Identifier
Created
Classification
Origin
06MINSK1019
2006-09-18 12:58:00
CONFIDENTIAL
Embassy Minsk
Cable title:  

UNION STATE STAGNATES ALONG WITH GAS NEGOTIATIONS

Tags:  EPET ECON PREL ENRG ETRD PGOV PINR BO 
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ZNY CCCCC ZZH
P 181258Z SEP 06 ZDK
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC PRIORITY 5101
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHVEN/USMISSION USOSCE PRIORITY 1280
RHMFISS/HQ USEUCOM VAIHINGEN GE PRIORITY
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MINSK 001019 

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/18/2016
TAGS: EPET ECON PREL ENRG ETRD PGOV PINR BO
SUBJECT: UNION STATE STAGNATES ALONG WITH GAS NEGOTIATIONS

MINSK 00001019 001.2 OF 002


Classified By: Charge Dereck Hogan for reasons 1.4 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 001019

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/18/2016
TAGS: EPET ECON PREL ENRG ETRD PGOV PINR BO
SUBJECT: UNION STATE STAGNATES ALONG WITH GAS NEGOTIATIONS

MINSK 00001019 001.2 OF 002


Classified By: Charge Dereck Hogan for reasons 1.4 (b) and (d).


1. (C) Summary. Despite public statements to the contrary,
and without knowing the content of the "Constitutional Act,"
Russia and Belarus still appear far from completing an
agreement on a Union State. Before seriously negotiating on
the Union State the two still must resolve issues that
re-emerged in the aftermath of the fraudulent March elections
-- gas prices and the ownership of Belarus' national gas
pipeline company Beltransgaz. Any agreement on gas appears
unlikely before December. While anything is possible,
Belarusian rhetoric on the possibility of a joint referendum
may be part of Lukashenko's public relations campaign to
demonstrate his ability to prevent Russia from taking more
drastic measures to achieve its perceived political and
economic interests in Belarus. That said, our contacts
familiar with the negotiations between Belarus and Russia
believe Lukashenko will have to accept moderately higher gas
prices and perhaps the transfer of a minority share of
Beltransgaz to Gazprom. End summar
y.

Union State Rhetoric Kicks into High Gear
--------------


2. (SBU) After Lukashenko's return from the August Eurasian
Economic Community (EURASEC) heads of state meeting in Sochi,
Chair of the International Affairs and National Security
Committee of the Upper House of Parliament Nikolay Cherginets
told press a draft Constitutional Act for a
Belarusian-Russian Union State was "99 percent" ready. Also,
local press picked up a story from the Russian paper Zhizn
claiming that the Kremlin was working on an order to set a
referendum before the end of the year.

But Real Preparations Apparently Going Nowhere
-------------- -


3. (C) Cherginets revealed the likely true state of
negotiations when he admitted the sides still did not agree

on the composition of the executive branch of the would-be
Union State. Even on the relatively less complicated task of
launching a single currency, which is called for under
existing drafts of the Union State constitution, the GOB is
in no hurry. Vladimir Novik, Deputy Chairman of Belarusbank,
recently told us no one at the bank had received any
instructions to even consider the implications of currency
unification.


4. (C) Contrary to press reports, none of our contacts
familiar with Union State negotiations suggested Lukashenko
is genuinely motivated to move forward on the union at this
time. With his popularity and authority weaker than Putin's
in Russia, any union would serve only to further diminish the
Belarusian dictator's standing. Valery Karbalevich, an
analyst with the Strategy think tank, suggested that
Lukashenko might have agreed to a proposal from Putin on a
joint referendum in return for concessions on gas prices and
the ownership of Beltransgaz. However, even if such an
agreement was established, Karbalevich stressed that
Lukashenko would not actually accept a referendum result in
favor of a Union State constitution.

Gas Crowds Out Other Issues Till December
--------------


5. (C) The grain of truth in this dubious scenario is that
Lukashenko is more focused on the successful resolution of
gas prices and control over Beltransgaz than on
implementation of the Union State constitution. Most
analysts remain convinced Belarus is in no hurry to set a
final price for gas or Beltransgaz. On the sale of
Beltransgaz, Lukashenko will likely refuse to budge, claiming
to Russia it is politically impossible for him to allow
foreign ownership of his country's flagship enterprise after
his repeated public statements that it was vital that Belarus
maintain control of the pipeline. Even absent objective
political concerns, it is doubtful Lukashenko would want to
make a deal that included giving up control of Beltransgaz.
Karbalevich noted initially Lukashenko refused Gazprom's
overtures to purchase Beltransgaz because a deal would have
conflicted with the dictator's psychological need for power.
Similarly, Aleksandr Potupa, President of the Belarusian
Association of Entrepreneurs, said Luka
shenko's obsession with control, including over business,
borders on a psychiatric condition.


6. (C) The Dutch bank ABN Amro will complete its appraisal of
Beltransgaz in October, when Putin is expected to be in Minsk
for a CIS heads of state summit. It is unlikely Lukashenko

MINSK 00001019 002.2 OF 002


and Putin would be able to seal a deal at that time, however.
Media expect a USD 2.5 billion difference between ABM Amro's
minimum and maximum appraisal values of Beltransgaz. Sergey
Zhbanov, the senior economic correspondent with the
independent newspaper Belgazeta, told us it would be a big
mistake to assume the two sides would settle on a sales price
in the middle, as each side wants to hold out. Economist and
opposition political figure Yaroslav Romanchuk also indicated
the negotiations would drag out until at least the end of the
year.

Lukashenko Will Have to Give Up Something
--------------


7. (C) However, our interlocutors could not foresee a clear
way out for Lukashenko. Russia seems intent on extracting
something costly from the Belarusian ruler, most likely in
the economic sphere. The Kremlin knows just as much as the
Belarusian regime that Lukashenko's relatively strong
domestic support hinges on continued economic growth to prop
up rising wages and steady pensions. Cheap gas, although not
actually as important as cheap oil, helps drive the
Belarusian economy, and thus any significant growth in gas
prices will dampen economic growth. None of the dozen
economists we spoke with doubted some rise in prices was
likely. Those close to the government were most confident
the economy could still grow, albeit more slowly if gas
prices increased by about seventy percent from USD 47 per
thousand cubic meters to USD 80. Aleksandr Matyas, the head
of a research institute affiliated with the Belarusian
Ministry of Economics, told us plans had already been draw up
to deal with an increase in gas pri
ces if need be. Zhbanov suggested Lukashenko might accept an
offer for Gazprom to purchase less than fifty percent of
Beltransgaz if that was what it took to ensure gas at an
affordable price.

Comment: Lukashenko Will Not Walk into the Number Two Slot
-------------- --------------


8. (C) Lukashenko will not likely agree to a referendum on a
Union State while he remains weaker than his Russian
counterpart in Russia. Although Lukashenko's public support
ratings are considerably higher than those of Putin in
Belarus, the Belarusian leader has shown no interest in
playing second fiddle in a Union State. Lukashenko would be
able to accept a bargain including modest gas price increases
and the sale of a minority stake in Beltransgaz. This will
delay later negotiations on a fifty-percent stake in
Beltransgaz to a future date when Lukashenko can hope the
Russians are preoccupied with their own elections. Moreover,
as long as he maintains his image as someone who can
negotiate with Russia, perennially extending Belarus'
dependence on cheap Russian gas serves to heighten some
Belarusians' aversion to radical democratic change.
Hogan