Russia Gives the Gift of Cheap Gas

UNCLAS SECTION 01 OF 02 MINSK 001549

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EPET ECON ETRD PGOV BO
SUBJECT: Russia Gives the Gift of Cheap Gas

Refs: (A) 04 Minsk 0193, (B) Minsk 1448


1. Summary: At a time when Gazprom is abrogating its supply
contracts with other countries and raising gas prices for the
recently democratic (Ukraine, Georgia),Belarus remains on the
Gazprom gravy train for another year. On December 27, Gazprom and
Beltransgaz (Belarus' domestic gas monopoly) signed a supply
contract for 2006. Gazprom agreed to continue to supply Belarus
with cut-rate gas, USD 46.68 per thousand cubic meters (tcm),and
agreed to guarantee the delivery of 19.5 billion cubic meters
(bcm),plus another 1.5 bcm as "technically" possible. End
summary.


2. On December 27, after several months of negotiations, Gazprom
and Beltransgaz signed a 2006 supply contract that retains 2005's
bargain basement price of USD 46.68 per tcm. This contract also
increases gas deliveries to an expected 21 bcm in 2006 (19.5 bcm
guaranteed, 1.5 bcm is technically possible),up from the 19.1 bcm
guaranteed and 20.15 actually delivered for 2005. Belarus had
hoped for 21.5 bcm. Gazprom and Beltransgaz also agreed to retain
the same tariffs for transit across Belarus: USD 0.75/tcm per 100
km in the Beltranzgas pipeline network, and USD 0.46/tcm per 100 km
in the Gazprom-owned Yamal-Europa pipeline. [Note: For purposes of
establishing prices, both networks are considered to be 575 km
long.]


"No, that Really is Market Rate"
--------------


3. Despite USD 46.68/tcm being a far cry from the USD 230/tcm
Gazprom is demanding from Ukraine, or even the USD 110/tcm Georgia
is paying, Gazprom and GOB officials all insist Belarus is paying
"market rate" for gas. Gazprom's press release on the contract
stated, "When determining the gas supply and transit price for
Belarus over 2006, Gazprom has taken into account the following
circumstances:" Belarus and Russia are creating a union state;
Gazprom owns the Yamal-Europa pipeline; in 2006 Gazprom expects
Belarus to grant Gazprom a long-term lease for the land under the
pipeline; and Russia and Belarus resumed negotiations to privatize
Beltransgaz, which would allow Gazprom to control a share of this
pipeline network.


4. On December 21, Gazprom's vice CEO Alexander Medvedev also
listed the above factors to explain, "Gazprom's policy on Belarus
is quite market-oriented; it is economically justified and is to
the benefit of all our shareholders, both the state and private
investors. On December 26, President Lukashenko argued that USD
46.68/tcm reflects market rates and is justified, since Belarus
charges significantly less than Ukraine for transit, because
Belarus will not join NATO, buys all its weapons from Russia, and
is not charging rent for Russian bases in its country.


The Official Quid Pro Quo
--------------


5. In return for dirt cheap gas, Belarus charges Russia less for
transit. From the Gazprom press release, it also appears the GOB
has promised to give Gazprom a long-term lease on the land under
the Yamal-Europa pipeline. More significantly, once again the GOB
has promised to sell part of Beltransgaz to Gazprom. The GOB
agreed to do so in 2002 and 2003, but in each case Gazprom accused
the GOB of reneging (ref A). Gazprom wanted to buy at least 50% of
the company, while the GOB offered to sell at most 49%, and that at
a price Gazprom claimed was highly inflated. To block any deal
with Gazprom, in 2004 the GOB sold 0.1% of Beltransgaz to the
company's employees. The twoQdes agreed to have an outside
company evaluate Beltransgaz's true value, but could not agree on
which Deloitte & Touche office to hire.


6. According to press reports, on December 6 Gazprom CEO Alexey
Miller and Belarusian Deputy Prime Minister Vladimir Semashko again
discussed creating a Gazprom-Beltransgaz joint venture. On
December 19, the Russian and Belarusian Prime Ministers discussed
the sale of Beltransgaz, and Russian PM Mikhail Fradkov told the
press that medium- to long-term gas cooperation depended on solving
transit issues. On December 24, Deputy Gazprom CEO Medvedev said
he expects a deal on privatizing Beltransgaz to be reached within
two or three months. He added, "The sooner we strike a deal on
Beltransgaz, the easier it will be to plan prices for Belarus in
the future. The special price for Belarus is effective in 2006
only." This pressure may have been effective (or Belarus put on a
show for Gazprom); starting in October Beltransgaz bought back the
0.1% of itself that had been owned by employees. The company is
now fully state-owned. Deputy PM Semashko told the press that
Belarus could now sell 50% to Gazprom (ref B).



MINSK 00001549 002 OF 002


Comment: What's the Real Quid Pro Quo?
--------------


7. After being burned twice by the GOB, it is doubtful Gazprom
agreed to low gas prices simply on the renewed promise the GOB
would finally sell a share of Beltransgaz. Instead, the terms of
this gas contract indicate that the GOR continues to use gas prices
to leverage its foreign policy in the neighborhood. Under the
guise of demanding market rates from all buyers, Gazprom is raising
rates for Ukraine and Georgia, the scene of two recent pro-
democratic revolutions. Belarus' gas negotiations were much more
contentious in 2003 and 2004, to the point where Gazprom briefly
turned off Belarus' gas. Now that the neighborhood has changed,
Belarus has escaped with no raising of gas prices. It also seems
likely President Putin has offered cheap gas to help support
Lukashenko in the March presidential elections. However, World
Bank Country Manager for Belarus Vladimir Voronin told Emboffs he
expects gas prices to rise sharply in 2007, with or without Russian
WTO accession.


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