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Russia/Belarus: Energy Agreement Paves Way To Integration

Russian President Vladimir Putin has extended domestic energy tariffs to Belarus as part of a union agreement between the two countries. The cost may be high for Russia's Gazprom and energy sector reform.

Boston, 16 April 2002 (RFE/RL) -- Russia's decision to grant a huge energy subsidy to neighboring Belarus may raise financial questions for the gas monopoly Gazprom.

Last week, President Vladimir Putin pledged that Russia would charge Belarus the same energy prices as it charges its own consumers. Interfax reported that the decision announced in Moscow at the Supreme State Council of the Russia-Belarus Union is scheduled to take effect on 1 May.

Putin also promised to charge Russian prices for railway transport starting on 1 June. He said the moves would help to "provide equal terms for business" in the six-year-old union, which has been slow to pursue integration because of lagging reforms in Belarus. The country is scheduled to adopt the Russian ruble as its currency in 2005.

A joint statement monitored by the BBC said: "The Russian Federation and the Republic of Belarus take more vigorous practical steps to adopt uniform principles of economic policy and create equal conditions for economic subjects of the two countries."

In Moscow yesterday, Putin told a meeting of top government officials that talks with Belarus "are not going smoothly," Interfax said.

Russia's total cost for extending energy and railway subsidies to Belarus is unclear. But the expense of supplying gas at reduced tariffs was suggested two months ago.

In late January, Gazprom confirmed a report by Belarusian Prime Minister Henadz Navitski that Russia would reduce the country's gas prices from $30 to $19.60 per 1,000 cubic meters. According to the Reuters news agency, Russia agreed in December to supply Belarus with 16.5 billion cubic meters of gas in 2002. If the lower tariff is applied to the entire amount at that rate, it would save Belarus $171.6 million this year.

The savings seem to be coming at the expense of Gazprom, which supplies all of Russia's gas exports, although the company did not figure in the reports. The Russian state owns 38 percent of Gazprom, but the government often appears to take decisions on interstate gas deliveries either without consulting the company or considering its finances.

The subsidy to Belarus raises old questions about whether Gazprom should be seen as a commercial enterprise or a policy arm of the Russian state.

Although Belarus is a transit country for some Russian gas, last week's announcement said nothing of a transit accord. Russia charges more for gas sold to Ukraine, which carries about 90 percent of Russia's gas exports outside the CIS. Other CIS countries like Georgia are paying three times as much as Belarus for gas bought from Gazprom's trading partner Itera.

But the political preference for Belarus is also likely to be costly for Russian consumers, who are paying higher tariffs this year to help Gazprom fund needed investment. Wholesale prices for gas in Russia rose 20 percent in January and may increase 35 percent this year under budget guidelines. It is unclear whether the break for Belarus has figured in the calculations.

The move also comes at an odd time for Gazprom's financing on foreign markets. Last week, Gazprom sold $500 million in Eurobonds in a five-year financing that carried an annual interest rate of 9.125 percent.

According to AFX news service, Gazprom said the proceeds would be used to develop its giant Zapolyarnoye gas field in Siberia and to build several pumping stations. But the subsidy for Belarus seems likely to eat up over a third of the amount that Gazprom has just raised, considering the cost for this year alone.

The strong response to Gazprom's offering is a sign that the market considers it a good risk. But it is hard to say how the company can account for the risk that the government may grant tariff breaks to other CIS countries that offer political concessions, cutting into Gazprom's profits. The question could also be an issue for Gazprom's other shareholders, including foreign investors.

Last month's bond sale may be one of many for Gazprom, which needs billions of dollars for capital projects. If the government guarantees Gazprom's loans, there may be little worry about repayment. But the situation may be complicated because Gazprom is also the government's biggest taxpayer, making both dependent on the same revenue.

The cost of Russia's energy commitment to Belarus and its 10 million consumers could also be hard to estimate. The heavily industrialized country has been among the most backward in the CIS in implementing economic reforms. Lower energy tariffs are more likely to promote waste than energy efficiency, raising the cost of old habits for Gazprom.

The greatest cost may be for Putin and his reform agenda. While he pursues new policies for Russia's energy sector, he seems to be compromising them for the sake of Belarus.