Russia signs Serbia, wins "pipeline war" with EU

MOSCOW (Reuters) - Russia won the right on Friday to route a major gas supply route to Europe through its ally Serbia, a move analysts described as marking a Kremlin victory in a "pipeline war" with the European Union.

The gas agreement, signed in the Kremlin before President Vladimir Putin and visiting Serbian leaders, alarmed the United States because it increased Moscow's control over energy supplies to Europe and could undermine a rival EU project.

Strong Russian opposition to independence for the Serbian province of Kosovo was a key bargaining chip in the agreement for Serbia to join the South Stream gas pipeline. Belgrade also agreed to sell a majority stake in Serbia's oil monopoly NIS to Russian gas giant Gazprom at a favorable price.

South Stream is a 10 billion euro ($14.65 billion) gas transit project organized jointly by Gazprom and Italian energy giant ENI to bring Siberian gas to Europe via the Black Sea.

"Our close political relations were today converted into economic results," Putin's chosen successor, First Deputy Prime Minister Dmitry Medvedev, told reporters. "This is a great breakthrough."

At the signing, Putin reiterated Moscow's strong backing for Belgrade's campaign against independence for Kosovo, which the European Union broadly supports. Serbia could count on Russia as a reliable friend and partner, he added.

The EU, worried about its dependence on Russian gas, has been promoting a rival pipeline called Nabucco which would take gas from Central Asia through Turkey to Europe. But it has been having trouble finding enough gas supply to justify the project.

"Russia has taken advantage of the current situation in the Balkans, when Serbia needed strong support on Kosovo," said Chris Weafer, chief strategist at UralSib investment bank in Moscow.

"The Kremlin has played a very smart and effective game over the past two years, effectively winning a pipeline war with the European Union."

The United States believes the deal with Serbia, which followed a similar agreement with Bulgaria, is deeply worrying, according to a confidential Serbian government document obtained by Reuters minuting discussions between Washington and Belgrade.

"The U.S. side warned about the political influence Moscow would gain by controlling energy resources in Serbia and the region, and expressed a negative assessment about the economic justification of South Stream," said the transcript of a high level meeting between U.S. and Serbian officials in Belgrade.

"They were especially concerned with Bulgaria's decision to join the deal with Gazprom, because it undermines attempts to diversify European gas supplies."

STAKE

Serbian President Boris Tadic told reporters as he started talks with Putin that without Russia's support "Serbia would find it far more difficult to defend its position on Kosovo."

Friday's agreements, signed by Tadic and Russophile Serbian Prime Minister Vojislav Kostunica, gave Gazprom a 51 percent stake in Serbia's NIS oil and gas company, for 400 million euros ($586 million) and a pledge to invest 500 million more by 2012.

Some analysts described the price as well below market value, giving estimates of 1.0-2.0 billion euros, although others said the plant needs heavy reconstruction.

NIS, the only state-owned oil firm in the Balkans to have escaped sale, dominates Serbia's market with a monopoly on refining and a network of almost 500 petrol stations.

Gazprom has big ambitions in the oil business and NIS will give it its first refinery outside Russia.

Under the gas deal, Gazprom will route a northern branch of its South Stream pipeline through Serbia and make Serbia a major transit hub for supplies.

"The other option for Gazprom would be to go via Romania, but historically ties with Serbia have been much better," said Valery Nesterov from Troika Dialog brokerage.

(Reporting by Oleg Shechrov; writing by Michael Stott; editing by Matthew Tostevin)