PRESSURES ON LUKASHENKO: CURRENT STATE OF PLAY

C O N F I D E N T I A L SECTION 01 OF 04 MINSK 000794

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/31/2016
TAGS: PGOV PREL ECON PHUM BO
SUBJECT: PRESSURES ON LUKASHENKO: CURRENT STATE OF PLAY

REF: A. MINSK 433


B. MINSK 787

C. MINSK 731

Classified By: CLASSIFIED BY CHARGE D'AFFAIRES CONSTANCE A. PHLIPOT FOR
REASONS 1.4 (B,D)


1. (C) Summary: Although Lukashenko secured a third term in
office through rigged March presidential elections, the
regime is grappling with unprecedented political and economic
pressure from the East and the West, and to a limited extent,
from within. Belarusians interpret Gazprom's plans to
quadruple natural gas prices as a broader Russian effort to
establish economic and political control over Belarus,
although it seems likely that Lukashenko will reach a
compromise. Targeted GOB officials are feeling the squeeze
of recent U.S.-EU sanctions. The democratic opposition,
buoyed up by the public support they gained during the March
elections, remains a thorn in the regime's side. However,
the opposition unfortunately has lost momentum as a result of
disorganization and leadership disputes. End Summary.

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Unprecedented Russian Pressure on Belarus
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2. (C) Russia, more than any other international actor,
plays a pivotal role in Belarus' internal politics. At the
moment, Belarusians see Russia closely and publicly
scrutinizing its political and economic support for the
Lukashenko regime.

Russia Targets Belarus' Economy
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3. (C) In a move perceived as a slap at Lukashenko, Russia's
gas giant Gazpromm announced only several days after the
March presidential elections that Belarus will pay USD 200
per thousand cubic meters for gas supplies in 2007, which
represents a fourfold increase in price from USD 47 per tcm.
Gazprom explained that it plans to raise gas prices for
Ukraine, Moldova, and Belarus to "European market prices."
President Putin noted on June 16 at the Shanghai Cooperation
Organization Summit that, "they (Belarusians) won't manage to
get freebies at our expense." Moreover, Russia is pressing
Belarus to raise oil export duties to Russian levels and to
reimburse the Russian budget for previous losses for Russian
crude imported to Belarus duty-free and charged Belarusian
duties upon re-export. GOB officials publicly stated that if
Minsk were forced to match its duties to Russia's, Belarus'
oil refineries would become unprofitable.


4. (C) Clearly, a significant boost in gas prices for
Belarus would have a dramatic impact on the Belarusian
economy. Independent economists generally agree that if
Russia were to increase gas prices to USD 200, Belarus'
annual GDP growth would drop from nearly ten percent to one
percent, and average wages would fall by nearly 11 percent.
If Russia were to also force Belarus to match Russia's export
duties, Lukashenko would have to scale down social payments,
including pension and wage payments, even further. (Note:
Lukashenko could try to mitigate the problem by drawing on
his "presidential" funds, but this would be only a temporary
fix.) Given that Belarus has consistently ignored IMF and
World Bank recommendations on badly needed economic reform,
the Belarusian economy is ill equipped to handle such major
external shocks.

Possible Motivations Behind Russian Pressure
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5. (C) The reasons for Russia's more aggressive handling of
Lukashenko remain unclear, but they likely have to do with
Putin's efforts to force Lukashenko to make costly economic
and political concessions in exchange for Russian political
and economic support in the run up to Belarus' presidential
elections. Reliable Embassy contacts claim Russia is
pressuring Lukashenko to cede some or all of Belarus' most
prized economic assets, including Belarus' gas transit
company Beltransgaz, the Mozyr oil refinery, and a host of
profitable business investment projects in Belarus. The GOB
has recently agreed to allow Dutch bank ABN Amro appraise
Beltransgaz, apparently as a first step in transferring
controlling interest to Gazprom and, in exchange, maintaining
subsidized gas prices.


