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Poland, Belarus & Ukraine Report: March 18, 2003

18 March 2003, Volume 5, Number 10
OPPOSITION WANTS TO SUE DEPUTY PREMIER FOR GAS DEAL WITH RUSSIA. The opposition Law and Justice (PiS) party believes Deputy Premier and Infrastructure Minister Marek Pol (Labor Union) committed a crime by signing in February a protocol mapping out amendments to a 1996 gas contract between Russia's Gazprom and the state-controlled Polish Oil and Gas Company (PGNiG), PAP reported on 17 March. PiS lawmaker Zbigniew Wasserman on 17 March notified prosecutors that Pol, along with PGNiG President Michal Kwiatkowski and PGNiG Supervisory Board head Andrzej Arendarski, acted to Poland's detriment by negotiating and authorizing what the PiS believes to be unfavorable conditions of gas imports from Russia.

According to the 1996 gas deal, Poland was to import 218.8 billion cubic meters of gas from 2003 through 2020. It later became clear that forecasts of domestic gas demand were overestimated at the time of the signing, and Poland started negotiations to decrease gas supplies from Russia. On 12 February, Pol signed a protocol whereby Russian gas supplies will be reduced in 2003-20 by 74.6 billion cubic meters, or 34.5 percent. Simultaneously, however, the government-to-government deal foresees supplies being extended by two years until 2022, indicating an effective reduction of 56.6 billion cubic meters, or 26.2 percent. Pol announced after the signing of the modified 1996 contract that Poland will spend some $5 billion less on Russian gas than planned. Poland consumes roughly 11 billion cubic meters of gas annually, 7 billion of which comes primarily from Russia and the remaining 4 billion from domestic gas fields.

The PiS wrote in its notification that it is difficult to calculate the losses that will be incurred by the Polish side because of the deal authorized by Pol but, according to rough estimates, the PGNiG alone will lose 6.4 billion zlotys ($1.6 billion) in 2006-2019. PiS parliamentary caucus head Ludwik Dorn told journalists that the gas deal with Russia makes Poland a "vassal" of Russia as regards supplies of energy resources. "This is not one of the biggest scandals -- because the word scandal is too weak here -- this is one of the biggest strategic threats to Poland in the short and long run," Dorn noted.

Another PiS lawmaker, Wieslaw Walendziak, who is also head of the parliamentary Treasury Committee, said the supplement makes Russia a monopolist of gas supplies to Poland for prices higher than in the open market. Walendziak predicted that Poland's chemical industry will collapse as a result of the faulty gas deal with Russia. Walendziak added that the deal also runs counter to a European directive obliging European Union members to seek diversified supplies of natural gas.

According to Wasserman, Pol committed a crime by signing a deal that will worsen the country's economic situation and therefore should be sued in court. Wasserman added that Pol, in accordance with the Criminal Code, will have a chance to avoid punishment if he reveals all the circumstances of the case and makes an effort to counteract any negative consequences of the deal he signed.

"The [PiS motion to sue me] is an example of a hideous political game," Pol commented later the same day. (Jan Maksymiuk)

THE DEVIL IS IN THE DETAILS: STALEMATE IN ECONOMIC INTEGRATION WITH RUSSIA. Recent developments in Belarusian-Russian integration have made it clear that both sides still have to demonstrate that some meaningful progress has been achieved on the road to forming a currency union and privatizing Belarusian industries by Russian business groups. Ironically, whenever any progress has been announced by one side, the other side has cooled any initial optimism by announcing that no breakthrough, in fact, has taken place.

Thus, Russian Finance Minister Aleksei Kudrin declared in an interview with Ekho Moskvy radio in February that the sides had reached an agreement on the creation of a single central bank of the currency union the operation of which would be transferred in full to the Russian Central Bank. Such progress, however, was immediately renounced by Pyotr Prakapovich, head of the National Bank of Belarus. Prakapovich claimed that the issue had only been "discussed" at a meeting of the interbank council of Russia and Belarus in Yaroslavl and that Kudrin's announcement expressed "his personal opinion."

Anatol Drazdou, a press secretary for the National Bank of Belarus, used even stronger words: "We will never accept Putin's offer. The National Bank and the government are strongly against it. We will wait [to find out] what politicians will say." "Politicians" in Belarus means President Alyaksandr Lukashenka and only Lukashenka. But the Belarusian president has never withdrawn from his initial position, which is that the currency union should be managed on equal terms by two sovereign states.

Likewise, the Belarusian side has made claims of progress in the privatization of the Belarusian petrochemical sector. Belarus's Economy Ministry declared that arrangements had been made to sell the sector's leading companies, including the refinery and Palimir conglomerate in Navapolatsk, as well as the Hrodna-based Azot and Khimvalakno chemical plants. Lukashenka signed the relevant decree allowing the privatization of the industry on 13 February. The only companies to express an interest in submitting bids were the Russian oil giants Surgutneftegaz, Sidanko, Sibneft, and LUKoil. It was later revealed, however, that the offer for privatization will not allow investors to obtain full control in the near future; instead, investors would be allowed to purchase a 10 percent stake every year for four or five years, after which an investor would be allowed to purchase a majority stake only if it has fulfilled its investment obligations. Russian media reports have claimed that potential investors are sharply opposed to this condition.

