Streetwise Professor

December 16, 2008

Balkan Smashmouth, Revisted

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 10:27 pm

Exactly 11 months ago I wrote a post about Russia’s use of “vaporware” and threats to seize control of Serbia’s national oil company NIS at a bargain basement price:

To make the deal look a little less like an abject surrender, Gazprom has also dangled the prospect of giving Serbia a stake in a future gas venture. Word of advice, guys-DON’T BELIEVE IT, and DON’T TAKE IT. Gazprom is the master of what Bob Amsterdam calls “premature contractualization.” That is, announcing deals just in time to forestall projects that are adverse to Gazprom’s interest, and then fading the deal when the threatening competing projects are shelved in response to the Gazprom announcement. Gazprom will whisper sweet promises in anybody’s ear to get what they want, and then renege when it suits them. (Nigeria-you should take note of this, as Gazprom has been wooing you too.)

Gazprom’s stratagem is analogous to a common ploy in the software business. In the 80s and 90s “vaporware” was a commonly employed competitive strategy. A software company would announce a new, improved software product in order to forestall entry by a competitor. Once the potential entrant was scared away, the new software would just fade away into the mists, never to be seen. Gazprom is essentially following this playbook-constantly announcing vaporpipelines, vaporwells, vaporinvestments, vaporstorage, vapor-you-name-it whenever a threatening project is mooted.

So, what Gazprom is offering Serbia is: a pittance in cash plus a pig in a poke in exchange for hard assets right now. Given Gazprom’s record of delivering on its big talk, the Serbs would be well advised to take cash on the barrelhead and take the promises for what they are worth-a little more than nothing.

“A little more than nothing” seems to be a gross overvaluation, based on this piece from Eurasia Daily Monitor:

Serbia’s coalition government has removed Economics Minister Mladan Dinkic from his concurrent assignment as head of the negotiating team on energy agreements with Russia. The impending oil and gas deals involve essentially a Russian takeover of Serbia’s energy sector. Dinkic and his colleagues who were also ousted from the team—State Secretary Nebojsa Ciric and Privatization Agency Chief Branislav Zec—stand accused of holding “unconstructive positions in the negotiations” (Radio B-92 cited by Interfax, December 11; RTS Radio Belgrade, December 12). The government’s Russophile elements have prevailed without apparent difficulty on their pro-European colleagues to precipitate the energy deals on Russian-imposed terms.

One major contentious issue is Gazprom’s promise to build a section of the South Stream pipeline through Serbia. The Russian side is avoiding a clear commitment to a construction schedule and gas supply volumes and is even stalling for time on submission of a feasibility study. This evasive attitude can only reinforce the growing international doubts about South Stream’s plausibility.

Nevertheless, the agreements on oil and gas are now expected to be signed in Belgrade before Christmas by a high-level Russian delegation. Moscow is throwing in some sweeteners outside the energy sector. These would, however, only lead to greater Russian economic penetration of Serbia, correspondingly influencing its political system, and raising questions about Serbia’s European integration, the goal of President Boris Tadic and parts of the body politic.

. . . .

Now, however, Moscow suddenly insists that NIS be separated from the package. It wants to sign the NIS purchase contract immediately and postpone the signing for South Stream for a few years. Officially, Moscow claims that the oil deal and the gas deal remain packaged together, but that this does not preclude separating the time-frames for implementation of each. For Serbia, however, this means no guarantee and indeed no leverage to ensure that the South Stream pipeline and storage site would be built in Serbia. Thus, the disadvantageous handover of NIS to Russia as an incentive for South Stream would have been in vain and a total net economic loss to Serbia (BETA, December 11; RTS Radio Belgrade, December 12).

Vaporware, indeed.   Serbia originally–and grudgingly–acquiesced to the sale of NIJ in return for promises regarding South Stream.   Now, Gazprom/Russia is telling Serbia those promises are no longer operative.   Beware any deal that involves asynchronous performance.   Especially if the party promising to perform later is Gazprom.   You can take their promises to the bank–and be met with stares of disbelief for having been such a sucker.

This discarding of even the pretense of proceeding with part of the South Stream project also speaks to its viability, and the effect of the ongoing financial crisis on that viability.   And if there’s not the money for South Stream–what about Nord Stream?   And if neither is an immediate prospect, what does that say about European gas supplies, and the prospects for Nabucco?   (There’s also an interesting article in EDM about Hungary’s MOL and Nabucco, but that will have to wait for another post.)

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  1. Oh ya, thats how they play. I have been involved in a project with them, and they are everything but straightforward!

    Comment by Surya — December 17, 2008 @ 9:20 am

  2. So, what about the price of oil. In spite of OPEC promising a huge cut in production, the price continues to fall. WTI is now trading at $36 a barrel, and will likely continue falling.

    Interestingly, Russia has made this promise to oil producers:

    “Российские власти готовы пойти на беспрецедентный шаг и обнулить ставку экспортной нефтяной пошлины, если цена нефти на мировых рынках опустится ниже $30 за баррель. Ð’ этом случае российский бюджет недосчитается 2 трлн рублей доходов.”

    The Russian State will not charge oil companies royalties if the price of oil drops below $30 a barrel (WTI price, not the price of the Urals blend ;)). Forgiving these royalties will cost the Russian budget two trillion rubles (roughly $71 billion)

    If this happens:

    «Правительство может пойти на такие шаги, если цена на нефть американской марки WTI достигнет $25 за баррель. При таких ценах практически вся экспортная выручка будет уходить на расходы по добыче, транспортировке и НДПИ,

    – указывает Громадин. – Если цена нефти надолго останется на этом уровне, это приведет к сильному дефициту бюджета».

    In other words, if the WTI drops to $25 a barrel, all the money that will be paid for the oil will simply cover the cost of production and transportation and the NDPI (have to check what the NDPI). This will lead to a “strong” budget deficit.


    Comment by Michel — December 18, 2008 @ 5:43 pm

  3. Замечательная статья, спасибо. Но я думаю, что надежда все-таки есть. 🙂

    Comment by Финансистка — August 23, 2009 @ 6:44 am

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