Serbia-Russia clinch power sector partnership deal

Friday 30th May 2008

It is the second energy pact between Belgrade and Moscow in 2008 after a deal that included Serbia in the South Stream gas pipeline and gave Gazprom a stake in Serb oil firm NIS. Together, they mean a big part of Serbia's energy sector could eventually be in Russian hands.

EPS has until mid-May to inform Inter RAO of projects foreseen by its expansion strategy, and the Russians must decide on their participation by July. Inter RAO will have first pick as the Serbs may not look for other partners throughout that time.

"This is the first step in our cooperation with EPS," Inter RAO general manager Evgeny Dod said after signing the deal.

"I hope that in three months we will be able to present joint projects. Once the projects are defined we expect the two governments to negotiate the details."

Inter RAO, which has power plants mainly in ex-Soviet states but also in Finland and Turkey, is 60 percent owned by former electricity monopoly, Unified Energy System (UES). The rest is held by Russian state nuclear firm Rosatom, which is due to get a majority stake by next spring, when UES spins off assets as part of a sweeping sector reforms.

EPS and Inter RAO's likely joint projects would be two 700-megawatt thermal plants estimated at a total €1.5bn, a vital project to avert shortages once existing ageing facilities are shut down.

The construction of several small hydro power plants on the river Drina – earlier slated as a joint project of Serbia with the Serb half of Bosnia – could also be on the cards.

EPS general manager Vladimir Djordjevic said EPS was looking for a strategic partner in its ambitious expansion plans.

"The investment earmarked for bulding new capacities by 2015 totals €9bn," Djordjevic said.

Analysts say Serbia's tilt to Russia is partly a gesture of protest over the United States and European Union's backing for Kosovo, a former Serbian province that seceded in February despite objections from Serbia and its big-power ally Russia.

But it is also a necessity, as rising nationalist sentiment has made Western investors hesitant. A May 11 early election, a neck-and-neck race between pro-Western liberals and pro-Russian nationalists has increased political instability.

"It depends on the new cabinet formed after the election whether this cooperation will be pursued or not," said a Serbian source close to the deal, noting that there were no penalties if Serbia backed out.

Vladimir Gligorov of the Vienna Institute for International Economics said Russian companies are natural energy partners because of their dominant position in the sector, with Serbia only one of many European countries relying on them.

But the deal did not send a good message because of the political overtones and the less than transparent procedure.

"The Russians are taking advantage of the weakness of Serbia's government and of political instability in the country to get good deals for their companies," Gligorov said.

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