Identifier
Created
Classification
Origin
08SARAJEVO1790
2008-11-26 08:20:00
CONFIDENTIAL
Embassy Sarajevo
Cable title:  

BOSNIA: RUSSIA'S ECONOMIC INTEREST -- RESTRICTED

Tags:  ECON ENRG PREL PINR PGOV EU BK 
pdf how-to read a cable
VZCZCXRO0004
RR RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHVJ #1790/01 3310820
ZNY CCCCC ZZH
R 260820Z NOV 08
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 9321
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 0082
RUEKJCS/JCS WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 SARAJEVO 001790 

SIPDIS

STATE FOR EUR DAS JONES, EUR/SCE HYLAND, FOOKS, STINCHCOMB

E.O. 12958: DECL: 09/21/2023
TAGS: ECON ENRG PREL PINR PGOV EU BK
SUBJECT: BOSNIA: RUSSIA'S ECONOMIC INTEREST -- RESTRICTED
TO A FEW SECTORS

REF: A) 07 SARAJEVO 678

Classified By: Classified by Charge Judith Cefkin for reason 1.4 D

C O N F I D E N T I A L SECTION 01 OF 03 SARAJEVO 001790

SIPDIS

STATE FOR EUR DAS JONES, EUR/SCE HYLAND, FOOKS, STINCHCOMB

E.O. 12958: DECL: 09/21/2023
TAGS: ECON ENRG PREL PINR PGOV EU BK
SUBJECT: BOSNIA: RUSSIA'S ECONOMIC INTEREST -- RESTRICTED
TO A FEW SECTORS

REF: A) 07 SARAJEVO 678

Classified By: Classified by Charge Judith Cefkin for reason 1.4 D


1. (C) Summary: The largest Russian investment in recent
years into the RS, Zarubjezneft's purchase of the Brod oil
refinery, the Modrica Lubricant Refinery and the "Petrol"
network of gas stations, seems to be finally advancing to
stage where the company has fulfilled its initial financial
commitments and is beginning to reopen the old Brod refinery
line. RS Government officials expect the company to begin
development in the next few months of the new processing line
that will produce EUFIVE-grade products. A local RS oil and
gas entrepreneur explained that the only way Russia would
guarantee oil supply to the Brod refinery for the long term
was to have Russian control of the refinery, in this case in
the form of Zarubjezneft. Oleg Burlakov, a wealthy Russian
investor, purchased a Visegrad (RS) chemical plant in May
2008 and has announced plans to invest one billion KM more
into BiH. There is media speculation that he will acquire an
iron ore plant, Lubija, from the RS Government as well as the
bankrupt Borja Wood Processing Factory, which once had US
investment interest. Russian investment in Bosnia and
Herzegovina, specifically in the Republika Srpske, often
attracts significant media attention, bringing greater
significance to the investment than what it truly deserves.
Nonetheless, the Russian DCM downplayed the potential for
future Russian investment in BiH. We do expect, however,
Russia's total control of the RS oil and gas industry to
continue to pay political dividends for the long term. End
summary.

ZARUBJEZNEFT FULFILLS INITIAL FINANCIAL OBLIGATIONS
-------------- --------------


2. (SBU) More than one year after the final sale of RS oil
and gas assets to Russian company Zarubjezneft, there has
been little reportable activity from other Russian companies
regarding investing in either the RS or the Federation.

According to local oil and gas entrepreneur Radomir Njezic of
Slavija International, Russia is only in the RS "by
accident." He explained that the only way Russia would
guarantee a long-term supply of oil to the Brod refinery was
if ownership control was in Russian hands, in this case in
the form of Zarubjezneft. According to Assistant RS Energy
Minister Dragana Kalabic, Zarubjezneft has fulfilled its
obligations with the RS Government pursuant to the terms of
the RS privatization of its petroleum assets -- Brod Oil
Refinery, the Modrica Lubricant Refinery and the "Petrol"
network of gas stations (REF A). Kalabic explained that
Zarubjezneft's initial financial obligations, which according
to official press reports total 72.5 million Euros, have been
fulfilled as confirmed to the RS National Assembly. The
company is already working with contractors to rehabilitate
the old production line at the Brod Refinery (reportedly, the
refinery has begun production this week). She explained that
the Russians have also committed to developing a new
production line that will produce EUFIVE-grade products and
this investment, predicted to total 322 million Euros, is
still forthcoming.

BURLAKOV MAKES PLENTY OF NEWS - ONLY ONE INVESTMENT CONFIRMED
-------------- --------------


3. (C) Post asked several public and private RS oil and gas
players about other non-Zarubjezneft Russian investors in the
RS. The only investor mentioned was Oleg Burlakov, listed as
one of the 300 wealthiest Russians. In May 2008, he
purchased (via his local Privredni Prerod company) Terpentin,
a local Visegrad chemical plant, which produces paint and
varnish, for 2.2 million KM ($1 = 1.51 KM). His investment
came amid big fanfare in a meeting with RS Prime Minister
Dodik. He has publicly announced plans to invest more than
one billion KM in RS over the next few years. (Note:
However, his very public personal financial difficulties will
likely preclude this much investment. End note) There has
been media speculation that Burlakov will also acquire the
iron ore mine, Lubija, with permission from the RS
Government. According to press reports, the RS Investment
and Development bank has been negotiating with Burlakov's
Privredni Prerod since mid-July about selling a 65 percent
stake in the company. The takeover could be disputed by
Arcelor Mittal, the world's largest steel manufacturer, which
is also interested in the mine. The media reported on

