GASTRIC REFLUX: NEAR-TERM ECONOMIC AND POLITICAL

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000681

SIPDIS

SIPDIS
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF/PISCITELLI/TILLER

E.O. 12958: DECL: 08/06/2017
TAGS: EPET PGOV PREL BO RS
SUBJECT: GASTRIC REFLUX: NEAR-TERM ECONOMIC AND POLITICAL
STABILITY

REF: A. MINSK 676

B. MINSK 674

C. MOSCOW 3777

Classified By: Ambassador Karen Stewart for reason 1.4 (d).

Summary
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1. (C) On August 3, Belarus made initial payment on its debt
to Gazprom as ordered by Lukashenko. GOB foreign reserves
remain sufficient to preserve economic stability in the short
term, although Belarus likely will seek foreign credits in
advance of further increases in gas prices in 2008.
Politically, Lukashenko once again deflected blame; Prime
Minister Sidorskiy may become a principal scapegoat. He also
hopes to refocus the EU's attention away from democratic
reforms and towards energy security. End summary.

Belarus Pays Up
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2. (U) On August 3, just before the deadline set by Gazprom,
Belarus made its first payment on its overdue debt to the
Russian gas monopoly (reftels). USD 190 million was
transferred from Belarus' foreign reserves and Belarus agreed
to pay the remaining amount within a week. Belarus will also
begin paying in full for further shipments of gas. (Note:
Belarus has been paying USD 55/tcm versus the USD 100/tcm
called for by the contract inked on New Year's Eve 2006. End
note.) A Gazprom spokesman stated later on August 3 that
Belarus still faced a reduction in gas shipments of 30
percent if the GOB did not make final payment by August 10.

Foreign Reserves Sufficient Through 2007
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3. (C) Economist with the Institute of Privatization and
Management's Research Center (IPM) Aleksandr Chubrik
confirmed to Acting Pol/Econ Chief that for the time being
payment does not jeopardize Belarus' economic health.
However, he predicted that the trade balance would worsen in
the winter due to seasonal factors, with the increase in gas
prices scheduled for January 2008 exacerbating matters.

Loan from Russia Still On the Table
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4. (C) IPM Deputy Director Irina Tochitskaya said the GOB
would still push to get a loan from Russia, with the main
sticking point Russia's calls for access to further
privatizations in Belarus. Mises Center analyst Yaroslav
Romanchuk said that Russia still seeks to "creep" into
Belarus through privatization. Despite Lukashenko's bravado
that western banks would loan him money, Chubrik and
Tochitskaya said European banks would not loan Belarus money
at less than 8.5 percent interest, whereas Belarus' First
Deputy Energy Minister claimed Russia would eventually lend
to Belarus at 5.96 percent interest. Chubrik believed Russia
would adjust its budget in the fourth quarter, allowing for a
credit to Minsk in October.

Politically Lukashenko Again Avoids the Blame
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5. (C) The August 2 evening news featured over 15 minutes of
Lukashenko blaming Russia for Belarus' economic problems.
The monologue included suggestions that Prime Minister
Sidorskiy had somehow failed in his July 30 mission to
Moscow. Tochitskaya likened the situation to the first act
of a lengthy play that concludes with Sidorskiy's dismissal.
She noted that in Belarus the National Bank answers to
Lukashenko, not Sidorskiy, making it disingenuous for the
dictator to claim his prime minister could have independently
come up with the funds to pay off the debt.


6. (C) Romanchuk said Lukashenko turned the situation to his
advantage. He mobilized the population against Russia once
again, claiming that the blame for the looming economic
consequences of higher gas prices lies with Moscow.
Additionally, Lukashenko hopes to the use the spat to keep
the EU talking about energy security rather than human rights
and democracy.

MINSK 00000681 002 OF 002



Comment: Just Wait Until January
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7. (C) Lukashenko seems to have realized that Moscow will no
longer back down in its slow but steady march to base its
relations with Minsk on modern economic realities. It is
clearly his fault that Belarus' noncompetitive industries in
many cases will sooner or later compete head to head with
Russian companies that have undergone restructuring years
ago. Unfortunately, Lukashenko has a surplus of
propagandists ready to portray Moscow and incompetent
underlings as the ones to blame.
Stewart