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Analysis & Opinion
17.06.10 Fighting His Corner
By Tai Adelaja

Belarus Insists That It Should Pay Russian Domestic Prices for Gas as a Member of the Customs Union

The spat between Gazprom and Belarus entered a new phase on Tuesday, after President Dmitry Medvedev gave Belarus a stark warning to pay off its gas debt or face the consequences. Belarus responded to the veiled threat two days later with vague promises to pay, Valery Golubev, deputy head of Gazprom, said. But will Alexander Lukashenko again manage to wiggle his way out of the corner he has been backed into this time?

Russia's gas monopoly, Gazprom, says Belarus owes it about $200 million, after failing to pay increased prices. "We will give our Belarusian colleagues five days to decide how to handle this," Medvedev told Gazprom CEO Alexei Miller during a televised meeting. “Otherwise, Russia would resort to other measures." In comments after the meeting, Miller said his company could “cut gas supplies to Belarus in proportion to its debt,” as stipulated under the current contract. Last June, Miller also warned of potential supply cuts over accumulated debts, but Belarus was able to avoid such extreme measure after negotiating with the gas supplier.

President Alexander Lukashenko was in Moscow on Friday where he met with president Medvedev and Prime Minister Vladimir Putin ostensibly “for bilateral talks.” President Medvedev said the Belarusian president had complained of financial difficulties, suggesting that Belarus could have problems meeting the five-day deadline. Medvedev, however, said that Belarus was not alone. "We have our own problems and Gazprom has many problems too," he said in an apparent swipe at Belarus.

Russia increased the price of gas supplied to Belarus from $150 per 1,000 cubic meters of gas last year to $169.20 in the first quarter of 2010, and $184.80 in the second. But Belarus has continued to pay $150, claiming that it should pay Russian domestic prices for gas as a member of the Customs Union. Gazprom said Belarusian debt could increase to $500 million or $600 million by the end of the year, unless it makes immediate arrangements to pay up.

Gazprom spokesman Sergey Kupriyanov said Wednesday that a letter has been dispatched to the Director General of Beltransgaz Vladimir Mayorov and First Deputy Prime Minister of Belarus Vladimir Semashko, warning of a possible cut in deliveries, RIA Novosti reported. Miller said Gazprom had earlier sent two letters “to Belarusian colleagues” asking them to pay up, but had received no response. He said Belarus was in a position to settle its debt because Gazprom paid $2.5 billion for a 50-percent stake in the Belarusian gas pipeline company earlier in the year.

Kupriyanov said the latest letter was meant to draw attention to Beltransgaz’s systematic violation of the terms of a December 31, 2006 contract and demand that the company take all possible measures to repay the accumulated debt by June 21. Otherwise, he said, Gazprom could exercise its right to impose restrictions on the supply of gas to the Republic of Belarus, as stipulated in paragraph 6.4 of the contract.

Last month Lukashenko said his country is ready to give away the controlling interest in Beltransgaz if the gas price Belarus pays is equal to the Russian domestic price. “If the Russians say they will sell gas to Belarus at domestic prices and on equal terms, we don’t mind their taking the controlling interest. The same applies to oil refineries. Cheap oil is a good condition. Not for free,” Lukashenko was quoted as saying by the state-owned Belarusian Telegraph Agency (BelTA). “They would like to get these enterprises almost for free. I openly told them that there is no such thing as a free lunch. We will not sell anything for nothing.”

Under the current agreement between Gazprom and Beltransgaz, Belarus is not entitled to receive gas at the Russian domestic price, Kupriyanov said, adding that Belarus was free to initiate price negotiations "within the framework of the established intergovernmental institutions" but that "the current contract must be implemented in full." About 20 percent of Gazprom's European exports still pass through Belarus, and Moscow has been accused in the past of using gas supplies to bully its neighbors. In January 2006 and again in 2009, Russia cut gas supplies to Ukraine, causing domino effects all over Europe.

Russia and Belarus are supposed to be close allies but have had several rows in the recent years, particularly over energy supplies. Long-standing plans for a Customs Union that is supposed to be introduced this year are still in doubt. Lukashenko has repeatedly railed against Russian efforts to increase the prices that Belarus pays for natural gas and crude oil imports, which have contributed to the deterioration of relations between the two countries over the past two years. Minsk has insisted that Russia supply duty-free oil not only for volumes consumed domestically in Belarus, but for all Russian crude supplied to the country. Most of that crude is refined by Belarusian companies Naftan and Mozyr for re-export to the West, and only a small portion of refined products stays inside Belarus.

After a marathon, eight-hour-long meeting with President Dmitry Medvedev in December, Lukashenko won a promise that Moscow would continue to supply six million tons of crude oil to Belarus for domestic use at pretax prices, which experts say is the equivalent of a $1.3 billion subsidy for Minsk. But Belarus would have to pay a 100 percent duty on the remaining crude imports, which stood at 21.5 million tons in 2009. Lukashenko said last month that Russia's suggestion to supply about six million tons for domestic consumption without duties, while slamming duties on anything on top, is not acceptable because it would mean that the country's oil refineries would operate at a loss.

In a May 27 speech before students of the Mogilev University, Lukashenko complained that Russia was backing his country into a tight corner. “They decided to put the heat on us. They told us: give us the enterprises, we will supply oil without duties, that is, at prices that will be equal in Russia and Belarus,” Lukashenko said, BelTA reported. "After Belarus’ refusal, Russia introduced oil duties that doubled the price. The oil became unaffordable for us. They calculated it would be and decided to drive us into a corner.”

As tensions deepened with his neighbor, president Lukashenko turned in desperation to Venezuelan President Hugo Chavez. In March he clinched a deal for the supply of 80 thousand barrels of Venezuelan oil daily to Belarus, which will then be sold in Europe after refining. In exchange Lukashenko offered to build three or four plants for the production of tractors, cars and heavy trucks as well as a large brick factory, which can produce 100 thousand tons of bricks in Venezuela.

But whatever the success of such stop-gap measures, Belarus could find itself still stuck in the corner after failing to play by the book. Without specifying a time or date, Belarus said Thursday that it was ready to pay its gas bills. “They keep promising to pay daily,” Golubev told reporters on the sidelines of the St. Petersburg International Economic Forum on Thursday. It may be a winning strategy to wriggle out of a tight corner.
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