VZCZCXYZ0000
RR RUEHWEB

DE RUEHBW #0966/01 2600523
ZNR UUUUU ZZH
R 160523Z SEP 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0427
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 000966 
 
SIPDIS 
SENSITIVE 
 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EFIN SR
SUBJECT: ENERGY DEAL WITH RUSSIA RATIFIED - DEAL OR NO DEAL? 
 
REF: A) Belgrade 929    B) Belgrade 93 
 
SUMMARY 
------- 
 
¶1. (U) On September 9 the Serbian Parliament voted 214 to 18 to 
approve the energy framework agreement with Russia that includes the 
sale of state oil firm NIS to Gazprom.  Ratification of the deal 
received nearly unanimous support from all sides in the deal.  With 
the framework agreement ratified, the Serbian government will begin 
negotiations with the Russian government and Gazprom on the details 
of the sale of NIS.  Concurrent with the ratification vote the 
Serbian government released a Deloitte and Touche report that valued 
NIS at $3.1 billion.  However, recent public statements from Serbian 
government officials have focused increasing the capacity of the 
South Stream pipeline branch through Serbia, rather than the price 
for NIS.  End Summary. 
 
VOTE IN PARLIAMENT DRAWS OVERWHELMING SUPPORT 
--------------------------------------------- 
 
¶2. (U) As reported in ref A, the Serbian Parliament voted 
overwhelmingly to ratify the energy framework agreement signed with 
Russia in January.  Four members of the governing coalition from the 
League of Vojvodina Social Democrats together with members of the 
opposition LDP and Union of Vojvodina Hungarians (NIS is 
headquartered in Vojvodina) were the only members to vote against 
ratifying the agreement in the 214 to 18 vote.  With the deal's 
strong ties to former PM Kostunica's DSS party leadership and the 
Radical Party (SRS) refocusing on its ties to the East, both DSS and 
SRS party members supported the agreement. 
 
DEVIL IS IN THE DETAILS 
----------------------- 
 
¶3. (SBU) The GOS will now have to negotiate the details of the 
purchase of state-owned oil firm NIS by Gazprom.  Deputy Prime 
Minister and Economy Minister Dinkic (G-17), who has told us 
repeatedly that 51% of NIS is worth more than the $555 million that 
Gazprom agreed to pay in January, will head the GOS negotiating 
team.  Dinkic opposed the negotiated deal to sell NIS to Gazprom, 
but he will be limited in how far he can push Russia as the 
negotiating team also includes the Finance Minister Dragutinovic 
(DS), Energy Minister Skundric (SPS), and most importantly Foreign 
Minister Jeremic (DS) and President Tadic's advisor Biserka 
Jeftimijevic-Drinjakovic.  President Tadic stood with then PM 
Kostunica and then President Putin in Moscow for the agreement 
signing in January.  Tadic is unlikely to allow this agreement to 
fail as he fears attack from his right for not maintaining a strong 
relationship with Russia. 
 
¶4. (SBU) At a September 9 press conference Dinkic said that Gazprom 
should offer a minimum price for NIS based on the fair market value 
for employees and citizens' shares (referring to the Deloitte 
valuation of $3.1 billion for all of NIS).  Dinkic said it would 
also be acceptable if Gazprom agreed to provide additional money to 
build infrastructure in Serbia.  He added that if NIS was a gift to 
the Russians then it should be announced publicly that it was a 
gift.  The following day an official from former PM Kostunica's DSS 
released a press statement that the energy agreement was, in fact, a 
gift from Russia to Serbia, since Russia was offering to build the 
South Stream pipeline through Serbia. 
 
RUSSIAN RESPONSE 
---------------- 
 
¶5.  (U) Russian Ambassador to Serbia Konuzin warned in a August 30 
letter to leading Serbian daily Politika that delay in ratifying the 
energy agreement could, "result in a delay and even loss of 
prospective investment for Serbia."  Following the ratification vote 
Belgrade-based Russian Chamber of Trade and Industry representative 
Yuri Buligin reportedly told Serbian Chamber of Commerce meeting 
that the South Stream gas pipeline might not go forward in Serbia as 
it was a "political issue" and there was  a "serious problem in the 
sector of energy cooperation." 
 
MORE INVESTMENTS OR A BIGGER PIPE? 
---------------------------------- 
 
¶6. (SBU) Srdjan Mihailovic, advisor to NIS' General Director, told 
us on September 10 that Dinkic was unlikely to move the Russians 
from the $555 million price for NIS.  Tadic Advisor Drinjakovic 
shared the same view, telling us September 12 that she expected 
negotiations would not drag out and that she would be very surprised 
if the NIS price changed.  Mihailovic said that Dinkic's focus on 
price is tied to his free shares program that will distribute shares 
in NIS to Serbian citizens and his desire to have those shares worth 
as much as possible.  He suggested that Dinkic might seek Gazprom 
agreement to buy shares distributed to NIS employees and Serbian 
citizens based on $3.1 billion value.  Dinkic could also exclude 
some of NIS's assets from the sale. 
 
¶7. (SBU) Dinkic, and later Energy Minister Skundric in an interview 
with Politika on September 13, focused on seeking an agreement with 
Russia to enlarge the size of the South Stream gas pipeline branch 
through Serbia from 10 billion cubic meters (BCM) to 15-18 BCM. 
Skundric also said that the GOS would press for more specific 
commitments from Russia to build South Stream across Serbia.  This 
effort to extract a commitment for a larger capacity pipe across 
Serbia may be an attempt to find something that Tadic can say that 
Gazprom is giving in exchange for the discounted price the firm 
offered for NIS. 
 
COMMENT 
------- 
 
¶8. (SBU) The overwhelming support in the Serbian parliament for the 
energy framework agreement with Russia highlights broad momentum 
behind the deal.  While DPM Dinkic has tried to derail or 
renegotiate the sale of NIS to Gazprom, he is unlikely to be able to 
achieve much more than a modest increase in Gazprom's investment 
commitment or additional vague commitments to build a larger branch 
of the South Stream pipeline across Serbia.  For Gazprom, the size 
of the South Stream branch, if it is ever built, will be determined 
by Gazprom's ability to find customers for the gas and not Serbia's 
desire to have a larger transit pipe.  Serbia must also consider the 
country's almost complete dependence on Gazprom for gas supplies. 
In the end, President Tadic and FM Jeremic have little stomach to 
annoy the Russian leadership by reducing the attractive economics of 
the sale.  Even with the NIS sale Russia will still have only 
limited investments in Serbia.  The energy agreement remains an 
important symbol of Serbia's aspirations to retain economic ties and 
relationships with both the East and West.  End Comment. 
 
MUNTER