BELARUS NEWS AND ANALYSIS

DATE:

02/01/2007

Belarus Deal Signals Russia's Growing Clout

Gas Monopoly Won a Price Doubling

By Steven Mufson

Washington Post Staff Writer

Belarus looked headed for a cold New Year's Day until the former Soviet republic's prime minister walked into the offices of Russia's natural gas monopoly, Gazprom, just before a midnight deadline and agreed to most of Gazprom's terms for continued supplies.

"There was a tense atmosphere among the Belarusan delegation since we have agreed to and signed a contract whose conditions for the delivery of gas are not at all favorable," Belarusan Prime Minister Sergei Sidorsky said at a news conference at Gazprom's headquarters late Sunday night.

Under the agreement, Belarus will pay more than twice its current price for natural gas for its 10 million people and -- to keep from paying an even higher price -- will sell Gazprom a 50 percent interest in its gas pipeline network. The terms are similar to what Gazprom has been extracting from other neighboring former Soviet republics, such as Ukraine and Georgia. The Russian energy giant wants higher prices for its natural gas, and it is using its leverage as sole or principal supplier to get a share of other countries' domestic pipeline networks and transit lines to the West.

"[Russian President Vladimir] Putin's mission has been to regain the energy assets and export infrastructure that [former Russian President Boris] Yeltsin lost when the Soviet Union broke apart," said Michael Lelyveld, a senior analyst on Russia at PFC Energy, a Washington consulting group.

The new deal is the latest instance of Gazprom playing hardball with its neighbors. Exactly a year ago, it cut off supplies to Ukraine, which had a newly elected West-leaning government, in what was widely seen as politically inspired move. That crisis ended when Ukraine agreed to a sharp price increase, to $95 per thousand cubic meters, while the price to Belarus remained at $47. Recently, Ukraine agreed to another hefty price increase to $130, but it kept the price well below Western European levels of $230 by giving Gazprom a stake in its pipeline system.

Now that Gazprom has treated the authoritarian, pro-Moscow government of Belarus in a similar way, it lends some credibility to Gazprom's claim to have not political but commercial motives, namely the end of heavily subsidized gas prices that date to when its neighbors were all Soviet states. Belarus will now pay $100 per thousand cubic meters, with prices rising to market levels by 2011. A portion of that price will be paid in shares of the national pipeline company.

"There have been absolutely no political demands from the Kremlin, only financial ones," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. Stern said that though this year's gas price in Belarus will be half that paid by Georgia, the differential may be more a reflection of the bargaining power Belarus had over the transit line to the rest of Europe than a political distinction between the pro-Moscow Belarus and the pro-West Georgia. Gazprom originally sought a price of $230 per thousand cubic meters from Belarus, then demanded $105; the implied price, $2.5 billion, it will pay for the Belarusan pipeline system is also more than it originally offered.

Still, in Western Europe, Gazprom's brinkmanship has raised alarms about its power and expansionism. Western Europe is heavily dependent on Russian natural gas supplies, which account for a quarter of Europe's needs and 40 percent of its imports. That share is expected to rise over the next 15 years, according to an analysis by Deutsche Bank Securities.

About 80 percent of the Russian gas crosses Ukraine, and the rest crosses Belarus. Both price disputes threatened to cut off or curtail those supplies; Belarus threatened to siphon the gas it needs from supplies destined for other countries, and a year ago, Gazprom's two-day cutoff to Ukraine crimped supplies elsewhere. That has spurred talk about Europe's energy security and its need for supply diversification.

"All of a sudden, Russian supplies, which seemed so reliable during the Cold War, seem unreliable," said Stephen O'Sullivan, emerging-markets oil and gas analyst for Deutsche Bank. He said that is driving Europe to look at nuclear power and liquefied natural gas imports from other countries. Even though the Belarus dispute was settled before supplies were disrupted, O'Sullivan says: "It gives more momentum to a search for alternatives to Russia . . . You never know what might happen down the line."

In addition, Gazprom has been trying to use its leverage as the biggest supplier of natural gas to Europe and its control over access to oil and gas exploration prospects in Russia to acquire stakes in pipeline networks in countries such as Italy, France and Germany. But those countries have been reluctant to put their private firms under the control of a state-owned company, especially because Russia strictly limits foreign acquisitions within its borders.

"Putin has told the Europeans that Russia's strategy is only aimed at enhancing their mutual energy security, but it's really all about expanding Russian power," Lelyveld said. "The assertive tactics may frighten the Europeans, but in the near term, there's very little they can do to reduce reliance on Russia."

The new agreement with Belarus, which is set to last four years, will alleviate some of Europe's concerns about supply interruptions. "The brinkmanship aspect is significant for Europe, but now that everything seems settled -- at least for the moment -- people will relax again," Stern said. "This four-year deal means that we should not be going through this again next year."

But as long as the state-owned Gazprom controls Russia's natural gas supplies and most of the exploration prospects in Russia, and with high energy prices pumping cash into its coffers, the company will remain powerful. It controls about a quarter of global gas output and reserves.

Last month, Gazprom used that power to pry its way into Royal Dutch Shell Group's oil and gas exploration and production project on Sakhalin Island, off Russia's east coast. Threatened with delays for environmental reasons, the project got the go-ahead the day Shell and its Japanese partners agreed to halve their share in the project, delay cost recovery and sell Gazprom a controlling interest.

One area in which Gazprom has been barred from using its muscle is domestic Russian gas prices. Those prices are rising but remain far below market levels. Domestic sales account for 70 percent of Gazprom's gas volume but only 30 percent of its revenue, according to a Deutsche Bank analysis. Raising Russian prices to global levels and domestic efficiency measures could cut Russia's consumption by an amount equal to a fifth of Europe's imports, enabling Gazprom to expand its exports or decrease its reliance on Central Asian nations, such as Turkmenistan, for a portion of its supplies. But the Russian government recently said that domestic gas prices would remain subsidized for at least the next five years.

Source:

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/01/AR2007010100720.html