Via Stratfor (subscription required), interesting analysis on the recent “political agreement” signed on Dec. 24 by Serbian President Boris Tadic and Russian President Dmitri Medvedev to construct the South Stream gas pipeline through Serbia. Additionally, as noted in the report, the Serbian delegation also signed a long-awaited agreement with Gazprom Neft while in MOscow for the sale of 51 percent of the Serbian state energy company Naftna Industrija Srbije (NIS) to Gazprom Neft for 400 million euros (US$560 million):

“…The agreements between Serbia and Russia for the sale of NIS and the construction of the South Stream pipeline were initially conceived as a single package, negotiated near the end of 2007, with Kosovo’s independence imminent and Russia the only significant counterforce to the new state. At the time, underselling NIS to the Russians in exchange for support on Kosovo and guarantees of long-term Russian involvement in the region (through the construction of South Stream) were vital interests to those in power in Belgrade.

With the pro-Western Tadic firmly in power following his re-election in February and the successful win by his party in the May parliamentary elections, Belgrade was expected to renegotiate the deal with the starting price tag for NIS closer to its estimated value of just over 2 billion euros (US$2.8 billion).

The current deal, however, may be the best that cash-strapped Serbia can expect to get in the current financial climate. Russia is not interested in paying NIS’s market price, or in making firm guarantees that it will build South Stream, but it is probably the only country in today’s financial climate with both the willingness and the cash to buy NIS. The South Stream project has been unbundled from the original NIS-sale package and was signed by Tadic and Medvedev as a political agreement, which essentially is non-binding and not worth the paper it is written on. At the moment, Russia is concentrating on bringing online its Yamal gas fields and updating its own pipeline infrastructure, leaving no money for exotic infrastructure adventures crisscrossing the Black Sea and the Balkans, which is what South Stream would be.

The bottom line is that Serbia needs the money, and NIS is the only asset it has to offer. With the global financial crisis hitting Europe hard, freezing interbank lending and putting all future deals into question, Belgrade has no alternative but to sell NIS to the Russians. The Balkans — including Serbia — are particularly hard hit by the crisis, as are firms from the two countries that had been most likely to purchase NIS — Austria and Hungary. Hungarian MOL is already stretched following its $1.76 billion bid in September for a near-majority stake in Croatia’s INA. Austrian OMV, while certainly interested in NIS, would have had to have scrambled to find a loan to finance the purchase. If NIS were to be sold through a tender offer, it would fetch a minimum of 800 million euros (more than US$1 billion) for just its assets (three refineries, more than 2,000 gas stations, oil fields in Serbia and Angola and a distribution network in Serbia).

Sitting on NIS and waiting for the financial situation to improve so that it could be auctioned at a higher price would make sense — if Serbia were in a fiscal position to do so. It is not. On Dec. 24, Fitch revised Serbia’s long-term rating to negative from stable, due mainly to its high private-debt exposure. The dinar has been sliding against the euro since September, putting the vast majority of consumer and business euro-denominated loans — made popular in the Balkans by foreign banks that dominate the market — at risk of default. Staring at a deficit in 2009, the government already has been forced by a “standby agreement” with the International Monetary Fund to make cuts in its 2009 budget that could exacerbate social unrest among pensioners, Serbian war veterans and students. The government needs cash and needs it right away.

The extremely poor investment climate is allowing Russia, which may be facing economic problems of its own but at least has cold hard cash on hand, to look for bargain energy deals across the continent (LUKoil’s recent interest in Spanish Repsol YPF being a case in point).

The NIS deal will give Russia a piece of Europe’s distribution and retail network, something that its energy companies crave. NIS, centrally positioned as the key energy company in the Balkans, will give Russia a nationwide company from which to expand to adjacent states, including, potentially, EU members Bulgaria, Hungary and Romania. However, the deal has enough caveats and loopholes for the both sides to back out, which means that the penned agreement in Moscow may not represent the last chapter of the NIS-Gazprom Neft saga.”