MOU TO GIVE GAZPROM STRATEGIC FOOTHOLD IN SERBIA

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