Despite pessimistic forecasts, the sides also signed an agreement on the South Stream project.

The South Stream gas pipeline, proposed by Russia's Gazprom and Italy's Eni, will run from Russia's Black Sea coast under the sea to Bulgaria, where it will branch off to northern and southern destinations in the European Union, supplying 30 billion cubic meters of gas annually to Romania, Hungary, the Czech Republic, Italy, Austria and Serbia. Deliveries are to start in 2013.

Possible routes for the land section are still under discussion.

Gazprom, the Russian energy giant, will build the underwater part of the pipeline jointly with Eni and its onshore part with the gas companies of the countries concerned.

Gazprom CEO Alexei Miller told media in Sofia about the South Stream's routes: "There are several variants, the final one to be chosen during work with our partners."

The Russian company is completing the relevant negotiations with Serbia, considered to be a crucial transit country. "We have drafted an intergovernmental agreement and the talks have entered the final stage," Miller said.

When inviting Serbia to join the project, Gazprom expressed a desire to privatize the local oil company, NIS, which has provoked a political battle between the advocates and opponents of an energy alliance with Russia.

Gazprom has offered Serbia 400 million euros in cash and 500 million euros in direct investment, and has promised to pay the company's 600 million euro debt, for a 51 percent stake. It has also promised to build South Stream across Serbia, expand the Banatski Dvor underground gas storage facility from 800 million to 3 billion cubic meters and turn Serbia into a gas distribution hub of southeastern Europe.

Serbian Ambassador to Moscow Stanimir Vukicevic said his country would earn between 100 million and 150 million euros from transiting gas a year.

Prime Minister Vojislav Kostunica is a wholehearted supporter of the deal with Gazprom. Its rivals, Austria's OMV and Hungary's MOL, have promised to pay more. The European Commission is opposing the idea because it fears that South Stream will strengthen the EU's gas dependence on Russia and turn Serbia into its foothold in the Balkans.

Serbian Economics Minister Mladjan Dinkic, who apparently favors OMV and MOL, has proposed auctioning the 51-percent stake in NIS for 2 billion euros, although the government had assessed the entire company at only 800 million euros.

This is why last week Serbia could not give an answer to Russia regarding NIS and South Stream. At the same time, a management reshuffle began in the Serbian company, with the supporters of Kostunica replacing the directors of Boris Tadic, the incumbent president of Serbia.

This is an indirect sign showing that the stake could still be sold to Gazprom. Its task has been complicated by the ongoing presidential elections in Serbia, but there seem to be more supporters than opponents of an alliance with Russia. Moreover, complications with Kosovo are unlikely to enhance the Serbs' sympathy for Brussels and its gas policy.

Miller said in Sofia that the implementation of the South Stream project had begun, adding that the pipeline would fully satisfy the gas requirements of southeastern Europe.

However, the EU has confirmed its support for the alternative Nabucco gas pipeline, which Azerbaijan, Georgia, Turkey, Bulgaria, Hungary, Romania and Austria are building to pump Central Asian gas to Europe via Turkey, bypassing Russia.

The Nabucco project, designed to carry 30 billion cubic meters a year, is unlikely to succeed because there will be only 12 billion to 15 billion cubic meters of gas for it. The project's advocates expect Turkmenistan to supply gas for the pipeline.

But Ashgabat keeps its gas reserve data top secret, and players on the gas market do not trust its leaders' statements about unlimited reserves. In fact, the country may have problems because this winter, which turned out to be rather cold, it cut supplies to Iran and Russia.

It probably cut gas exports to Iran in a bid to raise prices, but failure to supply 40 million cubic meters of gas daily to Russia, which has recently agreed to pay more for Turkmen gas, is an alarming sign.

Last Friday, Russia and Bulgaria signed an agreement to set up an international company that will carry out a feasibility study for the Burgas-Alexandroupolis pipeline project bypassing the Bosporus and Dardanelles straits. Taken together with the beginning of preparations for the construction of South Stream, this may mean that Russia's energy diplomacy in southern Europe and the Balkans is starting to become fruitful.

By taking one more step to acquire new transport assets in the region, Russia has demonstrated its desire to control not only oil and gas reserves, but also their transport infrastructure.

(Igor Tomberg is an economist and senior research associate at the Energy Research Center of the Russian Academy of Sciences' Institute of World Economy and International Relations. The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti. This article was published with the permission of RIA Novosti.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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