Gazprom: winning in Belarus

Gazprom is tightening its grip on Europe’s gas pipelines. After opening the new Baltic Sea link to Germany earlier this month, the Russian state-controlled group has announced it’s taking total control of the Belarus pipeline that runs from Russia to the European Union.

Gazprom is lifting its stake in Beltransgaz to 100 per cent by buying the cash-strapped Belarus state’s 50 per cent for $2.5bn – following years of bitter arguments with Minsk. It’s a triumph for Gazprom and Russia. However, it’s a mixed blessing for the EU: Russia/Belarus disputes may end, but only at the price of greater dependence on Russia.
Under the deal signed on Friday, Gazprom will secure 100-per-cent control of Beltransgaz in return for supplying gas to Belarus at a big discount. Minsk will pay just $165.60 per thousand cubic metres next year, 40 per cent less than in 2011.

Russian prime minister Vladimir Putin on Friday called it an "integration discount": he sees it as progress towards his ambition of creating a Eurasian Union in imitation of the European Union.

Moscow will also lend Belarus $10bn to build a nuclear power station, using Russian technology. It will be located close to the Lithuanian border, which won’t please Vilnius.
Gazprom pumps around 20 per cent of its west-bound export gas through Belarus, with most of the remaining 80 per cent going through Ukraine. This has left it hostage to regular contract disputes with both Minsk and Kiev.

Gazprom has strengthened its hand – at the huge financial cost of $10bn – by opening the Nord Stream Baltic pipeline, in partnership with German, French and Dutch utilities. The link will have a capacity of 55bn cubic metres a year, once the second of two pipelines is open late next year. This compares with the Ukrainian link’s 150bcm capacity and planned Gazprom exports this year of 150bcm.

All this leaves Ukraine in a more difficult position as it tries to renegotiate its contract with Gazprom to secure cheaper prices. Miller said on Thursday that its contract with Ukraine was valid and was unlikely to be revised.

Ukraine will struggle to pay as its economy slows and the state runs short of cash. A $15bn loan from the International Monetary Fund has been suspended because of Kiev’s reluctance to raise household gas prices in line with the Fund’s demands.

Gazprom would be interested in buying a stake in Ukraine’s state-owned pipeline system, but Kiev has so far refused to give up a chunk of its most valuable economic asset. The Belarus agreement will increase the pressure on Ukraine to also to sell to Gazprom.

All this leaves the EU in a quandry. Gazprom taking full control of the Belarus pipeline will weaken the influence of the unpredictable president Alexander Lukashenko. That will probably improve stability of supply – although Lukashenko’s ability to make the best of a poor hand should never be underestimated. Gazprom was furious with how little say it secured at Beltransgaz when it bought its original 50 per cent in 2008. Even when it controls 100 per cent, the pipelines will sit on Belarusian territory.

But the improvement in gas supply stability comes at the price of ceding to Russia even greater political influence in Minsk than it already has. The EU’s strategy of trying to engage its eastern neighbours – chiefly Belarus, Ukraine and Moldova – will be even harder to pursue.

So the EU may have gained economically but lost out politically. Even the economic advantages may erode if Gazprom is in future able to raise prices because of its stronger grip on the pipelines.

The EU’s response is to push the Nabucco project – the pipeline to bring Caspain gas to Europe via Turkey and circumventing Russia. But it remains unclear when this might be built – or on what scale. The original plans call for a 31bcm link. But smaller – and cheaper – variants have also been put forward. In the meantime, Gazprom is celebrating its success in Minsk.