Moscow's friendship with Serbia part of a power play rooted in economic interest

Feb 29 2008, 12:04

BELGRADE, Serbia (AP) _-Russia's support for Serbia in a dispute with the West over Kosovo is a key piece in its strategy of courting neighbors to promote political and economic interests.

It's an idea that has been paying off.

Moscow has been methodically expanding its influence in the Balkans through investments and political ties. By snapping up ski chalets in Montenegro, oil refineries in Bosnia, petrol stations in Slovenia, Russia is slowly spreading economic tentacles and cementing a system of political patronage throughout a region of strategic interest to the West.

Deftly trading on Belgrade's political obsessions, Moscow is using Serbia's anger at U.S. and European Union recognition of Kosovo to advance its plans for a pipeline known as South Stream. The project will supply natural gas to central Europe.

With few specifics on the deal widely known, analysts suggest the agreements give the Russians some of Serbia's most valuable assets at cut-rate prices.

"Russia is focusing on creating a corridor of friendly states (in the Balkans) which would support its pipeline routes," said Nicu Popescu, a research fellow at the European Council on Foreign Relations in London. "Serbia is important in this context because it is part of a bigger project of Russia dominating the energy infrastructure in the region."

Adding a face to Moscow's embrace, Dmitry Medvedev, the man all but assured of winning Russia's upcoming presidential election, traveled himself to Serbia this week to finalize the South Stream deal.

Medvedev made a point of lighting a candle at the largest Orthodox Church in the Balkans, cementing religious ties. He also used the trip to warn that Kosovo's independence violates international law and will fuel regionalist divisions around the world.

Russia has benefited handsomely from Belgrade's gratitude for its political support on Kosovo, particularly in energy.

Russia's initial offer of $600 million for a controlling stake in the Serbian oil monopoly NIS, for example, represented a fraction of the company's market value, some analysts argue.

For Serbia, the South Stream deal is expected to be worth as much as $1.5 billion, officials said.

The deal also illustrates Moscow's strategy of dealing with Europe's smaller nations individually rather than just focusing on big players such as Italy and Germany.

Russia has cut deals with EU members Bulgaria and Hungary on South Stream, skipping a potentially more complicated arrangement with the bloc itself.

Russia's "strategy is to have bilateral agreements with each country separately," Gergely Boszormenyi Nagy, an analyst at the Perspective Institute in Budapest. "This is one of the most important obstacles to the development of a common EU energy policy, which Russia is knowingly using."

Russia's oil monopoly Gazprom has harshly criticized EU plans to deregulate gas markets, warning this could lead to a disruption in supplies. Moscow also has refused to sign an international energy charter that would oblige it to offer foreign investors access to deposits and export pipelines.

Serbia will likely be a hub from where the pipeline would branch out to Hungary and Croatia, continuing on to Italy and Austria.

Russia is already Serbia's single largest trading partner with trade totaling euro2.62 billion in 2007, and the pipeline will likely boost this significantly when it becomes operational in 2013.

That has raised concerns among pro-Western analysts and politicians in Serbia. They say that with the pipeline and oil company deals, Russia will be in control of Serbia's vital energy network, allowing it to exert political influence on the government simply by threatening to raise prices further.

"There should be a difference between economic and political interests," Economy Minister Mladjan Dinkic said. "Russia strongly supports our sovereignty (over Kosovo). But at the same time they also hiked the price of natural gas they sell us by 30 percent," Dinkic said.

Moscow also has solidified economic ties with a number of other Balkans countries, including Macedonia, Greece, Bosnia, Hungary and Bulgaria.

Recent Russian acquisitions include an oil refinery in the Bosnian town of Bosanski Brod, a stake in Slovenia's main oil company Petrol, an aluminum smelter in the Montenegrin capital of Podgorica, as well as a string of hotels along the coast and in ski centers.

Russian companies also are important players with investments in real estate, commodities and other sectors in the region. Statistics show Russians have overtaken the British as the largest foreign investors in real estate in Bulgaria.

In Montenegro, which has the highest per capita foreign investment in Europe, nearly half the $1 billion that poured into the country in 2006 came from Russian sources.

Moscow maintains that the political issues raised by Kosovo's independence are completely separate from any economic considerations it may have in the Balkans.

But analysts note that tensions between the West and Serbia offer Moscow a unique opportunity to create trouble in an area of strategic importance for the West at little or no cost to itself.

"Whenever the (Russians) need to distract the West in the future, they can always rock the boat here," said Milos Vasic, a leading Serbian security expert.

Some have predicted that the problems sparked by Kosovo's secession will foment a long period of instability which could benefit Russia by creating a permanent drain on NATO.

"NATO will need to keep its forces (in Kosovo) for years to come to control the situation," said Alexander Konovalov, head of Institute of Strategic Assessment in Moscow.

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