Building Putin's Empire

Deal with Serbia gives Russia victory in 'pipeline war' with EU

Russia won the right Friday to direct a major supply route for natural gas through its ally Serbia to Europe, a deal that analysts described as a Kremlin victory in a "pipeline war" with the European Union.

The agreement, signed in the Kremlin before President Vladimir Putin and visiting Serbian leaders, increased Moscow's control over energy supplies to Europe and could undermine a rival EU project.

Strong Russian opposition to independence for the Serbian province of Kosovo was a key bargaining chip in the negotiations that resulted in Serbia joining the project, the South Stream natural gas pipeline. Belgrade also agreed to sell a majority stake in Serbia's state-owned oil monopoly, NIS, to the Russian natural gas giant, Gazprom, at a favorable price.

South Stream is a project worth a projected €10 billion, or $14.7 billion, organized jointly by Gazprom and the Italian energy giant ENI to carry Siberian gas to Europe via the Black Sea.

"Our close political relations were today converted into economic results," Putin's chosen successor, First Deputy Prime Minister Dmitry Medvedev, told reporters. "This is a great breakthrough."

[...]

The agreements signed Friday by Tadic and Prime Minister Vojislav Kostunica of Serbia, gave Gazprom a 51 percent stake in Serbia's NIS oil and natural gas company, for €400 million [US$593,259,318.44 ed.] and a pledge to invest €500 million more by 2012.

Some analysts described the price as well below market value, giving estimates of €1 billion to €2 billion [US$1,483,589,692.57 - US$2,966,249,293.59 ed.], although others said the NIS plant needed heavy reconstruction.

NIS dominates the Serbian market, with a monopoly on refining and a network of almost 500 gas stations. The NIS deal gives Gazprom its first refinery outside Russia.

Gazprom gets OMV stake

Gazprom will acquire a stake of 50 percent in OMV's natural gas hub in Austria, giving it greater access to the Continent's customers, under an agreement signed Friday, Bloomberg News reported.

The two will sell to Germany and Italy through the Baumgarten hub, located near a trunk pipeline from west Siberian natural gas fields.

Via The IHT

On January 17, 2008, The Streetwise Professor observed that

Gazprom/Russia is/are playing smashmouth ball over Serbia’s national oil company. Don Miller and Don Medvedev have presented Serbia with an offer it can’t refuse: to sell Naftna industrija Srbije at a fraction of its true value–and one with an unbelievably short fuse, like, you know, Friday.

In exchange for control of SIJ’s hard assets and guarantees of a monopoly position in Serbia for some period (take that Serbian consumers, Gazprom doesn’t do competition), Gazprom Neft (Gazprom’s oil affiliate) is offering an amount that has been estimated to represent well less than one-half (and perhaps as little as one-quarter) of the Serbian company’s value. The tacit quid pro quo is that Russia will support Serbia on Kosovo–but, if Russian rhetoric is to be believed (yeah, I know) they would do that anyways.

To make the deal look a little less like an abject surrender, Gazprom has also dangled the prospect of giving Serbia a stake in a future gas venture. Word of advice, guys–DON’T BELIEVE IT, and DON’T TAKE IT. Gazprom is the master of what Bob Amsterdam calls “premature contractualization.” That is, announcing deals just in time to forestall projects that are adverse to Gazprom’s interest, and then fading the deal when the threatening competing projects are shelved in response to the Gazprom announcement. Gazprom will whisper sweet promises in anybody’s ear to get what they want, and then renege when it suits them. (Nigeria–you should take note of this, as Gazprom has been wooing you too.)

Gazprom’s stratagem is analogous to a common ploy in the software business. In the 80s and 90s “vaporware” was a commonly employed competitive strategy. A software company would announce a new, improved software product in order to forestall entry by a competitor. Once the potential entrant was scared away, the new software would just fade away into the mists, never to be seen. Gazprom is essentially following this playbook–constantly announcing vaporpipelines, vaporwells, vaporinvestments, vaporstorage, vapor-you-name-it whenever a threatening project is mooted.

So, what Gazprom is offering Serbia is: a pittance in cash plus a pig in a poke in exchange for hard assets right now. Given Gazprom’s record of delivering on its big talk, the Serbs would be well advised to take cash on the barrelhead and take the promises for what they are worth–a little more than nothing.

It would be fair to say that Serbia is the first new province in Putie's Soviet Union Lite. Let's see how long it takes before soon-to-be Soviet Russian Premier Putin directs the new pawns - with their new military advisors - to square off against KFOR, while at the same time, telling the EU that abandoning their NATO obligations would be in their absolute best energy supply interests.

And whether he delivers the message or has his beard, Gazprom poohbah Gerhard Schroeder, do so instead.

See also: How To Attract Foreign Investment (Gazprom and its business partners)