Serbs fail to hide pain of UN sanctions: Robert Block reports on arguments by some in Belgrade that the international embargo is counter-productive

THERE are luxury goods in Belgrade's shops, tropical fruits in its markets, petrol in its pumps and foreign currency out on its streets. Yet scratch the surface of this picture of economic well-being and there is putrefaction. Serbia's economy is in ruins.

Despite defiant official claims that sanctions are having a minimal effect, the UN embargo is wreaking havoc. The West is now considering widening those sanctions should the Geneva peace talks on the war in Bosnia-Herzegovina break down this week. But according to political and economic analysts in Belgrade, the damage is already done. Any additional economic measures against the rump Yugoslavia will be counter-productive, they say.

The thin veneer of normality that blankets Serbia is largely the result of currency speculation and sanctions-busting. In the current political climate sanctions-busting is not just a means of survival but seen as a patriotic duty for Serbs who believe the world is unfairly out to get them. Economic indicators, however, point to a decay that no amount of smuggling and speculation can stop.

Inflation defies imagination. According to Mirjana Rankovic, the assistant director of the Federal Statistics Bureau, annual inflation in 1992 was 19,810 per cent, making Yugoslavia the world record-holder last year, taking the crown from the Latin American countries which traditionally hold the title. The rate at which prices are increasing has inspired jokes such as: 'If you go to a restaurant, pay before you order. Why? If you wait until after dinner the meal will have doubled in price.'

Exports last year from rump Yugoslavia, of which Serbia is the largest republic, are extimated at dollars 2.5bn ( pounds 1.66bn), 46 per cent less than in 1991. Imports were about dollars 3.9bn, a third down. The director of the Serbian Bureau of Statistics, Milovan Zivkovic, said gross domestic product dropped by 26 per cent in 1992 but gave no figures. He blamed sanctions for the fall. He said that compared with 1989, before the disintegration of Yugoslavia and the last year of a 'normal functioning' economy, GDP in 1992 was down by nearly 45 per cent.

Official figures show that in the last six months, 94 business have had to shut down or stop production because of a lack of materials. There are at least 800,000 employees on paid leave from their jobs. Another 450,000 are on the dole and that number is expected to increase to 600,000 by 20 January. Millions of Serbs are living off incredibly high interest rates (from 18 per cent a month on hard currency deposits to 140 per cent a month on dinar accounts) paid out by a few shady banks that have emerged as powerful money-brokers since sanctions were first imposed seven months ago.

Danko Dzunic, the director of the independent Institue of Economics, said roughly one-third of the economy has stopped working, one-third is only barely functioning, and one-third, mainly the agricultural sector, is working as normal. Serbia is rich in agricultural resources, but Mr Dzunic said it is only a matter of time before farmers also feel the pinch. The food industry depends on capital, technology and spare parts from outside the country.

If sanctions are not lifted soon, he said, the economic infrastructure and mechanisms that govern a normal functioning economy such as banking, tax collection, credit and capital markets trading, will be damaged beyond repair.

'Sanctions are working and hitting us hard. Our problem is that we are not a rational people. We are emotional. Because of our pride we think we can survive sanctions, but we cannot,' Mr Dzunic said. 'We are on the brink. It is only a question of months before we will be like Albania.'

The question Mr Dzunic and other analysts ask is not whether sanctions are working but what have they been designed to achieve? 'If the West's intention was to destroy our economy as a punishment for our political leadership, then the sanctions are a success. But if they were designed to bring about multi-party centrist democracy, the sanctions are counter-productive. The elections showed that with sanctions everything shifted to the far-right,' said Mr Dzunic.

Predrag Simic, director of the Institute of International Studies in Belgrade, agreed: the maintenance of sanctions during last month's presidential elections boosted the campaign of Slobodan Milosevic, the hardline Serbian President, over that of his pro- Western rival, Milan Panic, he said.

'The most sophisticated, Western-oriented part of our industry and our society have been destroyed. Sanctions ruined them economically and as a political force. Their last chance was Panic. Now the backbone of our legal economy is broken and all we are waiting on is for the body to be buried,' Mr Simic said.

There is a belief among many pro-Western liberals in Belgrade that the best way for the West to sweep aside the nationalist leaders in Serbia would be by lifting the sanctions. Anger now directed against the US, Germany and Britain, which is exploited by hardliners, would be turned against the government once people realised it was their political leadership, not the West, that failed them. 'The damage is already done. Anything else would be beating a dead horse,' Mr Simic said.