Posted by: russiaoilandgas | August 23, 2007

Belarus – Gazprom Dispute Highlights Need for Russia, EU Cooperation

Putin Oil Gas Russia Energy EU Belarus DisputeThe Gazprom – Belarus dispute appears to have come to an end as various news sources reported Belarus has paid its debts to Gazprom in full.

The current impasse can probably be best described as an aftershock of the seismic events of last winter when Gazprom unceremoniously informed selected Former Soviet Republics that they would no longer supply natural gas at the subsidized prices many had been enjoying. Ukraine was outraged, Belarus claimed poverty, but Gazprom played hard-ball by cutting off Ukrainian and Belorussian supplies until their price demands were met. 

Unfortunately, Western European supplies were lost in the maelstrom, as both Belarus and Ukraine hold strategic geographical positions and are transit countries for the natural gas pipelines supplying the EU.

Gazprom and Belarus signed a deal on December 31st 2006 that seemingly put an end to the conflict.   It set the cost of gas at Gazrpom’s asking price of $100 per 1000 cubic meters, but allowed Belarus to defer 45% of that price until July 23rd, by which time Belarus had to pay the remainder and start paying the full cost. However, Belarus defaulted, Gazprom threatened to cut off the gas, and the two countries descended into a fresh crisis.

First Belorussian representatives traveled to Gazprom’s Moscow headquarters to try to negotiate a loan.   When they arrived, though, Gazprom offered loan terms derided by Belorussian president Alexander Lukashenko as “unacceptable”.    He called the trips to Moscow “humiliating” and claimed that the Kremlin was trying to privatize “the entire economy”, insinuating that the real motive behind Gazprom’s belligerence was its wish to up its stake in Belorussian state run company Beltransgaz to a controlling share.

Instead, Lukashenko – and you couldn’t make it up – negotiated a deal with fellow member of the current US persona non grata list, Hugo Chavez, to loan Belarus money at favorable rates.   Although the loan has not been confirmed in the media, Forbes quoted the Venezuelan foreign ministry as confirming the negotiations were taking place.   At the very least, Venezuela has acted as a guarantor, stepping in at the 11th hour and allowing Lukashenko to dip into his national reserves in order to pay the debt.

Much as Gazprom is criticized for their rough-housing around Eastern European negotiating tables, a private company doesn’t have to subsidize anybody. Why should Belarus kick up a fuss about having to pay $100 when Western European customers pay $240? Gazprom certainly has a right to seek market rates for its product.

But perhaps the way they’ve gone about getting higher revenues has lost some friends – and, in the long term, perhaps even customers. Europe has intensified its effort to identify alternative suppliers of natural gas.   In the best case scenario, it sees potential for more disputes between Gazprom and the ‘transit countries’ through which currently travel the gas pipelines that supply Europe’s gas.

More sinisterly, the EU can hardly have failed to have read the conjecture from some analysts that the timing of the conflicts was unlikely to have been coincidence.   A pro-Kremlin government is replaced by a pro-West government in Ukraine and the gas price goes up; Gazprom would rather like to grab control of Beltransgaz, and the gas price goes up. Gazprom, critics argue, is being used as leverage to help Russia get what it wants.   Europe is concerned that as it becomes increasingly reliant on Russia for its energy needs, it may be faced with the same predicament as Belarus: give them what they want, or don’t get the gas you need.

But how likely is that? Gazprom is just as reliant on Europe as Europe is on Gazprom. What would happen to Gazprom’s business if EU (Gazprom’ biggest customer) suddenly stopped buying gas? It’s for this reason that the EU’s reaction to Gazprom’s tactics has probably caused as much alarm in Moscow as Gazprom’s various disputes did in Brussels. Looking at your biggest customer – and the customer with by far the largest revenue potential – searching for alternative places to buy your product can’t make for pleasant viewing.

Nord Stream, which will take gas directly from Russia to Germany by way of the Baltic sea, thus bypassing transit countries, will ease the tension.   And comments from both sides at this summer’s Moscow based Petroleum and Gas Congress held alongside the MIOGE certainly struck the right note. Eventually, both sides will realize that co-operation and mutual trust is the only way forward and put the words into action.  And much as some sectors of the media would have us believe that Gazprom will cut off supplies  at a moment’s notice,  Gazprom’s revenue is far too dependent on EU money for that to happen.

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