On Tuesday September 11th the president of Serbia, Tomislav Nikolic, and his Russian counterpart, Vladimir Putin, met at Mr Putin's country house in Sochi, Russia. No formal agreements were signed at the meeting (it is expected that formal agreements will be signed in the course of an official visit by one president or the other, probably before the end of 2012), and the official communiqué indicated that the meeting produced no really new elements in the Russian-Serbian "strategic partnership". Mr Nikolic pressed Mr Putin over the Serbian leg of the South Stream gas pipeline, even inviting him to come to Serbia to attend the official start of work on the project, scheduled for early December. Mr Putin's reaction was evasive, suggesting that Russia has still not committed 100% to the provisional schedule for the Serbia/South Stream project.

The main elements of the Russian-Serbian partnership, as confirmed by the meeting of the two presidents, are as follows:

Budget bailout

Russia will lend Serbia US$300m for general budgetary purposes in 2012, and a further US$700m in 2013. On September 10th Serbia's government adopted a revised budget for 2012, which aims to cut the budget deficit from the currently envisaged 7.1% of GDP to 6.7% (the first-half deficit was 7.2% of GDP). Even if the 6.7% deficit target is met, however, Serbia will still be left with a borrowing requirement of US$2bn for the rest of 2012, and Russia's US$300m will make only a small contribution to filling the hole. The finance minister, Mladjan Dinkic, is hoping to float a Eurobond issue in October. However, even if there is 100% take-up of this issue, which is planned at US$750m, and taking account of the Russian loan, Serbia will still be left with a financing gap of nearly US$450m. The US$700m Russia has promised for 2013 could play a more central role in budgetary stabilisation, especially if Mr Dinkic attains his (highly ambitious) target of cutting the deficit to 3% of GDP for that year.

South Stream and Russian gas

Work on the 411 km section of the South Stream gas pipeline projected to run through Serbia, at an estimated cost of US$2.6bn, is supposed to start in December 2012. However, Serbia is making all the running, and it is possible that the project may yet be modified or postponed by Russia. Meanwhile, the two sides have been discussing amendments to the long-term agreement on gas supplies from Russia to Serbia, which would guarantee an annual 5bn cu metres of Russian gas to Serbia over a period of ten years, at a price favourable to Serbia, but with Serbia repaying by 2014 a US$30m debt owed for gas deliveries by Russia dating back to 2000-01. The long-term agreement on gas supplies is not linked to the South Stream project, and there is no reason to believe that it will not go through as planned.

Railways project

In August 2012 Russia agreed in principle to lend Serbia US$800m for railway development, specifically for the building of a second track on the Belgrade-Pancevo line. This loan would be strictly earmarked for the railways, so it would not be available for general budgetary support. It would, however, help to support the beleaguered Serbian balance of payments, which is likely to show a current-account deficit of around US$4.3bn for 2012. The project, which would probably be largely implemented by Russian rail construction organisations, has still to be cleared by the Serbian Ministry of Urban Planning and Construction. In addition, Serbia has to find more than US$700m to compensate owners of compulsorily purchased land in connection with the Belgrade-Pancevo line project. It appears that the Russian loan would not be available for this purpose.

Russian investments

Against the background of a collapse in foreign direct investment (FDI) inflows to Serbia (there was a net outflow of US$192m in the first half of 2012), Serbia has offered the Smederevo steel plant, abandoned by US Steel earlier this year, to unspecified Russia partners, for a token US$1 (the same amount that Serbia paid US Steel). There is a proposal that a Russian company (again unspecified) should enter into an agreement with the Fiat subsidiary at Kragujevac to market Kragujevac cars in Russia. There is also talk of a tie-up between Russian Sberbank and the state-owned Nova Agrobanka. At the meeting with Mr Nikolic, Mr Putin stressed Russia's willingness to participate in the modernisation of the Serbian energy grid. Finally, the majority Russian-owned NIS oil company is looking at a possible takeover of the Pancevo petrochemical complex. Such a move would, among other things, resolve the issue of the US$222m owed to NIS by the company running the Pancevo complex.

The political dimension

Although the crux of the developing Russian-Serbian relationship is economic, there is also a significant political element. Russia has in recent months reaffirmed its support for Serbia over the Kosovo issue, including making symbolic donations for the reconstruction of damaged Serbian Orthodox churches in Kosovo. There have been meetings between the Serbian Ministry of Defence and representatives of the Russian defence industry, presumably with a view to Serbia purchasing Russian military equipment. In April 2012 a Russian-Serbian humanitarian centre was opened in Nis, in southern Serbia. This centre has substantial firefighting and mine-clearing capability, and Russian (non-military) aircraft are based there. Serbia, in turn, has stated that it will never join NATO, and that it is happy to be Russia's partner in the Balkans. The benefits to Serbia of close ties with Russia are clear, but Serbia is not without its uses for Russia, being one of the few countries in Europe with which Russia has a good relationship and on which it can rely for support. If Serbia eventually joins the EU it will play a similar role to Cyprus, representing Russia's corner in the EU.

Serbia looks West as well as East

"The only thing I love more than Russia is Serbia", said Mr Nikolic, in an interview aired on Russia's Channel One TV. However, in a separate interview before the summit meeting, Mr Nikolic stressed that Serbia was keen to join the EU, and looked to Germany as a model for internal structure and regulation. "Serbia", said Mr Nikolic, "should be a house with two doors."

Serbia is also looking to mend fences with the IMF and sign a new loan agreement, as Russian loans for budgetary support in 2012-13 will not solve Serbia's fiscal problems. An IMF fact-finding mission arrived in Belgrade, the capital, on September 10th to assess the macroeconomic outlook, and to express the Fund's concern about recent changes in the central bank law, which it believes has undermined the autonomy of the National Bank of Serbia (NBS, the central bank). Jorgovanka Tabakovic, the new NBS governor, hinted at a press conference on September 7th that it might possible to amend the controversial law. Mr Dinkic said that he would be looking to discuss financial aid from the Fund (either direct budgetary support or a precautionary loan) before the end of the year. In the field of macroeconomic policy, as in other areas, Serbia will not be putting all of its eggs into the Russian basket.