A Roadmap for Serbia to Reclaim Its Oil Industry: Ensuring Energy Independence and Strategic Security

Incoming Sanctions and a Call for Action

Sanctions Against Russian-Owned Energy Giant: On Saturday, Serbian President Aleksandar Vučić stated that the United States plans to impose sanctions on NIS, Serbia’s largest oil and gas company, due to the company’s majority Russian ownership, with Gazprom Neft and Gazprom holding a combined 56.15% stake. President Vučić stated that the sanctions will take effect on January 1, 2025, and the UK and other European countries will likely follow suit.

Hill: Russia Uses NIS Profits To Fund Ukraine War: The Ambassador of the United States to Serbia, Christopher Hill, said on Monday that he was unable to comment on the sanctions and stated that Russia uses NIS’ profits to fund its war in Ukraine without ever reinvesting it in Serbia. “This is a matter of Russia, not a matter of Serbia. In no way will we do something that will in any way, shape or form harm the Serbian economy. Any issues we will discuss thoroughly with the Serbian government and make sure there is absolutely no harm done to Serbia. That is not the purpose of it, and that will certainly not be the result of it,” Hill said to Serbian media. There have been no official statements from Moscow.

US Will Help Find A Resolution That Doesn’t Damage Serbia: The impending sanctions present a pivotal opportunity for Serbia to reclaim control of its energy sector, reduce dependency on Russian influence, and align with modern energy trends while safeguarding its economic and strategic interests. It can also be observed that the United States is ready to help Serbia resolve this issue without threatening Serbian interests, seen not only in Ambassador Hill’s statement, but also in the recent developments in Serbian-American energy relations, topped with the agreement on strategic cooperation in energy two countries’ representatives signed in Washington on September 18th of 2024.

One of Serbia’s Biggest Companies and Energy Security Issues

Controversial Sale And Failed Promise: 51% of NIS (Oil Industry of Serbia) was sold to Gazprom Neft for €400 million in 2008, with an additional €500 million invested in modernization of Serbia’s oil giant. In the first half of the same year, the company’s profits amounted to around €100 million, illustrating the sale’s favorability for Russia and damage to Serbian national interests. One of the main reasons behind the company being sold far below the fair market price was the lucrative promise of the South Stream pipeline going through Serbia—a deal that fell through ten years ago, when it got cancelled due to non-compliance with EU regulations.

Navigating Sanctions And Losing Access To Newest Tech: In 2014, the same year when the South Stream project was cancelled, NIS encountered large scale sanctions for the first time in the century. The company dealt with the sanctions by navigating exceptions and relying on banks not tied to the US and EU, but stands to lose in the long-term because the sanctions made access to newest, Western-made technologies impossible.

Serbia’s Effort To Diversify Its Energy Supply: Since the beginning of Russia’s invasion of Ukraine in 2022, Serbia’s reliance on Russian gas has underscored its vulnerability in the current geopolitical climate. Transitioning toward diversified energy sources will enhance Serbia’s energy security while aligning with EU and US strategic priorities to reduce Russian influence in Southeast Europe. There have been numerous steps taken by Serbia in order to diversify its energy mix, including increased investments in green energy and projects such as the new gas interconnector between Bulgaria and Serbia, which will increase access to natural gas from countries like Azerbaijan, as well as the landmark decision to develop nuclear energy in a partnership with France.

The Danger Of A Key Sector Being Controlled By A Foreign Actor: Despite significant progress in efforts to diversify Serbia’s energy supply, ownership of NIS remained a problem that was somewhat overlooked in the public. The importance of independent, diversified and secure strategic industries was one of the main lessons the world learned in 2022, the same year NIS experienced record profits of €787 million, almost double the price Gazprom paid for the controlling stake 14 years earlier. While the Serbian oil industry is unremarkable on the global stage, it is vital for the country’s economy, and since 2008, it has been controlled by a single foreign actor. Now, that foreign actor is using profits from Serbia’s oil industry to invade a country whose sovereignty Serbia supports, resulting in sanctions which threaten to severely impact Serbia’s vital interests.

Serbia’s Response Shouldn’t Be a Return to Statism

Nationalization Is The Only Immediate Solution: If the announced sanctions are imposed, and the JANAF oil pipeline becomes inaccessible while many of its suppliers are cut off, NIS would likely lose much of the appeal that has made it one of Serbia’s most prominent blue-chip enterprises. From an economic perspective, it would make sense for Russia to consider selling the shares of a business with such an uncertain future. However, international sanctions against Russia and current geopolitical circumstances are leaving no other option for Russia to mitigate this liability but to agree to a nationalization, with Serbia acquiring the entire Russian stake in the company. It would also make sense for Russia to agree to giving up its position in Serbia’s oil industry as Serbia still hasn’t imposed sanctions against Russia, a move which represents a major foreign policy issue in Western eyes. However, supporting Serbia’s effort to protect its energy interests through reduction of the Russian stake should be a priority for the West as it could open the door to further foreign and defense policy alignment.

