribing to the loan was prolonged for a year, and the creditors were offered foreign currency interest rates of over 15% per annum, which was very favorable in comparison with the price of capital in the world at the time, but highly unfavorable for the users of all this very expensive money in Serbia. In spite of this, nearly 90 million dollars were collected, or just 8.6% of the overall planned foreign currency sum.
Dinkic concludes: "The failure of the Loan for the Economic Renaissance made the authorities in Serbia abandon classic mechanisms of collecting money from the population in the following period. It was soon proved that with some more 'subtle' methods, which were not always in accordance with the unbending academic rules of economic sciences, it was possible to collect in a few months, and with much less effort, as much foreign currency as with the loan in one and half years. And without the obligation of returning the money."
In late 1990 and early 1991 two events determined the Serbian authorities' subsequent policy. Serbia made an incursion into Yugoslavia's wages system. Even though it wasn't the first to do so, because Slovenia and Croatia had previously withdrawn 143 million and 243 million DEM respectively, Serbia was the most successful with over three billion DEM. The former state was by that time de facto a former state, so that the economic settling of accounts between the republics could no longer be counted on. But, the illusion of the Socialist Federal Republic of Yugoslavia continued and the Federal Government tried to maintain the stability of the dinar and a single economy, i.e. state.
Dinkic notes that early 1991 saw the appearance of a small private bank. This was Karic Bank which very quickly drew the attention of the citizens by offering treasury bills payable on maturity of 30 days and an annual interest rate of 45% for foreign currency sold to the bank. The annual interest rate offered by state banks at the time stood at 10%. After a few months, the new private bank had a monthly turnover of around 150 million DEM, so that the bank kept increasing interest rates on treasury bills (in the second half of the year interest stood at 91%).
At the end of the year Karic Bank stepped out of the limelight. In the meantime, other banks had appeared which offered foreign currency interest rates on foreign currency deposits above 10% per month (Jugoskandik and Dafiment) and Dinkic believes that Karic Bank will be remembered as being "the first to show that the people still had a lot of money stashed away, and that under conditions of inflation it would be possible to get hold of this money if a nominally high price was offered." It was estimated that around 8 billion DEM were stashed away. The reader of the book "An Economy of Destruction - The Great Robbery of the People" will later come across the author's calculation that in two years of hyperinflation, thanks to the grey issue, at least 4.7 billion DEM were bought from the citizens.
Of course, it is not possible or necessary to quote all the methods used in milking the citizens of foreign currency which Dinkic discovered to be the basis of the economy of destruction. As an illustration, here is one method of using the grey issue for which ten commercial banks were chosen (six state and four parastate banks):
"The National Bank of Serbia (NBS) would put the dinar equivalent of 3 million DEM on the account of a privileged bank. let us assume that the black market rate that day stood at 100 din/DEM. Regardless of this, the competent person at the bank would inform the NBS that the actual black market rate was 130 din/DEM. After this the giro account of this privileged bank would be increased by 390 million dinars (telephone-telegraph orders were used to remit the grey money). The giro ('grey') dinars received from the NBS could be used for the purchase of foreign currency from the citizens in two ways: by turning it into cash and then turning it out into the streets - or through the mechanism of the giro purchase of foreign currency, directly at the bank counter. In the beginning this first solution was used more often. The bank would submit a request to the Public Auditing Office to take 390 million dinars off its giro account and give it to the bank in cash. Through the bank's dealers this money would end up in the streets, and with it 3.9 million DEM were bought from the citizens (at the rate of 100 din/DEM). The bank would forward the total of 3 million DEM to the National Bank of Serbia; it would keep a part of the remaining 900,000 DEM for its needs, while the rest would be paid out to deserving state officials, as a 'modest' reward for their recognition of the higher foreign currency rate in comparison to the real one. According to claims by certain bankers familiar with what was happening at the time, some top state officials earned 5-4 million DEM annually this way."
