Serbia sells its energy company to Russia

“Against stupidity, the Gods themselves contend in vain.” — Schiller

So Serbia’s government has agreed to sell its oil and gas company, NIS, to Russia’s Gazprom.

By itself there’s nothing wrong with this. What’s stupid about it is the price. NIS has a market value of around $2.8 billion. The government is selling it to Gazprom for $400 million, plus the promise of another $500 million in investment over the next five years. In other words, Gazprom — a company not exactly strapped for cash — is getting a windfall of almost $2 billion, at the expense of one of the poorest countries in Europe.

Why is the Serbian government doing this? Several reasons, all of them bad.
1) Kosovo. Many observers see this as a quid pro quo to Russia for continued Russian support of Serbia’s position on Kosovo.

Of course, Kosovo is going to be independent anyway… no amount of diplomatic maneuvering will make two million Albanians ever accept Serb rule again. All Russia can do is maintain a veto in the UN. But a large minority of Serbs seem to be finding psychological comfort in knowing that “Russia is on our side”.

2) To embarass Boris Tadic. Recall that Prime Minister Kostunica hates President Boris Tadic, a lot. Tadic is runing for a second term. The runoff election is in two weeks. Tadic is known to oppose the Gazprom deal. Forcing it through at this time puts Tadic in a difficult position.

3) Because some of the other bidders — most notably Hungary’s MOL and Austria’s OMV — were offensive to Serb nationalist sensitivities. We can’t have our national energy company owned by Austrians! (Insert a long rant about the First World War and/or Hitler here.)

And that’s about it.

Oh, there are also a couple of nominal reasons. Gazprom is promising to put a branch of the South Stream gas pipeline — which will run across the Black Sea and through Bulgaria — up through Serbia. This will make Serbia a transit country for natural gas! This will earn money for Serbia, and make Europe pay attention to them again!

Of course, (a) it will only earn money for Serbia if the government negotiates a competent deal which, based on the deal they’ve just negotiated, is very unlikely to happen; (b) this won’t happen until 2013 at the very earliest; and (c) by the time it’s built, South Stream will be just one of five large pipelines from Russia to Europe — six if you count Blue Stream, which runs across the Black Sea to Turkey — and Serbia will sit on just one branch of South Stream. Meanwhile, Europe’s largest economies are busily trying to diversify away from dependence on Russian gas.

Mladjan Dinkic, Serbia’s Minister of the Economy, has decried the deal as “humiliating”. Which is pretty accurate. Among its other provisions, the deal requires Serbia to not apply EU environmental regulations until at least 2012. Not that Serbia was going to join the EU soon anyway, but still: it’s pretty much a public declaration that Gazprom doesn’t want to be bothered with nonsense like environmental concerns.

So, at best we have a really stupid deal, obviously and blatantly bad for Serbia, whipped up in a hurry by short-sighted politicians for vaporous nationalism and short-term political gain. I say “at best” because there’s an alternative explanation: Gazprom may simply have bribed its way to success. After all, why pay $2.8 billion when you can just pay $400 million in cash and $50 million in bribes to politicians? — I will freely grant that this is speculative. But Serbia is not a country where either politics or business are famous for clean dealing. And it’s worth noting that the one Minister who loudly condemned the deal — Dinkic — is independently wealthy.

N.B., if there was corruption, I’d be mildly surprised if it was as crude as outright bribes. I’d rather expect it to take the form of favors, featherbedding and kickbacks. This guy gets a hundred jobs for his home town; this other guy gets ten million worth of construction contracts; that guy over there gets the Gerhard Schroder treatment, a guaranteed cushy job with a fat paycheck once he retires from life in politics. It’s not hard, and the Russians have a home team advantage for this sort of thing.

All that said, it’s still just painfully stupid.

I like Serbia a lot, and I’d be happy to move back there one day. But sometimes it’s kind of depressing.

