January 5, 2009 / 12:09 AM / 10 years ago

Russia kindles flame of hope in Bosnia refinery

BOSANSKI BROD, Bosnia (Reuters) - A flare at the top of a 50-meter high tower in the Balkans shows Russia building political capital in a notoriously fractured part of Europe.

Bosnians workers stand in front of an oil installation during the opening ceremony of the Brod refinery in Brod November 27, 2008. The flame in late November marked the restart of operations in Brod, Bosnia's sole oil refinery which had been out of action since 2005 after being seriously damaged during the 1992-95 war. It was financed by Russia as part of a broad plan to invest in energy in the countries of the former Yugoslavia. REUTERS/Damir Sagolj/Files

The flame in late November marked the restart of operations in Brod, Bosnia’s sole oil refinery which had been out of action since 2005 after being seriously damaged during the 1992-95 war.

It was financed by Russia as part of a broad plan to invest in energy in the countries of the former Yugoslavia.

Bosnia has reportedly received about $14 billion in aid since the end of the 1992-95 war, and Russia’s 200 million euro ($280 million) investment in the refinery is a small gesture in the context of European energy security.

But in a country where around 40 percent of people are registered unemployed, new refinery owner Russian state oil company Zarubezhneft offers a much-needed boon: hope for neglected local industries, and the prospect of future revenues.

“The refinery means life for all of us here,” said worker Momir Grabovac, standing near the shiny silver pumps in a reconstructed part of the refinery. Rusty containers in the background still bear the marks of wartime shelling.

“The town, which was dead, breathes again,” Grabovac added, saying that of the 4,000 people with jobs in Bosanski Brod’s population of 25,000, one in four had worked there.

Financed by a 350 million euro loan from the Russian Development Bank, the investments in the refinery as well as a motor oil plant in the town of Modrica and the Petrol distribution chain have lifted hopes Bosnia can trim its 8.8 billion marka (4.4 billion euro) foreign trade deficit in coming years.

“The decision was ... an economic and political decision,” Vladimir Dmitriev, head of the Russian Development Bank, said of the financing at the reopening ceremony: “It demonstrates the geopolitical interest we want to achieve in the Balkans.”

The bank’s Supervisory Board chaired by Prime Minister Vladimir Putin had approved the project as part of Russia’s overall strategy for the region, he added.

“This will have significant implications for Bosnia’s economy,” said Mahir Hadziahmetovic, vice-president of Bosnia’s Foreign Trade Chamber. “Bosnia, which was an exclusive importer of oil derivatives, will now have its own product.”

The refinery will be able to cover all Bosnia’s needs for oil, estimated at 1.5 million metric tons annually, and will be able to export once it starts producing 4.2 million tons at full capacity, he said.

TELLING TIMING

By relaunching the refinery just as Russia and Ukraine were making headlines in the West by embarking on a fourth winter of wrangles over gas supplies, Russia is keen to bolster its influence with its traditional allies, the Serbs.

The Serb Republic is an autonomous region that along with the Muslim-Croat federation makes up Bosnia but keeps close political and economic ties with its wartime supporter Serbia.

Russia was Serbia’s main ally in its unsuccessful bid to block independence for its former province of Kosovo, which declared independence in February. It has also often supported separatist Bosnian Serbs in their moves criticized by the West.

The refinery relaunch also came just before Gazprom signed a package of energy deals with Serbia worth up to $2.5 billion, which officials said could turn the Balkan state into a regional energy hub.

Gazprom’s oil arm, Gazprom Neft, took control of a 51 percent stake in oil monopoly NIS in exchange for a promise to include Serbia in countries to be transited by the South Stream pipeline, Russia’s proposed alternative route for gas exports to bypass Ukraine.

Europe gets about a quarter of its gas from Russia, some 80 percent of which is pumped west via Ukraine.

“Russia needs the South Stream pipeline as an alternative route to its sole gas route through Ukraine,” said Dejan Ostojic, the World Bank lead energy specialist for Europe and central Asia.

“This is a two-way street. Russia depends on Western customers as much as they depend on its gas supplies,” Ostojic told Reuters.

Under the deal with Serbia, Gazprom bought a majority stake in NIS for 400 million euros, pledging to invest 550 million euros by 2012 to modernize local refineries.

In turn, Serbia won agreements to build a gas storage unit and a 400-km gas pipeline, part of Gazprom’s 10 billion euro joint project with Italy’s ENI to deliver Siberian gas to southern Europe under the Black Sea.

U.S. and EU officials have expressed concerns that the South Stream pipeline would undermine their attempts to diversify European gas supplies, as well as increasing Moscow’s political and economic influence in the Balkans.

But Ostojic said Russia also wanted to diversify its gas routes to Europe.

“An energy problem for Russia is an energy problem for Europe,” he said. “Nobody can deny that energy is tightly linked to geopolitical and geostrategic plans, but its economic logic comes first. Everybody wants to make profit.”

WORTH THE RISKS?

Serbian energy expert Aleksandar Kovacevic said the Balkan country was taking a risk relying on Russia’s pledge alone to include it in the South Stream project.

“If the whole energy policy is based on one large project, then it is a risk for the economy,” Kovacevic said. “We don’t know what is the government alternative in case this project fails.”

Kovacevic said investment in regional refineries was a good move for Russia, as Balkan countries have become “enormous oil consumers” to power second-hand vehicles imported from Western Europe. Rail is still wrecked, river transport neglected.

The countries of the region need up to 10 million tons of oil annually, said Croatian oil expert Emir Ceric, adding that oil consumption has risen by between 2.5 and 3 percent a year.

Kovacevic said that economic policies based on high oil consumption were not sustainable on the long run: “If you buy an oil monopoly in a country, then it’s a lucrative business,” he said. “All refineries in the region at the moment could produce under full capacity and make profit.

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“But it’s a recipe for a long-term poverty.”

In Bosnia, such words will not help pay the bills.

“Russia will draft an export strategy for the market of southeastern Europe,” said Hadziahmetovic of the Foreign Trade Chamber. “Bosnia will have long-term benefits: it will reduce the foreign trade deficit and secure jobs for up to 1,700 people.”

Editing by Sara Ledwith

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