RUSSIA ENERGY: DOWN TO THE WIRE ON BELARUS GAS

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 013174

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: 12/27/2016
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA ENERGY: DOWN TO THE WIRE ON BELARUS GAS
STANDOFF

REF: MOSCOW 12963

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


1. (C) Summary. Lukashenko's two-year saga to avoid higher
gas prices and the sale of 50 percent of Beltransgaz (BTG -
the Belarusian gas pipeline operator) appears to be coming to
a close, and he is standing firm on both accounts. Gazprom
has dropped its insistence that BTG be part of the deal, and
is saying that $105/tcm is its final offer. Both Gazprom and
its European customers say they are prepared for supply
disruptions, but now that seems less likely. The MFA claims
"fierce" efforts for a "successful" negotiation are in play,
with an eye to avoiding last year's New Year's gas cut off.
This may explain Gazprom's significant concessions over the
last 24 hours on both BTG and price. Russia's energy tug of
war with Belarus, first over oil export duties, and now over
gas, appears part of Putin's increasingly tough stance
towards Lukashenko, who is characterized by some Russians as
"disloyal" and "too independent." End Summary.

BTG STAKE NO LONGER A FACTOR
--------------


2. (SBU) December 29 marks a shift in the high-rhetoric
atmosphere since talks broke down between Russia and Belarus
on December 26. This week has seen Belarus threatening to
cut off Gazprom supplies to Europe, and Gazprom CEO Alexey
Miller responding that Gazprom was under no obligation to
supply gas to Belarus if an agreement is not reached by New
Year's. Gazprom now appears to have significantly backed
down. Gazprom spokesman Sergey Kupriyanov said the firm was
no longer insisting on acquiring a stake in BTG, and was
willing to accept a price of $105/tcm for 2007 deliveries.
This is more than double the 2006 rate of $46.7/tcm, but
significantly below the rates being charged to Georgia
($235/tcm) and Moldova ($170/tcm) and Ukraine ($130/tcm).


3. (C) For weeks, the two sides have stumbled over the terms
of financing a possible 50 percent stake for Gazprom in BTG.
Belarus insisted Gazprom pay for the $2.5 billion BTG stake
up front in cash; Gazprom was looking to arrange longer term
financing, essentially reducing the price of gas to Belarus
over four years by roughly the same $2.5 billion (at a rate
of roughly $80/tcm for at least 2007). Belarus claims
Gazprom reneged on a previous deal to sell gas to Belarus in
2007 for $75/tcm and pay the full $2.5 billion up front in
cash for the stake in BTG, and pushed for any discussion of
joint management of the pipeline to be put off until the
first quarter of 2007. Gazprom's Director for Foreign
Relations Ivan Zolotov told us December 28 that without BTG
as part of the deal, Gazprom wanted to raise the 2007 gas
price to Belarus to $230/tcm.


4. (C) In a separate December 28 conversation, former Deputy
Energy Minister Vladimir Milov characterized the commercial
negotiations as a struggle over control of BTG. Lukashenko
has avoided concrete discussions about Gazprom's purchase of
a 50 percent in BTG for over two years. Yushchenko's success
last year in taking Gazprom's bid for a stake in Ukraine's
pipeline off the table may have emboldened Lukashenko's
steadfast reluctance to sell a stake in BTG to Gazprom. The
current negotiations are another attempt by Lukashenko to
delay a decision on BTG until next spring when more favorable
terms might be negotiated.

NOT YET A DONE DEAL
--------------


5. (SBU) Should the negotiations still come to a showdown
over the next two days, it is pretty clear how a cutoff would
manifest itself. BTG is one of two trunk lines,
Gazprom-owned Yamal-Europe is the other, through which
Gazprom sends gas to Europe via Belarus. Approximately 44
bcm of Russian gas to Europe transit Belarus (by comparison
30 bcm transits through the Yamal-Europe pipeline and 14 bcm
through BTG). Belarus buys 20 bcm annually, and this is
delivered solely through the BTG. For technical reasons,
Gazprom cannot completely shutdown the BTG, but could reduce
the pressure through the pipeline to a rough equivalent of 14
bcm -- or the amount needed for European deliveries. If it
wanted, Belarus could take this 14 bcm for itself, leaving

