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Eurasia Daily Monitor: THE RUSSIA-BELARUS GAS DEAL: LUKASHENKA SUFFERS A DEFEAT

By David Marples
Wednesday, January 3, 2007
Eurasia Daily Monitor – Washington,DC,USA
Published by The JAMESTOWN FOUNDATION

Two minutes before midnight on December 31, Russia’s Gazprom and the Belarusian government signed a contract to supply Russian gas to Belarus for the next five years. Had the agreement not been signed, Gazprom had threatened to cut off gas supplies to its smaller neighbor, thereby threatening also the Yamal network that supplies about one-fifth of the gas exported by Russia to Western Europe. Gazprom provides about one-third of the latter’s gas imports, with Germany as the largest single consumer, followed by Italy, Turkey, and France. The European Union expressed its relief that the two sides had ended the protracted dispute. What is in question, however, is the impact on Belarusian consumers.

One year ago, Gazprom, a government-controlled company (Russian First Deputy Prime Minister Dmitry Medvedev is chairman of the Board of Directors) offered Belarus gas for $46.48 per 1,000 cubic meters, less than a quarter of the world price. This price permitted the Belarusian government of President Alexander Lukashenka to continue supplying its industries at heavily subsidized prices, bolstering the economy, and permitting the president to win a bitter reelection campaign on March 19, based in part on promises of economic stability and growth. Having helped ensure that Lukashenka returned to power, Gazprom then demanded (in April 2006) that the Belarusians should pay $200 per 1,000 cubic meters in 2007.

Lukashenka rejected such a price outright and declared that under the terms of the Russia-Belarus Union, his country should not be paying prices higher than those in the nearby Russian city of Smolensk. As discussions continued, however, the Belarusians agreed to allow Gazprom to hold a 50% stake in the Belarusian state gas pipeline company, Beltransgaz, a suggestion first discussed in 2002. The two sides agreed to form a joint company by the end of 2006, but that proved impossible, as negotiations became more difficult. Instead, on December 31, the countries merely signed a protocol on establishing the joint venture.

Belarusian negotiators, including Prime Minister Syarhey Sidorsky and First Deputy Prime Minister Uladzimir Semashka, had hoped to limit the new gas price to $75. Shortly after Christmas, press releases suggested that the cost would be $105, with $30 covered through share payments for Beltransgaz. The final agreement, however, has left the Belarusian side in a very difficult situation.

In 2007 the Belarusians must pay in cash $100 per 1,000 cubic meters of Russian gas. The contract runs to 2011, and in the interim, prices will rise gradually: to 67% of the European rate (currently $250) by 2008; 80% in 2009; and 90% in 2010. By the final year, the prices paid by Belarus will be identical to world prices. In addition, using independent Dutch experts, Russia and Belarus established the value of Beltransgaz at $5 billion. Gazprom will therefore purchase shares worth $2.5 billion over the next four years until it controls 50% of the company. In turn, the transit rate for Russia will rise in 2007 from 75 cents to $1.45 for 1,000 cubic meters of gas over 100 kilometers.

From the Russian perspective, Belarus is simply being asked to respond to market conditions. The prices Minsk will pay in 2007 are still considerably less than those to be paid by Ukraine and less than half of those imposed on Georgia. Nevertheless, the strong stand taken by Gazprom is a reflection of the Putin government’s disillusionment with the Lukashenka administration. It believes that Lukashenka has been using the gas dispute as a means to enhance his local support and to play the nationalist card, claiming to defend Belarusian sovereignty against an intrusive neighbor.

Gazprom leaders also argue that Belarus has confiscated valuable Russian goods at the border, has resold heavily subsidized crude oil imports from Russia for large profits, and has been permitted to export various goods to Russia (such as sugar) without duties imposed. The so-called economic miracle, to cite a recent statement by former speaker of the Belarusian parliament Myacheslau Hryb, was thus attained through Russian benevolence and subsidies.

The Lukashenka regime must now face some harsh realities. Gas prices have doubled and further problems loom over the price for imported Russian oil. The situation calls for drastic and deep economic reforms, and even with some funding from the sale of the transit company, Belarusian factories are likely to suffer. Prices for individual consumers will also rise sharply. A valuable national asset will soon fall under Russian control.

The Russians have played the game ruthlessly and without compassion. On the other hand, they have abided by market rules as well as the principles of a union initiated by Lukashenka more than a decade ago. United Opposition leader Alexander Milinkevich maintains that the Belarusian government is now recouping the consequences of a disastrous policy that has inaugurated not merely an economic partnership with Russia, but a political union. As for the immediate future, the Belarusian public may now recognize that its “emperor” has no clothes, but the economic and political consequences of the president’s bombast and posturing may be very steep indeed.

(Narodnaya volya, December 28; Belorusskoe telegrafnoe agenstvo, December 30 and January 1; Belorusskie novosti, December 30 and January 1; RIA-Novosti, January 1; Agence France Presse, January 2; gazprom.ru)

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