SERBIA: RUSSIAN INVESTMENT - THREAT OR MIRAGE?

UNCLAS SECTION 01 OF 02 BELGRADE 000890

SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON EINV SR RU MW
SUBJECT: SERBIA: RUSSIAN INVESTMENT - THREAT OR MIRAGE?

REFTEL: A) Belgrade 365 B) Belgrade 93 C) Belgrade 382

SUMMARY
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1. (U) Russia is the largest exporter to Serbia exporting $2.6
billion in mainly oil and gas in 2007, while Serbia exported only
$450 million to Russia. Although Russian trade accounts for 14.3%
of Serbia's 2007 total imports, Russian foreign direct investment is
low and investors are non-committal. Russian is the 18th largest
investor in Serbia, behind Norway, Austria, Germany, and Greece,
among others. The Gasprom-NIS deal would be the largest Russian
investment yet, but it may not be the precursor to a Russian
investment invasion as some fear. Russian firms have pulled out of
and lost interest in large deals like mining firm RTB Bor and
perhaps JAT Airlines. END SUMMARY.

BILATERAL TRADE
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2. (U) Russia is the clear benefactor of the Serbian-Russian Free
Trade Agreement (FTA) signed in August 2000. Although Russia has
not ratified the FTA, it is in effect. The customs free advantage
coupled with Russia's proximity and oil reserves makes it the
largest source for Serbia's imports, accounting for 14.3% of
Serbia's imports or $2.6 billion in 2007. Almost 75% of Russian
exports to Serbia are energy related with crude oil making up 49%
and natural gas 25%. In addition, Russia exports aluminum,
fertilizer, cooper wire, and lubricants to Serbia.
Disproportionately, Serbia exported $450 million to Russia in 2007,
with equipment, floor products, paper, pharmaceuticals, apples, and
corn as top exports. Total trade between the countries in 2007 rose
almost 44% from 2006. In the first quarter of 2008, Serbian exports
to Russia totaled $196 million, up 92% compared to first quarter

2007. Russian imports were up 64% at $1.4 billion. The increases
were due mainly to higher oil and gas prices and Serbian domestic
demand.

ONLY A FEW DONE DEALS
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3. (U) Although imports from Russia are substantial, foreign direct
investment (FDI) is not. According to the Serbian Chamber of
Commerce, total Russian FDI between 2000 and 2007 was $500 million,
placing it as the 18th largest investor behind Norway, the United
States, Germany, and Austria and many others. Russia's largest
investment yet was Lukoil's purchase of 80% of state-owned Beopetrol
in 2003 for $336 million ($187 million purchase price, $136 million
of future investments, and a $13 million social program). At an
August 20 press conference, Moscow-city owned Moscow Bank announced
it would begin operations in October 2008 after it received a
greenfield license and invested the regulatory minimum $24 million.
The bank said it would look at acquiring local banks in order to
expand operations, including outside Belgrade. In August 2008, as
the sole bidder in a privatization auction, Russian auto parts
producer Avtodetal Service bought 39.2% of the region's largest bus
manufacturer Ikarbus for $10.7 million. Smaller investments--often
in partnership and consortium with other companies--are across
sectors including food, energy, and industrial products.


4. (SBU) Russia's interest in large state-owned companies up for
privatization is also low. Second bidder Strikeforce Mining and
Resources (SMR),part of Basic Element, failed to close the deal
with GOS to buy copper mining and smelting complex RTB Bor after the
government cancelled the contract with first bidder Austrian company
A-Tech (ref A). SMR would not agree to fulfill several deal
requirements to purchase the company. Russian billionaire Oleg
Deripaska owns Basic Element, a diversified investment company with
global assets in the energy, resources, manufacturing, financial
services, construction and aviation sectors. Russian air carrier
Aeroflot was seen as the most serious suitor for JAT Airways,
however, Aeroflot announced in July 2008 it probably would not bid
for JAT citing too high a purchase price and soaring fuel costs.

BUT, MORE TO COME
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5. (SBU) Russian investment in Serbia's energy sector, however,
could catapult Moscow to the top rungs of foreign direct investors.
The much debated deal involving Serbian state oil firm NIS (ref B)
would inject at least $640 million into the Serbian economy and $800
million in future investments. Expanding its interest in energy,
state-owned Russian electricity trading and management company Inter
RAO signed a protocol of cooperation in April 2008 with Serbian
state-owned electricity company EPS to build new hydro, thermo, and
gas production capacities in Serbia and in the region (ref C). In
late July 2008, an Inter RAO delegation met with new Mining and
Energy Minister Petar Skundric to discuss future projects. Skundric

BELGRADE 00000890 002 OF 002


is an honorary professor at the Technology Institute of St.
Petersburg.

RUSSIAN INTEREST VS. ACTION
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6. (SBU) In an August 8 meeting Assistant Minister for Foreign
Economic Relations in the Ministry of Economy Jelena Marjanovic told
us the Russians had often declared their interest in investing in
Serbia, but their talk was often not followed with action. Serbian
Chamber of Commerce's Advisor for Russia Vesna Nikolic Ugrica echoed
this sentiment to us in an August 11. As for the FTA, both
officials believed the FTA would benefit Serbia in the long run as
it would attract other European countries to establish operations in
Serbia to enter Russia customs-tax free. However, Ugrica said
Serbia wanted to expand the list of goods it could export to Russia,
which could not be done until Russia ratified the FTA. Earlier this
year, Russian Finance Minister Alexei Kudrin proposed that Russia
ratify the FTA after Serbia ratified the Gasprom-NIS deal.


7. (SBU) In an August 22 meeting, Russian Embassy officials Andrej
Hripunov and Holin Aleksandrovic told us Russian investors were
interested in all sectors of the Serbian economy. They said the
energy sector was of specific interest as Russia had a competitive
advantage in the sector and Russia was involved in most energy
projects in the former Yugoslavia. The two hailed Serbia as dynamic
in spite of its political issues, but admitted that bureaucracy and
changes in administrations and legislation were serious concerns.
The representatives insisted that Russian investors did not ask for
"special favors" and that their deals were "open and transparent,"
including the Gasprom-NIS deal.

COMMENT
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8. (SBU) Although the daily coverage of the Gasprom-NIS deal might
suggest an onslaught of Russian investment, Russian investors' (both
private and state) actions would suggest otherwise. Russian
investors seem to be as cautious as U.S. investors and instead have
focused on Russia's competitive advantages: oil and gas. Desperate
to decrease the more than $5.2 billion trade deficit, Serbia is not
concerned about the origins of foreign direct investment, just with
attracting it. Outside of the energy deal, Russia is showing little
interest in expanding its economic reach in Serbia. As with Russian
support for Kosovo, Serbs are finding themselves with empty promises
and no real evidence of critical Russian interest in Serbia, except
to further Russia's political agenda. End Comment.

MUNTER