Why is Russia selling gas to Serbia so cheaply?

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At a time when gas prices on the world stock exchange exceed 1,000 dollars per 1,000 cubic meters, Serbia reached an agreement at the negotiations in Sochi to keep the current gas of 270 dollars. On the example of Serbia, the BBC explains how diplomacy works in the sphere of gas trade.
At the end of each year, Gazprom concludes new gas price agreements, and this year’s negotiations were marked by record prices for this energy source on the world market – for several weeks now, 1,000 cubic meters of gas has cost more than 1,000 dollars.
However, there is no winter for the two countries in Europe – next year Gazprom will sell gas to Belarus for 128.5 dollars, and to Serbia for 270 dollars for 1,000 cubic meters – under the same conditions as they have bought so far.
“This is our salvation, we will have no 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 price of 270 dollars that Serbia received is almost twice lower than Gazprom planned to charge countries that do not share the state border with Russia, which increases delivery costs – 500 dollars for 1,000 cubic meters, as the company predicted according to projections for the fourth quarter 2021
Gazprom usually does not publish details of contracts with other countries – prices are announced by politicians or representatives of the Russian oil giant.
Apart from Belarus and Serbia, China will pay the current price of gas in 2021 – 171 dollars per 1,000 cubic meters.
At a press conference before leaving for Sochi late last month, Serbian President Aleksandar Vucic said “a good price would be 500 dollars for 1,000 cubic meters”.
In October, Russia proposed that Serbia pay 790 dollars in the future – three times more than the presidents of Serbia and Russia agreed in the end.
Authorities in Serbia “presented Gazprom’s proposal to the citizens as a price that only President Vučić can bring down in direct negotiations with Putin,” energy expert Miloš Zdravković points out for the BBC.
“We got an incredible price, we saved 300 million euros, one 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,” Zdravkovic said.
Moscow has “met its partners”, according to Russian expert Sergei Pikin, director of the Energy Development Fund.
“Besides, the needs for Russian gas are growing in Serbia, and Gazprom wants to support that,” he added.
Srecko Djukic, an economist and former Serbian ambassador to Belarus, believes that gas is “primarily a political tool”.
He reminds that Moldova, headed by pro-European President Maya Sandu, who succeeded pro-Russian President Igor Dodon, is already paying a higher gas price – 450 instead of the previous 250 for 1,000 cubic meters of gas.
Keeping the current price politically suits both Belgrade and Moscow, believes Igor Yushkov, a Russian expert at the University of Finance under the Government of the Russian Federation.
He states that this is how Serbia collects political points, and Russia provides a reliable ally in Europe.
“Vučić can now say how he promised that he would agree in Sochi that Serbia would get cheap gas, and here he is, he succeeded in that,” says Yushkov.
He adds that “Serbia is not even hiding its own political cards in the gas negotiations.”
“He promises that he will not join NATO, that he will remain an ally of Russia, he skillfully uses his geopolitical position in order for Russia to agree to special conditions in gas trade,” Yushkov points out.
Pikin points out that the price of 270 dollars for Gazprom is not low – every contract under which the price exceeds 100 dollars for 1,000 cubic meters is paid to the company.
“The normal price for Gazprom has always been between 200 and 300 dollars, and therefore, 270 is a good price.
“It should be borne in mind that Gazprom usually concludes long-term contracts, and forms the price according to the stock exchange price and the oil formula, and the higher the share of the oil formula in price formation, the lower it is,” says Pikin.
As of September 2021, the oil giant has earned more than 20 billion dollars – more than the company, in its entire existence, managed to earn in a year, said Gazprom’s deputy chairman of the board, Famil Sadigov.
What is the role of Serbia on the gas map of Europe?
Serbian experts point out 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 gas pipeline that passes through Serbia was ceremoniously put into operation on January 1 this year.
Thus, the point of delivery of gas for Serbia was moved from the Ukrainian-Hungarian to the Turkish-Bulgarian border, which enabled Russia to bypass Ukraine when it started delivering 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 whose territory significantly more gas is delivered than is consumed in it,” says Aleksandar Kovacevic, an energy expert.
He reminds that gas deliveries to Serbia are made in accordance with the long-term interstate agreement which was ratified in 2012.
Based on that 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’ assets.
Russia is an important player in the Serbian oil and gas industry – Gazpromneft, a subsidiary of Gazprom, became the majority owner of the Oil Industry of Serbia (NIS) in 2009, buying 51 percent of the shares.
Today, Gazpromneft owns 56% of NIS’s assets.
NIS is a former state-owned oil and gas company, whose restructuring in 2005 established Srbijagas, which is 100% owned by Serbia.
Today, NIS-Gazpromneft is engaged in exploration, production and refining of oil and gas, and exploits deposits in Serbia, Romania and Bosnia and Herzegovina.
They also manage the network of NIS Petrol and Gazprom gas stations, of which there are more than 400 in Serbia and the surrounding countries.
In addition, Russia financed the construction of the underground gas storage Banatski Dvor, 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 thus in its own profit,” says energy expert Milos Zdravkovic.
His colleague Aleksandar Kovacevic points out that “Serbia has qualified as a country in which Gazprom has commercial interests and directly performs gas supply and storage activities.”
“That is why the price of gas is optimally determined, so that it serves 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 with Gazprom would be signed 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.
That is not usual, since Gazprom mostly signs contracts for several years, Srecko Djukic notes.
In less than six months, general elections are being held in Serbia.
“Serbia has received a temporary price, until the political situation clears up,” Djukic said.
He believes that the price of gas that Serbia will pay in the future will depend on the outcome of the elections.
“All objective research shows that Belgrade will certainly be in the hands of the opposition, that the presidential elections are extremely uncertain, and as far as the parliamentary elections are concerned, I expect a fierce battle there,” Djukic points out.
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 also affect the price of gas that Serbia will pay.
Milos Zdravkovic points out that “it is not appropriate for Russia to raise the price of gas.”
“They must not allow gas from America and Qatar to become competitive on the European market,” says Zdravkovic, B92 reports.