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Poland, Belarus & Ukraine Report: January 5, 2007

January 5, 2007, Volume 9, Number 1
HOW HARD COULD GAS PRICE HIKE HIT ECONOMY? By more than doubling the price of natural gas supplies to Belarus in 2007, Moscow has stripped Minsk of a lavish and much-needed subsidy.

Cheap gas -- along with duty-free Russian crude oil refined and reexported by Belarus -- was largely responsible for the country's official two-digit economic growth during the past several years.

But on December 31, 2006, in Moscow, Belarus and Russia's state-controlled gas monopoly Gazprom signed a new deal, securing Russian gas supplies to Belarus and Russian gas transit across Belarus for 2007-2011.

Under the contract, Belarus is to pay $100 for 1,000 cubic meters in 2007 compared with $46.68 in the previous 2 and 1/2 years. The gas price for Belarus is to gradually increase to the European market level by 2011.

So will the gas price hike put an end to the "economic miracle" in Belarus?

Since Belarus imports some 20 billion cubic meters of Russian gas per year, at first glance it doesn't look good. The country's gas bill in 2007 will be higher by some $1 billion compared to last year.

But this financial burden will be significantly alleviated by the money Gazprom is to pay Belarus this year for its 50 percent stake in Beltranshaz, Belarus's gas pipeline operator. Gazprom agreed to pay $2.5 billion for half ownership of Beltranshaz by equal installments during the following four years.

And, additionally, Belarus has increased the price of Russian gas transits via its territory from $0.75 in 2006 to $1.45 for 1,000 cubic meters per 100 kilometers for the following five years.

Belarusian independent economic expert Leanid Zlotnikau argues that the gas-price hike will not hit Belarus so hard.

"Taking into account this year, the losses of our economy will amount to $500 million," Zlotnikau says. "Taking into account only this and nothing more, these are not big losses, because our gross domestic product amounts to some $32 billion-$34 billion."

Tatsyana Manyonak, a Minsk-based journalist focusing on economic issues, also says that in 2007 the government will be able to cushion the blow.

"Now it is necessary to revise all budget figures, all investment programs. But the Belarusian government had foreseen this situation. Therefore, in late 2006 it created a Fund of National Development, into which some $600 million had to be paid until the end of last year," Manyonak says.

But economists say in subsequent years, when the gas bill becomes much heavier, Belarus may find itself in trouble.

Another economic expert from Minsk, Leanid Zaika, estimates the new gas price could at least double inflation in Belarus in 2007: "This [price hike] may affect prices and increase the inflation rate from 5-6 percent to 12-14 percent, or even higher. All will depend on whether the new expenses will be covered entirely by economic entities."

The government has already announced that the main brunt of the gas price increase will be taken by corporate consumers, which will now have to pay $150 per 1,000 cubic meters of gas. Their electricity and heating bills will also grow by more than 50 percent this year.

As regards individual consumers, the government predicts that an annual increase in their housing and utility payments will amount to some $5-$6 in 2007.

But Zaika says that there is a more unpleasant development in store for the Belarusian authorities than the gas price hike and the forced sale of Beltranshaz to Gazprom. In December, the Russian government slapped a duty of $180.7 per ton on crude oil exported to Belarus as of January. Russia claimed it was losing billions of dollars every year by allowing its firms to send duty-free oil to Belarus's two refineries in Navapolatsk and Mazyr, which then reexported refined products to Europe.

Belarus halted crude oil purchases from Russia as of this month and has proposed to split between Minsk and Moscow profits from its exports of refined Russian oil on a 50-50 basis if Moscow lifts the duty.

The proposal has most likely been rejected by Moscow because on January 3 Belarusian President Alyaksandr Lukashenka imposed a transit fee on Russian oil of $45 per 1 ton.

If Moscow has its way regarding crude oil exports to Belarus, Zaika estimates that Belarus's losses may be much heavier than those linked to gas.

"We will be stripped of that part of the revenues that were received in the form of duties on refined oil, taxes on profit, and excises. The budget revenues will be less by some $200 million every month at the minimum," Zaika says.

With Belarus's 2007 consolidated budget revenues projected at some $19 billion, such a financial loss could cast doubt on the officially projected economic growth of 9 percent and inflation of 7 percent in 2007.

