VZCZCXRO0242
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBW #0251/01 0830630
ZNR UUUUU ZZH
R 240630Z MAR 09 ZDK
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1100
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BELGRADE 000251 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EFIN SR
SUBJECT: SERBIA: UNCERTAIN RELATIONSHIP WITH GAZPROM 
 
Ref:  Belgrade 246 
 
BELGRADE 00000251  001.2 OF 002 
 
 
SUMMARY 
------- 
 
¶1. (SBU) Serbia's energy marriage with Gazprom centered on the sale 
of state oil firm NIS at the beginning of this year had a rocky 
start and Serbs are increasingly unsure how Gazprom's interests fit 
with Serbia's.  Gazprom's initial actions since taking over NIS 
raise questions about the company's plans in Serbia and the 
company's role in the economy.  The Serbian government's 
relationship with Gazprom is already under stress following 
Gazprom's demand for payment of long-standing debts owed by 
state-owned firms and a dispute over whether NIS made a profit in 
¶2008.  End Summary. 
 
UNCERTAINTY ABOUT RUSSIAN PLANS 
------------------------------- 
 
¶2. (SBU) During the Ambassador's March 19 visit to Pancevo, Srdjan 
Mihajlovic, director of state-owned oil-pipeline company Transnafta, 
told us that he was not aware of any of Gazprom's plans for NIS and 
strategies for the future, even though the firm is Transnafta's 
dominant customer.  Pancevo petrochemical firm HIP Petrohemija 
director Slobodan Adzic said that he recently had tough talks with 
NIS's new management where they pressed for payment of $100 million 
debt to NIS.  NIS has a 19.8% ownership stake in the majority 
state-owned HIP.  HIP's relationship with NIS is critical as NIS's 
refinery located directly across from HIP in Pancevo and is the 
firms' primary supplier. 
 
DISPUTE OVER NIS PROFIT 
----------------------- 
 
¶3. (SBU) In addition to uncertainty about Gazprom's plans, the 
Serbian government disputes Gazprom's assertion that the firm did 
not earn a profit in 2008.  At the end of February 2009, NIS 
submitted to the Ministry of Finance a final account for 2008 
approved by the previous NIS management with a profit of $34 
million.  However, several days later, the new Gazprom management 
asked for additional time to review the firm's books and submitted a 
new final account for 2008, signed by the new director Kiril 
Kravchenko, claiming losses of $55 million in 2008.  According to 
the NIS sale contract, the Serbian government would receive 15% of 
NIS's annual profit during the next four years. 
 
¶4. (SBU) Ljubica Simic, NIS Corporate Director for Development and 
Investments, told us on March 12 that NIS had huge losses due to 
differences in prices of crude oil and derivatives in the last 
quarter of 2008.  She also said that Gazprom would not tolerate 
further non-payment from Serbian state-owned companies.  Milos 
Saramandic, the general director of NIS before the Gazprom takeover, 
told us on March 17 that the new NIS management did not consult the 
NIS managing board before sending the new final accounting for 2008 
with a loss. 
 
¶5. (U) According to the press, Gazprom was angry at a decision just 
before Gazprom took over NIS to return some $100 million from NIS 
profits from previous years to state-owned NIS debtors, including 
airline JAT, gas company Srbijagas and roads firm Putevi Serbia in 
order to cover debts to NIS.  One of the Russian members of the NIS 
managing board pressed charges in the Novi Sad Commercial Court to 
annul that decision.  Gazprom will have international auditor KPMG 
review the final accounting for 2008 by the end of June 2009. In 
addition, Gazprom temporarily blocked all payments to local NIS 
customers to review all financial transfers.  Talks between the 
Government of Serbia and Gazprom to resolve the profit issue started 
on March 19. 
 
NO COMMON LANGUAGE 
------------------ 
 
¶6. (SBU) Ljubica Simic told us that she had expected the new Gazprom 
management to dismiss her and her colleagues in NIS's finance and 
investment departments.  Currently, several dismissed NIS directors 
are working as consultants on short-term contracts.  Simic 
questioned the expertise of some new Gazprom colleagues.  Her likely 
replacement would be a young German philosophy graduate without any 
expertise in oil or refining.  New Russian Gazprom management and 
engineers had difficulty communicating since the Russians did not 
speak English or Serbian and Serbian managers and engineers did not 
speak Russian.  She described the atmosphere in the company as 
confused and uncertain.  According to Simic, she saw no clear 
strategy for the future and for investment from the new leadership. 
 
 
UNCERTAIN INVESTMENTS 
---------------------- 
 
 
BELGRADE 00000251  002.2 OF 002 
 
 
¶7. (SBU) Simic said that Russians were hit by the global crisis and 
they are looking for financial options to cover NIS's $760 million 
investment obligations.  Aside from the required investments Gazprom 
was reviewing all NIS's investment plans for 2010.  Simic admitted 
that NIS's plans were always overestimated.  NIS had announced 
tenders for the modernization of the company's refineries as 
envisaged by the purchase contract but Simic said the tenders might 
never go beyond announcement.  Simic explained that the formulation 
of the contractual investment provisions in the purchase contract 
allowed for flexible interpretation (i.e. Gazprom was contractually 
required to announce the tenders, but not to complete them).  She 
said that there was significant interest in the plant modernization 
tenders, including from the Czech affiliate of the U.S. firm CB&I 
(Chicago Bridge and Iron).  CB&I had an Engineering, Procurement, 
and Construction (EPC) contract for the modernization of a refinery 
in Rijeka, Croatia.  Simic did not expect better quality gasoline 
from the plant modernizations before 2012 and expected that NIS 
would import EURO5 standard gasoline if the government lifted the 
gasoline import ban in January 2011 as planned. 
 
COMMENT 
------- 
 
¶8. (SBU) Just a few months into Gazprom's takeover of NIS, Serbia is 
confronting Gazprom's opaque tactics and single-minded pursuit of 
profit.  There are questions about the firm's plans for NIS's future 
and the role Gazprom will play in the Serbian economy in the future. 
 Rumors about Gazprom's next move are the latest craze, with 
speculation ranging from Gazprom will cannibalize NIS of its all its 
assets over the next few years to claims that Gazprom will leverage 
the debts owed by state firms to take ownership of HIP or JAT. 
While political motivations drove the energy agreement that sold NIS 
to Gazprom, the economic reality of that choice are only now 
beginning to fully hit Serbia.  While our message over the last two 
years to the Serbian government and local business leaders that 
increasing Serbia's energy dependence on Russia was not a recipe for 
increasing energy security fell on deaf ears, we are using this 
opportunity to highlight with our interlocutors the risks of 
Serbia's current strategy.  While the NIS deal is done, final 
arrangements to give Gazprom control over the Banatski Dvor gas 
storage facility remain uncompleted and the recently announced power 
plant tenders offer an opportunity for Serbia to seek greater 
diversity in energy partners and increase energy security.  End 
Comment. 
 
MUNTER