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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBW #0607/01 1811408
ZNR UUUUU ZZH
R 301410Z JUN 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0027
INFO EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBW/AMEMBASSY BELGRADE

UNCLAS SECTION 01 OF 02 BELGRADE 000607 
 
SENSITIVE 
SIPDIS 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
RU 
 
E.O. 12958: N/A 
TAGS: ECON EINV ENRG EFIN SR
SUBJECT: SERBIA: GAZPROM DRILLING DEEPER INTO ENERGY SECTOR 
 
REF: 08 BELGRADE 1333; BELGRADE 51 
 
BELGRADE 00000607  001.2 OF 002 
 
 
SUMMARY 
------- 
 
¶1.  (SBU) Russia's energy giant Gazprom continues to make inroads 
into Serbia's energy sector, six months after it secured a deal 
giving it a majority stake in Serbia's state-owned petroleum company 
NIS.  Through Gazprom, Russia is now following through on investments 
in both oil and gas and is considering branching into Serbia's 
domestic banking sector to finance these investments.  The moves are 
not without controversy, with questions mounting about NIS's 
accounting practices and poor management.  Despite these close ties 
to Gazprom, Serbia has little assurance that it will not fall victim 
to any future energy crisis.  End Summary. 
 
NEW INVESTMENTS IN NIS 
---------------------- 
 
¶2.  (SBU) Following the sale of Serbia's state petroleum company NIS 
in December 2008 to Russia's Gazprom (reftel A), its new owners have 
begun allocating funds to upgrade facilities.  NIS intended to invest 
$118 million in 2009 to modernize, Aleksandar Cirilovic, President of 
the Democratic Party's Energy Committee and advisor to NIS President 
Dmitry Malishev, told us on May 31.  Of these funds, $68 million 
would be used to upgrade NIS's refinery in the town of Pancevo and 
$50 million was to improve NIS's environmental quality and controls. 
Cirilovic said he expected NIS would fulfill this investment even 
though there were widespread accusations surrounding NIS's accounts. 
 
NIS' BOOKS A MESS 
----------------- 
 
¶3.  (SBU) A recent audit of NIS by KPMG discovered that NIS had 
losses of $119 million in 2008.  These losses resulted mostly when 
NIS returned an estimated $100 million in dividends to state-owned 
firms that were indebted to NIS, including JAT (airline), Srbijagas 
(gas company) and Putevi Serbia (highway company) in order to cover 
these firms' debts to NIS prior to the sale to Gazprom.  In addition, 
NIS's current General Director Kiril Kravchenko told the media on 
June 2 that NIS suffered additional losses of $160 million in the 
first quarter of 2009, due to lower energy prices and falling demand 
during the economic downturn.  Serbian members of the NIS board have 
requested a new audit, but this was only likely to confirm KPMG's 
audit, Cirilovic told us.  Ernest & Young is the most probable choice 
for that audit, according to our sources. 
 
NIS MANAGEMENT A MESS 
--------------------- 
 
¶4.  (SBU) In addition to accusations of sloppy books, there are 
numerous complaints about how NIS was managed prior to Gazprom's 
arrival as well as accusations of continued mismanagement, with both 
Serbians and Russians pointing fingers - and blame - at the other. 
The Russian Embassy's Deputy Chief of Mission Vladimir Ulasevic told 
Charge on June 23 that prior to NIS's sale, the company's management 
"was in shambles."  He said the Serbian government had used NIS as a 
"cash cow," laying blame with the Democratic Party (DS).  Other 
parties have had their hands in NIS as well.  Until July 2008, NIS 
was controlled primarily by the party of former Prime Minister 
Kostunica, the Democratic Party of Serbia (DSS). But according to DSS 
Vice President Nenad Popovic, who spoke to Charge on June 16, the 
"Yellows" (DS) took a perfectly good company and ruined it, before 
the Russians came to town.  Ever optimistic about Russia, 
however(Popovic got rich manufacturing energy equipment in Russia, 
see http://www.absholdings.biz/eng/about/), Popovic claims that 
following a 2010 feasibility study, Gazprom will break ground on a 
South Stream pipeline in 2011. 
 
