Kosovo is attempting to sidestep an unlikely interstate agreement with Serbia on implementation of a recent regulation on cash operations by Kosovo’s Central Bank, CBK.

The regulation, which entered into force on February 1, despite international calls for a postponement, aims to fight counterfeit money. It simultaneously enforces a euro-only policy, so banning transactions in Serbia’s currency, the dinar, which is still used daily by Kosovo Serbs, especially in the Serb-majority north.

As Serbia does not recognise the statehood of Kosovo, which declared independence in 2008, Serbian commercial banks and other financial institutions handle domestic transactions to Kosovo.

By time of publication, Serbia had strongly opposed starting transactions in euros to Kosovo, and experts told BIRN that, in order to do this, it would need to change its regulations.

If Serbia decides to continue transactions in dinars, these payments would need to be converted into euros in Kosovo, and conversion fees would probably be paid by the citizens there, experts told BIRN.

Ahmet Ismaili, Kosovo Central Bank Governor, CBK, told BIRN on Thursday that Kosovo is now mulling ways for Serbia to continue paying Serbs in Kosovo through commercial banks – without the need for Serbia to make official changes in its currency policy.

“On February 6, I sent a letter to the Central Bank of Serbia expressing our readiness to support any technical solution”, to the issue of payments from Serbia to Kosovo Serbs, Ismaili told BIRN, following a closed meeting with representatives of Kosovo Serb civil society in Mitrovica.

“Considering these are massive payments, we want them to be done effectively,” he said.

Citizens left confused, feeling voiceless

Kosovo’s Central Bank says it is willing to accept any technical solution accepted by Serbia in order to ease the burden on citizens affected by the new rule.

However, experts and Kosovo Serbs say a lack of information and proper evaluation of implementation of the new currency rule on the ground has left people confused and at risk of financial repercussions.

Petar Dordevic, a resident of the Serb-majority municipality of Gracanica, said the new policy on use of the euro as the only transaction currency will make life harder for his community.

“Local Serbs perceive this decision as detrimental. They feel marginalized and voiceless in the process,” Dordevic told BIRN, adding that “citizens were not adequately informed before the decision was made, exacerbating the sense of frustration and uncertainty”.

The new regulation reiterates: “The only currency allowed to be used for carrying out cash payment transactions and in the payment system in the Republic of Kosovo is the euro.”

“Other non-euro currencies can be used … only as valuables for safekeeping in physical form, or in bank accounts in non-euro currencies, for making international payments in non-euro currencies and for foreign exchange activities,” it adds.

As experts explained to BIRN, because Serbia considers transactions to Kosovo as domestic, and so are done in dinars, they eventually are converted to euros with applicable fees.

Djorjde Djukic, a professor of the Belgrade economics faculty, told BIRN that if Serbia did not agree to make payments in euros, but continued using dinars, Kosovo Serb citizens risk “having to cross the border… to withdraw the dinars and buy euros”, so they can then pay in Kosovo.

“The political connotation, which is always involved here, means that the complete suppression of the dinar, which is no longer a legal tender in Kosovo and Metohija (how Serbia refers to Kosovo) … means that the Republic of Serbia loses its monetary sovereignty over that part of the territory,” Djukic noted, referring to Serb-majority northern Kosovo.

Milojko Arsic, also a professor at the Belgrade Faculty of Economics, told BIRN that Serbia and Kosovo would have to reach some kind of agreement at least on a temporary solution to the issue of payments to Kosovo Serbs.

“Serbia could decide to pay the dinar value, and the conversion costs would then be on the citizens. If the state took over, it would have to slightly increase the pensions in dinars,” he said. “There is also the question of who will buy those dinars in Kosovo,’ Arsic said.

Kosovo Central Bank governor Ismaili told BIRN that, in a letter to Serbia’s Central Bank from February 2, he had proposed leaving the technical solutions of converting dinars to euros to commercial banks, as Serbia is reluctant to allow international payments to Kosovo.

“Even if the Serbian Central Bank does not agree to (officially) respond to us, it can at least implement the proposal because it can be done even without the involvement of central banks,” he said.

He explained that the Central Bank of Kosovo has allowed three commercial banks which operate both in Kosovo and Serbia to regulate the issue with internal bank agreements.

Under his proposal, the Central Bank of Serbia would issue its dinar payments to these three banks, Raiffeisen, NLB, and ProCredit. They would then transfer the money to their branches in Kosovo in euros, with internal bank deals.

Ismaili explained that three Raiffeisen banks and one NLB bank currently operate branches in the Serb-majority north of Kosovo, adding that the Kosovo Central Bank had asked them “to increase their presence” in Serb-majority areas of Kosovo.

According to Ismaili, three micro-financial institutions in the north of Kosovo are also licensed to give loans and 15 non-bank financial institutions can officially exchange currencies.

The National Bank of Serbia and the Republican Fund for Pension and Disability Insurance did not respond to BIRN’s question about the proposals by the time of publication.

Kosovo under pressure to give more time

Kosovo and Serbian authorities have given contradictory interpretations of the meaning and effects of the new Cash Operations regulation in Kosovo. The international community has called on both countries to take the issue to the negotiating table as part of the EU-mediated dialogue.

All United Nations Security Council members, including the five permanent members, urged Kosovo on Thursday to postpone the regulation, echoing concerns raised about the everyday life of the local community in the north.

“The decision was taken without adequate preparation or consultation with the local population,” US Ambassador Linda Thomas-Greenfield said.

At the same time, the US, UK and France urged Serbia to investigate the September 2023 attack by Serb gunmen in the Kosovo village of Banjska and hold the perpetrators accountable.

But Kosovo Parliamentary Speaker Glauk Konjufca on Thursday insisted that the Serbian government had used its currency as a political weapon in northern Kosovo.

“The dinar has been an instrument that someone has physically brought from Belgrade in vans, and some officials of (Serbian President) Aleksandar Vucic via (Belgrade-backed Kosovo Serb party) Lista Srpska), went and distributed the money in homes … requesting loyalty,” he said. “The distribution of dinars [in Kosovo] is not just a battle of welfare,” Konjufca added.

He also insisted that the new currency regulation would “assist the integration (of Kosovo Serbs into Kosovo) because it hits precisely that physical manipulation.” 

For now, Kosovo has agreed only to an undefined transition period for the phase-out of dinars. 

On Wednesday, Kosovo’s Minister for Communities and Returns, Nenad Rasic, said that during a meeting with Prime Minister Albin Kurti and Bank Governor Ismaili, that they had “reached a conclusion on an undefined transition period, “so (dinar) users will have the opportunity to prepare for using the regulation. From the legal and technical aspects, this is the right way to continue”. 

Rasic noted that Ismaili had mentioned that the transition phase could end in late-February, but said that any exact timeline for this “that we would mention now would be inaccurate”.

On February 2, meanwhile, President Vucic said Serbia would continue making payments to Kosovo Serbs in dinars despite the move to enforce euro-only payments in Kosovo. He also said Serbia had paid February salaries, pensions and social aid for Kosovo Serbs in advance.