Russia/Belarus: Possible Gas War Looms

Returning from failed talks in Moscow, Belarusian Deputy Prime Minister Uladzimir Syamashka said gas supplies to Belarus and Gazprom's rights to transit its gas across the country are "mutually dependant." The message being that if Gazprom doesn't given Belarus the deal it seeks, Belarus may refuse to sign a contract allowing the company to pump gas across its territory.

Lines Drawn

Speaking in Moscow on December 27, Gazprom spokesman Sergei Kupriyanov said the company has no plans to back down.

"One shouldn't expect such Christmas presents from Gazprom," Kupriyanov said. "After all, Gazprom isn't Santa Claus."

With 80 percent of Gazprom's exports to Western Europe transiting Ukraine and only 20 percent through Belarus, Minsk's attempt to pressure Moscow looks empty.

"It won't cause serious damage to Europe," said Jonathan Stern, director of the gas program at Britain's Oxford Institute For Energy Studies. "It will cause serious damage to the Belarusian economy if it goes on for more than a few days because their economy is so heavily gas dependant. Europe not only at the moment is warm, but also Gazprom has gas stored in Europe and can, if it needs to, put more gas through the Ukrainian system."

Gazprom initially demanded that Belarus pay $200 per 1,000 cubic meters of gas in 2007, more than a fourfold increase over the $47 Minsk is currently paying.

"I think the Russians have decided enough is enough." -- analyst Stern

It has since modified the offer, asking for $105 per 1,000 cubic meters. As part of what Gazprom calls its "final offer," every 1,000 cubic meters of gas would cost Belarus $75 in cash and $30 in shares of Beltranshaz, the Belarusan state gas company whose pipelines carry Russian gas to Europe.

Belarus is insisting on a straight fee of $75 per 1,000 cubic meters, with no Beltranshaz shares.

Russia has supplied Belarus with natural gas at heavily subsidized prices since the 1991 Soviet breakup. Switching to market rates now would deliver a severe economic -- and potentially political -- blow, as President Alyaksandr Lukashenka has relied on cheap Russian energy to subsidize his Soviet-style economy.

Paying The Piper

But subsidizing Lukashenka has apparently become more costly than it is worth. Moreover, Belarus has been reluctant to part with shares in Belatranshaz, and has been asking more for them than Moscow wants to pay.

"These subsidies, with the price of gas now in Europe, these subsidies have become enormous -- in the case of Belarus amounting to perhaps $4-5 billion a year," Stern said. "That starts to be an awful lot of money and with no real progress on infrastructure sharing and a deteriorating political relationship, I think the Russians have decided enough is enough."

The gas dispute with Belarus is the last in a series of negotiations Gazprom has conducted as 2006 draws to a close. And the message the natural-gas giant is sending to its ex-Soviet clients is clear -- the era of cheap energy is over.

Georgia and Moldova have both agreed to pay higher rates in 2007.

"The era of subsidy, which was really a hangover from the former Soviet Union, is drawing to a close," Stern said. "They will do this as gradually as they can, to have as little impact as they can, but they are very firm that nobody is going to get subsidized gas prices from, at least, the end of 2007. So this is the last year of any subsidy whatsoever."

Georgia, which also faced a New Year's cutoff, agreed on December 22 to a rate hike that will see it pay Gazprom $235 per 1,000 cubic meters of gas in 2007. Moldova has agreed to pay $170, with the price rising to European-level market price by 2011. Moldova also agreed to pay for part of its gas imports by handing over shares in gas concerns, including its distribution system.

Azerbaijan, however, has rejected Gazprom's demand that it pay $235 per 1,000 cubic meters, up from the $110 that Baku currently pays. Azerbaijan says it plan to use its own energy reserves and is also in talks with Iran about possible alternative supplies.