Sep 9, 2008 | 20:17 GMT

4 mins read

Serbia: Balancing EU Candidacy and a Sale to Gazprom

Two international agreements ratified by the Serbian parliament Sept. 9 highlight the balancing act Serbia must perform as it seeks to join the European Union and maintain a special relationship with Russia. The key deal ratified — selling a controlling stake in Serbia's state-owned oil company to Russia's Gazprom — calls for a renegotiated price by the end of the year. The new price could be three times the original, which would indicate the willingness of Serbia's pro-EU government to drive a hard bargain with Moscow.
The Serbian parliament ratified two key international agreements Sept. 9 — one with the European Union that is a first step toward Serbian candidacy, and another with Russia to sell a controlling stake in Serbia's state-owned oil company to Russia's Gazprom. Both agreements have additional hoops to go through. The Stabilization and Association Agreement (SAA) still has to be ratified by each EU member state, while the actual price of Serbia's Naftna Industrija Srbija (NIS) still has to be determined — a potential point of contention that could stall the handover to Gazprom indefinitely. Ratification of the SAA was of great symbolic value to Belgrade, signifying the progress the current pro-EU government — which narrowly defeated a strong challenge by the ultranationalist Serbian Radical Party during parliamentary elections in May — has made toward EU membership. Nevertheless, it is the NIS deal that is of greater significance at this point. It will take years for the SAA to be ratified by all the EU member states, while the Serbian parliament is calling for a renegotiated NIS price by the end of the year. Now is the time for Belgrade to show Moscow (and the rest of the world) just how "special" Serbia's relationship really is with traditional ally Russia. Indeed, the Sept. 9 ratification of the NIS deal without a price agreement may be only a token nod by the pro-EU government toward the Kremlin, one that may not hold much water by the end of the year. The original NIS sale agreement was negotiated at the end of 2007 by then-Serbian Prime Minister Vojislav Kostunica — a moderate and relatively pro-Russian nationalist — at the height of Serbia's efforts to defend its control over Kosovo. The original agreement set the price of a 51 percent stake in NIS at $560 million, plus $700 million in "future investments." The price was set far below market value as Kostunica scrambled to essentially buy Russian support on Kosovo (which never got beyond rhetoric). The agreement included the sale of NIS refineries and storage depots as well as a Russian commitment to build a line of its South Stream natural gas pipeline through Serbia. Serbia has a difficult balancing act ahead of it. Ratification and eventual implementation of the SAA will take years, giving Serbia the short-term room to maintain its special relationship with Moscow. In the long term, however, that special relationship could hurt Serbia's chances of reaching its ultimate goal: accession into the European Union, which wants a firm commitment — now more than ever — from all potential member states that they will follow the Brussels line and not cozy up to the Kremlin. Even though the Serbian parliament ratified the NIS deal with an overwhelming majority, it is far from done. To facilitate the price negotiation, the Serbian government hired the auditing firm Deloitte & Touche to examine NIS assets, and the reported value was over $3 billion, more than three times the price Gazprom negotiated with Kostunica. In short, Serbia is willing to incur the wrath of Brussels for $3 billion. If the Serbian government uses the audited price to push for a new deal — almost a certainty — Gazprom will have a difficult decision to make. It will have to put its money where its mouth is, which it has not been inclined to do, and actually pay full price for a controlling stake in NIS. However, a militarily and politically resurgent Russia could also seek to be more assertive economically. Whatever the Kremlin's ultimate decision, it will not be able to count on Belgrade offering another political rebate on the NIS sale. It could still be an offer Gazprom cannot refuse. The distribution network and downstream assets that NIS offers would give Gazprom a key strategic entry point from which to spread its network into Europe. This is something for which the Kremlin may well want to open its wallet.

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