BELARUS NEWS AND ANALYSIS

DATE:

14/12/2006

Belarus: Can Foreign Investment Pay the Gas Bill?

Summary

Russia has increased natural gas prices for Belarus and imposed duties on crude exports, sabotaging Belarus' energy balance and financial health. Minsk will attempt to rectify the situation by opening the country's industry to foreign investment. Belarus will seek to balance a Western-oriented economy with a Russia that wants to retain the country as part of its periphery -- putting Belarus in play for the first time since the fall of the Soviet Union.

Analysis

Russia has imposed a $24.65 per barrel duty on crude exports to Belarus. The duty, approved Dec. 12, will take effect Jan. 1. Under the countries' previous customs arrangement, there was no duty on crude exports to Belarus -- a situation Russian oil companies took advantage of by exporting oil to Belarus, then exporting that oil and products refined in Belarus to other countries. This allowed the Russian companies to pay Minsk's smaller export duties and pay no export duties to the Kremlin.

At the same time, the two countries have been negotiating the delivery of Russian natural gas to Belarus. A deal has reportedly been struck, though both parties publicly deny any progress. Beginning in 2007, Russia's state-controlled natural gas monopoly Gazprom will charge Belarus $200 per 1,000 cubic meters of natural gas, up from the current price of $46.68. Russia will pay $4 billion for a 49 percent stake in the Belarusian energy transport network Beltransgaz, providing Belarus with some funds to offset the increased natural gas price.

The Belarusian government's original expectation was that the $4 billion not only would be sufficient to finance payments for the natural gas deliveries, but would also give Minsk the time -- approximately two years -- to look for alternative solutions. One proposal is to open the Belarusian business sector to foreign investment (retaining controlling stakes in strategic enterprises, of course). The country has several significant heavy industries, such as the production of tractors, tires, appliances and other manufacturing. European investors would like to get into the Belarusian market but have been deterred by the country's unfriendly business environment. However, Belarus does boast cheap labor and a vertically integrated industrial sector that at least somewhat facilitates cooperation. Moreover, should Belarusian President Aleksandr Lukashenko take the step to open the country for investment, he is likely to create a better environment than the restrictive Russia.

However, that plan may not work very well now that Belarus stands to lose an additional $1.7 billion to $2 billion in tax income from export duties on Russian crude. That gives the Belarusian government significantly less time to burn through the reported $4 billion income from the sale of Beltransgaz; the natural gas price increase is estimated to cost more than $3 billion alone. That indicates that this year, Lukashenko will adopt an aggressive policy to attract foreign investment in order to prepare the country for the next year's expenses. Although Lukashenko does have a presidential slush fund, the amount in it is unknown and he cannot be counted upon to use it in order to offset the expenses.

While Belarus attempts to attract foreign investment, Russia will not stand idly by. Russia considers Belarus an integral part of its periphery, vital not only for the transportation of energy to Europe, but for geopolitical considerations -- beyond Belarus lies NATO. Russia has decided to raise energy prices for all of its near abroad, since discounts were no longer ensuring loyalty, especially from the audacious Lukashenko, who has so far survived thanks to Russian subsidies. Russian investors will vie for any enterprises put up for sale, and Lukashenko will have to balance Western and Russian ownership of assets.

Although foreign investment will help, the Belarusian budget shortfall for 2007 will be approximately $5 billion -- or 16 percent of the country's 2005 gross domestic product of almost $30 billion -- meaning that Minsk will eventually have to bow to the Kremlin's pressure and sell more assets to Moscow in order to abate future price increases. The newfound openness to foreign investment will bring Belarus out of its cocoon somewhat, but will not completely turn it away from Russia.

Source:

http://www.stratfor.com/products/premium/read_article.php?id=281958

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