SERBIAN EMBASSY SAYS SOUTH STREAM "GUARANTEE"

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003498

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF

E.O. 12958: DECL: 11/25/2018
TAGS: EPET ENRG ECON PREL RS
SUBJECT: SERBIAN EMBASSY SAYS SOUTH STREAM "GUARANTEE"
ESSENTIAL TO NIS SALE

REF: A. BELGRADE 1222

B. MOSCOW 2841

Classified By: Econ MC Eric T. Schultz for Reasons 1.4 (b/d)

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SUMMARY
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1. (C) Serbian Embassy Counselor Boris Sekulic told us
December 1 that Gazprom CEO Alexey Miller will be in Belgrade
on December 5 to attempt to conclude an agreement on
Gazprom's purchase of 51% of Serbia's national oil company,
NIS (reftels). According to Sekulic, however, the Serbian
government is insisting that the sale be explicitly packaged
with a "firm guarantee" on the construction of the South
Stream gas pipeline, a guarantee Gazprom has been unwilling
to provide. Given pending sharp drops in gas export prices
and the effects of the financial crisis, we are not convinced
that Gazprom will be able to "guarantee" construction of a
$20 billion pipeline of dubious value. End summary.

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NEED "FIRM GUARANTEE" ON SOUTH STREAM
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2. (C) In a December 1 meeting, Serbian Embassy Counselor
Boris Sekulic told us that Gazprom's proposed purchase of 51%
of NIS (reftels) was one of the main topics of discussion
during the recent visit of a Serbian delegation led by First
Deputy Prime Minister Dacic. According to Sekulic, Dacic met
with Deputy Premier Igor Sechin (who has overarching
responsibility for the energy sector) and conveyed Serbia's
readiness to move forward with the long-pending deal.


3. (C) Sekulic said Dacic made clear to Sechin that Serbia
can only agree to the deal if Russia can provide a "firm
guarantee" that the proposed South Stream gas pipeline,
bringing gas from Russia, under the Black Sea, through Serbia
(among other transit countries),would be built. Sekulic
said the GOS is concerned by recent Gazprom statements
indicating delays in the construction of the pipeline, which
was originally to have been completed by 2013. According to
Sekulic, South Stream is a central element of the package to
which the GOS has agreed as part of the sale of NIS. Without
it, the GOS doesn't see much reason to give Gazprom control
of NIS.


4. (C) According to Sekulic, Gazprom has been reluctant to
provide the commitment the GOS seeks. Describing Sechin as
"very friendly" toward the Serbian delegation, Sekulic said
that Sechin assured them that "Gazprom is part of the Russian
government," which controls two-thirds of the Gazprom board,
and that South Stream will be built. However, he said the
two sides only signed a "protocol" during the visit, which
stipulates feasibility studies for the pipeline will be
prepared in the fourth quarter of 2009 and in 2010, with
construction to begin in 2014.


5. (C) Sekulic said the GOS wants more. In the absence of a
clear commitment that South Stream will be built, he
indicated that Serbia might be willing to consider an
additional financial inducement connected with the sale of
NIS. For instance, Sekulic said, Serbia might accept
subsidized gas sales if South Stream is not completed by a
certain date.


6. (C) Sekulic said other elements of the package to which
the two sides had agreed as part of the NIS sale, including a
proposed 500 million euro investment in NIS by Gazprom and
the construction of gas storage facilities, were not
contentious. The 400 million euro price for NIS --
previously considered by many in the GOS and many analysts to
be too little -- is looking much better in the context of the
global financial and economic crisis, he said.

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RUSSIA PUSHING TO CONCLUDE DEAL
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7. (C) The protocol signed during Dacic's visit stipulates
the deal be concluded by December 20. According to Sekulic,
Gazprom CEO Alexey Miller will travel to Belgrade on December
5 to negotiate a final agreement, and the GOS believes Miller

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has been "given broad authority" to conclude the deal.
Sekulic was skeptical of this deadline, however, repeatedly
saying that negotiations with the Russians are "not easy."


8. (C) Sekulic also said he believes the deal has taken on
more significance for the GOR in the aftermath of the Georgia
crisis. He suggested Russia seeks a "victory" in the form of
a successfully completed business deal to show cooperation
with Russia is still welcome in Eastern Europe.

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COMMENT
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9. (C) The Serbs are right to be skeptical about South
Stream. We believe Gazprom will find it difficult to move
forward with the project. It is an expensive, complicated,
and largely politically-motivated pipeline for which Gazprom
may no longer have the funds: the credit crunch and
financial crisis have hit Russia especially hard, gas export
prices (which lag oil prices by about six months) are
expected to drop sharply in 2009, and proposed increases in
Russian domestic gas prices will likely be delayed. For that
matter, we wouldn't rule out that Gazprom may even have
problems financing the purchase of NIS, especially if they
need to include subsidized gas.
BEYRLE