Reports. In-depth reports on the risk factors and threat implications of economic and financial statecraft.

Of the former Yugoslav countries, Serbia has arguably the most robust relationship with Moscow, a connection that not only involves cultural affinities between the two, but also robust and targeted Russian economic and financial positions within the country. One of the most significant developments over the past 10 years was Russias purchase of Naftna Industrija Srbije (NIS), Serbias leading energy company and the largest contributor to the national budget.

Serbia is also heavily reliant on Moscow for its natural gas needs, with Russia satisfying roughly 80% of the countrys supply as of June 2015. More recently, Russia has expressed an interest in the privatization of the countrys power company, EPS, which is the largest and most valuable in the country (employing over 30,000 people). The company owns all large power generation capacity in Serbia (managing 99% of all electricity production) and supplies the largest share of eligible consumers.

The tight bonds between Serbia and Russia are captured by two somewhat telling characteristics of the relationship. Serbia is both the first and only non-CIS member state to be an observer of the Russian-led Collective Security Treaty Organization (a status attained in the course of a 2013 strategic military agreement). The country is also the only non-CIS member state to have signed a free trade agreement with Russia (which, more recently, it has reportedly been under EU pressure to annul).

In general, the balancing act that the current, nationalist Serbian leaders are seeking to achieve involves establishing an economic direction for the country that is credible in the eyes of its population, while maintaining good relations with Russia. Thus far, these politicians have deftly managed to defend their positions on Kosovo as well as their kinship for the Russians, satisfying most Serb voters of their loyalty to the state, while also keeping the country seemingly on track for future EU membership.

Belgrade, however, risks strategically compromising itself, when its efforts to satisfy Moscows loyalty tests involve economic and financial concessions that create or further dependencies that can result in undue control and influence in times of conflict.

ExcerptedDeals & Transactions:

• Serbia is heavily reliant on Moscow for its natural gas needs, with Russia satisfying roughly 80% of the countrys supply as of June 2015. YugoRosGaz (a Gazprom subsidiary) plays a dominant role in Serbias gas industry, serving primarily as the countrys supplier (or purchaser) of Russian gas. YugoRosGaz is 50% owned by Gazprom and 25% owned by another company, Centrex, which has been accused of being a Gazprom-linked, corrupt middleman entity in the region.

• Although Serbia has, in the past, lacked significant gas storage capacity, which has exacerbated its energy security situation, significant development work has gone into construction of a new facility, the Banatski Dvor underground storage facility, which came online in October 2011 with a capacity of 450 million cubic meters. The facility was established under a joint venture that is dominated by Russian interests, with Gazprom Germania taking a 51% stake. In late October 2015, an MOU was signed to expand significantly the Banatski Dvor storage facility (making it the largest natural gas storage facility in Southeastern Europe). Gazprom has described the site as guaranteeing not only stable supply of Russian gas to Serbia, but also for Hungary and Bosnia and Herzegovina (an indicator of the regional importance assigned to the facility by Moscow).

• Moscows control over NIS undermines any real diversity of supply the country might otherwise be able to attain. NIS is an integrated oil and gas company that has a presence across the region, is the largest contributor to the national budget and, by itself, represents 9% of Serbias GDP. In 2013, oil contributed 11% to primary energy production in Serbia. NIS also owns the only two oil refineries in Serbia, the Novi Sad and Pancevo oil refineries (as well as a liquefied natural gas plant at Elemir). President Putin sent a letter in 2012 in which he pledged his continued commitment to this

• Since 2013, state-owned Russian Railways (until recently run by sanctioned Putin ally Vladimir Yakunin) has invested significantly in Serbia, including: an $800 million state export credit and construction deal in 2013 for the modernization of Serbias transportation systems; a separate $940 million contract for the construction of railway lines and associated infrastructure; the formation of a consortium in September 2014 to provide a signaling system for the Belgrade-Panchevo railway; and an August 2014 agreement to restore a 77 km section of the Belgrade-Bar railway, running between Resnik-Valjevo.

• Over the years, Moscow has provided various loans to Serbia, among them: a promise of 1 billion in budgetary aid and infrastructure investments; a 344 million loan from Moscow to help with budget liquidity; a $500 million loan in April 2013 to help finance the countrys budget deficit; a five-year $800 million loan offered in January 2013 to assist with transport modernization; VTB financing of infrastructure projects announced in December 2013; and a promise in the first quarter of 2014 to provide Srbijagas with a 175 million loan from Gazprom to help finance a Serbian section of the South Stream pipeline (although the whole project was later cancelled).

• In August 2015, Serbian news site B92 reported that MTS, Russias largest mobile operator, was potentially interested in purchasing the Serbian governments 58% stake in state-owned telecommunications firm, Telekom Srbija, which is in the beginnings of a privatization process. The company provides mobile telephone services through its subsidiary Mobile Telephony of Serbia and until 2010 held a monopoly on landline services. The company owns majority shares (51%) in four Arena Sport TV channels. Mobile Telephony of Serbia is the largest mobile operator in Serbia, with an estimated 43.3% market share.