28 thoughts on “Serbia sells its energy company to Russia

  1. Out of the various reasons you list, I think that the Kosovo quid pro quo is the most obvious, and the possibility of linking up to South Stream the most important.

    Gazprom is used to getting what it wants abroad by promising to building gas storage facilities and make the given country a distribution hub which will boast extra supplies in the event of an interruption from … Gazprom itself. However they have dangled this possibility before at least five or six nations already – and there can only be so many regional distribution points.

    Can you imagine how attractive the possibility is to Serbia to expand as a supplier (or at least have a hand on the tap) to countries like Croatia, Albania, and Greece? Magnificent.

    The Serbs have gotten such a raw deal – they are really due for some good news.

  2. Pingback: Global Voices Online » Russia, Serbia: Gazprom Buys NIS

  3. James: No offense, but… no. That sounds cool, but if you actually look at it? At Serbia’s neighbors?

    Romania is a middleweight natural gas producer and also has a pipeline from Russia via Ukraine and Moldova. Hungary, some local production, and also has a pipeline already via Ukraine. Bulgaria has a pipeline from Russia already, is going to get a second one (South Stream), and may get a third (Nabucco). Greece has a pipeline already and is building a second one (Poseidon).

    Montenegro doesn’t use gas at all, just hydropower and coal. Albania doesn’t use gas — they’re all hydropower — *and* they just discovered a big natural gas field offshore. Kosovo burns only coal. Macedonia burns only coal for heating; they do have a couple of natural gas power plants, but they have a pipeline from Bulgaria that’s sufficient for their needs for at least the next decade.

    Bosnia has a spur pipeline down from Hungary. Croatia is piggybacking on Italian gas and is also getting a spur down from Hungary.

    So… every one of Serbia’s neighbors either doesn’t use gas, or already has a pipeline in place. In most cases their current pipelines are big enough not only for current needs but for projected needs to 2020 or beyond.

    But then, the South Stream isn’t for the likes of Bosnia and Croatia. Those are small customers. South Stream is for moving gas to the big economies of central Europe, especially Germany. And the total amount coming through Serbia will be on the order of 1%-2% of Germany’s energy needs… enough to be worth doing, but not enough for blackmail.

    Further. *It won’t be Serbia’s hand on the tap*. It’ll be Moscow’s. It’ll be Gazprom gas going through a Gazprom-owned pipeline to customers who have made contracts with Gazprom. Unless the Serbs decide to nationalize the pipeline — hah — they’ll have *not a thing* to say about what goes through it and to where. All Serbia will do is (1)help maintain the pipeline and (2) collect a modest transit fee.

    Finally, note that the pipeline won’t open for business until at least 2013 — by which time the energy profile and needs of the buyers may have shifted significantly.

    So, no. Supporters of the Russian deal have been going on about how /this will make Serbia strategically vital again/, but no: it really won’t.

    Reality check: major existing pipelines go through Moldova and Belarus. Are those countries exerting much influence on the chancelleries of Europe?

    Peter: It never reached the point of making bids. That’s just the problem. It was a no-bid award to Gazprom.

    That said, Economy Minister Dinkic said last year that he wanted no bid lower than $2 billion. Four major bidders (OMV, MOL, Hellenic Petroleum and Lukoil) immediately expressed strong interest. So, it’s pretty clear that they could have gotten at least that much, and the market estimate of $2.8 billion seems plausible.

    Doug M.

  4. Greetings Doug,

    A good piece, as per usual.

    What you failed to mention, or maybe you are not aware of, is that Gazprom has purchased 50% + 1 share of NIS, not the entire monopoly.

    The final Gazprom offer has not been made public yet but it is believed to be, as you correctly stated, $400m — valuing NIS at $800m.

    Very conservative estimates put the value of NIS at $2 billion, hence Gazprom paid $600m less than the perceived value of the 50% + 1 share of NIS.

    So, I think you got the figures wrong but the rest of the analysis is correct indeed.

    This is such an idiotic deal that Tito will be rolling in his grave 🙂



  5. Hi Fidel,

    No, I knew about the 51%, but didn’t want to get into the that much detail.

