GAS FLOWS TO BELARUS, BUT ECONOMY STILL AT RISK

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000003 SIPDIS SIPDIS DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/EKIMOFF/PISCITELLI E.O. 12958: DECL: 01/02/2017 TAGS: EPET PGOV PREL BO RS SUBJECT: GAS FLOWS TO BELARUS, BUT ECONOMY STILL AT RISK REF: A. 06 MINSK 1314 ¶B. 06 MOSCOW 13174 ¶C. 06 MINSK 479 ¶D. 06 MINSK 420 Classified By: Charge Jonathan Moore for reason 1.4 (d). Summary -------------- ¶1. (C) Negotiations in Moscow over gas prices and a Russian stake in Beltransgaz (refs A and B) resulted in a last minute deal, averting a potential gas cutoff. Belarus managed to knock an additional USD 5 of the price per thousand cubic meters for 2007. In return, Belarus agreed to sell Gazprom fifty percent of Beltransgaz. Both sides compromised on the payment procedures for the stake. Transit fees for Russian gas sold to the EU will increase. Although commentators in Minsk see the arrangement as favorable to Belarus, a failure to secure concessions in negotiations over oil could still cripple Belarus' export potential. End summary. Deal Signed in Time to Pour the Champagne -------------- ¶2. (SBU) On December 31, two minutes before midnight, Belarusian PM Sergey Sidorskiy and Gazprom CEO Aleksey Miller signed a framework agreement for sales of gas to Belarus, the transit of gas through Belarus and the sale of 50 percent of Beltransgaz to Gazprom. Belarus will reportedly pay USD 100 per thousand cubic meters (tcm) for 21 billion cubic meters (bcm) in 2007. This represents a almost 120 percent increase over the previous price of USD 46.68 per tcm, but is lower than other prices suggested by Russia (of up to USD 230/tcm) and five dollars below the amount mentioned on December 29 by Sidorskiy. ¶3. (C) Gazprom will pay USD 2.5 billion for a fifty-percent stake in Beltransgaz. This is USD 300 million less than the top value per an independent audit by ABN Amro, according to the GOB. (Note: Post has not seen an official announcement on the range of the valuation, but understands the low end of the estimate was close to USD 3.5 billion. End note.) Vice PM Semashko told the press January 2 that Gazprom would pay the first yearly installment of USD 625 million in May and receive 12.5 percent of the shares in July. The purchase price will effectively offset USD 30 of the gas price increase. ¶4. (SBU) Also, transit fees for gas shipped to Europe via Belarus will increase. Gas shipped via the Beltransgaz line will increase from 14 bcm in 2006 to 15.7 bcm in 2007, with the price rising from USD 0.75 per tcm per 100 kilometers to USD 1.45 per 100 kilometers. Beltransgaz will increase its service charges for the Gazprom Yamal-Europe pipeline from USD 0.36/tcm/km to USD 0.43. All told, the increases could bring Belarus just over USD 100 million. In terms of gas prices, this would be the equivalent to knocking another USD 5 off the price increase if transit rates and service fees were keep constant. ¶5. (C) After 2007 the picture gets cloudy. The agreement lasts through 2011, with gas price hikes scheduled for each year. Gazprom will peg the hikes to a percentage of the Euorpean market level each year as follows: 2008: 67 percent of the market level 2009: 80 percent 2010: 90 percent 2011: 100 percent (Comment: There has been no public discussion of how the market price would be calculated and post suspects the calculation will become a source of contention come late ¶2007. End comment.) Originally, press reports claimed the transit rates were fixed through 2011. However, on January 2, Semashko told the press transit rates would be subject to re-evaluation every year. Also, even Gazprom's spokesman admitted on air December 31 that the company has received no guarantees its purchase of shares will give it any control over Beltransgaz. Institute for Privatization and Management economist Yelena Rakova told A/Pol/E Chief at this point Gazprom was mainly concerned about its image, believing another failure to buy into Beltransgaz would hurt its credibility in future negotiations. MINSK 00000003 002 OF 002 Comment: Putting Off One Problem to Tackle Another -------------- -------------- ¶6. (C) Although the deal will increase pressure on the Belarusian economy in the coming years, Lukashenko avoided the three primary risks he faced entering into negotiations. First, the deal prevents a cutoff of gas that could have threatened the perception of stability in Belarus. Second, by only giving Gazprom a minority stake in Beltransgaz until July, 2010, there is no immediate need to figure out how to keep control of the pipeline without unduly angering Moscow. Third, gas prices will not skyrocket in 2007. With extra money to play with from the sale of initial shares of Beltransgaz and transit fee increases, the Belarusian budget will only have to make the same adjustments it would if gas had been raised to USD 65/tcm. Most of our interlocutors predicted a price increase to at least USD 70 (Ref C and D). ¶7. (C) Irina Tochitskaya of the Institute for Privatization and Management presented what can be viewed as the most pessimistic scenario for a gas price rise to USD 70. According to her calculations, with do not allow for normal economic adjustments such as conservation, GDP could fall by a total of three percent over several years. Of course, prices will only rise after 2007, making the economic impact more severe in the years ahead. Also, in the short term there is still the risk of a loss of confidence in the Belarusian ruble (Ref C). ¶8. (C) However, part of Lukashenko's incentive to agree on gas was to avoid annoying Moscow before further important negotiations, including on oil export duties (Ref A). That Sidorskiy stayed in Moscow January 1 and talked for three hours with Russian PM Fradkov suggests there is at least some chance for Lukashenko to gain vital concessions on oil. Contracts for oil sales from Russia to Belarus have not been renewed for 2007 because current tariffs would render oil refining in Belarus unprofitable. According to Tatyana Manenok of the independent weekly "Belarus i rynok," Belarusian refineries have enough oil supplies to last until January 17. Post will monitor negotiations on oil, which accounts for 40 percent of Belarus' exports. Moore