The Blog

Russia's Serbia Strategy

It's the energy, stupid.

11:00 PM, Feb 21, 2008 • By CHARLIE SZROM
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YESTERDAY EVENING, Serbian Prime Minister Vojislav Kostunica boasted to a crowd opposed to Kosovar independence that, "We're not alone in our fight. President Putin is with us."

Briefly euphoric after breaking free, Kosovars now face a grim challenge: they must build a prosperous nation in the face of strident opposition from Moscow. Meanwhile, Serbian protestors broke into the U.S. Embassy in Belgrade yesterday; much of the American complex now lies charred. Russia's Security Council veto, which ensures Kosovo will not join the UN, hinders the international response to such incidents and impedes foreign assistance that might stabilize the fledgling democracy. Indeed, upon Kosovo's independence, Russian foreign minister Sergei Lavrov said the event "threatens the destruction of the world order that has developed over centuries."

Why should Russia go to the trouble of standing up for Serbia? Much has been made of the long historical affinity between the two. Serbia once stood as the bulwark of Eastern Orthodoxy, which had its greatest champion in the 'Third Rome' of Russia after the fall of Constantinople. The Catholic Hapsburg Empire lay just to the west, often as close as Croatia, and the Muslim Ottoman Empire occupied Serbia for centuries. Patriarch Alexiy II, head of the Russian Orthodox Church, demonstrated the strong religious ties between the two countries when he inserted himself into the debate by saying Kosovo's independence "has unilaterally upset the balance in the world."

Yet pretenses of defending international law or analysis pointing to traditional ties hide the real reason for Russia's position: Serbia lets Russia project power and accrue profit in Southeastern Europe.

Russian-Serbian trade has spiked, and Russian corporations have begun snatching up Serbian assets at bargain-basement prices. Vladimir Putin has even acknowledged this, calling it "natural that a resurgent Russia is returning [to Serbia]."

Trade between the two topped $2.6 billion in 2007, a 22 percent increase over 2006 and a 56 percent increase from 2005. Much of this exchange has been in energy imports from Russia, the country with which Serbia has its largest trade deficit.

When Serbia opened up the bidding for the assets of its national oil conglomeration, Naftna Industrija Srbije, Belgrade's favoritism led to enormous Russian profits. A number of companies--Hungary's MOL, Poland's PKN Orlen, Russia's Lukoil, and Romania's Rompetrol--made offers for the group late last year.

Despite a market valuation estimated at between 1 and 2 billion euros ($1.5-3 billion) by most analysts, Russia's Gazprom purchased a 51 percent stake in NIS for just 400 million euros ($589 million) in late January. Gazprom enjoys close ties with the Russian administration: Putin's presumptive heir to the presidency, Dmitry Medvedev, is chairman of the firm's board of directors.

In December, when Russia made an initial bid similar to the final purchase price, Serbia's economic minister, Mladjan Dinkić, said, "This offer is humiliating . . . the property alone is worth 800 million euros ($1.17 billion) according to conservative estimates, excluding business or market share." Analysts inside and outside Serbia believe the prime minister overruled Dinkić and pushed the deal through anyway to reward Russia for its support on Kosovo.

Russia, a "first among equals" in economic deals according to Serbian Deputy Prime Minister Bo idar Djelić, has extended its influence deep into Serbia's economy. Russia's Aeroflot has expressed interest in purchasing the flagship Serbian airline JAT; it may make an offer as early as late March according to Aeroflot official Mikhail Polyboyarinov. Other assets slated for privatization, such as Srpska Bank, have also come under the watchful eye of Russian financiers.

Most importantly, the NIS deal came bundled with a plan for Russia to construct the intermediate leg of its 550-mile South Stream pipeline project through Serbia. Carrying nearly 2.6 trillion gallons of natural gas a year to Europe from the Black Sea through Bulgaria, South Stream would force Serbia to rely on Russia for fuel supplies.

The pipeline would also cement Russia's control over the European market. The EU and the United States, hoping to blunt the Russian monopoly over the European energy market, plan to build a pipeline, known as the Nabucco project, to bring Caspian fuel from Azerbaijan through Bulgaria, Romania, and Hungary.