SARAJEVO 00001790 002 OF 003


September 3 that Burlakov will also purchase the bankrupt
Borja Wood-Processing Factory. Walter Council, the American
owner of U.S. company Balkan America, was previously
interested in purchasing the Borja Factory. According to
Council, a consistent supply of logs, the essential raw
material for the plant, was unavailable at the time, which
made the deal unattractive. Council is skeptical that
Burlakov will really come through with the necessary
investment for Borja, especially in light of the recent
losses on the Russian stock exchange. He says too often
foreign investors make promises of millions of dollars of
investment into the RS that do not ultimately materialize.
Unofficial estimates are that Burlakov would need to invest
more than 10 million euros in modernization of the plant.

RUSSIAN BANK OPENS IN BOSNIA
--------------


4. (SBU) The Russian Bank IEFK opened in Banja Luka in June
2007, and opened a branch in Dodik's hometown of Laktasi, a
large suburb of Banja Luka, in June of this year. According
to Alexsander Gitelson, IEFK Chairman, the bank intends to
open eight branch offices every year. However, this is the
first branch it has opened since the main bank opened last
year. According to the bank's official information, the bank
has 19 million KM in capital and is focused primarily on
projects in the energy, agriculture and metal processing
sectors. IEFK is one of nine banks owned by Russia's
East-European Finance Corporation and claims to be the only
bank in the former Yugoslavia with Russian capital.
According to Njezic, the bank does very little business in
the RS and was only opened to give private and public sector
Russians an opportunity to squirrel away their money outside
of Russia. (Comment: Although this suggestion has some
merit, the global financial market surely has more lucrative
options for wealthy Russians that the Bosnia and Herzegovina
banking sector. End comment.) In a meeting with Raiffeisen
Bank, the CEO for Bosnian operations told Econ Counselor that
he does not consider the Russian bank to be in any way
serious competition in the Bosnian banking sector. He was of
the opinion that the Russian bank was opened for some
"special purpose" and not normal banking.

DIP OFFICES AND LUKOIL
--------------


5. (SBU) Although there has been talk in the past about
opening a Russian diplomatic/representative office in the RS,
they have yet to open one. In March, Russian Ambassador
Konstantin Suvalov said that "the Embassy's branch office in
Banja Luka will be opened, although we cannot say when it
will happen. We are working on it." The RS, however, does
have its own trade office in Moscow, separate from the
official Embassy of Bosnia and Herzegovina. It is manned by
a "First Secretary of Trade", according to our colleagues in
U.S. Embassy Moscow. Lukoil opened a representative office
in Sarajevo in August 2008, which is responsible for oil
trading and distribution. According to Lukoil Commercial
Director Alen Hrkovic, the focus of the company's Sarajevo
office will be trading oil from Lukoil's refineries, making
the companies' products from its refineries in Turkey and
Bulgaria more competitive in the local market. The founder
is "Lukoil-Europa Holding" based in Amsterdam, the sister
firm of the Russian oil company.

RUSSIAN DCM PESSIMISTIC ON OLIGARCH PROMISES OF RUSSIAN
INVESTMENT TO BIH
-------------- --------------


6. (C) In a meeting with Embassy Sarajevo DCM, Russian DCM
Igor Kalubhokov was not very optimistic about the promises of
further investment coming from Russian oligarchs. As he
explained, there are only small businessmen and oligarchs in
Russia, with very few medium or even large-sized companies by
global standards. This leads to an uneven private sector, in
his view. When asked about Burlakov, specifically, he said
that Burlakov fished around for opportunities in the RS,
spurred on by RS friends living in Moscow. In his opinion,
not one of the potential investments has borne fruit. He
believes that for most Russian businessmen, Bosnia's
investment climate is too unstable to look for serious
opportunities. "Someone can make a million dollars selling
flowers in Moscow, why would businessmen need to look to the
RS to make money," was his comment.

SARAJEVO 00001790 003 OF 003



COMMENT
--------------


7. (C) Russian investment, even more than other foreign
investment, draws incredible media attention in BiH,
particularly in the RS. Based on the press, one would assume
that Russia is one of Bosnia's leading trade partners. But,
on the BiH Foreign Investment Promotion Agency's list of top
foreign investors, Russia has not been among the overall top
ten sources of investment in BiH since the 1992-1995 war.
Even in 2007, when Russia invested 132 million EUR in BiH
which included the RS oil and gas assets, they placed third
in total investments that year, behind Serbia and
Switzerland. Although Burlakov's actions are worth watching,
there has been little Russian investment outside of the oil
and gas of note. With little else to sell in the oil and gas
arena in the RS, we expect Russia's investment commitments to
fade from the headlines. This does not mean, however, that
Russia will not try to use their ownership of the oil and gas
sector as a method of political clout with the RS. There
also remains the possibility that some additional Russian
investment has taken place in Bosnia via third parties, but
we have encountered no credible evidence to that end.
CEFKIN