BELARUS NEWS AND ANALYSIS

DATE:

02/08/2007

Russia and Belarus on the brink of gas war

MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) - Belarus is again attempting to solve its economic problems at Russia's expense.

Minsk, which must do something to rectify its negative foreign trade balance, wants Russia to lend it $1.5 billion. It says that it needs $450 million to repay its debts to Russian energy giant Gazprom for gas delivered in the first half of the year.

Moscow will have to choose between helping its neighbor and beginning another gas war.

The meeting of Russian and Belarusian prime ministers in Moscow in late July did not solve the problem, as Russia refused to finance the repayment of Belarus's gas debts.

Under a bilateral contract, Gazprom is to supply gas to Belarus at $100 per 1,000 cubic meters in 2007, but Belarus paid only $55 in the first half of the year. It pledged to start repaying the debt on July 23, but Gazprom has not received any payments to date.

On August 1, it announced that gas supplies to Belarus would be cut by 45% from 10:00 a.m. on August 3.

Belarus has the money to repay the debt, as its gas pipeline company Beltransgaz received all the necessary payments from its clients, and the remaining funds can be taken from the republic's surplus budget.

Its budget revenues for January-June totaled $7.7 billion, while expenses were $6.95 billion. In addition, in early June Gazprom transferred $625 million to the Belarusian treasury in payment for a 12.5% stake in Beltransgaz.

But Minsk does not want to repay its debts to Gazprom from its own money, hoping for a loan from Russia instead.

The situation is absurd, and nobody can predict where it will go next. Will the Kremlin declare a gas war on Minsk?

Belarus has run out of time to transfer the requisite funds to Gazprom. Besides, the republic's authorities apparently believe that repaying its debts will amount to yielding to Moscow's pressure, and will prevent it from using the debts-for-loan blackmail in the future.

On the other hand, Russia will not benefit from increasing pressure on Belarus, as it has been already accused of using gas supplies as an instrument of foreign policy.

Moscow has pushed itself into a corner. It knew that the money Gazprom paid for Beltransgaz would not be used to repay debts to it last May, when First Deputy Prime Minister of Belarus Vladimir Semashko said that the money would be channeled into the national development fund for financing investment projects.

Money on the accounts of Beltransgaz and the surplus of the Belarusian budget is listed in Belarusian rubles, whereas mutual settlements are made in dollars. The Kremlin could hardly expect Minsk to spend the hard currency reserves of the National Bank in order to repay its debts to Russia.

Minsk learned to draw maximum benefit from its close relations with Russia long ago. It has now refused to repay its gas debts and is pressuring Moscow into granting a $1.5-billion loan simply to have the necessary funds to improve the national economy. Belarus needs hard currency to make up for its negative trade balance.

According to the National Bank, the country's import exceeded export by $881.6 million in the first half of the year, and Belarusian companies' debts to foreign contractors amounted to $295 million (without the debt to Gazprom). The bank has only $2.9 billion in hard currency reserves.

A weak payments balance is one of the shortfalls of the Belarusian "economic miracle." Its GDP grew by 8.9% in the first half of the year, inflation was only 3.5%, and industrial production increased by 7.7%.

But the good news is undermined by growing dependence on export-import transactions. A trade deficit is not threatening when it is balanced by a positive inflow of capital. However, the investment climate in Belarus is one of the worst in Europe. Foreigners are wary of investing in a country where the state controls production and is not willing to exchange property for money.

The Belarusian government has problems finding foreign loans. This year it intended to take out a $1 billion loan in China, borrow another $1 billion from Austria's Raiffeisenbank, and raise 10 billion rubles ($390.61 million) by floating bonds on the Russian ruble-nominated stock exchange, MICEX.

The only positive news was Venezuela's recent promise to lend it $500 million for joint projects.

If the foreign exchange rate is hit by a crisis, the Belarusian currency and economy will be in for a serious shock. The alarm signal sounded during the gas conflict with Russia early this year, when Belarusians rushed to sell Belarusian rubles.

The National Bank stabilized the situation by mobilizing the credit reserves of state-controlled banks and slashing the money supply. But this did not seriously improve the situation or the business climate.

President Alexander Lukashenko then launched a new campaign to increase the production of consumer goods and liquidate unprofitable enterprises, which made up 30% of the industrial sector.

Stanislav Bogdankevich, former chairman of the National Bank's board of directors, said that unless emergency measures were taken the Belarusian economy would be hit very hard in 2008. If Minsk pays internationally accepted prices for gas and oil, its economy will fold by 2011.

No wonder that Minsk has decided to use Russia again in an attempt to improve the situation. Who else, apart from the kind-hearted eastern neighbor, would grant it a soft loan cushion of $2 billion?

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

Source:

http://en.rian.ru/analysis/20070802/70176651.html