After signing the gas deal in Moscow, Belarusian Prime Minister Syarhey Sidorski said the country will have to hunt for resources in order to maintain economic development.

But Belarus has no gas or oil or coal deposits.

To avoid paying for Russian energy supplies with strategic assets like Beltranshaz, one of Belarus's only options might be to reform the country's economy. That would mean privatization of the major industries and could mean reforming the country's collective farm system.

It could also mean tapping into the human resources that are being restricted by the country's Soviet-style political and economic management.

More economic freedom could mean more political freedom --something many Belarusians would welcome. (Jan Maksymiuk)

(RFE/RL's Belarus Service contributed to this report.)

POSSIBLE ENERGY SOLUTION IN COAL BEDS. In the wake of Ukraine's announced plans to reduce its dependence on imported natural gas by using more coal for power generation, Ukraine's own enormous reserves of methane have been touted as a better alternative. The problem is finding a way to harness it.

Ukraine is believed to be sitting on more gaseous fuel than its principal supplier of natural gas, Turkmenistan.

Estimated reserves of 11-12 trillion cubic meters of coal-bed methane would give Ukraine at least three times the amount of natural gas in Turkmenistan, and four times that in Russia's Shtokman gas field.

Considering Ukraine's plans to reduce its dependence on imported natural gas, including through the increased use of coal for power generation, tapping into such a wealth of fuel would be a boon.

However, much of Ukraine's methane goes to waste -- raising environmental concerns as it is released into the atmosphere.

Ukraine's government estimates that up to 3 billion cubic meters of methane escapes from its coal beds every year, contributing to Ukraine's ranking as one of the world's top-10 emitters of methane.

It is believed that taking steps to reduce methane emissions, which constitute 16 percent of all greenhouse-gas emissions globally, may help reduce the impact of global warming.

Yet despite the potential economic and environmental benefits, little has been done to capture Ukraine's methane.

While initiative is not lacking, foreign investment, modern technology, and expertise are.

Ukraine has taken steps to remedy this. In October 2006 the government began to explore the possibility of allowing Florida-based Itera Energy to develop a pilot project for extracting methane in Ukraine�s Donbas coal-mining region.

Itera Energy, which has successfully extracted coal-bed methane in the United States, plans to conduct geological tests in select Ukrainian mines to determine how much gas is available and the feasibility of capturing it.

If the tests pan out, the company plans to extract some 600 million cubic meters of methane in 2007 and sell it to Ukrainian enterprises for around $135 per 1,000 cubic meters -- the same price Gazprom is charging Ukraine for natural gas in 2007.

Locally produced methane could prove to be extremely beneficial to the highly industrialized Donbas region, where chemical enterprises have demanded that the parliament and government lower natural-gas prices in order to remain profitable.

For Ukraine as a whole, tapping into a new domestic energy resource could prove to be both profitable and beneficial. The country could potentially save millions of dollars in import costs as it works to restore its traditional role as an energy exporter.

After all, Ukraine was the largest producer of natural gas in the Soviet Union until the 1970s, when Moscow decided to shift investments in the gas industry to the Yamal Peninsula and Central Asia. (Roman Kupchinsky)

UNPRECEDENTED OPPORTUNITIES, CHALLENGES POSED BY $1.2 BILLION AID PACKAGE. While Moldovans celebrate the New Year and a massive new aid package, serious challenges await the new EU border state.

On December 12, a delegation from Moldova, headed by Prime Minister Vasile Tarlev, left for Brussels to take part in a Consultative Group Meeting, jointly hosted by the European Commission and the World Bank. They were charged with presenting Moldova's progress in achieving the goals laid out in Moldova's Economic Growth and Poverty Reduction Strategy Paper (EGPRSP) and the EU-Moldova European Neighborhood Policy Action Plan.

Nobody expected that the very next day, donor countries would be announcing the largest aid package in the country's history.

The three-year $1.2 billion aid package is more than all the combined aid given to Moldova in its 15 years of independence, and is equivalent to the country's national budget for the last two years.

But while it represents a unique opportunity for development in the poorest country in Europe, it also poses difficult challenges for the government.