This was a time when it wasn't possible to pass through the main streets without hearing the buzzing of the dealers; the heyday of Boss Jezda and the "Serbian Mother" Dafina. However, in early March 1993 Jezdimir Vasiljevic managed to get out of the country, and soon after that Dafiment Bank started to close down. Their disappearance wasn't accidental, and it wasn't the reason for trying to find a new method of milking the citizens of their foreign currency. It was just that hyperinflation was in full swing and this created an unsurmountable physical problem because new quantities of DEM and dollars required enormous quantities of new dinars, regardless of the fact that new bills of greater nominal value were printed. A way out was found in the so-called giro purchase of foreign currency at bank counters, and in order to facilitate the manipulating of the grey issue, the mechanism of "making up the deficit by night" was introduced, so that privileged banks were practically freed of all concern in maintaining short-term solvency. The citizens breathed more easily when they could sell foreign currency in the banks instead of the streets, and they were attracted by the fact that in this new version, they were offered a higher black market rate than the street rate. Dinkic believes that the authorities diverted an eventual odium from the privileged banks by allowing numerous savings banks, exchange offices and all sorts of agencies to crop up literally overnight, all offering the giro purchase of foreign currency. This method culminated in autumn 1993: the author estimates that in the last 15 days of the giro purchase of foreign currency, around 130 million DEM were squeezed out of the citizens. It is understood, that as with the other methods, the citizens were always at a loss, because inflation regularly devalued the seemingly attractive dinar sum when doing business with the state. Of course, an increasingly smaller segment of the population had a choice, because the salaries and pensions reached a monthly average of just a few DEM.
We will leave the readers to enjoy themselves or get heartburn by reading of all the modalities of the permanent robbery uncovered by Mladjan Dinkic: we leave it to them to figure out why Boss Jezda disappeared a month before bankruptcy threatened his "bank", and how much his one way ticket cost him - the one Dafina Milanovic didn't manage to buy. The readers can learn of the ways in which the world's dirty money arrived and was laundered in Yugoslavia, and how capital was taken out of the newly created state, regardless of whether it is now on the state's foreign bank accounts, or partly on the accounts of prominent individuals...
Instead of all this, at the end of this review we offer an easily soluble dilemma: was credit from the primary issue used to revive production or inflation? Dinkic describes this practice as follows:
"A certain bank would approve a short-term credit of 1,000,000 dinars for the 'reviving of production' to its client, with a 30 days deadline for returning it. The whole arrangement would be based on fictitious documents, because reasonable people had no intention of reviving the economy under an astronomical inflation. After getting the credit from the bank, the firm would issue a counter order thanks to which 300,000 dinars would be returned to the firm, allegedly in the name of the deposit for the credit which had already been approved. These agreements between banks and firms achieved two goals. First, even though the firm had formally been approved credit on the basis of the 30% deposit, it in fact would not engage a dinar of its finances. Secondly, the bank would, on the basis of the approved credit totalling 1,000,000 immediately ask the National Bank of Yugoslavia (NBJ) for a rediscount credit, which would cover 70% of the bank's investments. In this way the bank would get back the remaining 700,000 dinars, this time in the form of a NBJ rediscount credit, which was formally approved for the financing of exports, agriculture and all sorts of things, but in fact used to buy foreign currency. With the received 700,000 dinars the firm would immediately contact its savings bank and buy foreign currency. For this sum it could get 5,600 DEM, if we assume that the selling giro rate stood at 120 dinars/DEM.
At the same time, the savings bank would be in a position to settle its dinar obligations with citizens from whom it had previously bought 7,000 DEM, on the assumption that the buying rate was 100 din/DEM. In the end, the savings bank would have earned 1,400 DEM through its transactions, while the money from the primary issue would end up on the citizens' accounts. After the 30 days deadline the firm would settle its credit owings to the bank with 1,000,000 dinars (because of the simplified example, we won't take into consideration the interest rates which were realistically negative). At the same time, the firm would have the right to get back the 300,000 dinars it had previously 'invested' as deposit. The bank would forward the difference of 700,000 dinars to the NBJ, thus settling the rediscount credit, so that all mutual claims and owings would be void."
