On January 10, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) imposed a package of sanctions on the Russian energy sector.
The restrictions affected dozens of companies, primarily leading producers and exporters of oil and petroleum products, such as Surgutneftegaz, Gazprom Neft, and their subsidiaries.
As part of the package, the U.S. also designated JSC NIS ad Novi Sad, (Naftna industrija Srbije), Oil Industry of Serbia, headquartered in Novi Sad.
The goal is zero Russian ownership
The U.S. foresees that the most extensive sanctions to date will cost Russian economy billions of dollars, significantly reducing Russia’s ability to wage war against Ukraine.
“Today, the United States imposed the most significant sanctions yet on Russia’s energy sector, by far the largest source of revenue for Putin’s war. … These measures will collectively drain billions of dollars per month from the Kremlin’s war chest and, in doing so, intensify the costs and risks for Moscow to continue its senseless war,” Deputy Director of the National Economic Council Daleep Singh told reporters.
Russia owns 56.15% of the NIS share capital: Gazprom Neft owns 50%, Gazprom has 6.15%, and 29.87% belongs to the Republic of Serbia. The remaining shares are owned by minority shareholders – citizens of Serbia, primarily the company’s active and former employees, as well as investment and pension funds, insurance companies, banks, and other entities.
In order for NIS to pursue its operations, an ownership transformation must take place, which will result in zero shares of Russian companies. Only in this case will the “Oil Industry of Serbia” be able to keep operating.
The U.S. doesn’t want Russia to manage Serbia’s key company, said US Assistant Secretary of State for European and Eurasian Affairs James O’Brien. He believes the only way to ensure zero risk is for the share of Russian ownership to also be zero, and this is America’s initial talking point.
Changes in the ownership structure should take place within a month and a half, that is, by February 25. Financial transactions can be extended for another 15 days, until March 12.
All transformations in Serbia will have to be coordinated with the American side.
About NIS
NIS ad Novi Sad is one of the largest energy companies in Southeast Europe.
The main operational areas of the “Oil Industry of Serbia” are the exploration, production and processing of oil and natural gas, the sale of oil and gas products, as well as the implementation of projects in the field of petrochemicals and energy.
The main production facilities are located in Serbia, that’s including oil and gas fields and the oil refinery in Pančevo.
The Pančevo refinery annually processes up to 5 million tons of oil, being the country’s largest.
As for gas and oil production, NIS is a monopoly in Serbia as it is the only company in the country operating in this field.
NIS also holds licenses to develop hydrocarbon deposits in Romania and Bosnia and Herzegovina.
In addition, NIS controls 80% of the domestic Serbian fuel market and 50% of retail sales through its own network of gas stations in Serbia and across neighboring countries. A total of 400 gas stations operate on the market under two brands, NIS Petrol and GAZPROM. In the retail network, the company is present, besides Serbia, also in Bulgaria, Bosnia and Herzegovina, and Romania. In BiH, the NIS gas station network is among the three market leaders.
NIS is also active in the field of electricity trading. In addition to the Serbian market, the company is represented in those of Bosnia and Herzegovina, Montenegro, Romania, Slovenia, and Hungary.
NIS employs about 5,100 people.
The “Oil Industry of Serbia” is the most profitable business in the country.
According to the financial report for 2023, NIS boasted EUR 3.37 billion revenue, with profit (EBITDA) amounting to nearly EUR 357 million.
The company allocated 75 percent of that to finance own development while 25 percent was distributed among shareholders through dividends.
Tax and other deductions to the Serbian budget in 2023 amounted to 244.4 billion dinars (about EUR 2.09 billion).
Sanctions implications
U.S. officials assure there will be no economic consequences for Serbia if Russia drops ownership of NIS shares.
At the same time, should Belgrade ignore the restrictions imposed by the U.S. and leave everything as it is, the further operations of this Serbian economic giant would become impossible.
First, financial institutions, fearing sanctions, may block NIS accounts.
Second, the supply of raw materials for the company’s refinery will be jeopardized.
Some 80-90% of crude oil is supplied to Pančevo via the JANAF pipeline, which runs through Croatia. The Croatian operator, fearing secondary sanctions, has already stated that, once the restrictions come into force, it will not transmit oil for NIS, despite their active contract valid until the end of 2026.
Experts name two possible scenarios for the developments related to the Russians’ withdrawal from NIS.
