IN A BEAR HUG
The Economist, UK
Dec 18 2006
Belarus will suffer as Russia raises gas prices
Belarus, for so long the recipient of Russian largesse on gas pricing,
is under intense pressure to pay much more for its gas from 2007 and
to surrender control over its energy industry. President Alyaksandr
Lukashenka’s pro-Russian stance no longer trumps Gazprom’s commercial
interests, and he is likely to cede at least partial control of
national pipeline network Beltransgaz in order to cap gas prices
at around US$135 per 1,000 cubic metres, rather than the US$200
that Gazprom is now demanding. However, even at this level it is
questionable whether Mr Lukashenka’s economic model will remain
functional-particularly given that Belarus’s lucrative trade in Russian
oil trading is set to end too. And with few bargaining chips left,
Belarus is likely within a few years to be paying even more for
its energy.
Gazprom is prepared to cut off Belarus if no agreement is reached
on gas pricing from 2007, senior officials of the state-controlled
monopoly were reported as saying on December 14th. Currently Belarus
pays US$46.67 per 1,000 cu metres while Gazprom is demanding US$200
per 1,000 metres. The Belarusian side has reluctantly accepted that
it will have to pay US$135 per 1,000 cu metres, in line with the rate
agreed with Ukraine. However, Russian officials are only willing to
concede this price if, as with Ukraine, Belarus concludes side deals.
In the case of Ukraine, these deals have not been reported. In the
case of Ukraine, Gazprom has long coveted at least 50% of Beltransgaz,
Belarus’s national gas network, which is responsible for approximately
a third of the Russian gas running through the country.
(The other two thirds go via the Yamal-Europe pipeline, which is
already majority owned by Gazprom.) The two sides have been negotiating
over Beltransgaz for over a year, but they still differ widely in
their valuations.
The end of the line Last year, Belarus was the only former Soviet
state that did not face Russian demands for at least a doubling of
the gas price; Belarusian prices remained unchanged. Today, however,
Mr Lukashenka’s unflinching support for Russian domestic and foreign
policies is no longer sufficient to keep gas flowing so cheaply. There
are two reasons for this.
First, Mr Lukashenka has this year won re-election and so Gazprom and
its controllers in the Russian government no longer feel an obligation
to be sensitive about Belarus’s political dynamics.
Furthermore, the Russian leadership is reportedly frustrated that
Mr Lukashenka has failed to make good on promises to push forward
integration with Russia; most likely, given the business focus of the
Kremlin, this refers mainly to the control of Belarusian industrial
assets by Russian capital. The haggling over Beltransgaz is only one
aspect of this.
Second, Gazprom will in the next few years struggle to produce or buy
(from Central Asia) enough gas to meet rising demand at home and
abroad. On one independent estimate, by 2011 it could be short by
approximately 92bn cu metres annually. Two-thirds of Gazprom’s output
is sold on the domestic market, where it charges a price that is below
production cost, and the company’s ability to force higher prices or
consumption cuts is limited. As a result, its focus on closing the gas
supply gap-partly through raising revenue to pay for more investment
or gas purchases-is on the export side. According to data for the first
quarter of this year, three-fifths of Gazprom’s output goes to European
states at an average price of US$242 per 1,000 cu metres. Two-fifths
goes to former Soviet states for an average price of US$89 per 1,000
cu metres. In this context, the obvious commercial solution for
Gazprom is to sharply increase gas prices to the former Soviet Union,
in order to boost its revenue and curb CIS gas consumption.
That said, Russia is not pushing a uniform pricing structure on those
countries; politics still plays an important role. As a senior Kremlin
spokesperson, quoted in the Financial Times on December 12th said,
countries that co-operate with Russia and are ready to share ownership
of domestic assets would be given time before prices reached "market"
levels. States that were "unloyal" or refused to sell assets will be
forced to European pricing levels immediately.
In the case of Belarus, with a view to Gazprom’s "supply tightness"
problem, the Russian monopoly arguably has no room for generosity. In
CIS terms, Belarus is a sizeable gas consumer as it uses 21bn cu metres
of Russian gas each year-more than twice the consumption of Georgia,
Azerbaijan and Armenia combined. Belarus consumed the same volume
of Russian gas as Italy in 2005, and more than half the Russian gas
consumption of Germany.
Out of options Mr Lukashenka has consistently refused to be browbeaten
on Beltransgaz, but he is now backed into a corner. According to a
former governor of Belarus’s central bank, Stanislav Bogdankevich,
60% of Belarusian industry is barely profitable or loss-making at
present-and this in a situation where gas is priced at less than US$50
per 1,000 cu metres. If gas prices quadruple, there is a serious risk
that the Belarusian economy would go into meltdown as its exports
would be priced out of their principal market, Russia.
Mr Lukashenka is under additional pressure economically because Russia
is threatening to place an export duty of around US$180/tonne on
crude oil exports to Belarus. Currently, Belarusian refineries import
Russian crude at below-market prices and then sell their processed
output on to west European markets at world prices. Russia has also
suggested that the proceeds from this trade-which generated almost
US$5bn in export revenue for Belarus in 2005-be redistributed, with
Belarus increasing its export duty sharply and then transferring 85%
of its windfall earnings to Russia.
Feel the pain Even assuming that Mr Lukashenka manages to limit the
rise in the price of gas next year to US$135 per 1,000 cu metres, the
impact is likely to be severe. The government will be forced to loosen
its fiscal policies in order to accommodate both significantly higher
gas import prices and its existing social programmes, agricultural
subsidies and generous wage policies. The budget deficit is therefore
expected to expand to around 3.5% of GDP in 2007. Russia’s move on
oil export duties will hit hard too, causing Belarus’s oil windfall
revenue to fall at a time when the need for subsidies across the
Belarusian economy will increase.
Moreover, the price paid for Russian gas will push up import costs
substantially-by roughly US$1.7bn. Growth in Russian demand for
Belarusian exports is also likely to slow, all of which will stretch
the current account deficit to around 8-9% of GDP annually in 2007-08.
The worst is yet to come Part of the reason for Mr Lukashenka’s
extreme reluctance to part with Beltransgaz is a recognition that he
has relatively few bargaining chips left with which to secure cheap
Russian gas and oil supplies in future years. The fact that the two
sides are now bickering over Beltransgaz, which handles the one-third
of Russian gas exports via Belarus not already under Russian control,
emphasises just how close Gazprom is to meeting its acquisition
objectives in Belarus. The Russian gas monopoly might of course fix
its eye on other energy-sector assets in future, in line with its
desire to diversify into power and oil, and to move downstream and
abroad in all three energy businesses; this would give Belarus a few
more bargaining chips.
Nevertheless, the example of Armenia-another supposedly close Russian
ally-might make Mr Lukashenka shudder. Nearly all of Armenia’s energy
sector is now in Russian hands, in return for which the country
has been promised cheap gas up to 2008. Thereafter, all signals from
Gazprom and Russian state officials point to prices rising to European
levels. The worrying prospect for both Armenia and Belarus is that
all they will get in return for transferring their strategic energy
assets to Gazprom is a few years’ grace before this happens.
And when it does, elites in both states are likely to conclude that
their unswerving loyalty to Russia has been poorly rewarded.