Tiny Balkan State Starts Free Zone

SVETI STEFAN, Yugoslavia -- Tiny Montenegro has declared itself an offshore economic zone with virtually no limits for foreign investment, despite opposition from Big Brother Serbia that could derail the project.

The republic, which forms what is left of Yugoslavia with Serbia, hopes to normalize ties with the West and revitalize its economy, shattered by a trade embargo imposed on Yugoslavia during the Balkan wars.

"The offshore project epitomizes our strategic aim of opening up toward the world," Montenegro's premier, Mile Djukanovic, said at a formal opening of the zone this past weekend.

Montenegro's aims to attract investment through formation of offshore companies that would pay taxes of just 2.5 percent, Djukanovic said. Cyprus has had the lowest such taxes in Europe, with 4.25 percent.

Serbian President Slobodan Milosevic, a devoted communist and effectively the most powerful man in Yugoslavia, is against the idea, although it is unclear is how far Milosevic will take his opposition.

He could derail the project in Yugoslavia's joint federal parliament, which he controls. Already, he has had Belgrade lawyers start court proceedings, arguing that Yugoslavia's constitution bars offshore companies.

Djukanovic remains optimistic, insisting that the offshore project is "compatible with the Yugoslav constitution" and that investors have nothing to fear.

Foreigners could have full ownership and control of their companies and banks in Montenegro if they pay the tax, he said.

Other forms of ownership, such as joint ventures with Montenegrin companies, are also possible.

Officials hope most of the new investment will be in tourism and hotels along Montenegro's beautiful 283 kilometers of Adriatic coast, said Milutin Lalic, director of Montenegro's foreign investment agency.

In the first year, Montenegro, a region of just 617,400 people, could gain a relatively small sum of 10 million Deutsche marks ($6.6 million), Lalic said. The eventual target is 150 million marks a year.