Serbia’s deal with Gazprom has a rotten smell

The possibility of radical nationalist Tomislav Nikolic carrying the second round of Serbia’s presidential election on 3 February worries EU policymakers since they expect him to move the country closer to Russia. But Serbia has just taken a decisive step in that direction by selling off its entire oil industry to Russia’s state-owned energy giant Gazprom.

The sale was announced by the Serbian government two days after the first round of the presidential poll, which Nikolic won with 39.6% against incumbent Boris Tadic, who received 35.4%.

On Friday (25 January), a framework agreement on energy co-operation between Russia and Serbia was signed in Moscow in a ceremony attended by President Tadic and Prime Minister Vojislav Koštunica. The two also met Russian President Vladimir Putin, a photo opportunity that could boost Tadic’s chances of re-election. Many Serbs are grateful to Putin for his steadfast opposition to independence for the breakaway province of Kosovo, an emotive issue in Serbia.

The terms of the sale remain to be finalised and have not been made public, but key elements have been reported in the Serbian and Russian press. Under the deal, Gazprom is to acquire a 51% stake in Naftna Industrija Srbije (NIS), Serbia’s oil monopolist, for a reported €400 million and a commitment to invest a further €500m over four years. Russia may have improved on that offer since but is unlikely to have come anywhere near what other potential bidders were apparently prepared to pay.

A senior official from the European Commission called it "a robbery of [Serbia’s] citizens".

Indeed, industry sources in Serbia say that these figures, if accurate, undervalue the company hugely, being perhaps a quarter of its true value. They also estimate that the promised investment will just cover necessary maintenance and will not enable NIS’s infrastructure, much of which is outdated, to be upgraded. The sale took place without competitive bidding, leaving other potential investors such as Austria’s OMV, which operates a chain of petrol stations in Serbia, in the lurch.

"The deal is very non-transparent," said James Lyon, a veteran Serbia-watcher with the International Crisis Group in Belgrade. "This has led many to question the motives of the people involved in this deal."

Reports that the deal foresees the continuation, for several years, of NIS’s monopoly on the import and refining of crude oil are unlikely to reassure EU policymakers. The same goes for a reported stipulation that EU environmental rules would not apply to the second component of Serbia’s new energy partnership with Russia, a new gas pipeline to be built across Serbia.

Both provisions would appear to contradict the thrust of a Stabilisation and Association Agreement with Brussels, which Belgrade hopes to sign soon.

Serbia hopes that the pipeline will form the backbone of the South Stream project in the Balkans. A joint venture by Gazprom and Italy’s ENI, South Stream will carry Russian and Central Asian gas to European markets and is a direct competitor of the EU’s preferred route, Nabucco.

Velimir Ilic, Serbian infrastructure minister, said that Serbia would receive some €200m every year in transit fees from South Stream. But it is not clear whether the Serbian branch would indeed be the main line.

In either case, European officials also worry that this may keep the entire Balkans directly dependent on one supplier, Gazprom, for their oil and gas needs for years to come.

These facts may prove to be of far greater strategic importance than who wins the presidential run-off in Serbia on 3 February, especially since Nikolic - despite his radical credentials - is essentially an unknown quantity.

This is not to say that economics are trumping politics. It is Serbia’s current condition as a country at the very beginning of a transition, where the rule of law is tenuous at best, which has made the Russian foray possible at such low cost.

European hopes that the prospect of EU membership years down the line would act as a motivation for reform and for a constructive stance on Kosovo appear quite naive in light of the Russian approach.

The possibility of radical nationalist Tomislav Nikolic carrying the second round of Serbia’s presidential election on 3 February worries EU policymakers since they expect him to move the country closer to Russia. But Serbia has just taken a decisive step in that direction by selling off its entire oil industry to Russia’s state-owned energy giant Gazprom.