Gazprom’s YugoRosGas Scandal in Serbia

There are some who unfairly complain that the Kremlin just uses its state-owned energy monopolies Gazprom and Rosneft as political instruments to threaten Western-leaning governments of Eastern Europe with supply cuts. That’s just not true! Clearly as we’ve seen from Belarus in the past and most recently in Serbia, Gazprom is willing to cut off virtually any country to force lopsided business transactions – even staunch allies of Russia. In its abuse of competitive markets, no one could accuse the Gazprom of not being impartially ecumenical.

Case in point, just yesterday I was speaking on corruption in the energy trade at a conference titled “Will Russia Change?,” hosted at the European Parliament by MEPs Christopher Beazley (EPP-ED), Justas Vincas Paleckis (PES), Janusz Onyszkiewicz (ALDE), and Milan Horáček (Greens/EFA). Among some in the audience, there remained some reservations if not doubts that what I was arguing represented a handful of isolated cases, rather than a systemic characteristic of how the Russian government is doing business.Then I come home to read Roman Kupchinsky’s excellent article on YugoRosGas, a gas trading company 75% owned by Gazprom operating in Serbia which has become embroiled in a scandal involving influence trafficking, alleged organized crime connections, labyrinthine minority shareholders, and a takeover of the entire country’s energy sector. What’s happening in Serbia right now with Russian energy is in many ways a showcase of a highly sophisticated, state sponsored corruption methodology which pursues mutual political interests.First, as we have seen everywhere from Switzerland to Austria and the Ukraine, the dominant tool in the Serbia takeover is the use of a gas trading “middleman” of dubious shareholders. As Kupchinsky explains in his piece, YugoRosGas (which threatened the Serbs to sign with this group under its terms or face a complete cut off from Russian gas) has a nexus of hidden shareholder ties which connect to a vast network of shell corporations and individuals leading a trail to the Kremlin.Some of the minority shareholders of YugoRosGas are part of the Austrian group Centrex, which is owned by Siritia Investments (Cyprus) and controlled by OOO Rubin, an affiliate of Gazprombank and run by Konstantin Shmelev, an executive formerly associated with the corruption-ridden RosUkrEnergo. You begin to get the idea here – buried under layers and layers of front companies, Russia has come up with a method of concealing monopolies.Kupchinsky lists more and more connections behind the Serbia takeover, but I’ll even point to one more: CEA Centrex Energy & Gas AG is 25% owned by Gazprom Germania (ZMB GmbH), headed by Hans-Joachim Gornig, the former head of the East Germany’s natural gas company. No one is sure if Gornig knew Andrei Akimov and Alexander Medvedev from their KGB days through cooperation with the Stasi, or if they struck up a new friendship of convenience. Then there is of course Gazprom Germania’s former financial director, Felix Strehober, who is currently under investigation by German prosecutors for perjury with regard to his past employment as a Stasi agent.During a June 12th testimony before the U.S. Senate Foreign Relations committee, Kupchinsky had the following comment: “Gazprom, with the silent support of the Kremlin has set up 50 or so middlemen companies, silently linked to Gazprom and scattered throughout Europe – such as the Centrex group of companies and the Gazprom Germania network – which do not add any value to the price of Russian gas being sold on European markets; yet they earn enormous sums of money which appears to simply vanish through shell companies in Cyprus and in Lichtenstein.“Secondly, there is a powerful business imperative beyond the corruption of the middlemen companies in Central Europe to establish a gas hub, sew up the Balkans from competitors, and discourage governments of the region from signing on to any competing supply route projects being promoted by Brussels. Gazprom has to play a delicate game in order to get countries such as Hungary, Bulgaria, and Austria to all think they have a chance at being made the gas hub, and extending the offer also to Serbia appears to be stretching the imaginations of these prospective partners. Romania for example has escaped the embrace of Gazprom and has firmly signed up to be part of the Nabucco pipeline project.Lastly, the state corruption and business monopoly campaigns have a mutual interest with the Kremlin’s political ambitions to seize back its Soviet-era “sphere of influence” – a narrative we have seen expressed over and over ever since the war in Georgia. Why, for example, would the Serbian government choose to sell the state gas company NIS for $2 billion less than what it was worth? Clearly promises of political support (to defend against the worldwide recognition of Kosovo) are being tied to Russian energy deals in a completely unprecedented way.But there are now some obstacles being thrown into the path blocking Russia’s rise to Balkan energy dominance. For one, the Serbs are realizing they may has vastly miscalculated Russia’s commitment to their partnership as well as the low level of the Kremlin’s soft power after Kosovo suddenly declared independence on February 17th. It was not encouraging when 52 member states of the UN extended recognition, while Russia was wholly unable to bring more friends to the table. Then there was the recognition of South Ossetia and Abkhazia’s independence, which infuriated Serbia (many people often forget that the Georgians, Serbs, and Spanish are fiercely united on the topic of territorial sovereignty).On top of all this, Vojislav Koštunica has now fallen out with Boris Tadic over how to proceed with talks with the European Union, and there is sure to be vigorous discussion over the value of over-commitment to Russia and all the costs of that relationship. Politically, citizens seem to be acutely aware of the importance of keeping Moscow at arm’s length. There were even large numbers of Serbs celebrating the election of Barack Obama, and hoping for a new chapter in U.S.-Serbia relations (photo). Unlike Russia, Serbia has a relatively free and lively press, and the stories of the YugoRosGas scandal have been profuse.As such, Serbia has requested that the deadline for the sale of NIS be extended until the end of the year, and Gazprom may have some trouble coming up with the liquidity to buy this 51% stake even at 25% of its true value. If Obama and his new friends in Brussels can prove that they are ready and willing to listen to Serbia’s legitimate grievances over Kosovo, I could imagine seeing the NIS deal delayed indefinitely. Meanwhile, we’ll just have to keep our eyes on how deep this YugoRosGas scandal is going to go.Photo: A member of pro-Western student group “Europe Has No Alternative” unveiling a billboard reading “Kosovo is Serbia” and showing a photo of the Democratic presidential hopeful Barack Obama, urging him to help Serbia, Saturday, March 1, 2008. The billboard carried the slogans in Serbian and English, reading: “Change that we can believe in” and “Barack Obama, be with us.” It also carried a photo of late U.S. President John F. Kennedy, who was one of the best known and most popular American leaders here. (AP Photo by SRDJAN ILIC)