A TANGLED WEB OF PIPELINES
By Paul Abelsky

Russia Profile, Russia
May 2 2006

Gas May Be Uniting or Dividing Issue

Russia’s energy relations with Belarus took center stage throughout
the month of April, with tensions escalating yet again at the end
of the month on the eve of a meeting between the presidents of the
two countries. Just prior to Friday talks in St. Petersburg between
Presidents Vladimir Putin and Alexander Lukashenko, Gazprom press
secretary Sergei Kupriyanov reiterated the company’s criticism
of its Belarussian partners. Starting next year, Gazprom intends
to shift toward market-based pricing of its gas exports. However,
according to the Gazprom spokesman, the Belarussian leadership has
yet to offer a new arrangement that will take the place of the current
setup. The discussions over how the economic relationship will change
are proceeding alongside the ongoing dialogue over the future of the
political ties between the two states.

With all international parties bemoaning the politicization of energy
supplies, the past two weeks have seen some of the most intense
efforts yet by major exporters and consumers of hydrocarbons to stake
out their economic and political interests in the face of Russian
energy dominance. After Great Britain appeared ready to erect legal
obstacles to Gazprom’s possible takeover of Centrica, the country’s
main gas supplier, and the European Union voiced fears about Gazprom’s
expansion, Russian officials threatened to direct their energy routes
to Asia and North America instead. Central to the intense volley
of accusations has been the anxiety over the Russian gas monopoly’s
dominant position in the European energy market, where it accounts
for over 25 percent of supply. Meanwhile, the company seems ever
more interested in acquiring a stake in the retail energy sector
and boosting its profit margins by selling directly to European
consumers at rates that occassionally exceed wholesale prices by a
factor of seven.

The tightening web of pipelines tying Europe with Russia has conjured
up fears of political influence of the kind ostensibly employed by
Russia during the gas crisis with Ukraine last December and January.

Indeed, the current tensions date back to Gazprom’s recalibration
of energy relations with other former Soviet republics. Ukraine was
recently threatened with yet another price hike in July, while Armenia,
Moldova and other states have recently had to negotiate revisions to
their contracts for Russia’s energy exports.

Nothing indicated Gazprom’s changing stance as much as its proposed
adjustment of tariffs with Belarus. Russia is supposedly working
toward the creation of a unified state with its neighbor to the west,
but the current conflict is the third major pricing dispute between
the two countries in the past four years. Parallel to the promised
price change, the Russian side has suggested that the adoption of
a single currency will simplify the existing arrangement. Applying
pressure on both fronts at once appears to be a form of a lightly
disguised economic ultimatum. Belarussian officials have long stated
that the creation of a joint monetary unit should become one of the
concluding acts of broader economic integration

“Using economic influence as levers of political pressure is a
dangerous strategy,” said Alexander Konovalov, director of the
Institute of Strategic Evaluations, a Moscow-based think tank. “As we
already saw with Ukraine, Russia’s reputation can be undermined in an
instant. Exploiting energy dominance to force economic integration
with neighboring states presents an inadequate approach, which is
likely to backfire.”

The political firestorm that erupted last December during Russia’s
heavy-handed effort to alter the price of its gas exports to Ukraine
stands in sharp contrast to the muted international reaction that
greeted the recent announcement promising a threefold spike in the
rates it charges Belarus. Indeed, this time, Russia appeared implicitly
to be acting in tandem with European countries who have launched
limited sanctions to punish the Belarussian government for improper
conduct during the country’s presidential elections in March. Russia
is likely pursuing its own agenda without any outright coordination
with European powers, but most observers were surprised when, during
a recent vote in the Parliamentary Assembly of the Council of Europe,
Russia abstained from casting a ballot against a resolution that
declared the election results in Belarus to be falsified.

“The European Union and Russia are following their own ambitions,
but there’s a sense of convergence with regard to Belarus,” Konovalov
said. “Russia is beginning to search for alternatives, aware of the
fact that Lukashenko won’t be there forever. And it’s clear that
all the discussion of a union state is empty talk. No one in Belarus
wants to compromise the country’s sovereignty.”

Russia’s energy relations with Ukraine and Belarus embody the
government’s differing approaches to two former Soviet republics,
which are both highly dependent on Russian exports. Weeks before the
crisis with Ukraine, Russia and Belarus signed a separate agreement
that guaranteed subsidized deliveries of gas for 2006. The price for
1,000 cubic meters was set at $46.68, less than Ukraine was paying
at the time, and almost a fifth of the average European rate.

On Dec. 10, Alexei Kudrin and Nikolai Korbut, the finance ministers
of Russia and Belarus, respectively, signed a deal that provided
the Belarussian government a credit of $146 million to cover the
expense of importing Russian gas. The sum was slightly less than the
$175 million provided by Russia the previous year, while the price
of gas remained virtually unchanged. On the eve of Lukashenko’s
inauguration on Apr. 8, Gazprom CEO Alexei Miller announced that
Belarus would be offered a price hike to match “European levels,”
followed by his deputy chairman Alexander Ryazanov’s qualification
that the rate should be set at least three times higher than the
current arrangement of $46.68 for 1,000 cubic meters.

“The price hike will not pass unnoticed but, as far as energy
dependency on Russia, the Belarussian model is more sustainable
compared to the Ukrainian economy,” said Pavel Daneiko, director of the
Institute of Privatization and Management in Minsk. “The so-called
‘Belarussian economic miracle’ is largely based on reprocessing
Russian oil and exporting the secondary byproducts. The upward trend
on gas rates will put pressure on prices for electricity and will
have a clearly negative effect. But it will be far from catastrophic,
necessitating the much needed changes toward more efficient methods
of energy use.”

Another factor in Gazprom’s stance toward Belarus is the company’s
protracted effort to take over Beltransgaz, the state-owned pipeline
monopoly. The two sides have long differed in the appraisal of the
company’s value, and Beltransgaz has now offered to trade a stake
in the company for access to gas and oil reserves inside Russia. In
a segment aired on Belarussian television after the conclusion of a
presidential meeting on Friday, the country’s Deputy Prime Minister,
Vasily Dolgolev, explained that the discussions centered not on a
straightforward sale of Beltransgaz, but focused instead on a more
complex exchange of assets.

Kirill Frolov, an expert at the Institute for CIS States in Moscow,
believes a “liberal lobby” within the Russian government is pushing
Gazprom to take more confrontational steps. Belarus’s political elite
needs to be offered appropriate terms toward further integration
instead of economic blackmail.

“Energy relations between our countries should actually be the basis
for advancing the creation of a unified state, instead of becoming an
instrument for provocation,” Frolov said. “Economic ties must play a
role, but it’s just one of a number of important factors to a broader
integration of brotherly nations. Differences in socio-economic models
don’t have to be an obstacle in this process. There are known cases of
mergers between differing economic systems, such as the incorporation
of Hong Kong into China, when the former retained significant aspects
of its sovereignty. What Russia needs is Belarus, not Beltransgaz.”

The tensions in the two countries’ energy relationship are likely
related to the misgivings surrounding the future Russian-Belarussian
partnership. Despite the political support extended to the Lukashenko
regime in the wake of the controversial ballot in March, the broader
prospects for future integration remain mired in uncertainties.

“It’s hard to say whether economic or political considerations were
more important in the recent initiative,” Konovalov said. “Russia’s
political leaders are tiring of Lukashenko, who ditches and deceives
Russia, while none of his countless promises are realized. Gas prices
should be set at a level decided outside an expedient political
arrangement. Until now, Russia has been rewarding Belarus with a
blunt economic gift.”

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