¶5.  (SBU) NIS's management is now increasingly under the control of 
Russian management.  Those Serbian members who are on the board have 
little, if any, energy industry experience and are politically 
divided, as is common with state companies in Serbia.  Cirilovic said 
he expected the current Serbian members of the NIS Managing Board 
would be replaced at the next NIS Assembly session, expected in 
September.  (As of June 30, two Serbian members had already resigned 
from the NIS board.) 
 
¶6.  (SBU) Criticism of current NIS management is also coming from 
other state owned companies.  Srdjan Mihajlovic, director the 
state-owned oil pipeline company Transnafta, told us on June 10 that 
he still had not had a meeting with NIS's new management, even though 
Transnafta was NIS's most significant customer.  He said the new 
 
BELGRADE 00000607  002.2 OF 002 
 
 
Russian management had come with little experience and had excluded 
competent Serbian energy experts who used to hold management 
positions in NIS from the current decision making process. 
Mihajlovic also expected and urged the dismissal of politicians from 
NIS's Board. 
 
GAZPROM SQUEEZING MORE FROM SERBIA? 
----------------------------------- 
 
¶7.  (SBU) Analysts believe Russia was well aware that NIS was being 
used for political purposes by the Serbian government in prior years. 
 Analysts suspect that NIS's new Russian management may be 
highlighting the company's financial losses now in an effort to 
further undervalue NIS in order to extract new concessions from the 
Serbian Government.  Specifically, NIS is seeking government 
permission for higher prices for crude oil processing, citing NIS's 
poor performance in the first quarter of 2009, Cirilovic told us on 
June 9.  NIS also wants exclusive rights to import Euro Diesel into 
Serbia, which would generate greater revenue streams for NIS and 
could further limit competition. 
 
¶8.  (SBU) Gazprom may be seeking to acquire additional shares of NIS, 
former NIS director Milos Saramandic told us on June 11.  According 
to the December 2008 Serbia-Russia energy deal, NIS is to be 
transformed from a closed shareholding company into an open 
shareholding company, meaning its shares are to be quoted on the 
Belgrade Stock Exchange (to become effective in early August). 
Gazprom has priority purchasing rights for these shares and analysts 
believe undervaluing NIS shares would make it cheaper for Gazprom to 
buy them, Saramandic said. 
 
 
GAZPROM WORKING WITH SRBIJAGAS 
------------------------------- 
 
¶9.  (SBU) In addition to investing in NIS, Gazprom is expanding its 
cooperation with state-owned gas company Srbijagas, as was envisioned 
in the December 2008 agreement.  Specifically, Gazprom is to form a 
joint venture with Srbijagas by the end of June in order to fill 
Serbia's Banatski Dvor gas reserve, which would have a capacity of 
300 million cubic meters.  On May 18, Director of Srbijagas Dusan 
Bajatovic (SPS) said he wanted this project completed by December 
2009, but this is technically infeasible.   Bajatovic has also been 
courting Gazprom Export and Gazprom Bank in order to secure financing 
for the Banatski Dvor project.   According to media accounts, Gazprom 
Bank is interested acquiring a local Serbian bank, such as Univerzal 
Bank, Privredna, or Agrobanka, primarily to fund this and other 
energy projects in Serbia. 
 
COMMENT 
------- 
 
¶10.  (SBU) Gazprom's purchase of NIS has thus far not resulted in a 
very happy marriage - with accusations abounding about who is to 
blame - but both sides are determined to move forward.  Serbia, 
increasingly the junior partner in this venture, is putting a lot of 
faith in Russia's willingness to fulfill its energy commitments in 
Serbia without renegotiating terms.  The test will be whether Gazprom 
follows through on upgrading NIS's facilities and filling its 
commitments to Srbijagas, even in this difficult economic climate. 
If Gazprom does not uphold its end of the bargain, the government's 
decision to partner with Russia on energy matters may become a 
political liability.  End Comment. 
BRUSH