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12 December, 2011  ▪  Oles Oleksiyenko

Belarus Sold

Cheap fuel may cost Belarus its sovereignty. Is Ukraine next?

On November 25, Gazprom reached an agreement with Belarus to cut the gas price almost by half, restructure Belarusian debts and issue a $10 billion loan in exchange for complete control over Belarus’ gas transportation system and further integration of the two countries. Commenting on this outcome, Vladimir Putin made what seemed to be a Freudian slip when he said “Ukraine” instead of “Belarus.” After all, Ukrainian and Belarusian authorities are handling the situation in an increasingly similar fashion


At first glance, a package of agreements signed during Alexander Lukashenko’s recent visit to Russia was another reward for “speculating on friendship” (the sin with which the Kremlin has long charged him). First, the gas price formula was fundamentally revised: it used to be based on the basic European price, while now the point of reference is the price in the Yamalo-Nenets Autonomous District of the Russian Federation, where the gas is actually extracted. Built into the price are the cost of transit and storage in Russia – $2.7 per 1,000 cu.m. per 100 km. and $6.2 per 1,000 cu.m., respectively – and overhead costs. Belarus has essentially obtained a domestic Russian tariff. Thus, with the gas price set at around $165 per 1,000 cu.m. in the first quarter of 2012 instead of the earlier projected figure of around $300, Belarus will save at least $2.7 billion next year. Second, Gazprom agreed to restructure Belarus' debt, which has doubled from $52.4 million to $106.7 million in October alone and has been accumulated in the course of the year as Minsk paid only 88% of the gas price ($245 instead of $279 per 1,000 cu.m.). Third, after the negotiation process with the IMF, whose mission in the country fell through in October, nothing stood in the way of receiving subsequent tranches of a loan from the Anticrisis Fund of the Eurasian Economic Community (EAEC) to the tune of $3 billion. Finally, Putin offered Lukashenko a generous line of credit ($10 billion for 15 years) to build a nuclear power plant in Belarus. And so the leader in Minsk succeeded in putting off his political demise for several more years. Moreover, Belarus’ draft 2012 national budget will be deficit-free even despite greatly increased social expenditure.


Russia, on the other hand, has not paid much at all. The so-called concessions turned out to be either prior commitments or good investments. In 2006, Moscow already promised to switch to “income-balanced prices” in 2011, but recently put this off until 2015. In fact, Russia's failure to meet the gas delivery commitments it assumed to promote Eurasian integration led to Lukashenko’s refusal to sign the declaration launching the EAEC on November 18. In late September he made a straightforward statement in Molodechno: “If equal conditions are unreal, we don't need the EAEC. … If it is cheap there, it means it should be cheap here. If it is expensive there, then it should be expensive here.”

However, the agreements reached on November 25 may follow in the footsteps of the 2010 Kharkiv Treaties between Viktor Yanukovych and Dmitry Medvedev. They will be in effect until the end of 2014, and if “income-balanced prices” in the Customs Union, which is supposed to become part of the EAEC by then, are again delayed, Belarus will have to once again negotiate with the Russian government. This time around it will have almost no assets to offer, because the November 25 agreements transferred 100% of Beltransgas to Gazprom, which paid $2.5 billion for a 50% stake. Pulling out of the EAEC will be much more complicated than simply refusing to join it. At the same time, another key requirement Lukashenko set before Gazprom for the acquisition of Beltransgas – maintaining transit volumes and, hence, payments to the budget – is not a problem for the monopolist, because it will now own the pipeline and will invest to have it upgraded and maintained. Equally beneficial to Moscow is the loan to build a nuclear power plant. Russia is essentially issuing the loan to itself, because it will supply the equipment and, in the future, the raw materials. This will only increase Minsk's dependence on Russia in both the energy and the financial sectors, because the nuclear energy bills will have to be paid by Belarus.


Most importantly, however, the recent Russia-Belarus agreement, dubbed a “grand finale” to their gas wars by Russian Energy Minister Sergey Shmatko, was a way for Moscow to enjoy the effects of some positive propaganda in its relations with other potential “friends” of Eurasian integration, such as Viktor Yanukovych. The Kremlin wanted to show that it can be generous to and tolerant of those who choose the “right” vector. Commenting on the agreements at a government meeting, Putin emphasized that it is much better not to be Europe: “With the average price for Europe (and Ukraine – Ed.) at $400, Belarus will pay $164 per 1,000 cu.m.”

In what was a symbolic gesture as far as choosing a geopolitical vector is concerned, a Belarusian court sentenced Ales Byalyatski, a prominent human rights advocate, to 4.5 years in prison and confiscation of property. The decision came on November 24, one day before the agreements with Russia were signed. Observers viewed this move as a demonstrative slap in the face to the EU and a signal that Minsk will clamp down on any activities of both the political and the civic opposition. As a result, Catherine Ashton, High Representative of the Union for Foreign Affairs and Political Policy, sharply criticized Lukashenko on the very day he was in Russia to sign the gas agreements.


Lukashenko’s renewed tilt to the East is a clear signal to the West and is similar to what is now being prepared by Yanukovych: “We are offended by your excessive demands.” Several years ago, in order to diminish the negative consequences of the crisis, Minsk was forced to step up its contacts with the West. In 2009 through March 2010, the country received five tranches of an IMF loan worth a total of $3.46 billion. In conditions of this year’s crisis, Belarus has again applied to the IMF, asking for a new line of credit to the tune of $7 billion. At the Eastern partnership summit in Warsaw on September 30, 2011, Polish Prime Minister Donald Tusk suggested that EU countries consider a new package of cooperation with Minsk that would include loans from the EU and IMF. In exchange, Lukashenko was supposed to start negotiations with the opposition, fully rehabilitate political prisoners and arrange for a snap parliamentary election that would meet OSCE standards. An IMF mission was in Belarus on October 4-17 and recommended continuing efforts to consolidate the budget and overcome inflation. However, after it became known that a package of agreements on gas with Russia would be signed, Lukashenko lambasted the government on November 22 for “infatuation with the market” and demanded that it increase expenditure to “support businesses,” return to strict administrative regulation and significantly raise salaries and other social spending next year. He suggested that “by having cast off the practice of government regulation we got negative consequences and serious problems whose solution will now require additional efforts and funds.”

In this way, signing the “beneficial” gas agreements will work against the Belarusian economy in the mid-term as it will preserve inefficiency. Because the positive effect of a lower gas price will be short-lived, the Belarusian economy will find itself in a quandary again several years from now as it will be unable to compete with even its partners in the EAEC/Customs Union. Because Minsk will have no more assets to offer, the Kremlin will most likely end its games with Lukashenko, just like it is about to do now with Smirnov in Transdnistria, and will utilize another social economic shock to install a fully controlled puppet in Minsk or worse, strip Belarus of its sovereignty and merge it with the Russian Federation as a collection of “regions,” as Putin already suggested doing a decade ago.

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