Europe Sees First Gas Cuts From Belarus-Russia Spat

By Jacob Gronholt-Pedersen Of DOW JONES NEWSWIRES

MOSCOW (Dow Jones)--A dispute between Russia and Belarus over natural gas spilled into the European Union for the first time Wednesday when supplies to Lithuania were cut.

Russia earlier in the day said it had cut gas supplies to Belarus by 60% as it seeks repayment of outstanding gas bills. Moscow cut deliveries to its neighbor Monday by 15% and has squeezed volumes each day since.

Belarus--a key transit country for Russian energy supplies to Europe--responded by ordering a halt to westbound shipments of natural gas. Europe, however, remained unaffected until Wednesday, when Lithuanian gas company Lietuvos Dujos said it had seen changes in supplies from 0900 GMT and that gas volumes to Lithuania and the Russian enclave of Kaliningrad were down by around 30%.

Lithuania relies almost entirely on Russia for gas supplies piped via Belarus and also acts as transit route for gas to Kaliningrad.

Lithuania is preparing to import gas via neighboring Baltic state Latvia, but the country's Energy Minister Arvydas Sekmokas said he doesn't expect any major problems due to lower demand during the summer months, AFP reported.

"If there is a major reduction, it is possible we'll limit consumption," Sekmokas said.

The European Commission had not yet received an official confirmation on the supply cuts to Lithuania when contacted Wednesday afternoon by phone. German and Polish importers said earlier Wednesday they had yet to see any supply disruptions.

Russian state gas firm OAO Gazprom (GAZP.RS) said Belarus owes it almost $200 million for gas supplied during the first half of the year. But Wednesday the company said it had received payment from Belarus for deliveries in May "in an encouraging sign our Belarusian partners acknowledge their obligations," but it still hasn't received outstanding payments for the first four months of the year. Gazprom says it may increase cuts to 85%, if Minsk fails to pay.

Gazprom had planned to ship 44.5 billion cubic meters of gas through Belarus this year--around a quarter of its total exports to Europe, though Belarus is capable of cutting off all transit volumes via the Yamal-Europe gas pipeline.

The standoff marks renewed political tensions between the two former Soviet states. Moscow and Minsk--traditionally close allies--have been at odds in recent months over frequent energy disputes and the failure to create a planned customs union with Kazakhstan. Belarusian President Alexander Lukashenko failed to show up for a key meeting in May, forcing Russia and Kazakhstan launch the union without Belarus.

Analysts expect the standoff to be short-lived with Lukashenko quickly giving in to Moscow, given limited negotiating power. But the situation may further hurt Russia's image in Europe, which depends on Russia for a quarter of its gas needs.

"Russia's new gas war is likely to tarnish its image as a reliable energy supplier," said Lilit Gevorgyan, analyst at IHS Global Insight consultancy.

Russia has sought to increase gas prices to ex-Soviet states in recent years, causing repeated problems with transit through Ukraine and Belarus. In January 2009, large parts of Europe were left without gas for more than two weeks as Moscow fought with Kiev over unpaid gas bills.

European importers have since sought to diversify away from Russian gas to alternative suppliers and fuels. Tuesday, Gazprom lowered its European export forecast for this year by 9%, due to low demand for its gas.

Meanwhile, Moscow is investing billions of dollars in new gas pipeline projects such as Nord Stream and South Stream, carrying gas under the Baltic and Black seas, bypassing occasionally troublesome transit states.

-By Jacob Gronholt-Pedersen, Dow Jones Newswires; +7 495 232 9197;

(Alessandro Torello in Brussels, Marcin Sobczyk in Warsaw and Jan Hromadko in Frankfurt contributed to this story)


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