Serbia's politics to complicate Russian moves to buy up assets

By bne IntelliNews October 12, 2007

Nicholas Watson in Prague -

Support from Russia always comes with strings attached, and Moscow is leaning on Belgrade to sell it a variety of assets in return for its support to prevent the province of Kosovo becoming independent. Happily for the EU, the complex political situation in Serbia means not everything will go Russia's way.

The biggest sign yet of Moscow's intention to buy up Serbian assets came on October 10 with the visit to Belgrade of Gazprom's chairman, Alexey Miller, who met with Serbia's President Boris Tadic and Prime Minister Vojislav Kostunica to discuss cooperation in the energy sector.

"Special attention" was given to the possibility that part of Russia's planned South Stream gas pipeline for transporting Russia's gas to Western Europe would be built through Serbia, a statement from Tadic's office said. The $5.5bn pipeline will cross the Black Sea into Bulgaria, from where two onshore routes are under consideration: a northwestern route to northern Italy, and a southwestern route that would also cross the Adriatic Sea to southern Italy. Serbia's energy minister, Aleksandar Popovic, said it was "doing everything" to convince Russia to route its planned South Stream gas pipeline through Serbia, from which the state would get valuable transit fees.

Prime Minister Kostunica said that "strategic cooperation" with Gazprom was in Serbia's interest. Indeed it is. Serbia is currently in talks, under the stewardship of Russia, the EU and the US, with the leaders of the ethnic Albanian province Kosovo about the future of the province. Serbia, backed by Russia, has offered Kosovo a degree of autonomy; Kosovo, with the West's support, says it wants nothing short of outright independence and says it will claim it unilaterally if no agreement is reached by December 10.

"Everybody knows this support from Russia comes with a price," says one energy industry leader in Belgrade. "There's a bill from the Russians that will have to be paid eventually."

As well as the gas pipeline and underground gas storage facilities, Russia has its eye on the state-owned oil company NIS - one of the last major energy companies in the region yet to be privatised. It dominates Serbia's market, the biggest in the Balkans, with a monopoly on refining. Miller told Serbian television that Gazprom was contemplating a "complex project" in Serbia, including the company's participation in the upcoming privatization of NIS. The Serbian newspaper Blic said Gazprom was also looking at the state power utility Elektroprivreda Srbije (EPS).

There are signs of growing Russian interest outside of the energy sphere, too. PM Kostunica recently held meetings in Belgrade with Valery Okulov, general manager of Russian state-owned airline Aeroflot, which is interested in the privatisation of the flag carrier Jat Airways. And in April, the government cancelled the €280m sale of copper miner and smelter RTB Bor to Romania's Cuprom after it failed to meet a payment deadline, and called a new tender in which five firms, including Russian tycoon Oleg Deripaska's Basic Element, have already submitted bids.

The chances of Russia prevailing in these privatisations, as well as those for another 1,100 companies with significant state stakes, look good, though not perhaps the fait accompli that pessimists in the EU who worry about "losing" Serbia would have believe.

Politics of balancing

The politics in Serbia is complex and volatile, with some parties in the current governing coalition pro-Russian and others pro-Western. And a feature of Serbian politics is that ministries under the control of a particular party appoint their own men to head up the various state-controlled industries

Prime Minister Vojislav Kostunica's right-leaning Democratic Party of Serbia (DSS), which is pro-Russian, has its ally in charge of the oil firm NIS, so a bid from a Russian firm would undoubtedly be looked on favourably. However, the power utility EPS is under the control of President Tadic's party, which is more pro-Western.

Given such fundamental differences between the various parties in the coalition, it is no surprise, therefore, that disagreements are also holding up the actual privatisations.

NIS' partial privatisation was first discussed in 2005 as part of a deal with the IMF. It was slated for 2006, but postponed due to the elections and political crisis that grips this country. NIS was supposed to have been privatised this year, but disagreements among the parties in the coalition about how best to sell off the oil firm means this won't happen until 2008. The government's plan was to sell a 25% stake in the company for $300m and then transfer an additional 12.5% stake following a capital injection by the new owner. However, some are now arguing the government should sell over 50% in order to get a better price, probably Kostunica's party, given it's Russia's Lukoil and Gazprom that are pressing the government to offer majority control of NIS. "It could take weeks, or months to resolve," an unnamed official told Reuters.

Matthew Hall, an analyst with Global insight, says: "The delays over privatisation are creating problems for NIS' investment programme, with the political row blocking finalisation of a commercial loan sought by NIS to modernise its main refinery, expand it retail station network, and pursue overseas exploration opportunities.

NIS owns the country's two refineries, the 100,000 barrel per day (b/d) Pancevo plant and the 60,000 b/d Novi Sad plant, which are both in desperate need of modernization.

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Serbia's politics to complicate Russian moves to buy up assets

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