Dejan Kozul in Belgrade -

For the first time since Soviet leader Nikita Khrushchev visited Belgrade in 1955, a Russian head of state will visit the Serbian capital on October 20. Officially, Dmitry Medvedev is coming to celebrate the 65th anniversary of Serbia's liberation by the Red Army from the Nazi occupiers; unofficially, say experts, he's coming to negotiate the privatization of state utility Electric Power Industry of Serbia (EPS).

This historic visit is not the first time Medvedev has been to Belgrade. In February 2008, he came here on a one-day working visit as first deputy PM and chairman of Gazprom's board of directors. One of the purposes of that visit was to sign the agreement to create a joint company that will build the Serbian part of Gazprom's multi-billion-dollar South Stream gas pipeline, which was then followed by the sale of state energy firm NIS to the Russians.

Is Medvedev hoping for another energy agreement this time round? Not according to Serbian Minister of Energy and Mining Petar Skundric, who states that, "the state must remain a majority owner [of EPS] because it is the greatest national asset Serbia has at its disposal."

"Even if we wanted to privatize the company, it would be absurd to do it now when Serbia has the lowest electricity price in the region, and when by raising the price by one euro cent, the company's value would increase by a billion euros," he said.

Industry analysts believe otherwise, as Serbia is due to receive a giant loan from Russia and the situation with EPS today shares several similarities with the period prior to the sale of NIS to Gazprom.

Similar states

Serbia will soon be in financial hock to the Russians. Belgrade signed earlier this year a €2.8bn stand-by facility with the International Monetary Fund (IMF) to bolster the country's economy, which like most others in the region has been badly malled by the global economic crisis. However, the IMF has postponed giving the Balkan country access to additional funds from the facility until Belgrade gives details on how it plans to finance its growing budget deficit. On October 8, the European Commission said the EU might loan Serbia up to €200m to help the country through the economic downturn contingent on meeting the IMF agreements, a new round of talks on which are, ironically enough, set for October 20, the same day as Medvedev's visit.

Medvedev, on the other hand, is bringing an offer of cash with him, but without those nasty strings attached. Russian Finance Minister Alexei Kudrin said during the World Bank annual meeting in Istanbul, Turkey earlier in October that up to $350m of a $1bn loan will be available this year to help finance Serbia's budget deficit. The remaining $650m, to be provided next year, will be used to build a subway in Belgrade and construct a ring road around the capital.

The fact Russia is prepared to loan Serbia even as it refuses to give extra money to Ukraine and Belarus and its own economy is struggling from the crisis leads many analysts to wonder what the conditions will be for such largesse. EPS would certainly be one of the few items on the Kremlin's shopping list.

The situation with EPS today also resembles that with NIS before it was sold to the Russians. For one thing, the government has hired several privatization advisers only to ultimately ignore their advice. The government has called public tenders for building new power plants, while EPS signed a cooperation agreement with Russian utility Inter Rao UES, which entails the construction of new thermopower and hydropower plants, as well as undertake joint projects on foreign markets. However, all the deadlines have passed and EPS hasn't even started building any power plants. NIS likewise was in desperate need of upgrading its decrepit facilities.

Likeweise, when Gazprom took over NIS, the Serbian company had wracked up huge debts because its profits were being used by the government to make up for losses at other state-owned companies. EPS is also taking over the debts of other state-owned companies and converting them into an unnecessary ownership stakes. Zorana Mihajlovic-Milanovic, a former adviser for energy of Deputy PM Miroljub Labus, tells bne that no new power plants have been built in the last in the last 20 years and that in 2008 EPS lost more than €300m. "Right now, the total deficit is €1.5bn. That means that almost 40% of the [value of the] company is needed to cover this deficit," Mihajlovic-Milanovic says.

Serbia's geo-strategic position also makes it very attractive for the Russians, as the country is in a position to become not only a transit corridor for oil and gas, but also electricity. "Knowing that Southeast Europe, with Serbia as an important transition link between the east and west, is placed between Russia and EU, it is normal that there is a great interest in the energy sector," Mihajlovic-Milanovic says. "Since EPS has signed a protocol on cooperation with Inter Rao, EPS is likely to be a part of these energy talks during the negotiations and verification of the deal about South Stream and NIS' status."

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