No more cheap gas for Russia’s neighbors
Mikhail Khmelev
RIA Novosti
17:27 | 31/ 08/ 2007
MOSCOW. (RIA Novosti) – Gazprom, Russia’s major natural gas producer
and exporter, is starting another campaign to drive up prices for
the gas it supplies to the Baltic states and the Commonwealth of
Independent States (CIS).
For the third year running the gas giant has been trying to go over
to market prices for its neighbors. And every time the talks have
run into difficulties. Russia’s desire to practice pragmatism in
its dealings with former Soviet republics has set its partners on
edge. But with present world energy prices Russia cannot afford to
sell its gas cheap. Even to its best friends.
In a few days Russia is to commence talks over gas prices with Latvia
and Estonia, and in October with Belarus and Ukraine. Lithuanian
distributors have already received offers to buy Gazprom gas at $280
per 1,000 cubic meters (the current price is $190). The same price is
going to apply to the other Baltic countries. Belarus is most likely to
pay $125-150 for Russian gas in 2008 (it is paying $100 now). The price
for Ukraine is expected to be raised to $180 from the present $130.
Currently, Russia’s closest neighbors, former Soviet republics, are
paying about 40-70% of the average European price. And these prices
are set by the market, not by the gas monopoly. Prices for European
consumers are set by the so-called "European formula", which depends
entirely on world oil prices, and are pegged to Rotterdam bourse
oil quotes. The price varies from country to country, depending
on transportation costs and agreements with local wholesalers and
retailers. Long-term supply contracts with European countries are
usually concluded at $280-320 per 1,000 cubic meters.
It is important to bear in mind that Gazprom is not the only supplier
to the European market, and other companies charge about the same
prices.
Russian gas on the post-Soviet space is heavily underpriced, but
three years ago practically none of Russia’s neighbors paid even
those low rates. In the early 2000s, when European consumers were
paying $200-250 per 1,000 cubic meters, prices for the Baltic and
CIS countries swung between $55 and $100.
For a long time Gazprom exported gas to CIS countries at a loss,
with Russia subsidizing neighboring economies for 13 years after the
break-up of the Soviet Union.
At the end of 2005, Russia decided to gradually introduce market
prices.
There were a number of reasons for such a sweeping change. The Russian
authorities found that a policy of supporting neighbors with cheap
energy was bringing no dividends. They did not rally into a viable
alliance, nor did they turn into Russia’s friends. And then, it was
argued, why export gas close to home at one-third the market price,
when Europe was willing to pay two to three times more.
The changeover to market prices for CIS countries was not smooth. In
most cases, Russia’s partners gave up cheap gas grudgingly. A doubling
of the price for Ukraine early in 2006 (from $55 to $100 per 1,000
cubic meters) involved disruptions in supplies to Europe. The agreement
with Belarus was signed in the last minutes of 2006.
Ukraine and Belarus are major consumers of Russian gas, with 56 billion
and 21 billion cubic meters respectively. Talks with other countries
were less difficult. In negotiations with the Baltic countries
(Lithuania, Latvia and Estonia), as European Union members, Russia
agreed to a three-year transition period starting from 2005. Today
these countries are paying $190-200 per 1,000 cubic meters. Other
buyers have accepted the new prices, too, although unwillingly. Armenia
is buying Russian gas at $110, Moldova at $170, and Georgia at $235.
As soon as Russia began increasing energy prices for its closest
neighbors, it was accused of using economic pressure against them. And
this was at a time when the European countries had been paying higher
rates for years.
Does it mean Russia has been dominating Western Europe, too? Gas
prices in Europe and the rest of the world are firmly pegged to world
oil prices, and cheap gas is no longer a prospect. Nor is Russia
going to subsidize its neighbors any more. "Competition" rather than
"commonwealth" is now the operative word to describe the situation on
the post-Soviet space. Former Soviet republics quickly forgot about
the Soviet Union. They will have to do the same about cheap Russian
gas, too.
The opinions expressed in this article are the author’s and do not
necessarily represent those of RIA Novosti.
From: Emil Lazarian | Ararat NewsPress
