Serbia Looks West to Weaken Russia's Energy Dominance

Tuesday 02 June 2015

Vucic's trip follows Russian Foreign Minister Sergei Lavrov's May 15 visit to Serbia, as well as Serbian President Tomislav Nikolic's attendance at the Moscow Victory Day Parade on May 9. Serbia maintains close economic and political ties with Russia, but over the past weeks Serbian policymakers have signaled that Belgrade's energy strategy is evolving. As Russia and the West continue to compete for influence in the Balkans, Serbia's orientation will ultimately hinge upon the European Union's willingness to finance energy and infrastructure projects in the country.

Serbia has long been heavily dependent on Russian energy. Natural gas from Russia currently meets more than 80 percent of Serbian demand, and in 2013, Russian energy giant Gazprom agreed to supply Serbia with 1.5 billion cubic meters of natural gas annually for 10 years. Moreover, Russia's Gazprom Neft owns a majority stake in NIS, a Serbian oil and natural gas firm with both production and refining operations. Russia also granted a range of loans to the Serbian government, pledging more than a billion dollars the past two years alone.

This dependence on Russia has kept Serbia's natural gas prices relatively high. During the first quarter of 2015, Serbian energy monopoly Srbijagas paid $340 (plus transit costs) per thousand cubic meters of Russian natural gas. By comparison, neighboring Hungary reportedly purchases Russian natural gas for only $260 per thousand cubic meters. Ukraine, embroiled in a conflict with Russia-backed separatists, paid only $329 per thousand cubic meters of Russian natural gas during the same time period, largely because of Ukraine's ability to import volumes from other suppliers — particularly Slovakia — and keep substantial amounts of natural gas in storage.

Serbia lacks significant ability to store the commodity, and the country's connectivity to energy sources other than Russia is limited. The Balkan state imports its natural gas through a Hungary-Serbia interconnector, and Hungary itself is largely dependent on Russian natural gas flowing through Ukraine. Ultimately, Serbia can only reduce its reliance on Russia by building new energy infrastructure.

Serbia's Emerging Infrastructure Options

Serbia was one of the countries originally slated to host a segment of the since-abandoned South Stream pipeline, which would have transported Russian natural gas across the Black Sea to Bulgaria and onward to Serbia, Hungary and other Central European markets. The Serbian government supported the project, which was expected to create more than 2,000 jobs in Serbia and ultimately attract some 1.5 billions euros (roughly $1.65 billion) in investment to the country. Following the cancellation of the project, Serbian officials participated in talks with Greece, Macedonia and Hungary on ways to bring natural gas to Central Europe, whether through a Russia-backed project such as Turkish Stream or an alternative Southern Corridor route designed to circumvent Russia altogether.

Russia's financial constraints, coupled with possible Western incentives for participation in alternate energy projects like the Southern Corridor, are pushing Serbia toward the Western-led options. In early May, President Nikolic said in an interview that Russia's Turkish Stream would be even more costly for Serbia than South Stream. Moscow has not offered financial assistance to help Central European states access Turkish Stream. In fact, the Kremlin has yet to even announce how it will fund the main parts of pipeline project.

As Russia's financial limitations raise questions among its Balkan partners, Western governments are promoting two possible alternative ways for Serbia to import energy. These proposals have been floated in the past, but the crisis in Ukraine and increased competition for influence in the Balkans has given Western governments fresh impetus to help Serbia diversify away from Russian energy.

The first proposal is for Serbia to construct the infrastructure needed to connect to the Trans-Adriatic Pipeline. Scheduled to become operational in 2020 with an initial capacity of 10 billion cubic meters of natural gas per year, the pipeline will transport natural gas from Azerbaijan across Turkey and onward to Greece, Albania and Southern European markets. Serbia would likely need to build pipeline networks through either Macedonia or Montenegro in order to access the new pipeline. Already, though, Croatia and Montenegro are planning on constructing a pipeline along the Adriatic coast that would come online by 2020 and connect to the Trans-Adriatic Pipeline. This project could, if built, allow Serbia to access Azerbaijan's supply.

Another potential opportunity for Serbia is a planned liquefied natural gas terminal in Croatia. The project, which is only in the early stages of feasibility studies and progressing slowly, would be constructed on an island in northern Croatia. In February, reports emerged that the United States had offered to help Serbia access natural gas from the new terminal. On May 28, Prime Minister Vucic declared that in order to ensure energy security, Serbia is "ready to diversify the sources of gas for Serbia, which is very important for our American friends as well." In essence, the prime minister confirmed that the United States has been actively seeking ways for Serbia to become less dependent on Russia.

European Investment Needed

Though U.S. technical and political support could play an important role in compelling countries such as Serbia to lessen their dependency on Russia, investment for the required pipeline infrastructure would likely come from the European Union. Brussels has earmarked 1.5 billion euros for investments in Serbia — an EU candidate country — between 2014 and 2020, and energy security is one of the categories of investment allowed under the program. Greater integration for Serbia would also support the LNG aspirations of Croatia, already an EU member. Connecting Serbia with the EU-backed Trans-Adriatic Pipeline helps the union further its own diversification strategies independent of Serbia's EU candidacy. Like the United States, some European governments — especially Germany — would like to curb Russia's influence in the Balkans.

As a country in the Eurasian borderlands with long-standing cultural and economic ties with Russia, Serbia will continue balancing between Russia and the West. Nonetheless, amid the confrontation with Russia over Ukraine and competition for influence in the Balkans, Western governments have a chance to gain influence in the region by providing political and financial backing for energy diversification projects in Serbia. Indeed, Russia's financial constraints and potential Western willingness to help Serbia break Russia's monopoly on natural gas exports to the country are already leading to an evolution in Serbia's position. As Vucic noted on May 28 during discussions of EU investment in the Balkans: "We need some money from the EU funds, and then you will see the smiles on our faces."

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