But this is not the real end. It is in the citizens' pockets because the foreign currency rate had jumped to 500 din/DEM in the meantime, so that the firm has achieved a debtor's profit of 4,200 DEM. The activities of these firms and the validity of their papers was not seriously controlled, writes Dinkic, because their owners weren't ordinary businessmen, but members of the ruling political-financial elite.
If the citizens think that they can breathe more easily, and that the authorities will look for foreign currency among their firms, we must advise caution: on Tuesday NBJ Governor Dragoslav Avramovic decided to say publicly that the state was spending too much and that the taxes and other levies were unbearable. Had he been able to change something, the Governor probably wouldn't have made the statement. This way, things remain as they were: only individuals will change in an unbearable regime.
Portraits and Works
It is taken for granted that an economy of destruction or the great robbery of the people aren't possible without a script writer, producer and protagonists. A number of names keep popping up in the book, and they are recognizable even when they aren't given. As an illustration, we will concentrate only on some important protagonists, starting with the only one who is neither in power nor alive - Borislav Atanackovic the long time National Bank of Serbia Governor and NBJ Governor for a short time. He was one the main protagonists of Serbia's incursion into Socialist Federal Republic of Yugoslavia's wages system estimated at 2.6 billion DEM (he was assisted by: the then deputy NBS governor Nikola Stanic, Serbian Finance Minister Jovan Zebic and his deputy Mirko Milovanovic, and Public Auditing Office of Serbia director Dragoslav Jovanovic). Secondly, as NBJ Governor, Atanackovic approved a "considerable" dinar credit to cover Dafiment bank's insolvency, even though the bank faced bankruptcy. Subsequent analyses showed that this credit was far from being a gift like the previous ones: Dafiment bank got the dinar credit of close to 3.7 million DEM, but deposited 251 kilos of the finest gold (value of 4.8 million DEM), while the bank covered the second credit of 10.6 million DEM with its right to build a business center near Vuk's monument in the center of Belgrade. This office building is estimated at 68 million DEM, and the gold has been deposited in the NBS safes - because Dafina Milanovic was not allowed, when she tried, to return the dinar credit and withdraw the deposit.
Even though a greenhorn and Serbian PM at the time, Radoman Bozovic soon joined the veterans: in autumn 1991 he ignored all NBJ requests for information about the Public Auditing Office accounts and the deposits of the republics and provinces, which under the balance scheme, are part of the NBJ system. This was the moment when the Serbian authorities started pursuing their monetary policy independently: the NBJ facade was left, but inside the policy of a "grey issue" started and culminated with a monthly inflation of 313 million percent in January 1994.
Borka Vucic, is the long time head of Beogradska bank branch in Cyprus. She was sent out even though she had retired, thanks to fact that she had won Serbian President Slobodan Milosevic's confidence during the banking episode in his life. When he was posted director of Associated "Beogradske banke", Milosevic found Borka Vucic on the executive board. She is said to be a "real trouper" and the only member of the team who always worked for a salary only, and this is how she got sent to Cyprus.
In the part of the book devoted to the parastate Dafiment bank the names of many state officials keep cropping up. Dafina Milanovic held the monopoly on oil imports when Nikola Sainovic was the Serbian Minister of Energy. As the director of the Simpo furniture company Dragan Tomic got a "very favorable (friendly) credit of 15 million DEM (Dafina would later mention some other millions of DEM given to Tomic, and the fact that he had disappointed her, whining all the time that others had done the decision-making); director of the Serbian Railway system Milomir Minic withdrew 50 million DEM from Dafiment bank - shortly after the Public Auditing Office findings came to light (early 1992), and the money disappeared mysteriously from Dafiment bank. This report was sent to the Serbian Government, but after a month had passed, Dafiment bank received "great competencies" in working independently with foreign currency and abroad...
What lies in the background of what Dinkic calls the "political establishment" which runs through the book as one of the protagonists in the division of foreign currency collected from the citizens in various ways, still remains to be seen.