BELARUS NEWS AND ANALYSIS

DATE:

01/08/2007

Gazprom In Wolf's Clothing

Vidya Ram,

LONDON -

The tough treatment of European energy companies by Gazprom may have shown the world who the boss is, when the state-controlled Russian energy company teams up with one of its southern competitors, but that imposing reputation comes with a cost. Now every move that Gazprom makes seems to get interpreted as a coded message from the Kremlin, even when the reasons are largely economic - as is the case with its latest threat to cut off natural gas supplies to Belarus.

Gazprom (other-otc: OGZPY - news - people ) said that it would be reducing its supply of gas to Belarus by 45.0%, starting Friday, after the country failed to pay around $456.2 million that it owed to the Russian company for gas supplied in the first half of the year.

Bracing for concerns that supplies to the rest of Europe could be under threat, Gazprom said that it would "take all possible measures" to ensure that gas would continue to be transported via a pipeline that runs through Belarus "in full compliance with the existing obligations to European consumers."

The pipeline currently supplies gas to Germany - the largest consumer of Russian gas - Poland, Lithuania and Ukraine.

The latest development isn't particularly surprising, given Gazprom's track record. In 2005, it cut fuel to Ukraine, after the country failed to pay up when Russia raised the price of gas. At the end of last year, Belarus narrowly avoided having its gas supplies cut off after it agreed to pay nearly double its previous rate. To make the hike more manageable Gazprom agreed that Belarus could delay payment of the full amount for the first half of the year until July 23. The country would then be charged a full $100 per 1000 cubic meters in the second half of the year.

Gazprom claims to be doing what it was entitled to under the contract. In exchange for getting a stake in Belarus' gas transportation company, Beltransgaz, Gazprom agreed to sell gas at a heavily discounted rate.

"Belarus obtained unprecedentedly beneficial terms and conditions for Russian gas purchases and a time period enabling to adapt to a new price," said Gazrpom in a statement.

However its move has stoked fears that Europe is becoming too dependent on Russian gas, and that Gazprom, which is effectively an arm of the Kremlin, could use its fuel as a bargaining chip for political purposes.

Dr. Bobo Lo, head of the Russian and Eurasia program at the Chatham House international thinktank, argues that Gazprom's motives - in this case at least - were largely economic.

"When people criticize Russia for politicizing energy relations, they often forget that Gazprom and the Russian government have financial motives too; they are interested in profit."

He added that Belarus had been exploiting Russia's eagerness to keep the country on its side. Gazprom wants to raise prices across the board and was no longer content to allow Belarus to pay "rock bottom" fees.

Until 2007 Belarus was paying a heavily subsidized rate for its gas, compared with Gazprom's other European customers.

There is also the possibility that Gazprom is using it statement as a negotiating tactic.

Nomura analyst Xavier Grunauer thinks that it could be an attempt by Gazprom to wheedle itself a better price for a stake in Beltransgaz.

Gazprom has already agreed to pay $625 million for a 12.5% stake in the company, and it hopes to raise its stake to 50.0% in the next four years.

Lo also believes that despite its tough stance, Russia will want to tread carefully, for fear of jeopardizing its relationship with its European customers.

"Moscow doesn't want to damage customer confidence and they know the Europeans have a tendency to panic," he said. He added that contrary to common perception it is Russia that is dependent on Europe, rather than the other way around.

Gazprom's announcement has already led to speculation about supply shortages to the other countries supplied by the pipeline. Ukraine skimmed the gas that it needed from the line before Russia cut its supplies, and there are fears that the same could happen in Belarus.

The European Union has issued a cautious response to the latest development, saying it was closely monitoring the situation.

Source:

http://www.forbes.com/markets/commodities/2007/08/01/gazprom-belarus-gas-markets-equity-cx_vr_0801markets08.html