MOSCOW 00013174 002 OF 003


European customers short. Belarus could also disrupt gas
supplies to Europe through the Yamal-Europe line by shutting
down three of the five compression stations that the two
lines share. Belarus has stockpiled fuel oil to replace
Russian gas supplies for power generation, which could meet
the country's needs for as long as two months, according to
Milov. On the Russian side, Stanislav Belikovskiy from the
Institute of National Strategy told us that Russia would not
be able store unsold Belarus gas for long, since it has only
17 days of storage capacity, which is almost completely full.


6. (C) According to Zolotov, Gazprom began preparing its
downstream customers for the possibility of a supply
disruption as early as July. Storage facilities in Germany
and Latvia could offset supply interruptions, according to
our German and Latvian Embassy contacts. A German Embassy
official told us that they had reserves for 70 days. The
Polish Oil and Gas Company claims that it is ready as well,
having filled its storage capacity. Poland receives 35% of
its gas through Yamal. Belikovskiy told us that Russia
cannot afford another gas crisis.

BELARUS POLICY AT A CROSSROADS
--------------


7. (C) The energy tug-of-war with Belarus this year is seen
by many as part and parcel of a broader cooling in relations
with Lukashenko. The Kremlin-friendly director of the Europe
Institute, Sergey Karaganov, who has advocated Russia,s
embrace of an alternative to Lukashenko, told us that he was
hopeful that Moscow,s policy toward Belarus would change.
The Russian bottomline remains the same, he emphasized, as it
seeks a Belarusian leader who is "dependent on and loyal to"
Moscow (and, in return, receives subsidized oil and gas).
The absence of chemistry between Putin and Lukashenko fuels a
tougher line toward Belarus; however, Russia,s policy is
complicated by the absence of an attractive alternative to
Lukashenko. Milenkevich, Karaganov argued, lacks national
appeal. The GOR, he noted, has good contacts within the
opposition and diaspora communities, adding that most
Belarusian opposition political material is published inside
Russia in neighboring Smolensk.


8. (C) Karaganov claimed the US had complicated the
Kremlin,s efforts to disengage from Lukashenko, noting that
Russia was damned if it did or didn,t pressure Lukashenko to
change. The US decision to raise the hunger strike by
Belarusian opposition leader Kozulin at the UN Security
Council angered the Russian leadership, he added, and fed
into a growing consensus that the US was intent on scoring
press points against Russia,s reemergence as a world leader.
In Karaganov's view, Belarus had two choices: to remain with
Russia, or join the West.

GOR SEEKING COMPROMISE
--------------


9. (C) Russia is making "fierce" efforts for successful
negotiations with Lukashenko to avoid a deja-vu New Year's
Eve gas cutoff according to government officials. MFA,s
Viktor Sorokin, Director of the Second CIS Department said
although Gazprom,s conditions should be "comfortable" to
Belarus, Moscow will push for a compromise to escape an
escalation into a cutoff. This official view was seconded by
Moscow Belarus watchers. Andrey Grozin, CIS Institute, told
us that the change in Russia,s overall foreign policies
necessitates a different energy policy towards Belarus --
closer to market-based conditions and pricing. He did not
envision a confrontation as it happened with Ukraine last
year. Like MFA officials, Grozin, predicted a last-minute
compromise.

COMMENT
--------------


10. (C) With Gazprom's latest offer of $105/tcm, and
agreement to take discussions about BTG off the table (at
least for now) it appears that Gazprom has stepped back from
its original game plan. Lukashenko may have called it right;
digging in his heals on BTG, and betting that the GOR would
pressure Gazprom to back off its high price demands has paid
off. A gas cutoff now seems increasingly unlikely, but from

MOSCOW 00013174 003 OF 003


our Moscow perspective it appears that Lukashenko could still
provoke a last-minute confrontation. If a showdown comes,
the most likely scenario would be for Gazprom to reduce gas
flows on January 1, and for Belarus to respond by
interrupting the transit of gas through the Yamal-Europe
pipeline.
BURNS