VZCZCXYZ0001
RR RUEHWEB

DE RUEHBW #1285/01 2270728
ZNR UUUUU ZZH
R 150728Z AUG 06
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 9156
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS BELGRADE 001285 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EFIN PGOV EIND SR
SUBJECT: MOU TO GIVE GAZPROM STRATEGIC FOOTHOLD IN SERBIA 
 
Ref: Belgrade 404 
 
SUMMARY 
------- 
¶1. (SBU) The scheduled signing of the Memorandum of 
Understanding (MOU) between the Government of Serbia (GOS), 
state-owned gas company Srbijagas and Russian Gazprom- 
Gazexport on August 8 was postponed by the Russians for 
technical reasons.  This MOU, approved by the GOS on July 
27, establishes a framework for future cooperation and a 
possible agreement with the Russians on construction of a 
400 km gas pipeline through Serbia worth approximately USD 
800 million, as well as an underground gas storage facility. 
In spite of the fact that econoffs were given assurances by 
the GOS and representatives of Srbijagas that these projects 
would be tendered and conducted in a transparent manner 
(reftel), the GOS plans to use the MOU to give Gazprom 
strategic partnership in key gas projects without tenders. 
On the heels of the successful sale of Mobi 63, this move 
highlights continuing transparency problems the GOS is 
failing to address. END SUMMARY. 
 
GOS APPROVES MEMORANDUM OF UNDERSTANDING 
---------------------------------------- 
¶2. (U) Based on two intergovernmental agreements between 
Russia and the former Federal Republic of Yugoslavia (FRY) 
in 1996 (reftel) and direct talks between Serbian Prime 
Minister Vojislav Kostunica, Serbian President Boris Tadic, 
and Russian President Vladimir Putin, the GOS approved the 
MOU between the GOS, state-owned company Srbijagas and 
Russian Gazprom-Gazexport during its session in Krusevac on 
July 27. 
 
¶3. (U) The MOU is not a binding document but provides the 
general framework for future cooperation between the GOS, 
Srbijagas and Gazprom, enabling working groups to begin work 
on the technical details of a possible contract.  Mladjan 
Dinkic, Minister of Finance, expects that the contract could 
be signed this autumn.  Dinkic stated that Gazprom will 
invest at least EUR 800 million to build a 400 km long gas 
network through Serbia from the Bulgarian border via 
Belgrade through Croatia ending in Italy.  This is the "blue 
stream" gas pipeline coming from Turkey and heading to 
northern Italy providing gas for the EU.  This pipeline 
would then be the base for other routes to Macedonia, 
Albania, southern Italy and Romania.  This would position 
Serbia as a transit country and not merely the end of the 
chain.  Dinkic expects that Serbia could receive EUR 200 
million per year from transit revenues, depending on the 
specifics of the future agreement. 
 
¶4. (U) Dinkic announced two possible options for the future 
arrangement with Gazprom.  In the first scenario, Gazprom 
would invest the aforementioned amount, and the transit 
revenues would be divided 75/25 in favor of Gazprom.  Dinkic 
mentioned a second option with vague language about a 
strategic partnership for other gas projects in Serbia. 
This statement most likely refers to a potential strategic 
partnership in the Banatski Dvor underground gas storage 
facility (reftel).  In his statements, Dinkic confirmed that 
the MOU is the result of a political deal between Kostunica, 
Tadic and Putin, but said that the deal is economically 
justified. 
 
¶5. (U) Milan Saramandic, Executive Director for Investments 
in Srbijagas, confirmed to Econ FSN that the MOU was a brief 
general framework that enables various forms of arrangements 
among signatories.  The MOU offers possible financing of gas 
pipeline construction by the Russians without specifying the 
exact route of the pipeline from the Bulgarian border to 
Croatia.  Saramandic said that the gas storage facility at 
Banatski Dvor is not mentioned in the MOU but the gas 
pipeline Nis-Dimitrovgrad will be a starting point of the 
transit route. 
 