Prime Minister Tarlev, quoted by the Infotag news agency, called the meeting "a historic event for Moldova." He laid out a number of goals for the money. Among these are reforming the judiciary and local government organs, which are often viewed as corrupt and inefficient. He also promised to use the money to improve education, public health, infrastructure, the creation of new jobs, and to promote rural development through long-term credits.

Moldova is perhaps best known to the outside world for its relative poverty. While boasting a large agriculture and wine industry, one of Moldova's largest exports since independence has been people. According to the International Monetary Fund (IMF), at least one-fourth of Moldova's economically active population has emigrated. Many of these people work illegally in Russia and the EU, with remittances currently accounting for 20-30 percent of GDP. Moldova's poverty and location have also made it a major source of human trafficking.

2007 will be a difficult rebuilding year for Moldova's economy. The Russian ban on Moldovan wine and agricultural products in March devastated Moldova's agro-industrial economy. While Moldova still registered positive growth in 2006, it was much slower than the 7 percent in 2005. In the third quarter of 2006, the National Statistics Bureau estimated that Moldova's economy grew by 3.6 percent and has continued to slow since March. Economic analyst Veaceslav Ionita, quoted in Info Prim-Neo, suggested that 2006 has been the worst year for Moldova's economic development since the 1998 ruble crisis spilled over into Moldova's economy.

Wine exports to Russia are scheduled to resume on January 15, but Moldova's recovery may take much longer, as companies must re-start manufacturing that was stopped and, in some cases, not well maintained during the ban. This aid package from international donors is one ray of hope for the resumption of rapid growth in 2007.

With Romania's entrance into the European Union this year, many within the EU worry about the stability of their new border. Currently, Moldovans cross the Romanian border without visa restrictions, and Romania received over 400,000 applications for dual citizenship from Moldova in the months of August and September 2006 alone. How this issue will be dealt with by Romania and the EU is unclear.

Romania recently spent $691 million on upgrading security on its border. At the same time, however, it expressed a desire for the country to remain open to Romanian people living outside its border, a group which the current government says includes many Moldovans. Meanwhile, several major British newspapers in October sounded the alarm at the prospect of a "Moldovan invasion" with hundreds of thousands of job-seekers flooding the market.

Prime Minister Tarlev stated that the aid package was the result of "relations based on friendship and trust in the spheres of finance and politics." It also represents the EU's desire to stabilize a now-critical border state.

The aid package also poses a serious challenge in its administration. Like all post-Soviet countries, Moldova's government has struggled with corruption. According to the 2006 Corruption Perceptions Index, Moldova is 81st out of 163 countries in terms of the severity of corruption, which places it first among the countries of the Commonwealth of Independent States.

However, Lilia Carasciuc, director of Transparency International in Moldova, contended in an interview earlier in the year that corruption in Moldova is still endemic and that it is difficult to tell how effective monitoring and reform efforts are. "There have been over 600 corruption cases, but nobody is in jail," she pointed out. She expressed concerns that a sharp increase in grant money over a short period poses problems for assimilation. Serious questions remain about whether anticorruption measures are up to the challenge of overseeing the distribution of such a large jump in finances.

Moldova's commitment to reform has also been questioned by some. According to the Economist Intelligence Unit, between 2001 and 2004, the government privatized less than 60 of the 480-plus enterprises scheduled for sale, and has annulled several earlier sales. The World Bank, in its "Ease of Doing Business" report, placed Moldova 83rd out of 155 countries surveyed.

If Moldova is unsuccessful in promoting reform, and if the distribution of funds is not well regulated, European and American donors will quickly become disenchanted.

How Moldova uses the aid promised to it by international donors will mark an important turning point. If Moldova uses the money to promote economic reform and infrastructure development, this may well be remembered as a milestone in Moldova's development. If, on the other hand, the government uses the money to delay reform, or if it is found that the money directly or indirectly funds corruption, Moldova's European aspirations will be severely damaged. Either way, 2007 will be critical for the EU's new neighbor. (Ryan Kennedy)

(Ryan Kennedy is a Ph.D candidate and a Fulbright researcher from Ohio State University, currently in Moldova.)