By Courtney Weaver in Moscow
Dmitry Medvedev, Russia's president, ordered state-controlled Gazprom to cut gas supplies to Belarus on Monday after debt talks between the Russian gas monopoly and Beltrangaz, its Belarusian customer, ended in a stand-off.
Alexei Miller, Gazprom's chief executive, told Mr Medvedev that Gazprom would immediately cut 15 per cent of its supply to Belarus and then continue reducing supply on a step-by-step basis by as much as 85 per cent.
Mr Miller said in his televised discussion with the president that while Belarus had finally admitted to owing Gazprom $200m for unpaid gas transit, the two sides had been unable to come to an agreement during emergency talks on Sunday.
While previous gas disputes between Gazprom and former Soviet neighbours such as Ukraine have posed a problem for European customers, the current argument is likely to prove most damaging not for Europe but for Gazprom and its reputation as a reliable exporter, analysts said.
"It's not just a simple issue about gas pricing between two sides," said Valery Nesterov, an analyst at Troika Dialog, the Moscow investment bank.
"Gazprom is in a precarious situation [financially] after making pricing concessions to Ukraine and some European importers but Belarus is in a precarious position as well : and cannot afford to pay such high prices immediately after the crisis," he said.
Beltrangaz has been paying $150 per 1,000 cubic metres of gas this year while Gazprom was charging a market price of $169.20 for the first quarter and $184.40 for the second quarter.
Mr Miller said Beltrangaz had offered to repay the debt by bartering machinery and equipment, but Mr Medvedev called such a proposal unacceptable.
"The debt must be paid in accordance with the contract and the contract stipulates complete payment in foreign currency : By law Gazprom cannot take pies, butter, cheese or pancakes or any other form of payment [for the debt]. Our Belarusian partners must understand this," the president said.
While he encouraged Mr Miller to "continue the discussions", he told the executive that Gazprom would have to "take some decision" against Belarus.
Analysts said the conflict was unlikely to escalate to the level of previous disputes with Ukraine because of the warm weather and the relatively small amount of debt in question. European importers are not expected to be affected.
Mr Nesterov said Russia's decision to cut the gas was likely "politically-motivated" following its disagreement with Belarus over the planned customs union between the two countries and Kazakhstan.
Alexander Lukashenko, Belarus's president, said on Friday that Belarus would be ready to join the union but only if Russia removed duties on oil and petroleum products staring in January.
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