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Derek Brower: Gazprom’s latest victim

Last night, it was Belarus By Derek Brower, journalist THEY left it late, to within two minutes of the midnight deadline for a deal, but Gazprom and Minsk reached an agreement last night to keep Russia’s gas flowing to and through Belarus. Once again, Gazprom used a brutal tactic – the threat to cut gas supplies to a relatively poor country in the middle of winter – to win a strategic battle. Once again, the security of energy supply of Russia’s customers was at stake. 061226russia_gas_shutoff.jpg And having threatened to cut off supplies to a neighbour that has been Moscow’s most loyal ally in the past five years, Gazprom got what it wanted: control over Beltransgaz, Belarus’ state-owned gas transmission company. Gazprom pretended that the latest crisis was about the price it gets for its gas. On those terms, the company has every right to complain – and so do Gazprom’s European customers. Gazprom should not be subsidising Aleksandr Lukashenka’s regime in Belarus by charging Minsk a fraction of the price Western Europeans pay for their Russian gas. That arrangement stinks for several reasons. First, it keeps Belarus’ economy artificially afloat on cheap energy. That helps to keep the country’s dictator in power. Second, the low prices for Gazprom’s gas paid by countries like Ukraine and Belarus hurt all of Gazprom’s customers: it gives the company less money to spend in the upstream developing its reserves. Of Russia’s FSU neighbours, only Azerbaijan and Georgia pay the kind of prices ($235 per 1,000 cubic metres) that Western Europeans pay. And Europe has no real right to complain – as it did during the so-called “Gas War” between Russia and Ukraine a year ago today – about Gazprom increasing these prices. It is a stipulation laid down by the EU and the US, among others: that Russia increase its natural gas prices before it can join the WTO. But it ain’t about the gas prices But whatever Gazprom says, its battle with Belarus – like the Gas War with Ukraine – is not really about the price of gas. And it will be difficult to quantify how much money Gazprom makes through the increased price, anyway. Russia will continue to subsidise Belarus’ economy in other less obvious ways as a means of softening the price increase. That is an established means of Russian operations in Belarus, as it in other allies, like Armenia. But securing control of Belarus’ state-transmission company, Beltransgaz, was the true prize on the table at last night’s high-stakes poker game. According to the deal signed between Gazprom and Minsk, Belarus will pay $100 per 1,000 cubic metres of gas – more than double the rate it was paying previously, but half the rate paid in Western Europe. But part of the $100 will be paid in shares of Beltransgaz until Gazprom owns 50% of the company. Gazprom says that at 50% its stake will not be a controlling one. Nonsense. As it fills the company’s pipelines with gas, Gazprom was already Beltransgaz’ dominant partner. Added to that, the new share structure makes it a dominant owner, too. Gazprom also says that it generously accepted a “high valuation” of Beltransgaz that priced the company at $5bn. That valuation came from ABN Amro, one of Gazprom’s favourite banks. But control over Belarus’ transmission network has a value for Gazprom that is difficult to quantify, given that it secures some 24% of the company’s exports of gas to the EU. It is surely worth more than $2.5bn, however. So what’s next? Had Gazprom shut off exports to Belarus this morning, Minsk would have shut down the onward supplies to the EU, as Ukraine did last year for the same reasons. It wouldn’t have been as dramatic – Belarus transits a quarter of Russian exports to Europe, not three-quarters as Ukraine does – but it would have hit European consumers. Again. Has a new New Year’s tradition been established? Will supply threats to Russia’s neighbours become as much a part of the season as a re-run of Ironiia sudby, the classic Soviet romantic comedy watched by Russians every New Year’s Eve? Not likely. Arguably, Gazprom has now thwarted its two problem countries. Last year’s Gas War gave it control – through RosUkrEnergo – of supplies through Ukraine. Last night’s show-down gives it control of Belarus. But Ukraine’s transmission network is still up for grabs. Ukraine wants Western firms to help modernise it. Russia wants Gazprom to do it. That is a future battle in the making. And despite Kyiv’s greater leniency to Russia these days, it is unlikely to cave in so easily to Gazprom’s demands for infrastructure. But last night’s events should have ramifications in Europe. The supply cut was averted – just. But 10 days ahead of the EU’s Energy Review, Brussels got another reminder about its security of supply problem. This year’s crisis centred on Belarus – the forgotten country of Europe – and not Ukraine, so it got less coverage. But a crisis it was. And it should have reminded the EU of Gazprom’s nature. It is a company addicted to conflict. And one whose confidence in its own power is so great that it remains unworried about how these conflicts damage its reputation. That is a combination that should continue to worry Europe.