RUSSIAN ENERGY ACTIVITIES IN SERBIA - NOTHING TO SEE HERE?

UNCLAS SECTION 01 OF 02 BELGRADE 000382 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EINV ENRG SR RS SUBJECT: RUSSIAN ENERGY ACTIVITIES IN SERBIA - NOTHING TO SEE HERE? REF: A: BELGRADE 26 B: BELGRADE 93 Summary -------------- ¶1. (U) On April 14 the Serbian state power company EPS signed an agreement with Russian electricity firm Inter RAO that gives Inter RAO the opportunity to partner with EPS in building new power generation capacity in Serbia. The agreement is seen as a politically-driven opening for additional Russian investment in Serbia. While the agreement garnered headlines, the Energy Minister chose not to mention it at all during a business conference on April 15. At the same conference a Gazprom representative faced heavy questioning of Gazprom's intentions, while he pressed for an extension of the ban on gasoline imports. End Summary Russians Sign Agreement on Power Plant Development -------------- -------------- ¶2. (U) On April 14 Serbian state electricity firm EPS signed an agreement with Russian firm Inter RAO on cooperation in developing power generation facilities. The agreement itself is a political gambit that makes no binding commitments on either side. EPS agreed to exchange info on prospective projects and joint activities in Serbia, as well as in third country markets. EPS has 30 days to send to Inter RAO a list of planned projects and Inter RAO can then express interest in participating as a strategic partner on those projects for the next 60 days. The agreement is not binding and will last until July 1, 2009. Each side can leave the agreement at any time. Electricity Agreement with Russia - What Electricity Agreement? -------------- -------------- ¶3. (SBU) In a surreal scene on April 15 at a previously scheduled conference on energy sector development in Serbia Energy Minister Popovic (DSS) and the head of electricity trading at EPS both avoided any mention of the deal just one day after it was signed. Incredibly, Popovic stated that even though the current government was only a caretaker, he hoped to move ahead with public tenders to select strategic partners to develop new electricity generation projects - exactly what the Inter RAO agreement proposes to do outside of any tender process. Popovic has long supported public tenders to select strategic partners to jointly build new power generation capacity with EPS (ref A). Despite Popovic's leading position in Kostunica's DSS party, (Note: Popovic is DSS's candidate for Belgrade Mayor in the May 11 elections. End Note) Popovic has been careful to limit his connection to non-transparent energy deals with Russia like this agreement and the NIS-Gazprom deal (ref B). We have been told by several contacts that Popovic is troubled by the lack of transparency in these deals so he has followed the childhood motto of, "If you cannot say something nice, do not say anything at all." ¶4. (SBU) A representative from electricity trading firm EFT told econoff on the margins of the conference that EFT understood the original Inter RAO deal included an exclusivity clause. This clause reportedly said that EPS could not participate with any other strategic partners on power generation projects. The head of EPS refused to agree to the provision and it was dropped at the last minute. Is Anyone Willing to Defend the Agreement? -------------- ¶5. (U) The electricity deal and the privatization situation was so toxic that the two Serbian speakers, the head of Srbijagas and head of the NIS executive board, refused to participate in the conference's second panel discussion appropriately titled, "Privatization and investment in the energy sector - preconditions and limitations." The panel ended up moderated by a Slovene with reps from a Slovenian and Norwegian energy firm talking about the Serbian electricity market situation. Gazprom Representative Doesn't Win Friends -------------- ¶6. (U) Dimitry Malyshev from Gazprom told the conference that Gazprom offered a perfect match for Serbian state oil firm NIS because Gazprom had excess crude oil and needed refining capacity, which NIS could offer. Malyshev said that it was unfortunate the Serbian parliament had not ratified the energy framework agreement with Russia and that this could cause a delay in the completion of the purchase agreements for state oil firm NIS, and the other parts of the framework. Skeptical conference participants repeatedly questioned Malyshev about Gazprom's intentions and promises. He claimed that Gazprom planned to double NIS refinery output, and would invest more than the 500 million euros agreed to in the energy framework agreement for the purchase of NIS, but would not be specific about plans or financing. He noted repeatedly that Gazprom could not complete its refinery upgrades before 2012 due to the delays on the Serbian side. Malyshev claimed that NIS would not be ready to compete with international players if Serbia opened the gasoline market to competition in 2010. He said that the Serbian government should share an interest in protecting NIS after 2010 because the government would still be a part owner of the firm. ¶7. (SBU) Minister Popovic also talked about the NIS deal. He said that serious agreements remained to be negotiated. He also said that Serbia would start filling the Banatski Dvor natural gas storage facility with gas very soon (despite Gazprom's previous pressure not to fill the facility until it was controlled by Gazprom). Following the Gazprom presentation a working-level Energy Ministry official specifically sought out Econoff to complain about Malyshev's "arrogant tone" and the injustice of the low price that Gazprom offered for NIS. Comment -------------- ¶8. (SBU) The cooperation agreement with Inter RAO contains no commitments, and could amount to nothing in the end. Instead, the agreement will likely show up in the speeches of DSS and NS party leaders on the campaign trail as another example of how Russia is Serbia's friend and ally. The fact that Popovic chose to speak about transparent tenders, rather than backroom deals like the Inter RAO and NIS sale demonstrates that while he is unwilling/unable to stop these deals, he is trying to avoid being closely tied to them. If the democratic, western-oriented parties win the elections on May 11 the Inter RAO deal will likely fade away. On the other hand, if the Radicals manage to form a government with DSS, Inter RAO will be in a position to shut out interested European power companies from developing projects in Serbia with EPS. End Comment. MUNTER