Russia-Belarus Gas Dispute Escalates

Gas War Again

Today, the Belarusian government sent a letter to the Russian state-owned gas giant Gazprom, threatening to siphon off Russian transit gas intended for European Union (EU) markets if Russia does not restore the full supply of gas to Belarus. The move is a response to Russian president Dmitry Medvedev's televised order yesterday to reduce gas supplies to Belarus for its failure to pay its outstanding debt of over US$192 million for Russian gas. The Belarusian government made a last-minute offer to settle the debt with goods, including machinery on 20 June, but the Russian government turned it down. Gazprom plans to cut its gas supply by 85%. Following Medvedev's announcement the supply was reduced by 15% yesterday, and by another 15% today.

The gas debt has accumulated as Belarus decided to disregard an earlier agreement with Russia on changing gas prices. Belarus has chosen to pay the 2009 rate of US$150 per 1,000 cubic metres (cm) for gas supplies used in 2010, even though Gazprom raised the price for gas exports to Belarus to US$169.2 per 1,000 cm in January, and then to US$184.8 million per 1,000 cm from April. Gazprom spokesperson Sergei Kupriyanov stated that the market-based price—for which Belarus still receives a 10% discount relative to European prices, according to the terms of a 31 December 2006 agreement on a gradual transition to European price terms for Belarus—is expected to rise to US$193 per 1,000 cm from July, with Belarus's gas debt likely to hit US$270 per 1,000 cm by end-June.

Following the Russian government's decision, Belarusian president Alexander Lukashenka refused to accept that his country owes a debt to Gazprom, claiming that in fact Russia owes US$217 million in transit fees. Gazprom has agreed that there is an outstanding debt, but blamed Belarus for not submitting the relevant documents for it to process the payment. Meanwhile, Gazprom has also confirmed that it will take measures against the Belarusian government if it fails to fulfil the terms of the gas transit agreement.

This is the second time in less than a year that the Russian government has asked the EU to activate its "early warning system" to notify European countries of a potential disruption to their imports of Russian gas. The first such instance was during the run-up to the January 2009 gas war between Gazprom and Naftogaz Ukrainy. Lithuania, Poland, and Germany, the main importers of Russian gas via Belarus, all reported that there had been no interruption in their gas supplies, although Lithuania—which is entirely reliant on Belarus as a transit state for its Russian gas imports, while both Poland and Germany also receive Russian gas supplies via Ukraine—was preparing to import Russian gas via Latvia and its Incukalns storage facility just in case.

Punishing Belarus?

The Russian government has decided to punish Belarus for not paying its debts. However, Medvedev also chose to humiliate Lukashenka by saying during his televised statement that Belarus has an obligation to pay for gas used and it cannot pay by using pancakes, machinery or anything else. The Russian president's humiliating comments may suggest that Belarus is being punished for its disobedience to the Kremlin, most notably for two main transgressions:

• Refusal to join Customs Union: Belarus signed a Customs Union agreement with Russia and Kazakhstan on 27 November 2009 but in June 2010 it decided to delay the final ratification. This decision has jeopardised the Union's hoped-for 1 July launch. Lukashenka refuses to join the union unless Russia agrees to treat the Customs area as one economic space where no tariffs will be charged on Russian oil and gas supplies to Belarus. Russian prime minister Vladimir Putin, the main driving force behind the troika union, has already made sure that Belarus receives concessions. The Russian government has scrapped tariffs for oil exports intended for Belarusian internal use. However Lukashenka continues to insist on further concessions in return for its membership of the union. He has resorted to suing the Russian government over the legality of the energy tariffs. Lukashenka hopes to push the Russian government to drop all tariffs, including the one on gas which will bring the overall gas price down.
• Flirting with the EU: This is not the first Belarus-Russia energy war. The first one was in mid-2000, again over gas prices, and at that point the Customs Union was not even drafted. Lukashenka had a similar agenda then—to secure a good energy deal with Russia in return for political loyalty. However, Gazprom was keen to push for at least a gradual increase in energy export prices. In a bid to influence Gazprom's decision Lukashenka started his flirtation with the West and the EU. The latter gave a cautious welcome to Belarus, trying to calculate if Lukashenka's move to get closer to the EU was simply to tease Russia or was actually the start of a new relationship. Despite the caution, Belarus has been included in the EU's European Neighbourhood Policy. However the European bloc maintains sanctions against the Belarusian regime, which include limiting travel of top Belarusian officials and freezing their assets in protest for failing human rights in the country. The Russian government has been accommodating to relatively close ties of other former Soviet republics with the EU. Should Belarus choose to follow suit, the Kremlin is not likely to punish it unless the Belarusian government also adopts an openly anti-Russian stance.

Outlook and Implications

The Russia-Belarus stand-off is a result of mixing energy commerce with politics. Lukashenka has never made a secret of his readiness to sell his political loyalty for cheap energy. The Russian government has weakened its bargaining position with Belarus when asking it pay world market prices by cutting a political deal with neighbouring Ukraine, which now receives cheap gas for extending the Black Sea naval base lease for the Russian navy until 2043. Belarusian state coffers lack the financial means to afford the rising Russian gas prices. This is mostly due to Lukashenka's government's failure to reform the country's economy, which remains largely Soviet in its structure and management. Lukashenka needs cheap energy to run the uncompetitive economy, hence his fervent determination to get the utmost from Russia. Lukashenka however has learned that maintaining his political independence and occasional loud spats with the Kremlin have so far helped him to get favourable deals for his country and his regime. Ultimately, once Russia gives more financial concessions to Belarus it can expect not only Belarus's prompt return to the Customs Union but also the relaunch of a ten–year-old project of creating a unified Belarusian-Russian state with one currency. However, the Russian government is also aware that Lukashenka's moves are constrained by the fact that he remains an authoritarian leader. Ultimately Lukashenka needs Russia as his flirtation with the West stops when the latter makes demands for democratic openings, something that Lukashenka is not ready for. Against this background, the Belarus-Russia gas row is likely to end with a new deal which will promptly return Lukashenka to the realm of Russian influence.

The gas row will most likely tarnish Russia's image as a reliable energy exporter that can resolve disputes with its neighbours prompting the Kremlin to make more aggressive pursuit of alternative energy export avenues.