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Analysis & Opinion
15.07.08 Looking Both Ways
By Boris Kamchev

The rising temperatures make for a sweltering summer across Serbia, but the heat is felt not only outside. The impassioned debate over an energy deal with Russia signed earlier this year have made things a little restless for the new Serbian government, made up of the pro-Western Democratic Party (DS), headed by President Boris Tadic, and the Socialist Party of the late Yugoslav president Slobodan Milosevic, both fierce political enemies at the beginning of the decade. The liberal wing of the government is still calculating whether the agreement with the Russians is good enough for the Serbian economy.

Meanwhile, the coalition leaders have embraced a common understanding over the nature of the policies and ideologies that inflamed the country to create division throughout Serbian society in recent times. The two aforementioned parties backed a declaration designed to reconcile the nationalist and state ideas (i.e. strong relations with Russia and Kosovo) with propositions on reform and EU integration. It means that the Socialists, who won the elections on hard rhetoric and insisting on the continuation of Milosevic’s policy, would distance themselves from his “glorious” past. Tadic and his Democratic Party would certainly not give up their condemnation of that policy, but they would be compelled to introduce the Russian-Serbian economical cooperation. Tadic feels the need to fulfill such an obligation so as to honor the desires of the electorate that voted in favor of his actual political opponents, namely the Radical Party of Tomas Nikolic and his ally Vojislav Kostunica of the Democratic Party of Serbia (DSS), both nationalists who support strong ties between Serbia and Russia.

The turmoil which troubled the formation of the new government in Belgrade seems to be over. This is what the Russian partners were waiting for as they now can address the energy accord and its most important agenda – the ratification of the gas arrangement by the new Serbian Parliament. Although there are many critics of this agreement, Deputy Prime Minister Bozidar Djelic denied several days ago that the ratification would be signed due to pressures of either a political or economic nature.

The opposition to the agreement – or at least those who are backing a continuation of negotiations with Gazprom so as to achieve a higher price for Serbia Petrol Industry (NIS) – are concerned over whether the gas accord that acknowledges the construction of the South Stream gas pipeline through Serbia is a condition separate from the sale of the NIS with the sale of some other Serbian companies as well.

In line with the agreement, Gazprom gets NIS control package of 51 percent for $625 million and, in return, it would route a 400 kilometer section of the proposed South Stream gas pipeline through Serbia and construct an underground storage facility there in Banatski Dvor. These plans would provide Serbia investments amounting to $1 billion and an annual income of $200 million in gas transit fees. Moreover, Serbia will be able to create 100,000 new jobs and increase its economic rating – and, of course, provide cheaper gas for the country.

Serbian Minister of Economy Mladjan Dinkic proves to be the most fervent government critic and opponent to Gazprom’s stake in NIS. According to Dinkic, NIS ended 2007 with a book-keeping value of about ?1.7 billion, making the figure of ?400 million offered by Gazprom for the Serbian national petrol company two times smaller than its book-keeping value. “It is crystal clear that the offer is below every acceptable price,” the minister said. The weight of his words is even heavier now, after he was appointed head of the working group for Serbia-Russia cooperation which stands on the forefront for continuation of the negotiations with Gazprom.

Some experts say that Gazprom’s offer of ?400 million euro for 51 percent of NIS can hardly be characterized as a market one. The auditor Deloitte and Touche estimated the book-keeping value of NIS to be worth ?1.6 billion. From this information, one can establish that half of the company should cost at least ?800 million. The real value of NIS is estimated to be in the region of two to three billion euro.

Chances are high that during the upcoming negotiations with Gazpromnyeft – the Gazprom subsidiary that proposed the offer to NIS – the working group will indeed ask for a higher sum. To show how determined the Serbian contingent is in pushing this issue further, a number of reports were announced in the local media that the offer of ?400 million for NIS came from the Serbian side and the main lobbying in Serbia for Gazprom was carried out by Rade Vojvodic, the godfather of the son of Russian Deputy Prime Minister Sergei Ivanov. According to the reports, Vojvodic “worked on” Serbian government secretary Dejan Mihajlov with notable success. The agreement with Gazprom was helped by ties with Nenad Popovic, the owner of energy company ABS Holdings, and with Borislav Milosevic, former Yugoslav ambassador in Moscow and the brother of Slobodan Milosevic. All of these Serbs are fierce political opponents of the leading DS party.

However, moderates within the Serbian energy industry believe that it would be erroneous to gamble with the Russians on this strategically crucial issue for the country. “The South Stream pipeline project is the life-vest for the economy,” said Voislav Vuletich, Secretary General of the Serbia Gas Alliance.

The West’s skepticism toward Russian energy expansion in the Balkans is a well known fact. From its democratic and liberal point of view, Europe wants a more diversified gas supply. However, the Nabucco pipeline project, the only rival scheme to South Stream which does not cross Russian territory, is politically and economically unstable. Gas for the Nabucco line must come from either a trans-Caspian pipeline reserved by Russia, or Iran. According to the Western observers, if the South Stream project comes into fruition, it would make Nabucco economically defunct.

Some Western experts are of the opinion that Russia is interested in controlling surplus pipelines (including the proposed Burgas-Aleksandropolis oil pipeline to Bulgaria), providing itself with greater flexibility to turn the taps on and off and reroute supplies for political expediency. These are old prejudices that can be heard from the West ever since the beginning of gas prices disputes with Ukraine emerged. It seems that the general attitude is this: should Serbia take advantage of Gazprom’s investments and freely open its economy to Russia, then that would entail the arrival of yet another ten large and medium-size Russian companies with their main banks ready to invest. Recently, for example, Moscow Bank has fulfilled all conditions required for business enterprise in Serbia.

The Russian State Duma has assured that Russia is ready to boost mutual economic cooperation, announcing that it shall ratify the agreement on free trade between the two countries. As the deputy at the Serbian Ministry of Trade Mihailo Vesovic claims, the agreement is expected to come into force before the end of the year, and would generate a 30 percent increase of exports to Russia. “The ratification would also make Serbia more attractive for numerous companies to organize their production here in order to export it to Russia,” Vesovich said.

At least Serbia will have a similar position to what Bulgaria had at the beginning of this decade. Overgas, a leading Bulgarian gas retailer, is 50 percent owned by Gazprom; Lukoil, the largest Russian private oil company, invested over $300 million in the country over by 2003. On the eve of Putin’s first visit to Sofia in 2003, local media rejoiced in declaring that “the Bulgarian path to Euro-Atlantic integration depends directly on its relationship with Russia.” A few years later, on Jan. 1, 2007, Bulgaria, together with Romania, they became full members of the European Union.

Should Belgrade be smart, wise and act quickly, Serbia will become a bridge between the EU and Russia until the country’s accession to the EU.
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