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Russia: Energy Policies Raise Concerns Over Politics

Russia's cuts in gas supplies to Belarus, Lithuania, and Latvia raise new concerns over political pressure in the region. But in the case of Minsk's demands for subsidized fuel, Moscow may find itself under greater pressure from the European Union for equal gas tariffs as it seeks to join the World Trade Organization.

Boston, 8 November 2002 (RFE/RL) -- Russia's dispute with Belarus over gas supplies seems to be turning from a problem of politics into a collision of economic worlds.

The rift between Moscow and Minsk has widened since 25 October, when Gazprom announced that the Russian monopoly would cut its deliveries because Belarus had used up its allotment of heavily subsidized gas for the year.

On Wednesday, Belarusian President Alyaksandr Lukashenka accused Kremlin officials of trying to take control of the country's pipeline company by slashing gas deliveries in half. Speaking on Belarusian radio, Lukashenka said, "They demanded immediate privatization of Beltransgaz, that is, the pipelines in Belarus left over from Soviet times."

He added, "Pressure on Belarus and attempts to shake us down, as people say, are unacceptable."

Russia's Foreign Ministry and Gazprom called the move "purely economic." In a statement, Gazprom said it is trying to recover a balance of $251 million in debts, fines, and penalties for gas supplied since 1999. Belarus has paid $31 million, or only 12 percent of the 2002 contract, Gazprom said.

The company is demanding a payment of at least $27.8 million by the end of the year.

But the argument has grown into more than the terms of a partial payment.

The dispute marks another setback with Russia since Lukashenka's outburst over Russian President Vladimir Putin's proposal in September for a monetary merger by 2004. Lukashenka accused Russia of planning to strip Belarus of its sovereignty and of "trying to overthrow me for seven years."

The future of the proposed union between the two countries now looks bleak.

Unless Belarus speeds up payments and agrees to a 50 percent price hike, all supplies could be halted by 15 November as the winter heating season starts. Belarus produces only about 1 percent of its own gas, according to the U.S. Department of Energy. Gazprom has been charging Belarus at a domestic rate of $24 per thousand cubic meters, less than a fourth of Russia's charge for European Union customers.

In his radio address monitored by the BBC, Lukashenka responded with fury and occasional contradictions, saying at one point: "But I want both Russians and Belarusians to know and understand that this is not about economics, this is unprecedented pressure on our country. This is not the first case either."

Lukashenka said Belarus should pay current bills now and all arrears within a year. But at the same time, he said Russia should pay Belarus $500 million for what he called "unregulated relations on the collection of indirect taxes," as well as items that include "privileges" during construction of the Yamal Peninsula pipeline and the cost of customs and defense for the Russian border.

Lukashenka suggested that Belarus could also raise transit tariffs for Russian gas to Europe, which are far cheaper than those through Ukraine.

Gazprom seems to be trying to settle accounts with several countries at once. On Monday, the company may have tried to dispel the notion that it was singling out Belarus by notifying both Latvia and Lithuania that it had suspended deliveries over unpaid bills.

The problem involving reimbursements by the Russian gas trader Itera disrupted the opening of a new Intergas pipeline from Belarus to Lithuania, the Lithuanian News Agency said.

In the past, such cutoffs have raised the specter of political pressure in the Baltics, which have recently seen a series of Russian moves aimed at controlling their oil ports. But in the case of Belarus, Gazprom may have more economic motives.

The issue is about more than Lukashenka's anger and the union. Belarus and its unreformed economy based on energy subsidies now seems to stand between Russia and the EU as it seeks to join the World Trade Organization.

The EU has demanded that Russia raise domestic gas tariffs to European levels as a condition of joining the WTO. And, although officials have reported recent progress, they have also made clear that tariffs remain a major obstacle to membership in the WTO.

On Wednesday, Fritz Harald-Wenig, the trade defense director of the European Commission, told Russia's RIA-Novosti news agency that the huge gap between domestic and export gas prices amounts to a subsidy for Russian industry, giving its products an unfair edge abroad. In Moscow, Yelena Danilova, a Russian Economic Development and Trade Ministry official, called the EU demand for equal tariffs "interference" in Russia's internal affairs, the RosBalt news agency said.

Despite the harsh words, the EU offered Moscow a strong incentive Thursday by formally recognizing Russia as a "market economy," a prize Putin has long sought. The status is expected to give Russian companies greater access to EU markets, but it could also lead to anti-dumping suits if the products are seen as subsidized by cheap gas.

The gas problem may still bar the way to the WTO. Last week in Geneva, Russia's WTO negotiator, Maksim Medvedkov, cited the rift over gas prices, saying, "We are not at all close to an agreement with the European Union."

The Russian government is also under internal pressure over tariffs. Although it is struggling to keep inflation down, Gazprom is pushing for a 50 percent tariff hike next year, more than twice the amount allowed in the budget for 2003.

On Wednesday, Boris Fedorov, the former finance minister who represents minority shareholders on Gazprom's board, argued that low tariffs may also endanger Russia's gas exports. Fedorov told the Reuters news agency, "The Gazprom management is now openly telling the government that without raising tariffs, we cannot maintain production and ultimately this puts a question mark over exports to Europe."

Fedorov estimated that cheap gas is subsidizing Russian industry by $3.5 billion a year. Under such pressure, Gazprom may find it impossible to justify more subsidies to Belarus, whether it endangers the union treaty or not.

Lukashenka's demands now seem to represent an old way of doing business for Moscow, which is more intent on seeking a new way with the EU.