BOSNIA: RUSSIA'S ECONOMIC INTEREST -- RESTRICTED

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