    But since you point it out: in this case, 51% is much more like 100%. It’s clear that Gazprom will have complete control, and the Serbian government will be a very silent partner. And Gazprom has shown real skill at creative accounting, so I doubt Belgrade will see too many dividends.

    There’s an additional wrinkle, too. Dinkic’s original plan, a few months ago, called for selling 51% to a foreign investor… and another 15% to Serbian citizens. The idea was that some Serbs would become minority shareholders and so act as a check on the foreigner: having access to corporate records, being able to ask questions at shareholder meetings, that kind of thing.

    This will not happen. Gazprom has made it a condition of the deal that the Serbian government cannot sell any of its 49% share without Gazprom’s permission! Which means that nobody but Gazprom and the Serbian government will be ableo to look at Gazprom’s books; no independent shareholders, no whistle-blowers or watch dogs. And it also means that the market value of the Serbian government’s shares is… zero; if you can’t sell a thing, it has no price.

    So, although the Russians “only” have 51%, they have pretty complete control and de facto ownership of the whole thing.

    As you say, Tito would choke and die.

    (Oh, and: it looks like Tadic is bowing to the inevitable; he’s supposed to fly to Moscow with Kostunica this weekend to ink the deal. Note that Kostunica has still not come out and endorsed Tadic over Nikolic, even though he promised to back in June. Should be a jolly trip.)

    Doug M.

  6. Hi Doug,

    You definitely know what you’re talking about and you’re right about the “side-conditions” put up by Gazprom. However, it’s good that you pointed out these details otherwise readers are led to believe that Gazprom has purchased 100% of NIS.

    The bottom line, in my humble opinion, is that this is strategically a bad decision regardless of the business details.

    Keep up the good work Doug!


  7. The sale isn’t that bad. Russia has the resources and eventually dirty coal will get changed out for more “green” sources. The demand will come with the supply. I think that EU members wouldn’t have given them a much better price and don’t have the resources like Russia.

    Russia has shown they are a better partner than EU countries. It seems the EU and its allies still have problems conducting negotiations “on a level playing field” when working with Serbia. Why would Serbia be comfortable dealing with EU countries on issues like engergy? They may end up like the Serbs in Kosovo.

    Also, if this goes through, Russia will have direct interest in Serbia. That may provide some insulation against another NATO act of aggression. So, there is some security issues with the deal too.

  8. “I think that EU members wouldn’t have given them a much better price”

    …except that several EU companies were lining up to make offers at $2 billion plus.

    “It seems the EU and its allies still have problems conducting negotiations “on a level playing field” when working with Serbia.”

    Yes, offering them a price four times higher than the Russians certainly was unfair.

    “That may provide some insulation against another NATO act of aggression.”

    [ding] Sorry, stupidity overload. But thanks for playing!

    Doug M.

  9. Same old hostile Dougie.

    You get a bullshit card. Cite one quote where one of your EU companies wanted to pay 2 billion dollars for 51 percent stake of a company worth roughly 2 billion dollars.

    You can’t. Those you cite had expressed interest, that’s all. Lying is a sign of stupidity. Are you a Texan by birth?

    Like the EU, it appears that the fact that you say something makes it true. Wrong again!

  10. “This company is for sale. Minimum bid for a 51% controlling share is $2 billion. Who’s interested?”



    “Us two over here.”

    I dunno. You don’t know anything about the topic — which is fine; most people don’t — but you’re not interested in learning anything about it, either. Instead, you’re bringing your preconceptions in (Serbia, good… NATO, bad…) and trying to hammer the facts until they fit.

    Also, you don’t seem to be understanding what you read. People do pay more than 51% of market value for a 51% share; we went over that. You could at least try to keep up.

    It’s not hostility. I’m just not seeing why I should take you seriously.

    Doug M.

  11. Doug,

    All I said is that is wasn’t all bad.

