Serbia Plays Key Role In Russian Gas Pipeline Plans

The final in a three-part series

Russian President Dmitry Medvedev (right) and Serbian President Boris Tadic i i

Russian President Dmitry Medvedev (right) shakes hands with Serbian President Boris Tadic during a signing ceremony in the Kremlin in Moscow on Dec. 24, 2008. Russia and Serbia inked a deal on the sale of a 51 percent stake in the Balkan country's oil monopoly to Russian gas giant Gazprom. Alexander Nemenov/AFP/Getty Images hide caption

itoggle caption Alexander Nemenov/AFP/Getty Images
Russian President Dmitry Medvedev (right) and Serbian President Boris Tadic

Russian President Dmitry Medvedev (right) shakes hands with Serbian President Boris Tadic during a signing ceremony in the Kremlin in Moscow on Dec. 24, 2008. Russia and Serbia inked a deal on the sale of a 51 percent stake in the Balkan country's oil monopoly to Russian gas giant Gazprom.

Alexander Nemenov/AFP/Getty Images

More In The Series

Gazprom, Russia's giant gas monopoly, is the world's largest producer of natural gas. The company lies at the center of the Kremlin's strategy to boost control over global energy supplies and, many believe, its political influence. Read more about the series.

Russian President Dmitry Medvedev had reason to look pleased when he met Serbian President Boris Tadic in Moscow on Christmas Eve. The two leaders finalized an agreement for Gazprom, Russia's behemoth state gas monopoly, to buy a controlling interest in Serbia's state oil and gas industry — and a plan for Russia to construct a gas pipeline through the country.

Former Serbian Prime Minister Vojislav Kostunica, whose government negotiated the deal, says it will end his country's crippling energy shortages by guaranteeing gas supplies and using Russian capital to rebuild Serbia's decaying infrastructure.

"We are in front of a very good solution," he says. "First of all, from the point of view of the interests of Serbia, for its independence, it is very important that the capitals of different countries are involved."

But critics say Gapzrom is exploiting Serbia's weak economy in its push to boost control over the European energy market.

'Russians Are Our Brothers'

Many Serbians welcomed sacrificing control of their energy industry — for political reasons as much as economic ones. Both Russia and Serbia are Slavic countries that consider each other traditional allies. Moscow supported Belgrade during its bombing by NATO in 1999, memories of which are still raw here.

Belgrade's vibrant main pedestrian street — with bustling shops, outdoor cafes and a sparkling fountain — is a stark contrast to the rest of the city. After years of economic sanctions under former President Slobodan Milosevic, the soot-stained, crumbling buildings give Belgrade the lingering look of a Soviet bloc city.

Student Vlada Vasic is among many who believe Serbia's plans to join the European Union are the only way forward. But he says they won't be affected by Russian control over the energy industry.

"Russia supplies a lot of countries in Europe, and the Russians are our brothers," he says. "I don't think we have anything to fear from them." (Story continues below)


Where the Gas Goes Gazprom, Russia's state-controlled gas company, is the world's largest producer of natural gas. The country supplies many European countries with a majority of the natural gas they use.
Rank Country 2006 Exports (in billions of cubic feet/year) % of Total Domestic Consumption
1 Germany 1,300 36
2 Italy 756 25
3 Turkey 703 64
4 France 353 20
5 Poland 272 47
5 Hungary 272 54
7 Czech Republic 261 79
8 Slovakia 240 100
9 Austria 233 74
10 Romania 180 28
11 Finland 173 100
12 Bulgaria 113 96
13 Greece 95 82
14 Serbia & Montenegro 74 87
15 Croatia 35 37
16 Slovenia 25 64
17 Switzerland 14 12
18 Macedonia 4 100

Sources: "Domestic Consumption," EIA International Energy Annual, 2007; "Exports 2006 and 2007," Gazexport as cited by Energy Intelligence, March 2008; "Sales to Baltic and CIS States 2007," CIS and E. European Databook. 2006 from Gazprom Annual Report.


Control Of Serbia's Energy Industry

Critics aren't so sure. The Gazprom deal came at a critical time, just as the Serbian province of Kosovo was preparing to declare independence, which Belgrade and Moscow opposed. Many believe pro-Western President Tadic, who was running for re-election, couldn't afford to displease the Kremlin.

In a cafe in Belgrade's down-at-heel Moskva Hotel, parliament member Slobodan Maras, of the opposition Liberal Democratic Party, criticizes Tadic for buying Russian political support.

"Signing away our energy industry was a huge price to pay for what we got," he says. "Now the Russians can direct our energy policy."

Competing Pipelines

There's much more at stake than simply the Serbian energy market. Belgrade is part of a fierce struggle between Russia and the West over the future of energy supplies to Europe. A number of European companies had hoped to buy into Serbia's energy industry but withdrew because of the cost.

But despite the recent economic turmoil, Gazprom found the money because it wants to make Serbia the European hub of its planned new South Stream pipeline from Russia. The project is meant to compete with a planned European Union pipeline from the Caspian Sea that would cut out Russia by delivering Central Asian gas through Georgia. The Georgians say energy was a major factor behind Russia's invasion of their country last year.

The United States champions the European Union's Nabucco pipeline. U.S. Deputy Assistant Secretary of State Matthew Bryza, who has led the effort, says Russia's plan is part of a strategy to win control over the European gas market.

"That for us is worrisome because monopolistic control works against the efficiency of the market, distorts markets, and that means that our European allies pay much more for natural gas than they need to," he says.

Murkiness Surrounds Deal

But the view from well-heated Washington sharply differs from how ordinary people see things in Serbia, a country that's been on the brink of economic collapse for years.

Lighting her stove in the high-ceilinged kitchen of an old central Belgrade apartment, Ivana Gevic says the Gazprom deal is the only way to make sure gas supplies don't run out.

"But I'm worried Serbia is becoming enmeshed in a murky, high-stakes deal," she says.

In October, a shady intermediary company suddenly raised the price Serbia will pay for Russian gas by 60 percent. Critics say the intermediary is one of the obscure structures the Kremlin is using to secretly control the company's profits.

'Energy Strengthens Russia's Hand'

Final negotiations between Gazprom and Serbia were further complicated by Gazprom's insistence on paying only half the estimated value for Serbia's state oil company. The deal could still fall apart, but energy analyst Sasha Djogovic says Serbia, hit hard by the recent economic turmoil, has no real alternative but to agree to Gazprom's terms, and that's something Russia is exploiting.

He says the decision was based not only on economic reasons, but for political reasons, too. The energy sector is Russia's hand for strengthening its political power in the world, he says.

Such has been the success of Gazprom's strategy, Moscow is even setting up an organization of gas-exporting countries that some are calling a natural gas version of OPEC.

Djogovic warns that unless the West develops a common response, it risks losing the competition over European energy supplies. "In the energy market," he says, "Russia is a shark."

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