BELARUS NEWS AND ANALYSIS

DATE:

25/07/2007

Preparing for tougher times

From the Economist Intelligence Unit ViewsWire

Belarus's president is worried about the future

Belarusian President Alyaksandr Lukashenka is reshuffling senior officials, at the same time as his energy minister is in Moscow for talks over an unpaid US$500m gas debt. The two issues are related, for cheap energy and a strong "power vertical" have been the bedrock of Mr Lukashenka's rule. With the era of cheap Russian energy coming to a close this year, it is all the more important for Mr Lukashenka to be sure he has a firm political grip on the country.

Ostensibly, Belarus is facing an energy crisis. On July 23rd Mr Lukashenka sacked the heads of petrochemicals giant Belneftekhim, gas pipeline operator Beltransgas and state oil and products trader the Belarusian Oil Company (BOC). The three officials, who have been replaced by the government's chief of staff, a regional governor and the deputy head of BOC respectively, have been accused by the president of failing to avert an energy shock in the country. On the same day as Mr Lukashenka was wielding the axe internally, Energy Minister Alyaksandr Ozerets was in Moscow for discussions with Russian gas monopoly Gazprom about an overdue debt of US$500m.

Time to pay

The gas debt is the result of a transitional arrangement reached in January, at the same time that Gazprom forced Belarus to pay US$100 per 1,000 cubic metres for its gas this year, which is double the 2006 tariff. (Also under that deal, prices will gradually rise to reach parity with the price paid by EU states by 2011). Under the transitional arrangement, Belarus was allowed to pay just 55% of the agreed US$100 price in the first half of the year, and to settle the balance by July 23rd. From the start of July, however, it has had to pay the full cash price.

Belarus says it doesn't have the resources to meet its debt, particularly as Russia has been slow to respond the Belarusian request for a US$1.5bn loan. So far, Gazprom has refused to relent, pointing out that Belarusian end-users have been paying US$120 per 1,000 cu metres in cash since the start of the year, so there should be funds to pay the debt. Moreover, Gazprom recently paid Belarus US$625m for part of the stake in Beltransgas that Minsk agreed to sell as part of the January 2007 gas accord.

To judge by the published budgetary figures, Belarus's budget is awash with cash. In reality the position may be less strong. Revenues are sharply higher this year because of the Russian-dictated increase in export duty on oil products. However, 80% of the revenue is supposed eventually to be transferred to Russia, so in practice Belarus is less able to pay. As for the US$625m for Beltransgas shares, the Belarusian authorities say they have earmarked it for investment.

It is possible that the Belarusian side will eventually secure the loan in return for ceding ground on the question of privatising state enterprises, particularly in the petrochemicals sector. Russian entities, including Gazprom, are interested in these purchases but have a far lower valuation of them compared with the prices sought by the Belarusian government.

A glimpse of the future

The latest problems in energy relations with Russia are a good reminder of the fundamental change sweeping through the Belarusian economy, as a result of the January 2007 gas deal and related accords on oil trading. This has led to a sharp drop in the volume of crude oil imported by Belarus, such that the value of oil imports has dropped by a reported US$237m. As a consequence, revenue from oil product exports has fallen by US$205m this year and exports of Russian-sourced crude have dried up entirely (in the first half of 2006, they amounted to 673,000 tonnes).

The partial collapse in export revenue from the oil sector has resulted in a drastic deterioration in the trade balance on energy products. In the first half of 2006, according to a report from Ukrainian news provider Glavred, Belarus ran an energy trade surplus of US$61m in the first half of 2006. This year, it has recorded a deficit of US$504m. As energy import prices rise further, it is difficult to see how the oil and oil product exporting enterprises will be able to revive unless the government loosens restrictions upon them. Moreover, higher energy prices will render the Belarusian economic model unviable. Mr Lukashenka may be able to cushion households from the full brunt of market-pricing for imported gas, but he will be unable to do the same for Belarusian industry. At that juncture, the planned economy will need some major retooling, and probably liberalisation and foreign investment, in order to function.

Leaning on the secret police

The clearest evidence for the assumption that Mr Lukashenka foresees difficult times ahead is the wave of sackings he has undertaken recently. A week before he dismissed the heads of BOC, Beltransgas and Belneftekhim, Mr Lukashenka dismissed the head and deputy head of the Belarusian KGB, Stsyapan Sukharenka and Vasil Dzemyantsey. There is some speculation that these changes are mainly the result of a long-running struggle between the KGB and the interior ministry for precedence; the argument is supported by the fact that the new head of the KGB-former chief of the presidential guard, Yury Zhabodin-was a senior figure in the Belarusian interior ministry throughout the 1990s. Mr Zhabodin is also supported by Mr Lukashenka's son, Viktar, who is reportedly gaining influence at the expense of Security Council Secretary Viktar Sheiman.

These hypotheses are not inconsistent with a broader reading: namely that Mr Lukashenka is making doubly sure he has an unwavering grip on those institutions that will keep him in power, ahead of anticipated problems in the economy. In this sense the KGB reshuffle is probably the key. The dismissal of the energy company bosses and the rumoured sacking of the entire cabinet are primarily intended for public consumption and to ensure that the president is not blamed for the present energy crunch.

Mr Lukashenka's rule thus far has rested on two pillars: cheap Russian energy, that has allowed him to maintain near-full employment and a statist economy, and control of what his Russian counterpart Vladimir Putin calls the power vertical. With cheap energy now a thing of the past and gas supplies set to become progressively more expensive, he needs more than ever to be sure that the power vertical is a reliable support.

Source:

http://www.economist.com/agenda/displaystory.cfm?story_id=9538531

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