    You’re wrong, have no facts, just opinion. Nobody offered 2 billion, nobody mentioned offering 2 billion. You just make it up as you go. You think shareholders would support paying twice as much? Nuts, you’re nuts with no proof. Gazprom committed at least $900 million for something worth, around 1 billion, maybe 1.2 billion.

    The EU membership is not much different than NATO. NATO cost Serbia 100 billion in damage. Why would they forget that when selling a State industry? How will they protect themselves from further aggression? Answer: sell NIS to Gazprom so the condition of the Pancevo refinery is Russian interest.

    If there is no demand, then why are others interested in a Southern Stream? Answer: There is demand, will be demand. Hydropower isn’t going to foster growth. EU aspiring nations will have to cut emissions using cleaner technology. Apparently, this is over your head.

    EU companies just got shut out because of their use of Serbia as a scapegoat. The corridor in Serbia will make for easy pipeline construction.

    Your hostility is what it is. You don’t know me. You just make it up as you go. You’re right about me hating what NATO was transformed into – from a defensive alliance to an imperial bully threatening peace and using violence in lieu of negotiations. Too bad for you that don’t see it that way.

  12. I am reserching topic of South stream for my local belgrade newspapers,and on chance i run onto this article,so i would like to clarify few things, in as few words as possible…
    First of all market value of NIS is NOT $2.8b.That number came from minister Dinkic who is favoring selling of NIS to OMV and(or)MOL.Other estimates are in range, of as low as 800m euros to 1.2b euros and $1.6b to $1.8b(US DOLLARS not euros) no one realy knows.Do not believe everything that western media tell you.
    you forgot to mention that,NIS has an debt of $600 million,infrastructure that was bombarded in 1999,and running on technology from 1980’s.
    So the deal goes like this,but all of this is purely speculations,i repeat this is only the summary of speculation,both sides are bound in silence:
    *400m euros for 51% stake in company
    *500m euros of investments
    *600$ for paying off the debt
    Serbia gets main branch of South stream gas pipeline,and $100-$200m a year for of transit fees…how many years? until gas is depleted…
    *and you forgot to mention building of 3m cubic meters of gas storage near Banatski dvor,payed buy russians…
    *serbia is paying the highest gas price in europe because curent pipelines are passing through several countries,so after South stream pipeline becomes operational serbia will get cheaper gas.
    *gas powered electric plant is building near Novi sad as we speak,so the electricity,produced in that way will be cheaper.
    *Only bad thing is that Gasprom gets an monopoly on oil imports.NIS is the only importer of crude oil,diesel and petrol in Serbia,so we will have major monopoly of Gasprom and NIS(as we had to date…) so nothing really changes…

    So…you loose some to get some…maybe this time we got something bigger.

    Today in Moscow our president,premier and minister will sign the contract.From monday it will be posted on this site and than all speculations regarding whats in it will be over.
    and than we will see what we get,the donkey or full breed Arabian stallion.
    Until that moment please watch Djokovic-Federer on Australian open semi final…

  13. @ Miki,

    Some good points. Obviously I disagree!

    — The market value of a large company like NIS can really be determined only two ways: stock price, or what a buyer will pay. Stock price is no good since it’s entirely government owned. Buyer price… well, it’s clear that other buyers were willing to pay more than NIS. The fact that Gazprom insisted on a no-bid deal makes this pretty clear.

    — Transit fees: maybe. Transit fees are not fixed; they’re a product of negotiation. Do you think the government will do a good job of negotiating for them?

    — $500 million of investment and Banatski Dvor facility: these are promises, and Gazprom’s record on promises is not gread. To be specific, Gazprom has used the “we’ll build a major storage facility — then you’ll be a regional hub!” argument on at least four different countries. And Gazprom has delayed or reneged on promises before; cf. their agreement with Sonatrach in Algeria, where after 16 months they still haven’t started any of the investments they promised back in September 2006.

