From Russia with loans

The agreements signed during president Medvedev’s visit to Belgrade not only reinforce Russia’s economic influence over Serbia, but also demonstrate that relations between the two will not be impeded or diminished by Serbia’s accession towards Europe.

By Ian Bancroft

The high-profile visit to Serbia by Dmitry Medvedev, the Russian president, has been largely focused on economic and energy relations between the two countries. With Serbia to receive a $1bn billion loan from Russia, which will be used to cover part of its growing budget deficit and to finance various infrastructure projects, important questions remain about the real price of Russian support. What these agreements do demonstrate, however, is that Serbia’s closer ties with the EU do not constrain it from strengthening relations with Russia in pivotal strategic areas.

Though Serbia agreed a €3bn stand-by agreement with the International Monetary Fund (IMF) in March, access to these funds has been withheld until the Serbian government tackles its growing budget deficit. Though some of this reduction will be achieved through politically-contentious public sector lay-offs, Serbia has been keen to secure access to alternative sources of finance. As Mladjan Dinkic, Serbia’s minister of economy and regional development, clarified, whilst “the EU is our strategic partner…unfortunately they couldn’t help us too much in the crisis – they could only provide €100m, €50m this year and €50m next…[and] obviously that is not enough for our needs”. Having already negotiated favourable term loans from China for various infrastructure projects, this substantial loan from Russia will provide Serbia with much-needed fiscal flexibility.

Whilst Serbia’s prime minister, Mirko Cvetkovic, insists that there are no conditions attached to the loan, there is intense speculation concerning the fate of key energy assets, including Elektroprivreda Srbije (EPS, the country’s power monopoly), which is expected to be privatised once the global economic environment improves. Having already signed a strategic co-operation agreement with Inter Rao UES, a Russian energy company primarily engaged in power generation and electricity trading, EPS’s debts and need for urgent infrastructural investments, particularly the construction of new thermo- and hydro-power plants, ensure that the prospect of greater Russian involvement is an increasingly attractive proposition for all sides.

Throughout his visit, Medvedev was accompanied by a one-hundred strong delegation of government and business officials, including foreign minister, Sergei Lavrov, Gazprom president, Sergei Mueller, the director of Russian railways, Vladimir Jakunin, plus the directors of the Bank of Moscow and Lukoil, respectively. Also part of the delegation was Sergei Shoigu, Russia’s minister for emergency situations and Russia’s head of the Serbian-Russian Intergovernmental Committee on Trade, Economic and Scientific Cooperation, who discussed the possibility of Serbian companies taking part in construction work for the Sochi 2014 Winter Olympics.

With respect to the energy sector, an important agreement has been signed between Gazprom and Srbijagas, Serbia’s state-owned gas company, to establish a joint venture to develop and construct an underground gas storage facility at Banatski Dvor, which will ultimately be connected to the South Stream pipeline. Addressing the Serbian parliament, Medvedev emphasised that “Russia has the intention for Serbia to be the main player in the region regarding gas distribution”. Earlier this year, Russia’s Gazprom Neft secured a 51% controlling stake in Serbia’s state-owned oil monopoly, Naftna Industrija Srbije (NIS), for €400m, with a promise to invest a further €547m by 2012 and to include Serbia in the South Stream pipeline project. NIS recently secured a $100m loan from the Bank of Moscow to help cover its daily operating costs.

Aside from marking the sixty-fifth anniversary of the liberation of Belgrade by the Soviet army, Medvedev’s visit to Serbia has a further symbolic importance by demonstrating that the latter’s closer ties with the EU do not imply a diminution of ties with Russia. Through its financial, energy and diplomatic leverage, Russia continues to extend its strategic authority over the struggling Serbian economy, primarily through targeted acquisitions of key energy-sector assets. With opportunities for co-operation in such spheres far from exploited, this increasingly well-charted course will continue to have a profound impact on Serbia and the Western Balkans.