Serbia keeps Russian support in gas sector

Serbia keeps Russian support in gas sector
By Ivana Jovanovic in Belgrade October 28, 2015

Russian support for Serbian energy security was confirmed at a meeting between the prime ministers of the two countries on October 27. Serbia is close to signing an agreement with Gazprom Neft to expand its Banatski dvor underground storage facility, and could also be part of new gas export routes being considered in Moscow.

Serbia has been trying to maintain its traditionally good relations with Russia at the same time as working towards its primary goal of EU accession. The December 2014 decision to scrap the planned South Stream pipeline was a blow to Serbia, which is almost totally dependent on Russian gas imports. However, the latest Russia-Serbia summit confirms that Serbia will continue to benefit from its relationship with Russia.

At their meeting in Moscow, Vucic and his Russian counterpart Dmitry Medvedev agreed to improve political and economic ties including in the energy, transportation and defence sectors.

In the energy sector, Medvedev told a press conference that Russian officials had “apprised our Serbian friends” of “new ideas” following the termination of the South Stream project. No further details on alternative projects were disclosed.

Moscow is also keen to turn Serbian energy company Naftna industrija Srbije (NIS), which is majority owned by Russia’s Gazprom, into a regional leader.

“We have resolved all kinds of debts and difficulties of the enterprise in the process,” Medvedev told journalists after the meeting, according to a statement posted on the Russian government website. “Let’s hope that this will be a highly efficient and interesting project ... This once loss-making enterprise currently provides, as far as I know, up to 14% of Serbia’s budget revenue.”

Serbia would have benefitted from South Stream as the project would have increased its energy security, even though the project was not compatible with EU policy. As well as securing gas supplies, Serbia could have used its fees as a transit nation to repay its gas debts to Russia.

Following the meeting, Vucic said that Serbia would pay off all its debts to Gazprom - one of the Serbian government’s main concerns in the run-up to his visit to Moscow.

Serbia agreed with Russia in late 2014 to repay its debt of €224m in three installments. The first €100mn was due by the end of 2014, the second €100mn by the end of 2015 and the third, of €24mn, by the end of 2016.

Medvedev confirmed that further talks between the two sides would address the issue of Serbia’s gas debt to Russia.

The meeting followed an October 1 announcement from the CEO of Serbian oil and gas conglomerate Srbijagas, Dusan Bajatovic, that the company had agreed with Gazprom Neft on the extension of the Banatski dvor underground gas storage facility, which is majority owned by the Russian company. The storage facility can currently hold up to 450mn cubic metres (cm) of gas, enough to cover household consumption for three months.

“I think we are about to sign an agreement with Gazprom on expanding the [Banatski dvor] gas depot to 1bn cm,” Vucic told journalists. “With this expansion, we want to become a giant in terms of gas storage. In this way we will meet our own requirements and won’t have to worry about whether Serbia will receive gas or not.”

Vucic was accompanied by a Serbian government delegation and over a hundred business representatives. In addition to the discussions on gas supplies, several agreements were signed including a memorandum of understanding on economic cooperation, attraction of investments and joint projects, and a separate agreement on defence cooperation.

In the railways sector, a memorandum of strategic partnership was signed between Russia’s RZD International and Infrastructure of Serbia Railways. This follows Russia’s approval of a $800mn loan with Serbia in 2012, intended for the modernisation and construction of Serbian railway lines. RZD International will work on the project.

While the main focus was on economic cooperation, Vucic noted at the opening the Serbian-Russian business forum that Serbia is one of the few European countries that has not introduced economic sanctions against Russia, and confirmed that this policy will continue, a government statement said.

Even though as an EU candidate country, Serbia is expected to follow almost all EU recommendations and stand behind its official foreign policy, it has refused to impose economic sanctions against Russia.

In 2014, Russia was the second largest importer to Serbia, after Germany, and the fourth largest destination for exported Serbian goods, after Italy, Germany and Bosnia and Herzegovina, according to data from the Serbian Investment and Export Promotion Agency.

The value of trade between the two countries has dropped recently, which Medvedev attributed mainly to low energy prices. “Regarding our trade with our Serbian partners, it is primarily due to declining energy prices, because oil and gas still account for a significant portion of our trade,” he told the press conference. “Global market volatility and exchange rate fluctuations also play a role in this.”

The value of Serbian exports to Russia also dropped in the first half of 2015. However, Serbian producers have benefitted from tit for tat trade sanctions between Russia and western countries. Although the overall value of Serbian exports to Russia fell in the first half of this year, the number of exporters increased.

Serbian exports to Russia decreased 33% y/y to $322mn in January-June 2015, although the number of Serbian companies exporting to Russia increased during the same period. Also bucking this trend were agricultural exports which increased by 70% in 2014, and were up by a further 40% in the first half of 2015, according to Russian government data.

“Serbia has a niche of its own in the Russian agricultural market, which isn’t a bad thing at all. I hope our partners will manage to consolidate their positions, because sanctions will not last forever, and those who have taken someone else's place are usually reluctant to give it back, which we will only welcome,” Medvedev commented.

Serbia is keen to attract more Russian investors, and Belgrade also hopes to work with Russia on joint projects targeting third countries.