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Financial Times: Gas dispute threatens Belarus, Georgia

By Neil Buckley and Arkady Ostrovsky in Moscow
Published: December 13 2006 22:07 | Last updated: December 13 2006 22:07

Russia is preparing to cut off natural gas supplies to neighbouring Belarus and Georgia unless the two former Soviet republics agree by the year-end to pay much higher prices in 2007.

Coming a year after Gazprom, the Russian gas giant, briefly cut gas to Ukraine in a similar pricing dispute, such a move could provoke further international criticism that Moscow is using energy as a political tool.

It might also intensify pressure on Russia to ratify the European Energy Charter treaty, which would require such disagreements to be resolved through arbitration.

Action against Belarus could affect supplies to Poland and Germany since a transit pipeline runs across the republic, though it carries only a third of the volumes running through a bigger export pipeline across Ukraine. Last January, pressure in the trans-Ukrainian pipeline to western Europe dropped as a result of what Gazprom said was Ukraine “stealing” gas for its own use.

Gazprom has made clear it is prepared to reduce price increases in exchange for stakes in the republics’ gas distribution networks. It is pushing hard for 50 per cent of Beltransgaz, the Belarusian company that also controls the export pipeline across the country, although Russia and Belarus differ sharply over its value.

Dmitry Medvedev, Gazprom chairman and Russia’s first deputy prime minister, declined to comment directly to western reporters this week on whether the company was prepared to cut off supplies. But he admitted negotiations were “not easy”.

“I wouldn’t want tensions to arise,” he said.

Sergei Kuprianov, a Gazprom spokesman, told a radio station he could not exclude a cut-off to Belarus, although he added: “We would hate to see that.”

But it is understood Gazprom is preparing for a worst-case scenario if agreements are not reached.

Senior Russian officials say the increases are a move away from subsidised supplies for former Soviet republics towards transparent market pricing for all, which Gazprom hopes to achieve by 2008.

While Belarus has been happy to remain in Moscow’s orbit, western-leaning Georgia sees the threat as politically motivated. It has seen Russia sever transport and mail links in a feud and portrays the demand to double the price it pays from $110 per thousand cubic metres to $230 – close to European levels – as a matter of more than economics.

Georgian officials say that since Georgia’s gas is sourced from nearby Central Asia, it should pay less than more distant European customers.

Georgia says it can replace Russian gas with supplies from neighbouring Azerbaijan and from Iran. But as well as trying to raise prices to $230 to Azerbaijan, Russia is reducing its gas exports to the country next year, limiting Azerbaijan’s scope to re-export surpluses to Georgia.

The proposed price increase to Belarus is striking since the republic has been a close Russian ally. The fact Gazprom left prices at $47 for Belarus last January while demanding $230 from western-orientated Ukraine was seen as evidence of Russian discrimination.

This year, Russia is pushing for a four-fold increase from Belarus to $200. Analysts see the demand as punishment for the failure of Alexander Lukashenko, the authoritarian Belarus president, to deliver on promises of closer integration with Russia.

Mr Lukashenko is pressing for the same price Ukraine has agreed for next year – $130 – but economists say even that could damage the Belarusian economy.

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