Purge of Serb Negotiating Team To Precipitate Onerous Energy Agreements with Russia

Serbia’s coalition government has removed Economics Minister Mladan Dinkic from his concurrent assignment as head of the negotiating team on energy agreements with Russia. The impending oil and gas deals involve essentially a Russian takeover of Serbia’s energy sector. Dinkic and his colleagues who were also ousted from the team—State Secretary Nebojsa Ciric and Privatization Agency Chief Branislav Zec—stand accused of holding “unconstructive positions in the negotiations” (Radio B-92 cited by Interfax, December 11; RTS Radio Belgrade, December 12). The government’s Russophile elements have prevailed without apparent difficulty on their pro-European colleagues to precipitate the energy deals on Russian-imposed terms.

One major contentious issue is Gazprom’s promise to build a section of the South Stream pipeline through Serbia. The Russian side is avoiding a clear commitment to a construction schedule and gas supply volumes and is even stalling for time on submission of a feasibility study. This evasive attitude can only reinforce the growing international doubts about South Stream’s plausibility.

Nevertheless, the agreements on oil and gas are now expected to be signed in Belgrade before Christmas by a high-level Russian delegation. Moscow is throwing in some sweeteners outside the energy sector. These would, however, only lead to greater Russian economic penetration of Serbia, correspondingly influencing its political system, and raising questions about Serbia’s European integration, the goal of President Boris Tadic and parts of the body politic.

The roots of the problem stem from the framework agreements signed in January 2008 in Moscow in the presence of Tadic, Serbia’s then-Prime
Minister Vojislav Kostunica (a Russophile rival to Tadic), and Russia’s then-President Vladimir Putin. The political context at the time gave Russia a unique, unrepeatable leverage. Moscow manipulated Serbian nationalism against the West over Kosovo’s then-imminent declaration of independence and made it impossible for pro-European Serb politicians to resist South Stream’s lure on the eve of Serbia’s presidential election runoff (see EDM, January 28).

Moscow no longer has such strong leverage; and Serbia’s pro-Europe forces have acquired some counter leverage from the European Union’s offer to sign a Stabilization and Association Agreement with Serbia. But the terms of the January agreement with Russia continue to weigh heavily on Serbia; and Belgrade’s desire to maintain strong political relations with Moscow continues to distort the fragile coalition government’s energy policy.

Immediately at stake is the state-owned Serbia’s Petroleum Industry (Naftja Industrija Srbije, NIS). This includes the obsolete refineries at Pancevo and Novisad, with a combined processing capacity of 6.5 million tons of crude oil per year (currently operating at an annual rate of 4 million tons), which meets the internal demand for oil products. NIS also includes an oil supply pipeline entering Serbia from Croatia and a fuel distribution network that holds 72 percent the market share in Serbia’s highly protected market for oil derivatives.

Under the Moscow framework agreement, Serbia will hand over 51 percent of NIS to Gazprom’s subsidiary Gazprom Neft, without a competitive tender. The overall price is generally regarded as deeply undervalued: €400 million in cash up-front and €500 million in investments from Gazprom Neft later. Serbia accepted these terms reluctantly, as an inevitable “incentive” for Russia to choose Serbia for building a section of the South Stream gas pipeline branch and a gas storage site. Indeed, the Russian side insisted all along that NIS be thrown into the package with the gas pipeline and storage. NIS became a palm-greaser for the larger deal with Gazprom.

Now, however, Moscow suddenly insists that NIS be separated from the package. It wants to sign the NIS purchase contract immediately and postpone the signing for South Stream for a few years. Officially, Moscow claims that the oil deal and the gas deal remain packaged together, but that this does not preclude separating the time-frames for implementation of each. For Serbia, however, this means no guarantee and indeed no leverage to ensure that the South Stream pipeline and storage site would be built in Serbia. Thus, the disadvantageous handover of NIS to Russia as an incentive for South Stream would have been in vain and a total net economic loss to Serbia (BETA, December 11; RTS Radio Belgrade, December 12).

Negotiations held during the first week of December in Moscow and Belgrade, with the participation of Gazprom CEO Alexei Miller in both rounds, cast more doubt on Gazprom’s resources to implement South Stream. The Russians even backtracked on financing the NIS purchase fully and on schedule. The Serbs sought a time-table for the South Stream feasibility study and for the project’s implementation. They also asked for “guarantees” that Russia would indeed build South Stream in Serbia after the handover of NIS. The Russian side prevaricated, however. Further disappointing Belgrade, Miller declared that South Stream’s capacity in Serbia would not exceed 10 billion cubic meters annually (Politika, Blic, BETA, December 3, 4; FoNet, B-92 TV, December 5).

That overall figure would include supply for Serbia (plus Bosnia-and-Herzegovina’s Serb Republic), storage in the planned Banatski Dvor site, and transit of the gas via Serbia to third countries. These would probably be Hungary and Austria, but possibly also Slovenia and northern Italy, as the Russian side has signed nonbinding agreements of intent with all these countries to play them off against each other. Thus, Serbia and others would end up with meager volumes in the best of cases.

Meanwhile, Russia is proposing reconstructing and modernizing Serbia’s Djerdap (Iron Gate) hydropower plant on the Danube and is offering the services of Russian companies to build or modernize highways, railways, bridges, and the Belgrade subway system. The Russians would accept some of the payment in Serbian dinars. Apparently, a critical mass in the Serbian government favors these offers and will consents to the high-risk proposition of de-packaging the NIS deal from South Stream. The purge of Serbia’s negotiating team seems intended to precipitate the signing of agreements before Christmas.