Wednesday, June 23, 2010

MOSCOW BLOG: Belarus backs down on gas bill as Russia gets its energy PR right

That was quick. Russia's state-owned gas monopoly began to cut off Belarus' gas supplies at 10:00am on the morning of June 21 over $200m in unpaid energy bills, but by 4:00pm that same day Minsk had backed down and promised to cough up "within two weeks."

Not that Moscow was even going to accept this promise and actually went through with a 15% reduction in gas deliveries, saying it wasn't prepared to wait even two weeks.

And on Tuesday Belarusian president Alexander Lukashenko lashed out at the Kremlin calling the row over unpaid bills that saw Russia reduce gas deliveries as the start of a "gas war" and ordered a halt to gas transit through the republic to Europe -- not that anyone in Europe reported any change in volumes arriving through there pipes. Clearly there is going to be some haggling before this dispute is over.

Still, as the news broke about the gas cut-off, journalists scrambled to cover the latest instalment of Russia's so-called "gas wars." However, the thing that sticks out from this story - apart from Minsk totally misjudging the situation - is that Russia finally appears to "get it" when it comes to international PR over energy issues.

On the face of it, Moscow has acted very aggressively in order to force Belarus to pay. This seems to jibe with Foreign Minister Sergei Lavrov's promise in a leaked policy paper that Russia was putting its foreign policy on a pragmatic basis where there would be no more "gnashing of teeth."

There was gnashing aplenty on June 21, but the key is that Moscow forced the issue now when the minimum damage would be done, rather than in the middle of winter, as in previous episodes, when the maximum damage would happen. I suspect it's no coincidence that the deadline for the payment was set for June 21 - which happens to be the official first day of summer. In other words, the demand for gas in Europe is at its absolute nadir for the year and so even if Moscow followed through on its threat to cut 85% of Belarus' supplies, it would make no noticeable difference to Gazprom's clients in Western Europe. TV station Russia Today interviewed the head of one of Germany's gas company who said the gas in storage was more than enough to cover any shortfall.

And then there was the amount cut. In the energy showdowns with Ukraine in 2006 and Belarus in 2007, Gazprom simply turned off the taps completely from one minute to the next. This time, from the very start the maximum that would be cut was 85%. Moreover, the plan was to cut gas progressively in chunks of 15% over a period of weeks. Even more surprising was how careful the Kremlin was to flag the cut-offs in advance as the tension built over several weeks and went as far as informing its western partners before the gas volumes were reduced - something it pointedly forgot to do in previous rows.

Taken all together, this is the clearest demonstration yet of the President Dmitry Medvedev-sponsored "business orientated foreign policy" and is a major improvement in the Kremlin's efforts to bolster its reputation as a reliable energy partner.

If you were going to characterise the issue in terms of personalities, then this gas showdown is marked by Medvedev's liberal outward-looking, sophisticated approach to dealing with foreign investors, as opposed to Prime Minister Vladimir Putin's inward-looking, strong-arm tactics typical of his "vertical power" way of doing things - not that it's likely policy is actually driven by either man in isolation of the other. But still, this is another piece of evidence of the "new look" that Medvedev was trying to sell at the St Petersburg investment forum at the weekend.

Not-so-special relationships

Finally, the gas issue highlights another trend that has been in place since Putin was president: Russia has conceded any attempt at forging "special relationships" with its former Soviet vassal states.

There is no reason - economically speaking - why Russia should subsidise the Belarusian economy (or any other country's economy for that matter) and it is remarkable that Gazprom has increased the prices for all its customers.

Having said that, there are still marked differences in the price that Gazprom asks for its gas, which is presumably based on the customer's ability to pay. Belarus has the cash to pay off its $200m bill - Minsk reported this week that it has just under $6bn in foreign currency reserves - however, it needs to spend heavily on investment and with presidential elections looming this winter, the government clearly wants to keep as much in reserve as it can to lavish on voters before they go to the polls.

If Gazprom insisted on the roughly $380 per 1,000 cubic meters (cm) it currently charges Western European countries, then it would precipitate a financial crisis in Belarus. The same is true in Ukraine where former prime minister Yulia Tymoshenko did a deal in January 2009 to pay over $300 per 1'000 cm for gas, which very nearly did precipitate a crisis - the state had to be bailed out by the IMF and the government started drawing down its special drawing rights to meet the monthly bill, only just squeaking through the year.

Indeed, the new gas deal that Ukrainian President Viktor Yanukovych cut with Gazprom a few months ago is highly significant, as he managed to get a discount - the same discount Minsk is asking for - and reduced the price to about $250 per 1,000 cm. In this sense, Ukraine is now the only former Soviet state where the Kremlin has entered into a "special relationship" where it is prepared to subsidise a foreign economy with lower gas prices. Yanukovych clearly would prefer to have a special relationship with the EU, but Brussels, despite the friendly rhetoric, has failed to come up with any practical support whatsoever, driving Yanukovych into Putin's arms as a result.

By BNE. Published on 23 June 2010
Copyright (c) 2010. BNE. Reprinted with the permission of Business New Europe
The views expressed in this article are the author's own and do not necessarily reflect those of S & D.

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