Identifier
Created
Classification
Origin
06BELGRADE1285
2006-08-15 07:28:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Belgrade
Cable title:  

MOU TO GIVE GAZPROM STRATEGIC FOOTHOLD IN SERBIA

Tags:  ENRG ECON EFIN PGOV EIND SR 
pdf how-to read a cable
VZCZCXYZ0001
RR RUEHWEB

DE RUEHBW #1285/01 2270728
ZNR UUUUU ZZH
R 150728Z AUG 06
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 9156
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
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
-------
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