BELARUS NEWS AND ANALYSIS

DATE:

31/07/2007

Russia, Belarus: The Kremlin Turns the Screws

Summary

Without help from the West to pay off its nearly $500 million debt to Russia, Belarus must surrender control over its natural gas pipeline to Russian state-controlled natural gas titan Gazprom. The debt and its consequences for Belarus are the results of Belarusian President Aleksandr Lukashenko's cold attitude toward the West and the change in Belarusian-Russian relations that began when Russian President Vladimir Putin was elected.

Analysis

Belarusian Prime Minister Sergei Sidorsky is meeting with his Russian counterpart, Mikhail Fradkov, in Moscow from July 30 to Aug. 1 to ask for a $1.5 billion loan from the Kremlin. Part of the loan is to cover Belarus' $450 million debt accrued during the six months since Russian state-controlled natural gas behemoth Gazprom raised the cost of natural gas from $55 per 1,000 cubic meters to $100 in January. Relations between the previously close Russia and Belarus have been notably strained since this price hike, leading to a series of struggles over pipelines, money and control of the Russian natural gas that flows to Europe. Now Belarus is groveling on the Kremlin's doorstep and has no choice but to begin bowing to Gazprom's demands for Belarusian energy assets, keeping Minsk firmly under Moscow's thumb.

Belarusian President Aleksandr Lukashenko has failed to fend off the Kremlin's advances into Belarus. As "the last dictator in Europe," Lukashenko has isolated himself from the West and proven unreliable to Russia by retaliating against the Moscow-ordered natural gas price increase. Thus, Belarus is at Russia's mercy, and now Gazprom control over Belarusian natural gas pipeline firm Beltransgaz is on the horizon -- a huge loss for Belarus but a huge gain for Gazprom, since 20 percent of Russian natural gas exports to Europe travel through Belarus.

Belarusian-Russian relations began changing when Russian President Vladimir Putin took office in 2000. Until 2005, Lukashenko had seen the glimmering prospect of reunification with Russia. However, that year, Putin dismissed all pro-Lukashenko ministers, and the Belarusian hope of reunification faded away. For three more years, Belarus received all the natural gas and crude oil it needed from Russia, at generously subsidized prices and with extra to sell to the rest of Europe; in 2006, revenue from oil sales and energy subsidies netted $7 billion. Then, all that changed.

Under Putin, Russia decided there was no need to purchase Lukashenko and Belarus' loyalty with a billion-dollar carrot when it could simply intimidate them with a highly lucrative stick. Trouble began in January, when Russia raised the price of natural gas from $55 per 1,000 cubic meters to $100 and imposed a duty on oil. Lukashenko responded with a tariff on the 1.8 million barrels of Russian crude passing daily through Belarus. When Russia reduced supplies by the exact amount needed by Belarus' refineries, Lukashenko ordered that oil be siphoned off from the remaining supply intended for European consumers. All oil shipments to Belarus were suspended Jan. 8, just as refineries throughout Western Europe noticed a dip in deliveries. Europe felt a slight sting while Belarus felt the lash.

Minsk scrapped the tariff Jan. 8 and supplies resumed Jan. 10, giving Lukashenko a chance to appraise the dynamics of his new relationship with the Kremlin. Belarus began accruing debt by continuing to pay only $55 per 1,000 cubic meters of natural gas, and Gazprom decided to capitalize on the substantial amount of money owed it. When Gazprom made an offer for Belarusian pipeline firm Beltransgaz in February, Lukashenko doubtlessly saw the sharks beginning to circle.

At this point, Lukashenko could have looked to the West for help, but he did not. Time passed, the debt mounted and Belarus eventually agreed to sell Gazprom a 50 percent stake in Beltransgaz in a desperate search for funds. To ensure that Lukashenko missed the July 23 repayment deadline, Gazprom delayed the sale until June and arranged to pay in four installments due by 2010. As a result, Belarus had no way of paying off its debt and the deadline passed.

Lukashenko decided to put all the blame for the missed deadline and mounting debt on someone else, and he proceeded to fire the heads of petrochemicals company Belneftekhim, Beltransgaz and the Belarusian Oil Co. Now Lukashenko is shifting the blame for the increasingly tense Russian-Belarusian relations from himself to Sidorsky, a potential future rival and convenient political scapegoat.

Russia has practically guaranteed Belarus it will get the loan to pay off its debt -- on Moscow's terms -- and Lukashenko will get the credit. Gazprom will secure the Belarusian pipelines that carry its oil and natural gas to Europe, increasing Russian control over key energy assets. In any case, Lukashenko will achieve a hollow victory and the Kremlin will confirm its power over Belarus.

Source:

http://www.stratfor.com/products/premium/read_article.php?id=293212