SERBIAN'S ENERGY DEAL WITH RUSSIA POSTPONED

UNCLAS SECTION 01 OF 02 BELGRADE 000336

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON ENRG SR MW
SUBJECT: SERBIAN'S ENERGY DEAL WITH RUSSIA POSTPONED

SUMMARY

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1. At the April 3rd session, Serbia's caretaker government
denied PM Kostunica's proposal to send the draft law on the
Serbian-Russian energy agreement to parliament for ratification.
Belgrade and Moscow signed the deal on January 25, 2008. The
DSS-NS coalition used the failure as a political tool to accuse
DS of not working in Serbia's national interest. The deal is
now uncertain and may or may not be approved by the new
government or ratified by the new Parliament. End Summary.



GAS DEAL ON AGENDA

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2. PM Kostunica included the Serbian-Russian energy deal on the
April 3rd to be sent to parliament for ratification. In his
argument he said that Russia had completed all procedures
necessary for the deal to take effect, so Serbia should do the
same. Although DSS and NS ministers voted for the energy
agreement to be sent for immediate parliamentary ratification,
DS ministers abstained, explaining that the caretaker government
did not have the authority to approve and propose laws. G17
Plus Minister of Economy and Regional Development Mladjan Dinkic
did not attend the session in protest at what he described as
Kostunica's attempt to use the deal for election campaigning.




3. At the post-session press conference, DPM Bozidar Djelic
from DS and Minister of Trade and Services Predrag Bubalo from
DSS debated their interpretations of Serbia's law on the power
and authority of a caretaker government to approve draft laws
and send them to parliament for ratification. The two, however,
did agree that the Russian energy deal was crucial for Serbia,
and Djelic said that it would be approved by the new government
and ratified by the new parliament. On April 3 Srdjan
Mihajlovic, advisor to the NIS General Director, told Econ FSN
he expected the energy deal to be one of the main topics of DSS
political campaign against DS and that negotiations with Moscow
would continue during political campaigning and after elections,
especially if democrats win. Mihajlovic believes in order to
avoid attacks from DSS Tadic will not block negotiations.



DEAL NOT DEAD

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4. Milos Saramandic, the new General Director of NIS from DS
confirmed in a conversation with Econ FSN on April 4 that PM
Kostunica's DSS party was in a hurry to close the NIS deal. He
said General Secretary of the Government Dejan Mihajlov and
President of NIS Managing Board Srdjan Bosnjakovic, both from
DSS, were Gazprom's main lobbyists and wanted to close the deal
before elections, after which a DS victory might lead to DS
control of NIS management. Saramandic also said he believed
Kostunica included the deal on the agenda knowing it would fail
to create an opportunity for DSS to accuse DS and G17 Plus
ministers of working against Serbia's national interest.




5. According to Mihajlovic, there is a power struggle over who
will control negotiation with the Russians and who will lead key
NIS positions. According to Mihajlovic, Gazprom is doing due
diligence of NIS thanks to Bosnjakovic's willingness to freely
share documents with Gazprom. Bosnjakovic is able to do this
while DS members are distracted with an internal battle over who
will head key positions within NIS. Reportedly, Saramandic is
unsuccessfully trying to channel the flow of documents.




6. Mihajlovic believes DS would try to negotiate with the
Russians knowing that it would be hard to change the purchase
price of $570 million, but DS would still fight to increase
future investment commitment. DS may also try to reorganize NIS

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and spin-off some of its smaller companies and NIS Naftagas (the
domestic production and research division) to sale individually.
According to Mihajlovic, DS would offer Gazprom a concession
for domestic production and ask for royalty fees. When the
concession expires, NIS Naftagas would sell in a tender.



GAZPROM GIVES SERBIA A BLACK EYE

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7. During an April 2 lunch at DCM's house to discuss the
economic and financial future of Serbia, bankers and academics
agreed that the Gazprom deal gave Serbia a black eye in
international financial circles. Everyone knew, they said, that
NIS was undervalued, that others --including Hungarian and
Austrian companies -- had been interested in the tender, and
that the sale to Russia was completely political.
Privatizations up until the NIS privatization had been done in
accordance with modern financial and economic principles, but
the Gazprom deal was completely corrupt. They said they thought
future investors would be increasingly wary of a level playing
field in Serbia, as a result of the Gazprom deal.



COMMENT

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8. Although there was much hype surrounding Kostunica's attempt
to muscle the Russian energy deal onto the caretaker
government's agenda and into parliament, for the most part his
short-term goal was seen for what it really was: political
maneuvering and campaigning. The question remains: if the
democrats win, will Tadic find the strength to stand up to DSS
and negotiate a transparent deal for Serbia's energy resources?
End Comment.
MUNTER