Reducing Russian Ownership To A Zero?: Nationalization is a necessary first step, but it should follow a phased approach. Initially, Serbia could acquire the Russian stake in NIS while securing transitional expertise to ensure smooth operations. The next phase would focus on implementing structural reforms to improve efficiency and governance, followed by a public offering to attract diversified investment and establish long-term stability. Reducing the Russian stake to just below 50% would be insufficient, as sanctions could still disrupt the company’s operations, making a complete nationalization of shares owned by Gazprom the most effective short-term solution to safeguard Serbia’s economic interests and energy security.

Transitional Nationalization, Not A Return To Statism: On the other hand, nationalization without a planned public offering would represent a significant shift in Serbia’s approach to managing strategic industries. It would be a troubling signal to private investors and an additional burden for the Serbian government, as state-owned companies are marred by issues like inefficiency, mismanagement and corruption. Keeping NIS under Serbian government control would be an unfavorable alternative to a transitional nationalization because it would further entrench inefficiencies and stunt potential reforms which could aid Serbia’s green transition in a competitive, market-driven environment.

Diversified Ownership and Energy Security

Financing the Nationalization of NIS Shouldn’t Be An Obstacle: After the sanctions were announced by the Serbian president, NIS stock experienced a drop in value and the Russian shares in the company are now valued at €630 million, less than the amount the Serbian government allocated for the new national football stadium (€956 million). So, while it would require a significant effort, acquiring the Russian share of NIS in its entirety would be realistic for Serbia, which owns 29.87% of the stock at the moment. However, it might not be possible to finance the deal without international backing, and it is essential to do this in a way that doesn’t violate sanctions against Russia. Since NIS is a profitable company with the potential to reach a new level after exhaustive reforms, finding financial institutions willing to help finance the deal, for example EBRD, shouldn’t require a Herculean effort.

Protecting National Interests Via Golden Shares and Retail Investors: The main argument for strategic industries like energy being under state control is protection of sovereignty and the citizens’ interests. That can be accomplished with the government’s share in the company remaining the same as it is now, under the principle of the golden share, which would give the government the power of veto in matters concerned with national and strategic interests. This principle has proven to be an effective way of allowing a company to function on the basis of free-market economics while allowing flexibility in rare situations where strategic or national interests are at risk. Most oil companies’ governance in developed countries has been organized around this principle, making it an industry standard. National interests can be protected additionally by first offering the shares to Serbian citizens and institutional investors, with potential to turn it into a campaign aimed at increasing the number of retail investors.

Partnering With Major Energy Multinationals: Reform of the country’s energy industry is necessary in order for major companies like NIS to contribute to Serbia’s energy independence and full alignment with EU values and regulations. Including major multinational energy companies would notably help Serbia for several reasons. NIS’ experts in Serbia would get the opportunity to expand their knowledge with help of colleagues from abroad, as well as to import and operate Western-made technologies more easily. Multinational energy companies’ approach to corporate governance in cases of diverse ownership could establish a similar framework in NIS, helping to balance shareholders’ interests while ensuring efficiency. Nationalization of NIS and necessary reforms and investments would be a significant financial burden, but partnering with large multinational corporations and the access to capital it would bring can help offset some of the potential costs for the Serbian taxpayer.

Potential Foreign Investors: Serbia could approach regional energy juggernauts such as Hungary’s MOL Group and Poland’s Orlen, with the Hungarian company being a favorite because it already has a significant presence in the region, there’s a strong bilateral energy partnership and geopolitical circumstances additionally make Hungary’s MOL Group an attractive investor. Approaching French companies like TotalEnergies SE would make sense because it would be a horizontal expansion of the energy partnership between Serbia and France, currently based on nuclear energy. Having EU-based companies investing in Serbia would be beneficial for its green transition, ensuring alignment with EU energy policies and continuing the trend of European investments in Serbia’s renewables industry. Azerbaijan’s oil and gas giant SOCAR could also be a potential partner, as this could be a way to deepen the emerging energy partnership with Serbia. American companies ExxonMobil and Chevron might also show interest in NIS as they have already made substantial investments in regions where Russia is a strategic competitor, like Central Asia.

How Partnerships With US and EU Can Accelerate Serbia’s Energy Independence: Engaging American institutional investors could transform NIS, providing the capital, governance expertise, and strategic alignment needed to modernize Serbia’s energy sector. By collaborating with prominent and experienced pension funds, private equity firms, and other institutional investors, Serbia could fund green energy initiatives, upgrade technology, and improve operational efficiency while adopting best global practices to ensure transparency and reduce corruption risks. This proposal could also strengthen economic ties, with the US Development Finance Corporation (DFC) and the European Bank for Reconstruction and Development (EBRD) potentially playing a pivotal role in financing nationalization and energy transition projects, bolstering Serbia’s energy security and paving the way for a modernized, sustainable energy future. Reforming NIS with US and EU partnerships could serve as a model for broader economic collaboration. Building on the September 2024 strategic energy agreement, Serbia can deepen its integration into Western economic frameworks, foster innovation, and attract further investment in sectors beyond energy.

Date: December 20th 2024

Аuthors:
Vuk Velebit, Pupin Initiative
Andrej Cvejanov, Pupin Initiative

Researchers:
Petar Ivić, Pupin Initiative
Martina Kojić, Pupin Initiative
Dimitrije Simović, Pupin Initiative