Looking from a distance of 15 years, how do we view the privatization of NIS and the economic-political agreement with the Russian giant? Was it a good business move for Serbia, and did Gazprom’s arrival change future agreements between our country and giants? The answers were provided by broker Nenad Gujaničić and the editor of the weekly magazine Radar, Milan Ćulibrk.
In the package, the construction of the South Stream through Serbia was also agreed upon, which later fell through, as well as the construction of a gas storage facility in Banatski Dvor.
The political background of this sale, Stevanović reminds, is clear – it is related to the then, as well as the current situation in Kosovo and the necessary support of Russia to Serbia’s policy.
The majority stake in NIS was sold for about 400 million euros, approximately around the same time as the sale of the Robne kuće Beograd (Department Stores Belgrade) for slightly over 360 million euros.
These two sales were often compared, given that RKB “went” for a bit more than 360 million euros.
The price of NIS shares was therefore criticized from the beginning, as all value assessments were much higher – estimates even reached several billion euros.
At that time, the sale also included the NIS buildings in Belgrade and Novi Sad, refineries in Pančevo, Novi Sad, Elmir, around 500 gas stations, 1600 internal stations, 44 depots for kerosene supply, numerous tanks, shares in companies, the right to use reserves, oil fields in Vojvodina, and concessions for oil fields abroad, such as in Angola.
Particularly contentious in this agreement was the mining royalty – it remained at around three percent, although by law, it should have been seven percent. This was interpreted as another concession to the Russian side, but also as giving NIS the green light to use all of Serbia’s reserves, estimated in the billions of euros.
The sale was accompanied by numerous controversies, many of which are still active. However, broker Nenad Gujaničić believes that there are still some positive aspects.
“It is clear that the privatization was non-transparent. When political-economic arrangements are made, it is clear that it is not good. What is good is how NIS looks today, and we can imagine how it would look if it were led by political representatives,” says Gujaničić.
“Every service user sees what these gas stations look like, the financial results are much better, it is a highly profitable company and looks good, especially compared to other state-controlled enterprises,” he added.
In comparison to regional companies, according to his opinion, NIS is in a better position than INA, which, as he explains, is divided between Croatia and Hungarian MOL and has not had investments for a long time, which is crucial in the oil business.
“We can imagine what would have happened if it hadn’t been privatized. In an ideal situation, our companies would be led by the most skilled domestic people, everything would work great, the state would collect dividends… That has never happened in these areas. The control of companies is the most important,” he emphasized.
The market value of NIS on the stock exchange is about 40 percent higher, around 1.2 billion, he said.
“However, if NIS were hypothetically sold, it is certain that the price would not be less than three or four billion euros, and that it is our most valuable company. We don’t know the values of others because they are not on the stock exchange,” explained the broker.
Both Gujaničić and he, Milan Ćulibrk recalled, were working at the magazine “Ekonomist” at that time, which was one of the few media outlets that opposed that arrangement.
“Non-transparency and a direct deal were the biggest objections. The then Russian ambassador asked to come to the editorial office of Ekonomist to explain ‘how things stand’ and said that NIS was not worth a penny more. I asked, if that’s the case, why not go for an international tender and choose the best buyer, instead, everything was done internally, and a new gas pipeline, which never existed, was served to us as a bonus – supposed to compensate for that low price of 400 million euros,” he recalled.
For comparison, Ćulibrk says, the net profit of NIS was three times higher than that price just last year and the year before.
“The key problem was the last year before privatization when, miraculously, NIS reported a net loss. Such a company was reporting a net loss before the global economic crisis,” he emphasized.
When a business audit was conducted, it was evident that NIS operated like most other state-owned companies, Ćulibrk reminded.
“The question is, what would have happened to NIS if it were not controlled by the Russians but by someone like ‘Mića Grčić number 2’ or similar. What would have happened during the energy crisis?” he asked.
Asked about how the state behaves as one of the owners, Gujaničić says that this is the second most controversial thing.
“NIS would probably be much more valuable if the state were an active shareholder here, and there was a clear market relationship. The biggest problem is ad hoc unplanned relationships – the state says ‘we won’t increase your mining royalty, but participate in the privatization of Petrohemija.’ Or the state says ‘we won’t impose a tax on your extra profit, but make a donation to the budget of 60 million euros.’ These are ‘don’t touch me, I won’t touch you’ relationships, and there is no real business control,” he evaluates.
Regarding the question of whether it was possible to then announce a tender, as it was said at the time that NIS wanted to continue production and invest in the refinery, and other companies were not interested in that, Gujaničić says that these are certainly risks.
“We can see from the privatization of INA that if it is not done properly, many things can happen. However, when you go for a tender, you can set conditions and control privatization. The question is, who controlled the privatization of NIS? There were indeed massive investments, but the question is whether Gazprom provided them directly or if NIS repaid them from its operations. I believe that nobody controlled that,” he said.
However, Gujaničić points out that NIS is now the most transparent company in Serbia.
“We already know the results for 2023. For example, we will know the results of Telekom probably in May or June, and EPS probably earlier. Otherwise, that is totally non-transparent. You can ask the director of NIS a question on any portal – you may not have much influence, but that is a concept of transparency for us,” he said.
