GAZPROM'S THREATS A PLOY FOR STRENGTHENING UNION?

C O N F I D E N T I A L SECTION 01 OF 03 MINSK 000381

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/07/2016
TAGS: EPET ECON PREL ENRG ETRD BO
SUBJECT: GAZPROM'S THREATS A PLOY FOR STRENGTHENING UNION?

REF: 05 MINSK 1549

Classified By: Classified by Ambassador George Krol for Reasons 1.4(B,D
)


1. (U) Summary: Gazprom and Minsk have been arguing for years
over control of the GOB's Beltransgaz pipeline network. To
date Lukashenko has fended off Russian attempts to take over
the company, and at the same time has secured rock-bottom
natural gas prices for his country-one of the main factors
keeping Lukashenko's unreformed economy afloat. In late
March and early April Gazprom initiated the latest campaign
to take over Beltransgaz, by announcing that gas prices for
Belarus would rise to nearly world prices in 2007, a 3 to 5
fold increase. The GOB has until the end of April to present
a counteroffer. So far the GOB has suggested a number of
economically questionable joint ventures with Gazprom, but
has not publicly offered to sell Beltransgaz. An independent
reporter who claims inside sources in the GOB stated the GOB
is not overly worried, believing Gazprom will not follow
through on threats to sharply raise gas prices. Instead, she
opined that Moscow is using this issue to finally force Minsk
into
a stronger union state. End summary.


Cheap Gas, the Back Story
--------------


2. (U) In a sweetheart deal that looks likely to be ending,
Belarus buys natural gas from Russia's Gazprom for USD 46.68
per thousand cubic meters (tcm) (reftel). Belarus has in
recent years avoided the gas increases faced by other former
Soviet states partially because the GOB agreed in April 2002
to create a joint venture with Gazprom out of Belarus'
state-owned pipeline company Beltransgaz. This joint venture
was to have been created by July 2004, but no progress has
been made because the GOB refuses to sell a majority stake in
the company and because the GOB and Gazprom disagree on
Beltransgaz's value; the GOB claims the company is worth USD
5 billion, while Gazprom insists it is only worth USD 600
million.


Gazprom Demands European Prices
--------------


3. (U) On March 30, in a meeting with Belarusian Energy
Minister Aleksandr Ageev and Beltransgaz director Dmitry
Kazakov, Gazprom CEO Alexey Miller announced that in 2007
Gazprom would raise gas prices for Belarus to European
levels. He did not name a price, but some analysts have
stated this means up to USD 235/tcm (Belarus currently pays
USD 46.68/tcm.) Miller gave Minsk until the end of April to
present a plan to Gazprom on how to raise these gas prices,
which presumably means Gazprom is waiting to see Minsk's
counteroffer. On March 31, Gazprom's deputy CEO Andrey
Kruglov told reporters in Belarus that, "By June we should be
able to understand what the relations between Gazprom and
Beltransgaz will look like." Russia's Ambassador to Belarus,
Aleksandr Surikov, tried to soften the blow when he told
reporters on March 31 that they should not dramatize this
story, that Gazprom was simply opening negotiations on gas
prices and was waiting for Belarus' counter-offer. Surikov
claimed Russia had to raise gas
prices to meet its WTO obligations. However, on April 4,
Gazprom deputy Aleksandr Ryazanov told the press Gazprom
would triple gas prices for Belarus in 2007.


4. (U) On March 28, an anonymous GOB source told Prime-Tass
that the GOB's goal is to agree to a gas price equivalent to
that paid by Russia's ninth price belt (the Smolensk region
currently around USD 42). This source also stated that any
decisions on privatizing Beltransgaz would depend on Gazprom
offering a favorable price for gas. On March 31, Beltransgaz
director Kazakov announced, "It would be incorrect to speak
about the sale of Beltransgaz. We are not talking about the
sale, we are talking about the development of gas transport
facilities of the two countries." He added that Belarus is
ready to face gradual increases in gas prices, claiming
Belarus deserves only mild increases because it is Russia's
Union State partner, but complained that any sharp price rise
would result in bankruptcy for many Belarusian firms.
Several sources, including independent economist Leonid
Zaiko, have told the press that any price above USD 80/tcm
would result in the bankruptcy of at least one-third of
Belarusian ent
erprises and the failure of many of the GOB's social
assistance programs.

MINSK 00000381 002 OF 003





Rumors of a Deal Gone Sour?
--------------


5. (C) On March 30, Associated Press reporter Yaras Karamanov
told Poloff he heard that Lukashenko had earlier offered
Russia a controlling stake in Beltransgaz in exchange for
Russian support during the March presidential election.
Gazprom waited ten days after the election for the GOB to
announce this sale. When no announcement was made, Gazprom
therefore started making public statements of price increases
to pressure the GOB. Independent economists Yaroslav
Romanchuk and Elena Rakova separately told Econoff in the
weeks before the election that the GOB was under heavy
Russian pressure to sell Beltransgaz, and that Belarus'
Council of Ministers was meeting daily to discuss how to
handle this pressure.


GOB Counter Offers
--------------


6. (U) As a preliminary counter offer, on March 31 Energy
Minister Ageev announced five joint projects the GOB will ask
Gazprom to participate in, presumably for cheaper gas. The
press has reported four of these projects:

1) The on-going upgrades to Gazprom's Yamal-Europa (YE)
pipeline. The GOB will complete the last two compressor
stations in Belarus in mid-2006, bringing YE's throughput
capacity to 33 billion cubic meters per year. Ageev claimed
the GOB gave Gazprom USD 200 million in tax and duty
preferences and another USD 20 million in unspecified
benefits for these stations.

