Economist, UK
Jan 3 2007
A cushioned blow
Jan 3rd 2007
>>From the Economist Intelligence Unit ViewsWire
Belarus’s gas deal with Russia marks the end of an era
Belarus extracted slightly more favourable terms from Russia on gas
pricing in 2007 than had been expected, indicating that Moscow would
prefer to reduce the risk of toppling President Alyaksandr
Lukashenka’s regime. Nevertheless, Russia will acquire a 50% stake in
an import gas export pipeline and will, by 2011, charge Belarus a
"European" price for gas. Unless Russia’s next president reverses
course, the days of cheap Russian gas to the former Soviet Union are
numbered; and Gazprom is getting nearer to controlling the export
infrastructure in those countries.
Late on December 31st officials from Gazprom, Russia’s
state-controlled gas monopoly, and Belarus agreed to a package deal
on gas supplies for 2007. In the absence of a deal, Gazprom had
threatened to cut supplies from January 1st and the Belarusian side
had indicated it would disrupt Russian gas supplies via the
(Russian-controlled) Yamal-Europe pipeline and the Beltransgaz
network to Poland, Lithuania and northern Germany. Belarus was the
only former Soviet state that Gazprom spared from a sharp price rise
in 2006, with the tariff staying at US$47 per 1,000 cu metres.
However, for 2007 the Russian company sought a radically higher
price-of US$200 per 1,000 cu metres, or US$140 if Belarus was
prepared to sell to Gazprom half of Beltransgaz.
Five-year fix
A few days before the December 31st agreement, it became clear that
the deal would involve Beltransgaz, thus providing for gas prices
that would for several years be well below those in Europe. Gazprom
had offered a price of US$105 per 1,000 cu metres, US$30 of which
would be in the form of Beltransgaz equity. In the event, the deal
provides for a cash price in 2007 of US$100 per 1,000 cu metres,
while Gazprom will pay US$2.5bn for 50% of Beltransgaz. The deal
provides for a five-year transition to prices that will be in line
with those paid by Gazprom’s European customers. Over this period,
transit fees paid by Gazprom to Belarus will double.
Just as importantly, a compromise on the question of oil duties seems
within reach. Russia had threatened to impose a duty of around
US$180/tonne on crude oil exports to Belarus, thus wrecking a
lucrative arrangement by which Belarusian refineries import Russian
crude at below-market prices and then sell their processed output on
to west European markets at world prices. In 2005, this generated
export revenue for Belarus of nearly US$5bn. According to some press
reports, Russia has now imposed this duty. According to Belarusian
officials, however, an agreement on revenue-sharing from this
business should be signed within a month-at which point, presumably,
the duty will be lifted.
A final act of friendship
It seems that the Gazprom-under the direction of its majority
shareholder, the Russian state-has made concessions to Belarus that
might be sufficient to prevent Mr Lukashenka’s regime from going
under. According to a former governor of Belarus’s central bank,
Stanislav Bogdankevich, 60% of Belarusian industry is barely
profitable or loss-making at present. If gas prices were to nearly
treble to US$140, as Gazprom had proposed, the Belarusian economy
would have risked going into meltdown. Mr Lukashenka’s budgetary
calculations-which include subsidies for household gas supplies-would
also have been thrown into disarray. Both the economy and the budget
are likely to suffer now that gas prices have doubled, but at this
level Mr Lukashenka has more chance of keeping his country stable in
2007. However, as another major price rise next year is on the cards,
Mr Lukashenka has just a year to change his economic policies in
order to stave off a potential disaster in 2008.
Compared with the deals struck by Gazprom with other former Soviet
states, the Belarusian one seems favourable. Georgia, which enjoys
testy relations with Russia and has refused to sell its gas pipelines
to Gazprom, has been moved straight up to a "European" price of
US$235 per 1,000 cu metres from the start of 2007. So too has
Azerbaijan. Compared with Ukraine, which has a pro-Western president
but a prime minister who enjoys a measure of Russian support,
Belarus’s deal also looks good: Ukraine will pay US$130 per 1,000 cu
metres this year and has no promises of a four-year grace period
before it pays a price analogous to those in the EU. Pro-Russian
Armenia’s deal also looks less generous than Belarus’s: its grace
period stretches only to 2008. It’s also worth noting that the
concession to Belarus is quite costly for Gazprom, as it is one of
only two major consumers of Russian gas in the former Soviet Union
(the other is Ukraine). Belarus consumes almost as much Russian gas
as Azerbaijan, Armenia, Georgia, Moldova, Lithuania, Latvia and
Estonia put together.
To be revisited?
Two important aspects of the Gazprom-Belarus deal remain uncertain.
First, there is no clarity on pricing in the years between 2007 and
2011. A steady rise in prices would see tariffs of around US$140 per
1,000 cu metres in 2008, US$175 in 2008, US$210 in 2010 and US$250 in
2011. However, the Belarusian side will have an interest in putting
off sharp rises for as long as possible-so unless the figures or
precise formulae are written into the agreement, a great deal of hard
bargaining lies ahead. This is particularly the case because it is
not clear what the "European" price for gas will be in 2011. If oil
prices are considerably lower in 2010 than today, the price paid by
EU states for Russian gas in 2011 could easily be much lower than the
US$240-260 per 1,000 cu metres level seen at present.
Second, as with most agreements between CIS states in the energy
sphere, it is worth questioning whether the gas deal is final. In
2002, for example, Gazprom and its Ukrainian counterpart signed an
agreement that set the terms for the gas trade to 2013, but this was
ripped up by Gazprom in late 2005. From the Belarusian side, there is
considerable unhappiness with the new arrangement: Prime Minister
Sergei Sidorsky said it was signed in a "difficult atmosphere" and on
"unfavourable terms". It is quite conceivable that in future
Belarusian leaders will claim they signed under duress. And it is
highly probable that the Belarusian government will attempt to secure
more favourable terms from Russia’s next president than it has from
Vladimir Putin.
The future becomes clearer
Belarusian efforts to alter the thrust of Russia’s gas-pricing policy
are likely to be in vain. Gazprom’s decision to hike prices for the
former Soviet Union is driven by a looming gap between the gas it can
produce or buy from Central Asia, and the gas demanded by its
customers at home and abroad. Two-thirds of its exports go to the
former Soviet Union, for a price that is less than 40% of that paid
by EU customers. In this situation, Gazprom needs to raise prices to
former Soviet customers to force consumption cuts and increase its
revenue for investment.
Alongside higher prices for the former Soviet Union, Gazprom is
steadily gaining control of export infrastructure. Already the
Russian company has a majority stake in the Yamal-Europe pipeline,
which delivers two-thirds of Gazprom’s exports to Europe via
Belarusian territory; the remainder goes via Beltransgaz, and 50% of
that company will soon be under Gazprom’s control. In time, Gazprom
will probably seek a controlling stake. In Armenia, all the gas
pipelines-including an incomplete one linking to Iran-are now
majority-controlled by Gazprom. The largest missing piece in
Gazprom’s CIS jigsaw is the Ukrainian pipeline system; it remains to
be seen whether Ukraine will follow Belarus and agree to joint
control in return for a phased transition to European prices, rather
than a sudden one.
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From: Emil Lazarian | Ararat NewsPress