6. (C) Some analysts also suggest Russia is demanding that
Lukashenko move forward on political and economic integration
with Russia, including the formation of a stronger
Belarus-Russia Union State. Putin has expressed concern and

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regret that Belarus has moved so slowly on Belarus-Russia
Union State negotiations. Moreover, Russian politicians'
recent statements suggest Russia is pushing for simultaneous
referenda in Belarus and Russia on the Constitutional Act
governing the Union State as early as this Fall. Analysts
point out that Russian law prohibits the convening of
referenda during election years, and therefore 2006 would be
the last opportunity for a referendum before Putin steps down
from power in 2008. (Note: Russia will hold parliamentary
elections in 2007 and presidential elections in 2008.)
Belarus and Russia have been negotiating the political and
economic powers of the Union State since the inception of the
project in 1997, and Russia may be using the threat of higher
gas prices to acceler
ate the talks.

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Unified Pressure From The West
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7. (C) Following the official OSCE finding that the
presidential elections were fraudulent, the U.S. and EU have
worked in concert and demonstrated unparalleled resolve to
shine the spotlight on the regime's anti-democratic practices
and human rights violations. The U.S. and EU imposed visa
bans and froze the assets of the most odious GOB officials.
The West has also made it clear to the GOB that more
officials will be targeted for sanctions until the regime
reverses its policies.


8. (C) The GOB has reacted by stating privately and publicly
that Belarus never before had been the object of such
"informational and political pressure" from the West, yet it
will not bow to external pressure (ref A). When the USG and
Canada refused to grant a refueling request to a GOB
delegation returning from Cuba, Lukashenko announced the GOB
would respond by refusing overflight clearances to aircraft
carrying USG and Canadian official delegations. More
recently, the GOB announced it would freeze the assets of
President Bush and Secretary Rice in Belarusian banks. These
announcements remain ambiguous and even comical.


9. (C) Despite the rhetoric, the targeted GOB officials
clearly have been affected by the sanctions. EU diplomats in
Minsk have told us that several of the GOB officials on the
EU visa ban immediately tried to apply for or renew their
tourist visas to an EU country, but their applications were
rejected. The increasing isolation over the past several
years has also led Belarus to strengthen political and
economic ties with such countries as Venezuela (ref B),Iran,
Cuba, North Korea, and Sudan. Belarus is particularly keen
on deepening and broadening relations with China. The nature
of the relationships with these states remains mainly
political and diplomatic, but Belarus is desperately seeking
to develop stronger economic ties with them to offset
potential problems with Russia.

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Belarus' Opposition Made Some Gains
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10. (C) Currently, the democratic opposition poses little
threat to the regime, but the surprising number of street
protesters following the stolen March elections clearly
caused some concern for Lukashenko. With the help of U.S.
NGOs, the democratic forces unified and took advantage of the
election campaign to establish direct contact with voters and
present them with an alternative to the Lukashenko regime.
The public protests could explain why Lukashenko disappeared
from public view for several weeks before and after his
postponed inauguration ceremony. The Belarusian president is
known to be obsessed with being adored by his constituents,
and the massive and prolonged dissent to his reelection
likely caught him by surprise. Despite increased GOB
repression, the opposition coalition has taken concrete steps
to use the tentatively scheduled January 2007 municipal
elections to reach out to more Belarusians with an
alternative vision for Belarus.


11. (C) However, the opposition has been unable to
capitalize on gains made during the presidential election
campaign and is struggling to remain united. Many in and
outside of the coalition have criticized coalition leader
Aleksandr Milinkevich for indecisiveness and inaction
following the elections. Milinkevich recently demonstrated
his leadership potential by creating an executive arm of the
coalition to implement its plans for the upcoming local
elections, but several political analysts note the coalition
leader still devotes too much energy attending to the
conflicting interests of the political parties in the

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coalition. Civil society groups stress that Milinkevich and
a "coalition of the willing" need to reach out more to the
thousands of Belarusians who participated in the election
rallies and demonstrations in March. Many analysts interpret
rival coalition leader Anatoly Lebedko's call for holding a
second democratic congress, similar to the October 2005
congress, as an effort remove Milinkevich
from the de facto coalition leadership position. The
authorities sentenced another key opposition leader,
Aleksandr Kozulin, to five and one-half years in prison for
"petty hooliganism" and disturbing the peace (ref C).

