Times Online, UK
July 1 2006

Cheap gas comes at a high price for Belarus
By Christopher Granville

SPEAKING in the Lithuanian capital Vilnius last month, Dick Cheney,
the US Vice-President, accused Russia of being an energy blackmailer.
The unspoken grounds for this criticism were clearly Russia’s
decision last January to stop supplying natural gas to Ukraine to
secure a higher price.
In reply to such criticism that Russia is using energy supplies for
political ends, Russian officials have argued that, on the contrary,
the highly subsidised gas prices which Ukraine and other former
Soviet states had previously enjoyed were inherently political. By
contrast, the new policy of asking customers in the former Soviet
Union to pay for gas at the current European market price is the best
way to de-politicise the region’s energy markets.

In principle, Russia’s shift to market pricing of gas rather than
government price-setting makes sense. Back in January, Condoleeza
Rice, the US Secretary of State, said that it behoved Russia as a G8
member to continue subsidising the Ukrainian economy for a
transitional period of several years. This was an interesting
addition to the qualifications for G8 membership.

The real weakness in the Russian `pro-market’ position is the
impression that it remains selective. Ukraine is required to pay the
market price for gas, while other former Soviet states continue to
enjoy cheap gas in return for political loyalty to Russia.

But Moscow has an answer to that too. Several former Soviet countries
have been able to buy Russian gas at a 50 per cent discount to the
European market gas price in return for letting Gazprom, the Russian
gas monopolist, into the local gas distribution business. In this
`downstream’ segment of the gas market, suppliers mark up the price
paid for gas at the border before selling it on to local end users.

Russia has been quite consistent in offering a discounted price for
gas in return for giving Gazprom a share in local markets. Such
arrangements are in place in countries ranging from traditional
Russian allies such as Armenia to the Baltic States, which have a
difficult and often tense relationship with Russia as the former
colonial power. The gas price rise from $50 to $95 per thousand cubic
metres which Ukraine finally agreed to last January was also
consistent with this broader picture.

Until recently, the one glaring exception to this picture has been
Belarus. Aleksander Lukashenko, the President and effective dictator
of that country, has managed to keep the price of Russian gas
supplies down to $50 per thousand cubic metres, on the grounds that
Belarus is building an ever closer union with Russia. But President
Putin now seems tired of exchanging subsidies for vague friendship.
For the past few months, Belarus has been put on notice that it too
will have to pay more for gas. Mr Lukashenko’s priority is to keep
the cash price low, since this essentially finances his dictatorship.
Instead he is offering Gazprom a 50 per cent equity stake in his
country’s gas pipeline company which ships gas westwards into the EU.
Similar such offers in the past have come to nothing over valuation
disagreements. But the fact that Mr Putin is sending in western banks
to do the valuation work shows that this time, he means business.

Christopher Granville is editor of Trusted Sources, a new online
analytical service focused on China, Russia, Brazil, India and other
emerging markets.