NO TENDERS TO BE ISSUED 
----------------------- 
¶6. (SBU) Zorana Mihajlovic Milanovic, former energy advisor 
to former Deputy Prime Minister Miroljub Labus, told Econ 
FSN that Gazprom executive Alexandar Medvedev accepted the 
GOS's conditions presented by Labus on January 27 that both 
projects would be tendered.  Milanovic said that the 
Russians were being courted as the desired strategic partner 
for the Nis-Dimitrovgrad gas pipeline, but strategically it 
would be dangerous to give them partnership in the gas 
storage facility.  Milanovic explained that Banatski Dvor is 
an attractive investment because it could become a central 
storage facility.  In addition to its full capacity of 850 
million cubic meters, there are some four to five smaller 
facilities with a total capacity of 750 million cubic meters 
that could be connected to it.  Milanovic said that Serbia 
could have seven to nine additional storage facilities in 
the future. 
 
¶7. (SBU) The ongoing problem with Banatski Dvor is the lack 
of funds to complete the investment and resolve the gas 
supply problem in Serbia (reftel).  The GOS finally approved 
EUR 11.1 million for the technical phase of the facility 
which should be finished in February 2007.  This will enable 
storage of 150 million cubic meters of gas.  The remaining 
problems are finding an additional EUR 30 million needed to 
fill the facility with Russian gas and finding a strategic 
partner to complete the facility by 2014.  Given the current 
indebtedness to the Russians, these factors most likely 
played into the deal with the Russians. (However, Ministry 
of Finance sources have told econoff that Srbijagas will 
have enough money to pump in gas for the first phase of the 
storage reservoir.) 
 
INDEBTEDNESS TO THE RUSSIANS 
---------------------------- 
¶8. (SBU) Milutin Prodanovic, Assistant Minister for Public 
Enterprises in the Ministry of Energy, told Econ FSN that 
organizations like the World Bank and EU kept stressing the 
importance of the gas storage facility and Nis-Dimitrovgrad 
gas pipeline, but no one was eager to provide funds for 
their construction.  On the other hand, Srbijagas owes 
Gazprom USD 235.3 million for gas, and the GOS is hard 
pressed to repay this debt.  Prodanovic said that it was 
only a matter of time before eventual acceptance of 
Gazprom's offer, which would allow them market access. 
Otherwise, Gazprom would find another route through 
Bulgaria, Macedonia and Albania, and Serbia would forego 
transit revenues.  He sees no need for tendering these two 
projects since two intergovernmental agreements between 
Russia and former FRY already exist. 
 
¶9. (SBU) Clearly, Serbia's interest in this deal is to 
obtain additional gas supply routes from Bulgaria and 
Romania, in addition to the single route from Hungary that 
currently serves Serbia, thus becoming increasing energy 
security and potentially becoming a transit country, as 
well.  However, in April 2006 the GOS, specifically Labus's 
cabinet, blocked the signature of a similar MOU between 
Srbijagas and Austria's OMV.  They believed that the MOU 
would give OMV a privileged position and send negative 
signals to other potential strategic partners, especially 
the Russians.  The purpose of that MOU was to enable a 
connection to the Nabuko gas pipeline, the major pipeline 
projected to bring Caspian gas across Turkey to Europe, and 
thereby decrease dependence on Russian gas.  However, Serbia 
pursued a different approach and signed a protocol on 
cooperation with the Romanians in May that will allow access 
to Nabuko. 
 
¶10. (SBU) Branka Tubin, Senior Gas Expert in the Energy 
Regulatory Agency, said that in addition to its hasty and 
opaque process, another odd characteristic of the MOU with 
the Russians is the top-down manner in which the agreement 
was drafted.  Usually an MOU is drafted by ministry experts 
and then passed to other Ministries for recommendations, 
followed by presentation to the government for approval. 
This was the case with the OMV MOU, but not with the Gazprom 
document, which was developed at the highest levels of the 
Serbian government.. 
 
COMMENT 
------- 
¶11. (SBU) Although this MOU may have some legal basis in 
Milosevic-era intergovernmental agreements, the lack of a 
tendering process for these large projects and the 
methodology used for developing the MOU expose the GOS to 
accusations of impropriety and backroom deals.  The Russians 
are clearly interested in establishing a foothold in the 
Serbian energy market and are exploiting these agreements 
made with the FRY to position themselves in two strategic 
gas projects. 
 
POLT