RUSSIAN ENERGY: WINTER GAS, BELARUS, AND THE

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012963

SIPDIS

SIPDIS

DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF/PISCITELLI
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR GRAHAM AND MCKIBBEN

E.O. 12958: DECL: 12/14/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: WINTER GAS, BELARUS, AND THE
CAUCASUS

REF: MINSK 1244

Classified By: Ambassador William J. Burns. Reasons 1.4 (b/d).


1. (C) Summary. This year is no exception to the rule that
Gazprom's annual gas tariff negotiations with its CIS
customers are blunt instruments, and generally go down to the
wire. Deals have not yet been cut with Belarus, Azerbaijan,
and Georgia. Gazprom did manage to ink one with Ukraine,
thus avoiding a repeat of last year's New Year's cutoff.
Gazprom has threatened to increase tariffs for each country,
but the greatest danger this winter may be a cutoff to
Belarus. Continued pursuit of alternatives where they are
commercially viable remains a strong and always-smart energy
policy for nations dealing with Gazprom, especially while
Gazprom feels more heat at home over inadequate supplies and
investment. End Summary.
.
SUPPLY CONCERNS
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.

2. (C) Gazprom, struggling with a now well-documented
production problem of its own, is employing stop-gap measures
in order to weather this winter's cold. Shawn McCormick
(protect),VP for government relations at TNK-BP, told us
that Gazprom spread the word to its industrial customers
about six months ago that, at temperatures colder than -15
Celsius, the gas company would begin reducing supplies to
this segment of the market. As a result of this
announcement, these companies began stocking up on fuel oil
as an alternative to gas. McCormick said that Gazprom did
this to ensure it could meet its deliveries to the lucrative
European market and avoid any further tarnishing of their
reputation as a reliable supplier.
.
THE DEMAND SIDE -- BELARUS...
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.

3. (C) Gazprom's negotiations with Belarus hinge on coming to
agreement on the value of Beltransgaz (BTG),the Belarusian
pipeline operator (ref A). Gazprom indicated that they would
charge USD 200/thousand cubic meters (tcm) unless Belarus
turned over a 50 percent stake in BTG, the value of which
would then be shaved off of the tariff. Most contacts we
have canvassed view a cutoff to Belarus as unlikely and, at
worst, expect the two sides to agree to disagree and come up
with an artful way of allowing themselves more time to reach
some sort of agreement on BTG. One variant we have heard
would be for Russia and Belarus to extend the current gas
price with the understanding that any subsequently-negotiated
increase would be retroactive to the beginning of the year.



4. (C) However, Vladimir Milov, former Russian Deputy
Minister of Energy, warned that there is a real risk of a gas
cutoff being repeated with Belarus (which had been cut off
two years earlier for a brief period). He agreed that such
an outcome would have great reputational costs for Putin.
However, he added that many senior energy policymakers and
Gazprom officials do not put a premium on Russia's
international standing and are driven by more parochial
interests, in this case taking control of BTG. For domestic
political reasons, Milov predicted that Lukashenko will not
be able to give in to Russian demands for BTG and, if the gas
is cutoff, he will simply take transit volumes destined for
Europe and divert them for domestic consumption. Some
investment analysts believe the recent ante-upping moves over
the valuation of BTG by "independent" assessors is partly
negotiation tactics but is also a serious stab at making the
math and the politics work out to everyone's relative
satisfaction.
.
...AZERBAIJAN AND GEORGIA...
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.

5. (C) Gazprom's stance toward its Caucasus neighbors is
markedly different than that toward Belarus. Belarus holds
some cards -- transit volumes to lucrative markets -- while
Azerbaijan and Georgia do not. As a result, most people we
have spoken to believe Gazprom will not hesitate to raise
prices and, if no agreement is reached, withhold volumes to
the latter pair. Milov noted that, if discussions between

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Turkey, Azerbaijan, and Georgia end up ensuring that Georgia
gets enough gas to make it through the winter, then Russia's
decision is irrelevant. In particular, he said President
Aliyev's public comments about sending Azeri oil through BTC
was an indication of Russia's waning influence on energy
issues in the region. He called Aliyev's handling of the
situation "brilliant" in neutering Russia's ability to extend
any gas-related pressure on either of the two Caucasus
countries.
.
COMMENT
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.

6. (C) Russian energy policymakers are increasingly fixated
about dealing with the looming production crunch and ensuring
that they fulfill Gazprom's contractual obligations to their
European customers. We get the sense that Russian
policymakers are expending much more mental energy thinking
about gas flows to and through Belarus than to the Caucasus,
in spite of the still widespread hostility toward Georgia
among senior officials. Gazprom is playing a much longer
game with Belarus than it is with its southern neighbors, who
will rely much less (if at all) on Russia energy when Caspian
gas volumes start flowing in earnest next year. Russia still
believes it can win the Belarusian game -- and continue
dominating the European market -- but it is slowly dawning on
them that Azerbaijan and Georgia have a better hand than in
the past.
RUSSELL