The Gas Dance Begins

UNCLAS SECTION 01 OF 02 MINSK 000479

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EPET ECON PREL ENRG ETRD USTR BO
SUBJECT: The Gas Dance Begins

Ref: Minsk 381


1. Summary: Belarus and Gazprom have entered into negotiations of
sorts on the price of gas for 2007. Gazprom announced that Minsk
can expect to pay USD 145/tcm (up from USD 466.68/tcm),while the
GOB responded it could agree to an 11 percent price increase (to
USD 51.81). Other than consecutive public statements, there do not
appear to be any actual negotiations underway. According to a GOB
press release, Lukashenko and Putin talked around the gas price
issue at their April 28 meeting in St. Petersburg. The GOB also
continues to refuse to sell half of Beltransgaz to Gazprom, but
Lukashenko reportedly told Putin Minsk could trade some Beltransgaz
assets for access to Russian oil and gas fields. End summary.


2. On April 28, the same day Presidents Lukashenko and Putin met in
St. Petersburg, Gazprom announced that the GOB had failed to
provide a counter-offer to Gazprom's earlier announcement that it
would raise the price Belarus pays for gas in 2007, and suggested
Belarus therefore pay USD 145/thousand cubic meters (tcm). [Note:
Belarus currently pays USD 46.68/tcm. In March Gazprom announced
it expected the GOB to provide a counter-offer by the end of April
(reftel).] On May 3, Belarusian Deputy Prime Minister Vladimir
Semashko told Interfax that Belarus would agree to a rise in gas
prices for 2007 of between 10 and 15 percent, although he suggested
11 percent. Semashko claimed Belarus deserved such a low rate
increase because Gazprom currently has a profit margin of 25
percent, which Belarusian industries cannot match, and because
Minsk has never cut-off Gazprom's transit to Europe.


Lukashenko and Putin Talk Around the Issue
--------------


3. Lukashenko's press service announced that Lukashenko and Putin
did not discuss gas pricing on April 28, and instead expect their
governments and companies to reach a pricing agreement by October.
However, the press service announced that, "the Russian government
has no intention of blackmailing Belarus and understands that our
country is Russia's only true ally and partner." An anonymous
Russian source told RIA Novosti during the meeting that Belarus
would have more luck paying for gas if it would adopt a common
currency with Russia.


4. Lukashenko's press service claimed that the two leaders
discussed the fate of GOB-owned gas pipeline company Beltransgaz,
at Lukashenko's insistence. A press release specifically claimed
Lukashenko did not offer to sell half of Beltransgaz, but that he
suggested exchanging some Beltransgaz assets for Belarusian access
to Russian oil and gas fields. Lukashenko's spokesman claimed,
"The Belarusian side received understanding and approval" for this
idea.


Negotiations Likely to be Tough
--------------


5. Over the past month various GOB officials have publicly
explained that Minsk does not expect gas prices to rise greatly,
and that Belarus does not plan on selling half of Beltransgaz to
Gazprom. On March 31, Beltransgaz director Dmitry Kazakov told the
press Belarus should pay less for Russian gas because Belarus is
Russia's Union State partner. On April 14, Lukashenko told
reporters that Russia cannot sharply raise gas prices for Belarus
because under the Union State agreement Belarusian and Russian
companies should operate under identical conditions, meaning
identical energy costs. That same day Deputy Prime Minister Andrey
Kobyakov told the press Belarus added a provision demanding equal
conditions for companies in all member states to the draft
agreement on a single oil and gas market for the Eurasian Economic
Community. Energy Minister Aleksandr Ageev meanwhile explicitly
stated Belarus was not offering to create a Beltransgaz joint
venture with Gazprom.


Serious Repercussions for the Economy
--------------


6. On April 19, local World Bank analyst Marina Bakanova told a
conference that Belarus would lose 13 percent of GDP if it is
forced to pay market rate (USD 235/tcm) for gas. A price rise to
USD 110/tcm would cost Belarus four percent of GDP, and the country
would lose 0.5 percent of GDP if prices rise only to Russian
domestic levels for 2007. She also estimated that the GOB could
not compensate by raising gas transit rates as the most this would
earn would be one percent of GDP. The National Bank of Belarus
(NBB) announced April 13 that any rise in gas prices above 10
percent would result in a drop in currency proceeds and affect the
exchange rate. The NBB further stated that if gas were to climb to
USD 95/tcm, the economy would suffer greatly, currency proceeds
would drop, gold and foreign currency reserves would dwindle and

MINSK 00000479 002 OF 002


there would be problems with the exchange rate.


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


7. Minsk continues to challenge Moscow and Gazprom on both rising
gas prices and the control of Beltransgaz. Surprisingly, Belarus
has succeeded in outmaneuvering Russia on these issues for the past
several years. This year, rather than waiting until mid-December
to start negotiations, Gazprom is giving itself plenty of time to
force what it wants (higher prices, Beltransgaz) out of Minsk.
While it is unlikely that Belarus would be forced to pay USD
145/tcm, a price that would cripple the Belarusian economy and
possibly destroy Lukashenko's popularity, this time around Moscow
seems determined to raise prices. Whatever price increase the two
sides agree to, the GOB will be less able to afford the social
projects that keep the populace happy, to keep subsidizing bankrupt
state enterprises, and Belarus' recent rates of high economic
growth will decline.


PHLIPOT