BELARUS NEWS AND ANALYSIS

DATE:

05/01/2007

Breaking Up is Hard to Do

by TOL

Moscow is stopping the subsidies that kept Lukashenka popular despite his authoritarian tendencies and roguish global image.

It's never easy when your sugar daddy changes the rules of the game. Just ask Belarusian President Alyaksandr Lukashenka.

Minutes before midnight on New Year's Eve, Lukashenka's regime was forced into a humiliating climbdown in its pricing dispute with Russia's state-controlled natural-gas monopoly Gazprom.

With Russia threatening to turn off the taps, Belarus reluctantly agreed to pay Gazprom $100 per 1,000 cubic meters of gas. The price is still cheap by world standards, but it is still more than twice the $46.68 Minsk had been paying for more than two years. Moreover, the price is set to steadily and gradually increase to European market levels - over $200 per 1,000 cubic meters - by 2011.

Georgia, Moldova, and Ukraine have all been forced to swallow even stiffer price hikes in recent years. But those increases have been widely interpreted - at least partially - as punishment for Tbilisi's, Kyiv's, and Chisinau's efforts to break free from Moscow's political grip and cozy up to the West.

The Belarus case, however, is different. For more than a decade, the Kremlin's relations with Lukashenka have been a fairly predictable affair. Moscow provided cheap energy, and Minsk returned the favor with absolute political loyalty.

In addition to heavily subsidized gas, Russia also allowed its oil companies to export crude to Belarus duty free - oil which Minsk then refined and re-exported to Europe at market prices for a huge profit. Saying that the practice was costing it billions of dollars a year in tax revenue, Moscow ended that gift in December as well, slapping a $180.70 per ton duty on oil exports to Belarus.

By changing the game with Belarus, the Kremlin is sending an unambiguous message: both friend and foe in the former Soviet Union can now expect to pay market prices for energy.

And as a result, Lukashenka cannot possibly be sleeping very well at night.

Until now, Moscow's subsidies have allowed the Belarusian leader to maintain a generous social welfare state and a retread Soviet-style command economy. The resulting stability, and impressive economic growth, has kept Lukashenka popular despite his thuggish authoritarian tendencies and roguish global image.

All that is now about to change. Belarus can expect to pay approximately $1 billion more for energy in 2007 than last year. Some economists are saying that inflation, currently at 5-6 percent, could more than double.

Lukashenka has attempted to soften the blow from Russia's moves by raising the price Moscow pays to transport gas across Belarusian territory and imposing a new transit fee on Russian oil.

Some of the new costs will also be offset by the $2.5 billion Gazprom will pay over four years for a 50 percent stake in Belarus' pipeline system Beltranshaz. But the catch there is that Minsk did not want to sell Beltranshaz at all, and by caving in to Gazprom's pressure to do so it has surrendered a vital bit of leverage.

Overall, the trend for Belarus' economy without Russian subsidies is far from rosy. And given his international pariah status, Lukashenka, unlike Georgia, Ukraine, and Moldova, cannot turn to the West for help.

Lukashenka now faces what must look like a Hobson's choice. He can sit back and watch the economy shrivel and shrink - and most likely suffer serious political fallout. Or he can attempt economic reforms aimed at creating a viable private sector, which would ultimately cut into his absolute dominance over Belarus.

With its erstwhile ally on the ropes, questions remain about exactly what kind of game Russia is playing. On the surface, simple economic motives and logic are certainly at work. Russia is simply tired of subsidizing its neighbors, no matter how pliant they may be, with cheap energy. But as is always the case in the former Soviet Union, business and politics are practically impossible to separate.

Some Kremlin watchers see a bid to get rid of Lukashenka and replace him with a less embarrassing lackey.

Others see an attempt to pressure Lukashenka into unifying his country with Russia on terms favorable to the Kremlin. That is, Belarus is absorbed as a province of the Russian Federation rather than entering the co-equal union of two states as Minsk has sought.

Such an outcome could suit Putin given the fast approaching 2008 presidential transition. If Putin decides to leave office as the constitutional says he must, he would be able to do so as the leader who began re-uniting the Slavic lands lost in the Soviet breakup. And if Putin wants to stay on, unification - which would technically create a new country - could provide the pretext to change the constitution to allow him to do so.

No matter how it all plays out, one thing is certain: Lukashenka's sweetheart deal with Russia is over and the geopolitics of the region are about to undergo a major shift as a result.

Source:

http://www.tol.cz/look/TOL/article.tpl?IdLanguage=1&IdPublication=4&NrIssue=199&NrSection=2&NrArticle=18054

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