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Cablegate: Russian Energy Activities in Serbia - Nothing to See Here?

UNCLAS SENSITIVE BELGRADE 00382

SIPDIS
BRUSSECX:
ACTION: ECON UECON
INFO: PAO UDCM UCUST UFCS PR POL UPAO UNAS UPOL UAGR
UAMB DAO DCM FCS AMB UAID

DISSEMINATION: ECON
CHARGE: PROG

VZCZCBSO476
RR RUEHBS
DE RUEHBW #0382/01 1071535
ZNR UUUUU ZZH
R 161535Z APR 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0182
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBW/AMEMBASSY BELGRADE 0271

UNCLAS SECTION 01 OF 02 BELGRADE 000382

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV ENRG SR RS
SUBJECT: RUSSIAN ENERGY ACTIVITIES IN SERBIA - NOTHING TO SEE HERE?

REF: A: BELGRADE 26 B: BELGRADE 93

Summary

-------

1. (U) On April 14 the Serbian state power company EPS signed
an agreement with Russian electricity firm Inter RAO that gives
Inter RAO the opportunity to partner with EPS in building new
power generation capacity in Serbia. The agreement is seen as a
politically-driven opening for additional Russian investment in
Serbia. While the agreement garnered headlines, the Energy
Minister chose not to mention it at all during a business
conference on April 15. At the same conference a Gazprom
representative faced heavy questioning of Gazprom's intentions,
while he pressed for an extension of the ban on gasoline
imports. End Summary

Russians Sign Agreement on Power Plant Development

--------------------------------------------- -----

2. (U) On April 14 Serbian state electricity firm EPS signed an
agreement with Russian firm Inter RAO on cooperation in
developing power generation facilities. The agreement itself is
a political gambit that makes no binding commitments on either
side. EPS agreed to exchange info on prospective projects and
joint activities in Serbia, as well as in third country markets.
EPS has 30 days to send to Inter RAO a list of planned projects
and Inter RAO can then express interest in participating as a
strategic partner on those projects for the next 60 days. The
agreement is not binding and will last until July 1, 2009. Each
side can leave the agreement at any time.

Electricity Agreement with Russia - What Electricity Agreement?

--------------------------------------------- ------------------

3. (SBU) In a surreal scene on April 15 at a previously
scheduled conference on energy sector development in Serbia
Energy Minister Popovic (DSS) and the head of electricity
trading at EPS both avoided any mention of the deal just one day
after it was signed. Incredibly, Popovic stated that even
though the current government was only a caretaker, he hoped to
move ahead with public tenders to select strategic partners to
develop new electricity generation projects - exactly what the
Inter RAO agreement proposes to do outside of any tender
process. Popovic has long supported public tenders to select
strategic partners to jointly build new power generation
capacity with EPS (ref A). Despite Popovic's leading position
in Kostunica's DSS party, (Note: Popovic is DSS's candidate for
Belgrade Mayor in the May 11 elections. End Note) Popovic has
been careful to limit his connection to non-transparent energy
deals with Russia like this agreement and the NIS-Gazprom deal
(ref B). We have been told by several contacts that Popovic is
troubled by the lack of transparency in these deals so he has
followed the childhood motto of, "If you cannot say something
nice, do not say anything at all."

4. (SBU) A representative from electricity trading firm EFT
told econoff on the margins of the conference that EFT
understood the original Inter RAO deal included an exclusivity
clause. This clause reportedly said that EPS could not
participate with any other strategic partners on power
generation projects. The head of EPS refused to agree to the
provision and it was dropped at the last minute.

Is Anyone Willing to Defend the Agreement?

------------------------------------------

5. (U) The electricity deal and the privatization situation was
so toxic that the two Serbian speakers, the head of Srbijagas
and head of the NIS executive board, refused to participate in
the conference's second panel discussion appropriately titled,
"Privatization and investment in the energy sector -
preconditions and limitations." The panel ended up moderated by
a Slovene with reps from a Slovenian and Norwegian energy firm
talking about the Serbian electricity market situation.

Gazprom Representative Doesn't Win Friends

------------------------------------------

6. (U) Dimitry Malyshev from Gazprom told the conference that
Gazprom offered a perfect match for Serbian state oil firm NIS
because Gazprom had excess crude oil and needed refining
capacity, which NIS could offer. Malyshev said that it was
unfortunate the Serbian parliament had not ratified the energy
framework agreement with Russia and that this could cause a
delay in the completion of the purchase agreements for state oil
firm NIS, and the other parts of the framework. Skeptical
conference participants repeatedly questioned Malyshev about
Gazprom's intentions and promises. He claimed that Gazprom
planned to double NIS refinery output, and would invest more
than the 500 million euros agreed to in the energy framework
agreement for the purchase of NIS, but would not be specific
about plans or financing. He noted repeatedly that Gazprom
could not complete its refinery upgrades before 2012 due to the
delays on the Serbian side. Malyshev claimed that NIS would not
be ready to compete with international players if Serbia opened
the gasoline market to competition in 2010. He said that the
Serbian government should share an interest in protecting NIS
after 2010 because the government would still be a part owner of
the firm.

7. (SBU) Minister Popovic also talked about the NIS deal. He
said that serious agreements remained to be negotiated. He also
said that Serbia would start filling the Banatski Dvor natural
gas storage facility with gas very soon (despite Gazprom's
previous pressure not to fill the facility until it was
controlled by Gazprom). Following the Gazprom presentation a
working-level Energy Ministry official specifically sought out
Econoff to complain about Malyshev's "arrogant tone" and the
injustice of the low price that Gazprom offered for NIS.

Comment

-------

8. (SBU) The cooperation agreement with Inter RAO contains no
commitments, and could amount to nothing in the end. Instead,
the agreement will likely show up in the speeches of DSS and NS
party leaders on the campaign trail as another example of how
Russia is Serbia's friend and ally. The fact that Popovic chose
to speak about transparent tenders, rather than backroom deals
like the Inter RAO and NIS sale demonstrates that while he is
unwilling/unable to stop these deals, he is trying to avoid
being closely tied to them. If the democratic, western-oriented
parties win the elections on May 11 the Inter RAO deal will
likely fade away. On the other hand, if the Radicals manage to
form a government with DSS, Inter RAO will be in a position to
shut out interested European power companies from developing
projects in Serbia with EPS. End Comment.
MUNTER

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