2) Construction of a second YE pipeline, which Ageev claimed
would save Gazprom USD 480 million compared to building the
North European Pipeline. (Note: the infrastructure and
compressor stations for YE1 were built with the capacity to
handle a second pipeline.)

3) Construction of a 450 megawatt power plant on the Polish
border, worth USD 500 million, designed to export electricity
to Europe. Ageev said this plant would require one billion
cubic meters of gas annually.

4) Ageev also invited Gazprom to invest USD 1.05 billion in
Grodno Azot, a Belarusian chemical company. Ageev offered to
barter Azot-produced carbamide for Gazprom gas.


Gazprom's Threat a Ploy for Stronger Union?
--------------


7. (C) On April 4, Econoff met with Tatyana Manenok, energy
reporter for independent newspaper Belarusy i Rynok
(Belarusians and the Market). She claims to have strong
contacts within the GOB. (Note: GOB officials have regularly
refused to speak about energy issues with Emboffs.) Manenok
opined that Gazprom's threats are not economically motivated,
but are conversely intended to ensure Belarus remains in
Russia's zone of control. The GOB knows that Gazprom will
not raise prices until 2007, as there is a signed contract
for this year. Moscow is simply using this moment, after the
elections and when Lukashenko is under pressure from the
West, to try and push Lukashenko into a more rigorous union
state so as to secure Russia's western border against NATO as
well as to finally force Minsk to accept currency union. She
explained Moscow is also pushing Minsk on the Union State
Constitutional Act, and that Putin and Lukashenko may meet in
May to sign some sort of union agreement. To a lesser
extent, she said
Moscow is also acting tough against Belarus to show off to
the West in advance of the G-8 summit.


8. (C) At worst, Manenok said her GOB contacts believe Russia
will raise gas prices a little bit, but that there is no
threat of a sharp price jump. Therefore, many in the GOB
discount the recent Gazprom threats. (Note: Despite this
information, Manenok recently wrote that her contacts in the
GOB believe Gazprom will raise prices to USD 100/tcm if Minsk
does not privatize Beltransgaz.) The GOB also plans to fight
to keep Beltransgaz, realizing that after any sale Belarus
would have no more bargaining chips and nothing would stop
Gazprom from raising gas prices.


A Sale is for the Best, Eventually

MINSK 00000381 003 OF 003


--------------


9. (C) According to Manenok, Beltransgaz's staff want their
company to be at least partially privatized, and support
Gazprom buying a 50% share. However, in 2005 Lukashenko
replaced the director of Beltransgaz and the Minister of
Energy with his supporters from the Presidential
Administration (Kazakov and Ageev respectively). These two
are afraid to make any decisions without permission from
Lukashenko himself. The company's staff do not see any signs
their company will be sold in the near future, but she
speculated that a sale is possible towards the end of 2006,
as the current gas contract nears completion.


"Cheap Energy and Fear"
--------------


10. (C) Manenok stated that Belarus is making itself more
susceptible to Russian pressure. Lukashenko's policy of
connecting every village to natural gas increases the
country's dependence on Gazprom. Many officials in the GOB
are also arguing that Belarus should raise the transit rates
it charges for Gazprom gas. These rates remain very low and
have not changed for many years. Conversely, these same
officials argue that Belarus should not pay more than
Russia's ninth price belt price (USD 42),plus transit costs.
Manenok also explained that Belarus is addicted to cheap
Russian gas. Agreeing with Zaiko and others, she said that
USD 80/tcm is Belarus' "point of zero return." If gas rose
above that level, the GOB knows that at least half its
enterprises would be unprofitable and the regime could not
afford the social programs that keep Lukashenko popular.
According to Manenok, "Cheap energy and fear keep this
economy going."


Economics Not a Concern
--------------


11. (C) Manenok estimated that Gazprom does not need
Beltransgaz's pipelines for economic reasons. She said that
the new compressor stations on YE could easily handle any
near-term increase in Europe's demand, and that in fact
transit through Beltransgaz has been falling this year.
(Note: the Ministry of Statistics reported gas transit
through Beltransgaz fell 16.4% in the first two months of the
year, while it rose 57.8% through YE.) As Europe also tries
to diversify away from reliance on Russian gas, Manenok
opined that Gazprom will not need to build YE2.


12. (C) As for the five proposals Ageev presented, Manenok
said they are mainly for show, so the GOB can claim it is
receiving something in return from Gazprom in case it is
forced to give up Beltransgaz. She claimed that the GOB has
not given any thought as to whether these projects are
economically viable. For instance, Belarus currently sells
some electricity to Poland. These sales are only profitable
because the GOB uses cheap gas from Russia in its power
stations. Any increase in gas prices would make electricity
exports unfeasible, so a new 450 MW power plant makes no
sense. She also did not understand why Gazprom would be
interested in bartering gas for Azot's carbamide.


Comment
--------------


13. (C) The on-again, off-again battle between Gazprom and
the GOB for control of Beltransgaz has been continuing for
years. In February 2004 Gazprom even went so far as to cut
off all gas to Belarus for a day. Supplies, however, were
restored after Lukashenko outmaneuvered Moscow in the realm
of public opinion (Lukashenko even called Putin a terrorist,
with no apparent Russian retaliation). It is telling that
Moscow is trying again to secure Beltransgaz, and is striking
when Minsk is under sharp criticism from a united West over
the recent undemocratic election. If Lukashenko has to
accept a sharp increase in gas prices, the Belarusian economy
will suffer a severe blow, and Lukashenko will lose one of
his key pillars of support.
Krol