    — $600 million of debt: if I understand correctly, most of that debt is owed to the government. Since NIS is entirely government owned, that hasn’t mattered much until now. Perhaps Gazprom will promptly repay this money… but, again, do you think the government will demand fast and complete payment? Or that Gazprom will respond if they do?

    — Cheaper gas: Serbia will be getting all its gas from a single monopolist supplier. This, not the number of transit countries, will set the retail price.

    — Donkey vs. stallion: we say “the devil is in the details”, and the details will show if this is a bad deal or a truly horrible one. But we already know that this was done in a hurry and without competition; that the government was a very bad negotiator; and that Gazprom has imposed conditions (no minority shareholders) that will give it a very strong position. Even if they had paid full price, these would make the deal smell very bad indeed.

    @ Todd,

    Commenting here is a privilege, not a right. Occasional snark is fine; consistent obnoxiousness is not.

    This is a yellow card. Mind your manners, please, or you’ll be deleted until you do.

    Doug M.

  14. From the AP, by DUSAN STOJANOVIC 01.14.08, 1:55 PM ET

    “The sale of Oil Industry of Serbia, or NIS, is being offered solely to state-run Gazprom and at a below-market price. In return, Russia would agree to route a significant portion of a planned gas pipeline through Serbia, which stands to benefit from the transit fees on supplies being shipped to westward points in Europe. …

    “Serbian government ministers said Gazprom has offered 400 million euros ($600 million) for a 51 percent stake in NIS – a fifth of the estimated value of the company. The Russians have also pledged to invest 500 million euros ($740 million) in the modernization of the Serbian energy monopoly. …

    “Economy and Privatization Minister Mladjan Dinkic, of the pro-Western G-17 party … said NIS should be sold at an international auction with Gazprom participating. Other companies showing interest in the purchase of NIS include Austria’s OMV, Poland’s PKN Orlen, Hungary’s MOL and Romania’s Rompetrol.

    “‘I’m sure that we would get five to eight times more for NIS if it was sold through international bidding,’ Dinkic said. ‘I am very worried. I was told it was indecent to ask the Russians for a market price.'”

    Also, an enterprising reporter went and asked Gazprom how solid those promises were about building South Stream through Serbia. They turned out to have a bit of natural gas about them:

    Serbian Branch Of South Stream Gas Pipeline Not Certain — Dow Jones — January 24, 2008: 01:35 PM EST

    “It hasn’t been decided if the planned South Stream gas pipeline from Russia to southern Europe will have a branch that passes through Serbia, a spokeswoman for pipeline developer South Stream AG said Thursday, contradicting previous statements from a person in the Serbian government.

    “‘We are studying different routes for the South Stream pipeline. Final decisions on the route will be based on the technical, economic and commercial feasibility studies that we are carrying out and that we expect to complete by the end of the year,’ the spokeswoman said. …

    “South Stream AG is a Swiss-based company recently incorporated by Italian oil company Eni SpA (E) and Gazprom on a 50-50 basis for the development of the pipeline.

    “The 900-kilometer pipeline would run under the Black Sea from Novorossisk in Russia to Burgas in Bulgaria. A branch of the pipeline is likely to run from Bugaria through Greece and into Italy, where Eni has long-term gas supply contracts with Gazprom.”


    I’ll just add that over a decade or so of keeping half an eye on oil and gas in Russia, I’ve seen an awful lot of non-Russian partners complain about broken promises and terms that suddenly change after the deal has been sealed. Let the seller beware.

  15. Governments, especially governments with not a lot to lose in the reputation department, are more free to make bad business decisions than non-sovereign entities: the deal can be unilaterally “renegotiated”.

  16. With Gazprom? The company that’s now going to control all of Serbia’s natural gas and oil? Ummm.

    Also, the current government has done a pretty good job of painting itself into a corner. Everyone’s been talking about what a *great* deal this is for Serbia. That’s going to make it very hard for them to turn around and “renegotiate”.

    And then of course Gazprom has rather a lot of money to throw around. Do you want those campaign contributions or not, Mr. Minister?