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Despite Pressures, Regime Not in Imminent Danger
-------------- ---


12. (C) Clearly, Lukashenko and his inner circle have been
affected by the squeeze from the East and the West, but we
should not underestimate the president's political acumen and
the political and economic realities constraining Russia.
Lukashenko has probably concluded that Russia will not take
action to unseat him or foment a political crisis in Belarus.
In negotiations with Russia, Lukashenko is likely taking
into account the following considerations:

-- Russia's Near Abroad Policy. Given the Orange and Rose
revolutions in Ukraine and Georgia, reliable Embassy contacts
assert that Russia's foreign policy in its neighborhood is
based on stability and loyalty. A senior Russian diplomat in
Minsk recently confirmed with Pol/Econ Chief that Lukashenko,
despite his faults and quirks, is viewed as a relatively
stable ally to Russia.

-- Lukashenko's Need for Complete Economic Control.
Lukashenko and his inner circle are keenly aware that if
Belarus gives up control of key economic assets such as
Beltransgaz, it will lose its most important bargaining chip
in future disputes with Russia. As one prominent Belarusian
economist put it, "once Belarus cedes control of Beltransgaz,
what else does Putin have to talk about with Lukashenko?"
Moreover, without control of key moneymaking assets like
Beltransgaz, Lukashenko's grip on Belarus is weakened.

-- Belarus' Status As A Gas Transit Country. As in February
2004, if Russia remains unwilling to sign a gas contract at a
substantially lower price than USD 200 per tcm, Belarus will
simply refuse to sign a gas transit contract with Gazprom,
thereby putting Russia's gas supplies to EU countries in
jeopardy. Economists here speculate that to in order for
Russia to avoid future problems with its EU consumers, it
would still export gas through Belarusian pipelines, allowing
Belarus to siphon off a portion of the gas that is
technically "contraband" within its borders.

-- Little Time Left To Create a Stronger Union State.
Political observers are divided over whether Russia is really
pursuing a stronger Union State with Belarus. If this is
Russia's main objective, most analysts agree that Lukashenko
will keep stalling on gas price negotiations at least until
the end of they year, thus making it highly unlikely that a
referendum on the Union State's Constitutional Act would be
held in 2006. Once this year passes, political commentators
insist that Russia will not be able to hold a referendum on
the Act until 2009, after Putin has left office. Moreover,
Lukashenko supporters and a large segment of the opposition
compare their country favorably with the chaos they see in
Russia and would resent more acute Russian pressure for
integration.

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More Likely Scenario - A Gas Price Lukashenko Can Afford
-------------- --------------


13. (C) Several months into Lukashenko's third term, the
regime is grappling with external, and to some extent,
internal pressures, but it does not seem to be on the verge
of collapse. Lukashenko, though clearly bothered by it, is
accustomed to being shunned by the West, and the domestic
opposition is still too marginalized and disorganized to
present a formidable challenge to the regime in the near
future. The key source of pressure for Lukashenko during his
third term is Russia. Most analysts here conclude that the
Kremlin, among other things, has grown weary of watching
Lukashenko tout his "economic miracle" at the expense of
Russia and thus seeks to extract costly economic and possibly
political concessions from the Belarusian president in
exchange for continued support. World Bank representatives
in Minsk have told us that any gas price over USD 90 per tcm
would have an impact on the economy.


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14. (C) However, economists generally agree that Belarus and
Russia will agree on a gas price that will weaken, but not
undermine, Belarus' economic stability. Several economists
with reliable contacts in the GOB estimate that the final
price for gas will be between USD 100 and 130 per tcm, which
they speculate would be painful but not catastrophic for the
economy. One economist explained that if Belarus were to pay
USD 100, then its GDP would drop by four percent and average
wages by five percent. On the sale of Beltransgaz, political
observers speculate that Lukashenko will somehow manage to
retain controlling interest of Beltransgaz. For a variety of
reasons, Lukashenko is counting on, or at least hopeful that,
Russia needs Belarus almost as much as Belarus needs Russia.
Phlipot