The Belarus Bypass Surgery

So much for the “Friendship” Pipeline – the supply artery carrying up to 1.2 million barrels of Russian crude a day across Belarus and on to consumers Poland, Germany, Slovakia and the Czech Republic (10% of Europe’s oil).

The big news breaking today is that Russia has given approval to carry out unnecessary bypass surgery on Europe’s energy supply coronaries. Perhaps the Kremlin didn’t enjoy getting scolded last week at the EU-Russia Summit in Samara, when EC President José Manuel Barroso sternly remarked that “Poland’s problem is a pan-European problem, just as Lithuanian or Estonian problems are problems for all of Europe.” Irregardless of possible political motives, the announcement today that approval has been given for the expansion of the Baltic Pipeline System (which will take oil to the Russian port of Primorsk) feels fortuitously timed. Attentive readers of this blog will recall our coverage of the supply disruption of the Druzhba pipeline last January, as well as the gas war between Minsk and Moscow. You can’t say we didn’t warn you. Back in late December and early January, when Gazprom was threatening to cut off supply to Belarus, Alexander Medvedev argued that Russia was simply asking the former Soviet republics to pay “market prices,” and that he was tired of the West vilifying Russia for simply following commercial sense. Many in the media bought this excuse – the same line of reasoning used during the Ukraine fiasco. Those who believed that argument must be feeling naïve today. How interesting is it that the Primorsk pipeline announcement comes just three days after Russia finally closed the deals to take control over Belarus’s pipelines? As we pointed out months ago, market prices are all well and good, but those price disputes provided convenient cover for what the Kremlin was really after – Beltransgaz – a controlling stake in the transit company, providing Moscow with one more pressure point from which to squeeze Europe. When Russia plays hardball with the former satellite states on energy prices – the last thing they are looking out for are their accounts receivables. It is a deficit creation strategy, which forces critical transit countries to give up key concessions in transit, delivery, and point of sale companies. The last thing they want is money (there’s no shortage of that) – they seek to create a situation in which the only way out is to give up strategic infrastructure. Furthermore, if Gazprom were really only looking to get market prices from Belarus, then why are they now paying only $100 per 1,000 cubic meters of Russian gas in 2007 (just 40% of the “average” price in Europe)? The Financial Times reports:

The Beltransgaz deal, which was 13 years in the making, will increase Gazprom’s lock over gas networks to the west just one week after Russia, Turkmenistan and Kazakhstan agreed to expand shipments out of Central Asia via Russia in a blow to western governments’ efforts to build alternative pipelines bypassing Russia. Gazprom signed a $2.5bn (€1.9bn, £1.3bn) agreement with the Belarus government on Friday for the 50 per cent stake. It is to pay Belarus $625m for a 12.5 percent stake in Beltransgaz in the next 20 days, while the remaining 37.5 per cent of the pipeline operator’s shares are to be transferred from 2008 to 2010. “It is a big question: which is the centre of power [in Russia] – the Kremlin or Gazprom?” said Mr Kirkilas. (blogger’s note: Gediminas Kirkilas, Lithuania’s prime minister). Warning of instability in the run-up to Russian parliamentary elections later this year, he added that he expected to see “a lot of people from Gazprom” in the Duma. “During the cold war, Russia was a more reliable partner than it is today,” he said.

So what does this all really mean? The most immediate message to take home is that Russia wanted to remind Europe that it will continue its “divide and rule” strategy of bilateral energy deals so long as it pleases. By approving the extension to Primorsk on the Monday following the summit, the Kremlin is calling Barroso’s bluff – if Europe really wants to stand behind new members at the cost of good relations with Russia, then prove it. But the Primorsk extension is also very real. Apparently it could be completed in as little as 18 months, and would allow for Russia to divert some if not all supply that currently go through the Druzhba (back in April they said they would probably send half of Druzhba’s oil to Primorsk). Not that that is going to be the automatic outcome. I think that the Primorsk line will likely exist as the “threat alternative” – Druzhba will still be the most cost-efficient way of getting oil to major markets such as Germany, and now that Gazprom has a 50% share in Beltransgaz, Russia can collect transit fees from its own supply (which sounds like another RosUkrEnergo – a shell company that could allow Russian officials to siphon and launder money). While Russia may be eager to become less reliant on transit countries, never underestimate the attractive pull of an opportunity for corruption. The Primorsk extension will certainly weaken Belarus and Europe’s bargaining position during price negotiations, but for now it seems like the crude will continue to flow through the Druzhba as long as the price is right.