BELARUS NEWS AND ANALYSIS

DATE:

02/01/2007

Belarus, Russia: The Natural Gas Supply-Crunch Reprieve

Summary

Russia and Belarus recently reached an eleventh-hour deal on energy imports, narrowly avoiding an energy cutoff to Europe. But this deal -- born out of blackmail and desperation on both sides -- will not stick.

Analysis

Russian state natural gas firm Gazprom and Belarus reached a natural gas supply deal late Dec. 31, 2006, ensuring the continued flow of the annual 10 billion cubic meters (bcm) that transit Belarus en route to Europe. The agreement heads off any imminent supply crunches for Europe or Belarus, but only temporarily.

Gazprom had originally demanded a fourfold price increase from $46 per 1,000 cubic meters as well as 50 percent ownership stake in Beltransgaz, the Belarusian state natural gas transport network. For the past few years the Kremlin, via Gazprom, has sought to strengthen its hand in dealing with its energy customers, largely via acquiring stakes in energy transport and distribution infrastructure.

Under the deal, Belarus will pay $100 per 1,000 cubic meters of Russian natural gas imported in 2007. A year later, the price of gas for Belarus will be 67 percent of the price Gazprom charges the European market (currently about $280 per 1,000 cubic meters) minus transport costs. The cost will then scale up year by year before reaching the full European average Jan. 1, 2011. All previous barter agreements were ended immediately, so all payments must be in cash. Gazprom will pay $2.5 billion in cash over the next four years to acquire the 50 percent stake in Beltransgaz.

This is hardly the final word on the issue, however. In a similar pricing scrap with Ukraine just after the first of the year in 2006, a similar agreement was reached -- one that has been up for renegotiation a dozen times since. Many of the former Soviet states have little to boast in terms of economic attractiveness, with their state energy transport systems among their most valuable assets. In Ukraine, for example, transit fees Kiev charges Gazprom for transshipments to Europe constitute the government's single-largest source of income. Handing those assets over to Gazprom would spell both economic suicide and political enslavement.

What is unique about this deal is not its origin or its nature, but its target: Belarus. Until recently, Belarus was Russia's only dependable ally, largely because the Kremlin has provided Belarus with plentiful energy at subsidized rates. But as Russia adopts a more-pragmatic, harder-edged foreign policy, all of these subsidizations are now being phased out. As that assistance fades, so too will Belarus' reflexive support for all things Russian, up to and including efforts to re-form some successor to the Soviet Union, such as the proposed Russia-Belarus union state.

But though some changes can be expected in Minsk, do not expect too much. President Aleksandr Lukashenko's past belligerency toward the West has earned him no friends there, so any course he charts separate from Russia will be starting from square one.

Source:

http://www.stratfor.com/products/premium/read_article.php?id=282452

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