    No… unless G17 and Cedo form the next government (hahahaha, oh please excuse me, ha), no plausible Serbian government is going to push back very hard. Gazprom will pay very little in taxes, and nobody’s going to complain. Gazprom’s going to follow environmental rules as much or as little as it cares to, and nobody’s going to complain. And if Gazprom breaks its promises, most of Serbia’s politicians will fall over themselves to accept its explanations.

    Think United Fruit in Central America, except that Gazprom is far bigger and more powerful than UF could ever be. Not everybody likes bananas, but we all like to stay warm.

    Doug M.

  17. Hi, Doug. Since I do this sort of stuff for a living, I figured I’d take a look. As you know, it’s a solid piece of analysis. We should write something professionally.

    Although there is one little thing that’s kinda making me cough slightly.

    “Unless the Serbs decide to nationalize the pipeline — hah.”

    I do have to say that I’ve heard of countries with far stupider governments than Serbia, and under far more foreign pressure, renegotiating far less idiotic deals.

    Either you’re talking about a relatively short timeframe, or I’m missing some institutional detail. Which is it, may I ask?

  18. Doug I have to agree it aint complicated to just write 400 million Euros (not dollars?!) ‘for 51 percent of the company’. You just wanted to show what a bad deal it was. It may well be a bad deal but people would like a bit of accuracy, and the whole picture please. I’m not even the pedantic type and mistakes like that irk.

    My chief problem with the deal is something I’m not sure you have mentioned – the dirty monopoly word. Russians already own Beopetrol and I reckon they will have a majority of the petrol pumps in Serbia (not that I give a toss they should double, no triple the price of petrol in these parts anyway).

    ‘No… unless G17 and Cedo form the next government (hahahaha, oh please excuse me, ha)’

    I’d say that if Nikolic wins that is a realitic option. It goes like this – DS withdraw from government due to lack of DSS support for Tadic. SRS dont want to join the government – trust me they wont. Elections are called and there is an increase in support for DS and LDP. The only question is whether LDP will bite. In the final analysis they would.
    It may be an outside bet but its not a joke.

  19. “DS withdraw from government due to lack of DSS support for Tadic.”

    This would require DS to, as they say, reach down and find a pair.

    Theoretically possible, but it would be a big departure from their behavior to date.

    Doug M.

  20. You know what I hate?

    When I predict that someone will behave badly — i.e., that DS will continue to be a craven bunch of gutless wonders — and I am then, immediately, proven right.

    * * * * *

    B92: Will the governing coalition collapse because of the lack of support

    Đelić: The government’s working, and President Tadić and the DS have always guaranteed our society and country stability, and that’s what we’ll continue to do.

    B92: That means you’re not considering withdrawing from the government?

    Đelić: We’re working for the good of our citizens, we expect a great victory for Boris Tadić on Sunday. The government will continue to function.

    The deputy prime minister also doubts Koštunica’s statement yesterday that he had still not decided who to vote for on Sunday.

    “I can’t believe that the prime minister, who is the guarantee of democracy, won’t vote on Sunday. I’m sure that Koštunica who, together with Tadić, and led by Zoran Đinđić, toppled the regime of Milošević, Šešelj and Tomislav Nikolić seven years ago, cannot vote for anyone other than Tadić,“ he predicted.

    * * * * *

    Bganon, I like you. But let’s be real. Until DS discovers its missing testicles, there is zero chance of G17 or Cedo being any more important than they already are. (In fact, in G17’s case, I think they’re in serious danger of becoming irrelevant and disappearing altogether. I’m sorry to say it, since I have a soft spot for technocrats, but there it is.)

    If Tadic wins, this ridiculous government will stagger on. If Nikolic wins… probably, this ridiculous government will stagger on; after a day or two of suffering and complaining, DS and the rest of them will decide that it’s still better to stay in government (where they can work to limit the damage, you know) rather than risk another election. Because elections, you know, are scary.

    Doug M.

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