The first is the purchase of shares owned by Gazprom Neft and Gazprom by the Serbian state.
The second is the nationalization of the Russian share. However, the latter option currently seems unlikely.
The solution
According to the Russian side, nationalizing NIS is impossible as such.
Russian Foreign Minister Sergei Lavrov recalled on January 14 that the agreement on the founding of the joint Russian-Serbian company “Oil Industry of Serbia” states that “under no circumstances shall it be subject to nationalization”.
At the same time, Vučić assures that Belgrade does have such an opportunity, while emphasizing that the government has no intentions to proceed with the option.
Commenting on the Russian minister’s statement claiming Serbia has no right to nationalize the NIS, the Serbian president stated:
“Sergei Lavrov, my comrade and friend, says Serbia has no right to make a decision on nationalization. I have never said that Serbia will do so. At the same time, Serbia does have the right to do it. My friend Sergei misinterpreted something or perhaps someone gave him wrong information regarding Article 2 of the intergovernmental agreement.
…As for the Oil Industry of Serbia, Article 15, Article 9 or 12 are applicable, saying that in the event of circumstances that prevent one of the parties from fulfilling its obligations, the authorized bodies shall announce appropriate consultations. Therefore, we called for consultations, but I’d like to immediately inform my friend Sergey, as I have informed all others, that Serbia does not want to nationalize Russian property. As I said, that’s while I am president, until I am replaced”.
Plus gas…
Talking about the redemption of the Russian share as the most likely scenario, the question arises of the terms of such a transaction – and its cost, in the first place.
According to expert estimates, based on NIS’s performance over the past 10 years, the Russian block of shares in NIS is worth no less than EUR 2.5-3 billion.
Experts are unable to offer more precise figures, and it’s not because it is impossible to calculate the market value of the company’s shares, but because this asset was part of a broader agreement between Belgrade and Moscow from the very start.
In 2008, the sale of 51% of NIS to Gazprom Neft took place in accordance with an intergovernmental agreement signed by Russia and Serbia, without any competition, at a price below market value. The Russians then paid EUR 400 million for the controlling stake in the Oil Industry of Serbia. According to an assessment by Deloitte run in August 2008, Gazprom Neft underpaid EUR 700 million. But at the end of 2008, Serbia approved the deal anyway.
The NIS deal was part of a general agreement on Gazprom’s entry into Serbia’s energy sector, and also included an agreement on the laying of the South Stream gas pipeline to Serbia and farther into Europe, and the construction of the Banatski Dvor underground gas storage facility by Gazprom.
That gas storage facility was put into operation in 2011. Meanwhile, nothing came of South Stream – in the spring of 2014, after Russia went for annexing Crimea, the European Union abandoned the project altogether.
Interestingly, in the summer of 2014, Belgrade tried to raise the issue of the NIS sale without a tender and unfair dividend payments. But then this topic “froze”. In the end, Serbia did start receiving Russian gas from the south through the Turkish / Balkan Stream.
Now, negotiations on the buyout of the shares of the Oil Industry of Serbia are expected to be combined with discussions on the terms of a new contract for the supply of Russian gas as the existing deal with Gazprom expires in March.
Hybrid oil
The current situation around NIS is a test, even for Vučić, who is known as a true master of balancing between the West and Russia.
In addition to its broad energy and economic significance, the “Oil Industry of Serbia” also plays another role, a hybrid one. Money from the company’s profits is said to have largely been going to politics and the media, contributing to defending Russian interests and promoting the Kremlin’s narratives.
Russia’s withdrawal from NIS, as analysts predict, will significantly weaken Moscow’s influence in Serbia and wider across the Balkans. It is not only about reducing economic or energy dependence, but also about shrinking Moscow’s opportunities (primarily financial) to spread its hybrid influence across the region.
However, Vučić still has a chance to “cheat” in this situation.
Belgrade may fulfill all the demands put forward by the American side, formally removing the Russians from NIS by completely buying out their shares. But, at the same time, the Serbian authorities have the option to appoint managers loyal to Gazprom/Gazprom Neft as compamy top managers, thus preserving Russia’s informal influence on the critical asset.
At the same time, such indirect control cannot be compared with direct ownership. Therefore, at the end of the day, the reduction of Russian influence on the Balkans as a result of sanctions targeting NIS may turn out to be quite challenging and painful for Moscow.
