Serbian Dinar May Rise After Wartime Fugitive Karadzic Arrested

By Emma O'Brien

July 22 (Bloomberg) -- Serbia's dinar may climb against the euro after Bosnian Serb wartime leader Radovan Karadzic was arrested after 13 years on the run, boosting the case for the Balkan nation's European-Union membership bid.

Karadzic was detained yesterday by Serbian security forces and handed over to the Special War Crimes Court in Belgrade, the country's Security Council said. He is facing charges of genocide over the murder of almost 8,000 Muslins in Srebrenica during the 1992-95 Bosnia-Herzegovina war. Karadzic's capture was a condition for closer relations with the EU, which Serbia hopes to join.

``It's going to be positive for the dinar because it reflects positively on Serbia's EU accession path,'' said Goran Saravanja, a Balkan region analyst for UniCredit SpA in Zagreb, Croatia. ``It shows they are open to working with the international community and that there is the political will to comply with the Hague.''

The dinar was little changed at 78.8884 per euro by 8:40 a.m. in Belgrade, from 78.7900 yesterday. Against the dollar, it rose 0.4 percent to 49.4066, from 49.6253.

The currency has gained 0.4 percent against the euro since July 7, when the new pro-European coalition government was endorsed after two months of negotiations. The administration, led by Prime Minister Mirko Cvetkovic, has vowed to prepare Serbia for membership of the 27-member EU and open its economy to further international investment. The EU signed the Stabilization and Association Agreement with Serbia in April.

The arrest raises the possibility that Ratko Mladic, the Bosnian Serb military commander, will also be apprehended, Saravanja said. ``This is extremely positive not just for Serbia but for the entire region.''

Serbia's benchmark interest rate, at 15.75 percent, is the highest in Europe after Turkey. It has been raised five times since December and makes the dinar an attractive target for the carry trade, where funds borrowed in countries with lower rates of interest are invested in countries where returns are higher.

The dinar has advanced 3.4 percent against the euro and 19 percent versus the dollar during the past 12 months.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net