VZCZCXRO8099
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #1302/01 3520558
ZNR UUUUU ZZH
R 170558Z DEC 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0775
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 001302 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EFIN SR
SUBJECT: SERBIA: GAZPROM NIS PURCHASE CONTINUES TO DIVIDE SERBIAN 
GOVERNMENT 
 
Ref: A) Belgrade 1243 B) Belgrade 1222 
 
SUMMARY 
------- 
 
1  (SBU) With negotiations on the sale of Serbian state oil firm NIS 
nearing completion PM Cvetkovic will replace DPM Dinkic as head of 
the negotiating team.  Dinkic publicly distanced himself from the 
NIS deal, but reiterated that his G-17 party would remain in the 
government coalition.  Russian pressure to conclude the deal 
increased in the wake of the December 5 visit by Gazprom head Alexei 
Miller.  The government move to put a senior Ministry of Foreign 
Affairs official in charge of the technical negotiations highlighted 
the increasingly political focus of the NIS deal.  End Summary. 
 
 
DPM DINKIC OUT - PM CVETKOVIC IN 
-------------------------------- 
 
¶2.  (SBU) With the pressure on to complete agreements to finalize 
the key components of the energy framework agreement with Russia, 
the Serbian government shuffled its negotiating team.  At the 
December 11 Serbian government meeting Deputy Prime Minister and 
Economy Minister Dinkic (G-17) stepped down as head of the 
negotiating team for the energy framework agreement with Russia. 
Dinkic resigned as head of the team because the government did not 
support his proposals that would have limited Gazprom's purchase of 
state oil firm NIS until after further progress on the South Stream 
gas pipeline project.  Dinkic was opposed to many specifics of the 
energy framework agreement since its signature (ref B) and has 
struggled to find ways to change the deal to provide greater 
benefits to Serbia.  Dinkic's G-17 colleagues on the negotiating 
team, including Nebojsa Ciric, State Secretary in the Economy 
Ministry responsible for privatization who headed the technical 
negotiations, and Branislav Zec from the Privatization Agency also 
left the negotiating team. 
 
¶3.  (SBU) Prime Minister Cvetkovic (DS) replaced Dinkic as the 
formal head of the negotiation team.  This appointment highlighted 
the importance of the overall agreement to the Serbian government. 
Interestingly, Ciric told the press on December 14 that his role as 
head of the technical negotiation team would be taken over by 
Ministry of Foreign Affairs Chief of Staff Borko Stefanovic. 
Stefanovic has no experience with energy issues and his appointment 
as the key interlocutor in the negotiations highlights the political 
context for the overall agreement and the importance that it has for 
President Tadic and his inner circle.  Minister of Energy Skundric 
(SPS) defended the NIS sale publicly and in parliament, but the 
Ministry of Energy does not have the lead in the negotiations. 
Stefanovic's appointment should also be seen in the context of 
Foreign Minister Jeremic's public statement on December 14 that, "I 
believe that the bilateral relations with the Russian Federation 
will be the most significant bilateral relations this country will 
have in the next several decades." 
 
Russian Visit Brings Pressure 
--------------------------------------------- - 
 
¶4. (SBU) Gazprom head Alexei Miller's December 5 visit to Belgrade 
ratcheted up the pressure on President Tadic and the Serbian 
government to finalize a contract on the sale of NIS, while leaving 
the key issues regarding the South Stream gas pipeline and the 
Banatski Dvor gas storage facility for the future.  Gazprom and 
Russian officials continue to press for an agreement by December 20, 
though the framework agreement says only that detailed contracts 
should be signed by the end of the year. 
 
¶5. (SBU) Russian pressure on Serbia to conclude the NIS contract 
within the energy framework agreement is mostly political, but is 
also economic.  Serbia depends on natural gas imports for more than 
90% of its natural gas.  While gas accounts for only about 15% of 
total energy use in Serbia, the country cannot survive without gas 
from Gazprom.  Serbia negotiates gas purchase contracts through the 
murky Gazprom-controlled firm Jugorosgaz each year so is very 
vulnerable to Russia's new price demands.  At the same time, with a 
monopoly on gasoline production in Serbia, NIS topped the local 
magazine Ekonomist's list of Serbia's most profitable companies in 
¶2007.  The firm has been a key source of revenue and political 
patronage for the government. 
 
Split Over the Deal, but Government Stable 
------------------------------------------ 
 
¶6. (SBU) Despite Dinkic's very public opposition to the NIS sale in 
its current form, Dinkic told the Ambassador on December 10 that he 
would not bring down the government over the sale.  At the same 
time, he assured us that the government was stable and that the 
Democratic Party leadership was aware of his planned actions. 
 
BELGRADE 00001302  002 OF 002 
 
 
Tomislav Damnjanovic, President of the G-17 Executive Board, told us 
on December 11 that the party wanted to make clear that G-17 was not 
responsible for this deal and feared the public would look back two 
years from now when the gas pipeline deal evaporated and blame 
Dinkic for the failure (ref A).  Dinkic did manage to pressure the 
government into taking any deal signed for NIS to Parliament for 
ratification, but even without G-17 support a deal would likely pass 
as some opposition parties would support the sale.  Progressive 
Party (SNS) head Nikolic said publicly that SNS would support the 
sale of NIS in the parliament, but then would call for new 
elections. 
 
¶7. (SBU) Coalition partner Nenad Canak's League of Social Democrats 
of Vojvodina also criticized the NIS sale at their party congress on 
December 14.  Canak said that he opposed the deal, but would 
continue to support the government coalition. 
 
Contract Details Still an Issue 
------------------------------- 
 
¶8. (SBU) In a conversation with us on December 15 DS Party energy 
expert Aleksandar Cirilovic told us that so far there was no plan 
for a Serbian government official to travel to Moscow to sign a NIS 
agreement this week, but that negotiations continued on the deal. 
Several sources close to the negotiations have told us that Gazprom 
had rejected Serbian proposals to provide additional guarantees 
regarding Gazprom's planned investments in NIS and environmental 
upgrades.  The required phase-out of NIS's gasoline production 
monopoly was also a significant unresolved issue. 
 
COMMENT 
------- 
 
¶7. (SBU) The NIS sale is political, money is only discussed 
tangentially, the emphasis is on Serbia's keeping its word with 
Russia.   The move to put PM Cvetkovic and FM Jeremic confidant 
Stefanovic in charge of closing the deal highlights the importance 
of this agreement to Tadic's DS.  Jeremic's comments regarding the 
importance of Russia showed the government's true interest in the 
deal - a misguided and sentimental attempt to balance east and west. 
  Gazprom is holding firm against detailed commitments in the NIS 
contract or additional provisions to further link the NIS sale to 
the South Stream gas pipeline.  While the government initially sold 
this deal to the Serbian public as a package to help make Serbia a 
player in distributing gas in the region through South Stream, the 
"special relationship" with Moscow is now the key headline.  Most 
people here expect the NIS deal to go forward, but the political and 
economic ramifications of the deal will remain a legacy of Tadic's 
administration.  End Comment. 
 
MUNTER