BELGRADE/PRISTINA (Reuters) - The red box of the buttery 'Plazma' cookie, one of ex-Yugoslavia's best-loved snacks, offers a quick introduction to the dilemma of businesses trapped in the political tussle between Serbia and Kosovo.
Belgrade, which vows never to accept the secession of the Albanian-majority territory, wants product labels to refer to Kosovo as part of Serbia, drawing on its constitution and on laws that ban "false advertising."
Kosovo, however, insists that all products on sale in the new state must include details for the 'Republic of Kosovo', the name it took at its February 17 independence proclamation.
In a strange compromise, the Plazma box lists the cookie's Kosovo distributor under the country section for Albania. It is a sign of the uncertainty and confusion that has cut the robust trade between Serbia and Kosovo by half in a single month.
"According to our figures, trade between Kosovo and Serbia dropped by 50 percent since February 17," said Milovan Spasic of the Kosovo Chamber of Commerce, a Belgrade-based Serbian government office that treats Kosovo like any other province.
"The decline is due to uncertainty over how institutions on either side will react and what regulations will be introduced."
Kosovo is recognized by 30 states, but its United Nations membership is blocked by Serbia's ally Russia. Meanwhile, firms either side of the border play cat-and-mouse with bureaucrats, or take the easy way out by smuggling.
In a rival "Kosovo Chamber of Commerce" in Kosovo's capital Pristina, an official said Serbian goods were entering Kosovo
"easier than before," especially since ethnic Serbs in north Kosovo had burnt customs posts in protest at the secession.
"Trade is like water, it finds a channel," said the official, who spoke on condition of anonymity. "For example, we know that some 20 fuel tanker trucks enter Kosovo each day from the north with no papers."
There is no single reliable estimate of the volume of trade between Serbia and Kosovo.
Serb sources say that in 2007 it was $200 million, mostly Serb exports of construction material and machinery, with smuggling accounting for an additional $50 million a year.
Kosovo estimates are much higher at around $750 million, $450 million of that illegal.
"The most commonly smuggled goods are cattle, narcotics and jeans," said Dejan Jovovic of Serbia's Chamber of Commerce.
The smuggling channels mostly go through the Sandzak area of southern Serbia, a region famous for its prolific production of fake Levi's jeans in the 1990s, when Serbia was under international sanctions for its role in the Yugoslav wars.
Milan Kovacevic, a Belgrade-based business consultant, said legal trade will suffer until bilateral ties are cleared up.
"Goods will take illegal routes until Serbia and Kosovo resolve the dispute by signing a political agreement," he said. "Only after that will trade boom: Kosovo and Serbia are linked, they are neighbors and were once part of the same country."
The trade barriers in this case are not official state policy, since both Serbia and Kosovo have signed the Central European Free Trade Agreement (CEFTA) and could face fines if they break it with tit-for-tat measures.
Instead, they are ad hoc measures that amount to petty, yet obstructive red tape from both sides.
"CEFTA makes trade easier," said Mihailo Vesovic of Serbia's trade ministry. "The problem is the mostly indirect barriers."
Businesses cite as examples Serbian labeling rules, and Kosovo's refusal to recognize Serbian quality certificates.
A company, Serbian or foreign, can face fines of up to 1.0 million dinars ($19,000) if it mentions Kosovo as a separate territory on labels used on products sold in Serbian stores.
Terms allowed are 'UNMIK/Kosovo', referring to the United Nations mission that took over the province in 1999 after NATO expelled Serb forces, 'Kosovo, Serbia' and 'Kosovo/1244', the number of the Security Council resolution that put Kosovo under U.N. administration.
Kosovo is also sticking to its guns: Kosovo police seized a shipment of Serb-made medicine going to a hospital in the Serbian-minority enclave of Gracanica, saying it did not have the approval of the Kosovo drug agency.
Some Serbian companies, keen to defend their place in Kosovo's market, have found novel ways to bypass legal pitfalls.
"On paper, goods go through Albanian distribution centers," said Stevan Santo, general manager of confectioner Pionir. "But in practice, they are being transported through Serbia."
Others say the uncertainty is already hurting business.
"Since February 17, our business with Kosovo stopped," said Mirjana Ignjatovic, a sales director in Keramika Mladenovac, a Serb manufacturer of bathroom ceramics. "We haven't heard a word from our buyers in Kosovo since."
Experts expect the impasse and obstructions to carry on for years, until attitudes soften and relations are normalized through parallel progress towards European Union membership. Kosovo's cookie-lovers certainly hope so.
"Plazma are one of the most wanted and best-selling Serbian products, people really like them," said Tahir, an employee at a big supermarket in Pristina. "We tried with some similar Italian cookies, but in the end sold only two packs."
Writing by Ellie Tzortzi; editing by Mark Trevelyan