Serbia, energy and politics: Why Russia sells gas to Serbia so cheaply?

At the end of each year, Gazprom concludes new gas price deals, and this year ‘s negotiations were marked by record prices for this energy source in the world market – for several weeks, 1,000 cubic meters of gas costs more than $1,000.

However, there is no winter for two countries in Europe – next year Gazprom will sell gas to Belarus for $128.5 and Serbia for $270 per 1,000 cubic meters – on the same terms they have bought so far.

“This is our salvation, we will not have problems with electricity, gas or heating, as well as with the total supply,” said Serbian President Aleksandar Vucic after a meeting with his Russian counterpart Vladimir Putin on November 24 in Sochi.

The $270 price Serbia received is almost twice as low as Gazprom planned to charge countries that do not share a state border with Russia, which increases delivery costs – $500 per 1,000 cubic meters.

Gazprom usually does not publish details of contracts with other countries – prices are announced by politicians or representatives of the Russian oil giant.

In addition to Belarus and Serbia, China will pay the current gas price in 2021 – $171 per 1,000 cubic meters.

Gas as a political issue

At a news conference before leaving for Sochi late last month, Serbian President Aleksandar Vucic said “a good price would be $500 per 1,000 cubic meters”.

In October, Russia proposed that Serbia pay $790 in the future – three times more than the presidents of Serbia and Russia had agreed in the end.

“The authorities in Serbia have presented the Gazprom proposal to the citizens as a price that only President Vucic can drop in direct negotiations with Putin,” energy expert Milos Zdravkovic told the BBC.

“We received an incredible price, we saved 300 million euros, a national stadium,” Vucic said after the meeting in Sochi.

Zdravkovic believes that the agreement reached enabled Serbia and Russia to send political messages that are good for both sides.

“In the Serbian media, the agreement reached in Sochi was presented as a victory for the Serbian negotiating team, and Russia was given the opportunity to demonstrate soft power and show that countries that have good relations with Moscow will get cheaper gas” said Zdravkovic.

Moscow has “met its partners,” according to Russian expert Sergei Pikin, director of the Energy Development Fund.

“In addition, the need for Russian gas is growing in Serbia and Gazprom wants to support that,” he added.

Srecko Djukic, an economist and former Serbian ambassador to Belarus, believes gas is “primarily a political tool”.

He recalls that Moldova, led by pro-European President Maya Sandu, who succeeded pro-Russian President Igor Dodon, is already paying a higher price for gas – $450 instead of the previous $250 per 1,000 cubic meters of gas.

Maintaining the current price is politically appropriate for both Belgrade and Moscow, believes Igor Yushkov, a Russian expert at the University of Finance under the Government of the Russian Federation.

He emphasizes that this way, Serbia collects political points and Russia secures a reliable ally in Europe.

He adds that “Serbia does not even hide its political cards in the gas negotiations.”

“It promises that it will not join NATO, that it will remain an ally of Russia, it skillfully uses its geopolitical position for Russia to agree to special conditions in the gas trade,” Yushkov said.

Pikin points out that the $270 price tag for Gazprom is not low – any contract with which the price exceeds $100 per 1,000 cubic meters is paid to the company.

“The normal price for Gazprom has always been between $200 and $300, so 270 is a good price.”

What is the role of Serbia on the gas map of Europe?

Serbian experts stress that the reasons for the low price of gas that Serbia received are not only political, but also economic.

The part of the “Turkish Stream” pipeline that passes through Serbia was put into operation with a ceremony on January 1 of this year.

Thus, the gas delivery point for Serbia was moved from the Ukrainian-Hungarian border to the Turkish-Bulgarian border, which enabled Russia to bypass Ukraine when it started sending gas to Hungary and Croatia in October using this route.

“When the Turkish Stream was put into operation through Serbia, it became a transit country through which much more gas is distributed than consumed,” said Aleksandar Kovacevic, an energy expert.

He recalls that gas deliveries to Serbia are made in accordance with the long-term interstate agreement ratified in 2012.

Based on this agreement, in 2013 a commercial agreement was signed between Gazprom as a supplier and Jugorosgas as an importer in Serbia.

Jugorosgas is a Russian-Serbian company, which since 2007 has acted as an intermediary between Russian Gazprom and the Serbian state oil company Srbijagas.

Gazprom owns 50 percent of Jugorosgas’s assets.

Russia is a major player in the Serbian oil and gas industry – Gazpromnjeft, a subsidiary of Gazprom, became the main owner of Serbia’s Oil Industry (NIS) in 2009, buying 51 % of its shares.

Today, Gazpromnjeft owns 56% of NIS assets.

NIS is a former state-owned oil and gas company, the restructuring of which in 2005 was founded by Srbijagas, which is 100% owned by Serbia.

Today, NIS-Gazpromnjeft is engaged in the exploration, production and refining of oil and gas, as well as exploits deposits in Serbia, Romania and Bosnia and Herzegovina.

They also manage the NIS Petrol and Gazprom gas station network, of which there are more than 400 in Serbia and surrounding countries.

In addition, Russia funded the construction of the Banatski Dvor underground gas storage facility, which opened in 2011, becoming one of the largest in Southeast Europe.

Gazprom and Srbijagas are co-owners of Banatski dvor D.O.O. which manages the warehouse.

“By giving a preferential price for gas to Serbia, Gazprom is investing in the Serbian oil and gas industry, and consequently in its profit,” says energy expert Milos Zdravkovic.

His colleague Aleksandar Kovacevic states that “Serbia has qualified as a country in which Gazprom has commercial interests and carries out gas supply and storage activities directly.”

“That is why the price of gas is optimally set, in order to serve the strategic and business goals of the Russian giant,” he added.

Elections and a six-month contract

Before leaving for Sochi, Vucic announced that a new contract would be signed with Gazprom for a period of five or six years.

However, after the meeting with Putin, it was announced that the price of gas will remain the same only in the next six months.

This is not common, as Gazprom mostly signs contracts for several years, notes Srecko Djukic.

General elections will be held in Serbia in less than six months.

“Serbia received a temporary award until the political situation is clarified,” Djukic said.

He believes that the price of gas that Serbia will pay in the future will depend on the election result.

“All objective research shows that Belgrade will surely be in the hands of the opposition, that the presidential elections are extremely uncertain and that in terms of parliamentary elections, I expect a fierce battle,” Djukic said.

Djukic and Zdravkovic expect changes in the energy market in the next six months and that relations between Europe and Russia will normalize, which could affect the price of gas that Serbia will pay.

Milos Zdravkovic emphasizes that “it is not appropriate for Russia to increase the price of gas.”

“They must not allow gas from USA and Qatar to become competitive in the European market,” Zdravkovic said.