Ćulibrk reminds that here we are talking about “small pieces” of the state as a minority owner and Gazprom as the majority, and that “all other shareholders have no say.”
“This is a disaster for the stock exchange, the market, the idea of shareholder ownership. Although it is logical because the idea of shareholder ownership is compatible with a democratic system, where every vote counts. It’s not surprising that tens of thousands of votes from small shareholders are worth nothing. Then the state agrees that, instead of paying a larger part of the profit (Gazprom pays up to 50 percent of its profit in other countries, here it’s 25 percent), it takes a donation of 60 million and ‘messes with small shareholders.’ Is it fair – no. Can it happen – it can,” he said.
From the very beginning, the question of the amount of mining royalty was raised. It was then decided that for “NIS, the taxation conditions that were in force in Serbia at the time of signing the agreement between Serbia and Russia apply, and the company is not subject to any deterioration in taxation conditions until the ‘achieving profitability’ of the projects agreed upon in the agreement.”
How is it not profitable if the profit in one year was twice the selling price, Ćulibrk asks.
“Usually, it takes between eight and 15 years for the investment to be recovered. Here, the return was achieved in half a year, and the mining royalty remained. To be clear, I don’t blame the Russians here; they look out for their interests. It is in their interest for the mining royalty to be zero – who allowed that, our state. Then and now. And no one lifted a finger to change that. Otherwise, the mining royalty in Russia is much higher, around 20-something percent,” he said.
“How much is the mining royalty for Ziđin? How much is it for anyone else? What would the royalty be for the project of the century Rio Tinto? And here we are talking about billions. It is true, but they end up in the accounts of the owners – now it’s Russian Gazprom, Chinese Ziđin, and tomorrow maybe the Australian-Chinese company Rio Tinto,” he said.
The state should take care, but it doesn’t, Ćilibrk points out.
Regarding the question of oil reserves and whether they may have been exploited more than agreed precisely because of the low mining royalty, Gujaničić says that the production was initially increased due to the new technology brought by Gazprom.
“We could not reach those reserves due to the technology we had at that time. And you can see that the production of oil from domestic sources grew until 2012, 2013, and then the oil crisis started. Since then, production has been decreasing, which tells us that there are not so many reserves anymore. NIS has investments in Bosnia and Romania to find new reserves, but there are not as many. Processing in the Pančevo Refinery is about 20 percent from domestic production; the majority of crude oil is imported,” he explained.
The state has not given up a single dinar of excise and sales tax to mitigate the effects of price increases during the energy crisis, Ćulibrk said.
“Another problem is that before privatization, the share from domestic sources was about 15 percent of the total processed quantities in Serbia. Then that share went up to 40 percent. Domestic oil resources were used, and that oil was valued at about 20-23 dollars per barrel, while in the world, it is around 80 – so four times cheaper. But that oil at the pumps was calculated for us as if it were all purchased on the world market. And that is the problem. Hence the extra profit,” he explained.
This is a problem for the state, but as Ćulibrk says, it’s not surprising that the issue is not addressed when you “see who the presidents of the state’s boards of directors are.”
“These are people who have no idea about energy, who have never dealt with it, and are there based on political lines. They are there to be silent and receive good allowances… It is said that the compensations for members of the boards of directors are measured in six figures in euros annually,” he said.
Gujaničić mentions that it is fair to note that in the year of the pandemic, NIS incurred losses.
“NIS faced numerous challenges here, but also had incentives from the state. Our economic environment is such that foreign investors come here because they get things ‘under the table.’ We don’t accidentally have so much foreign direct investment… But NIS had a serious crisis in 2014 and 2015 when the price of crude oil fell on the world markets, then there was the pandemic, and now this situation with Ukraine. NIS has been under global sanctions since the annexation of Crimea, and, of course, much bigger problems came with the war,” he said.
He reminded that the direct purchase of Russian oil is prohibited.
When asked about the political component of this agreement, i.e., Russia’s support for Serbia regarding Kosovo and Metohija at the United Nations Security Council, Ćulibrk says that it is much more important to look at what has been done from the signing of the first Brussels Agreement in 2013 onwards.
“Whenever we have news from Moscow, it is that they will agree with the official position of Serbia. And what do we have in Serbia? We don’t have the dinar as a means of payment, people can’t withdraw their salaries, license plates of the Republic of Kosovo pass through Serbia without any problems, and our people with passports issued in northern Kosovo by the Serbian Ministry of the Interior are not valid, and they are the only ones who need a visa… I think that should have been charged in some other way, not through a lower price for NIS,” he reminded.
This agreement is valid for 30 years, and then for the next five if both parties agree. Investments and the construction of a gas storage facility in Banatski Dvor have been completed, but the South Stream pipeline has not.
Gujaničić thinks that there is nothing in the story about compensation.
“What we need to focus on is the future, how that company can be worth more and how the 30 percent owned by the state will be worth more. We can’t do anything without Gazprom. The worst-case scenario for us is that due to sanctions, they cannot operate here and are shut down. This is a drop in the ocean for Gazprom; they can sacrifice NIS as needed for their higher interests. We hope it won’t come to that. As for us as citizens and the state, the business should be controlled to make the state’s share worth more,” he concluded.
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