Russia Profile
May 2, 2006
A Tangled Web of Pipelines
Gas May Be Uniting for Dividing Issue
By Paul Abelsky
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.”