Moreover, it has been reported that intense negotiations concerning additional conditions of the contracts are still under way. Such conditions include the price (for example, the cost of Palimir alone is estimated at $1 billion, which is deemed too high by potential investors) and so-called social guarantees on the part of investors (Minsk wants to prevent investors from laying off the workforce of privatized petrochemical plants during the entire period of the transaction). Potential buyers have been pressing for the removal of these conditions, which Minsk may find too costly to dump.

It is also worthwhile to mention in this context the controversy surrounding the privatization of Belarusian industrial giants. As has been the case with almost every aspect of the integration, progress in this area depends heavily on whether or not Russian authorities (or oligarchs) are able to strike a political deal with Lukashenka and assist him in his efforts to strengthen his hold on power and to extend his term in office. While seeking support from powerful business groups, however, Lukashenka has to confront the reality that profit seeking is the primary motivation of every investor. Turning outdated and worn-out Belarusian industrial giants into profit-making companies would require not only substantial investment but also their radical restructuring, which could lead to massive layoffs and cause an end to the extensive social infrastructure -- such as preschools, schools, and recreational facilities -- financed by these enterprises.

Since the majority of such giant companies are "city-forming," i.e., they provide employment and income for a majority of the population in the city where they are located, this could cause an enormous social dislocation throughout the country and easily generate public unrest, which Lukashenka has so far managed to sidestep by maintaining full employment and subsidizing loss-making enterprises. In his effort to avoid this worst-case scenario, Lukashenka has tried to take Russian companies hostage, indicating that their interests would be respected only in return for their loyalty, as well as for their political and financial support. His offer of a gradual sell-off of minority share packages and a five-year period of proposed privatization in the petrochemical sector means that only those oligarchs who will support his re-election and the extension of his term in office will have any chance to eventually get what they aspire to.

This plan, however, has three pitfalls. The first is the lack of desire on the part of Russian business groups to de facto pay generous subsidies to the Belarusian industry for five years before they have a chance to become its owners. The second is a credibility problem: Lukashenka has an ostensibly poor record of respecting contract obligations. Two years ago, the leading Russian brewery Baltika was invited to buy the Krynitsa brewery in Minsk for $50 million according to the same scheme (gradual concession of control in return for investment). In the middle of the process, when Baltika had already invested about $10 million in new equipment in Krynitsa, the Belarusian government revoked the agreement and announced that the deal would be possible only if Baltika agreed to fulfill an additional set of conditions, including the development of barley and hop crops in Belarus and building a new hockey arena in Minsk. At that point, Baltika withdrew from Belarus, thereby losing its investment.

Given Lukashenka's record of dealing with investors, a much larger investment in Belarus will only be possible if political guarantees for the security of the investment are given to the Russian oligarchs by their own government. But here comes the third pitfall: To grant such guarantees, the Kremlin has to make a decision about its commitment to support Lukashenka's remaining in office at least until the end of this decade. And if such a commitment is not made, Lukashenka will be able to receive a substantial Russian investment only if he withdraws his tough conditions for privatization and thereby paves the way for the economic and social processes that may seriously weaken his grip on power. His only alternative would be either to acquiesce to the Russian version of the union between the two countries that was voiced by President Vladimir Putin last year (incorporation of Belarus by Russia) or to agree with the Kremlin's proposal of a monetary union (in which the Russian Central Bank will be the only body that will determine monetary policies). Each of these two options means substantial weakening or even the end of Lukashenka's grip on power. There is little chance that Lukashenka will be able to make a good choice between these two evils.

This report was written by Vital Silitski, an associate professor at the Department of Economics at European Humanities University, Minsk.

EU PROPOSALS FOR FUTURE TIES SPARK DISAPPOINTMENT. Last week, the European Union mapped out plans for future relations with the countries that will be its neighbors once it expands in 2004 (see "RFE/RL Poland, Belarus, and Ukraine Report," 11 February 2003). The plans, contained in a document titled "Wider Europe -- Neighborhoods: A New Framework for Relations With Our Eastern and Southern Neighbors," were presented by the European Commission to the European Parliament on 11 March. The proposals are expected to be made official policy following an EU summit in June.

The document says the EU should offer Russia, Ukraine, and Moldova, among others, closer economic integration and enhanced political cooperation in exchange for political, economic, and institutional reform based on "shared values."

Norbert Jousten, the EU's ambassador to Ukraine, Belarus, and Moldova, said the proposals, which are meant to cover the coming five to 10 years, include preferential trade terms; expanded transport, energy, and telecommunication links; and the possibility of visa-free travel to the EU. The document also appears to leave open the possibility of eastern neighbors eventually joining the EU. Jousten called the proposals "a very ambitious offer" and a solid opportunity for Kyiv.

But Ukrainian officials are less enthusiastic. A Ukrainian Foreign Ministry spokesman, Markiyan Lubkivskyy, criticized the proposals, saying they do not fully meet Ukraine's "aspirations" for becoming a full-fledged EU member.

Oleksandr Sushko, the director of Ukraine's Center for Peace, Conversion, and Foreign Policy, told RFE/RL that Ukraine is unlikely to accept the proposal in its current form. "It is natural that the Foreign Ministry reacted in such a way. Any long-term EU strategy regarding Ukraine that does not recognize the prospects for Ukraine's possible membership in this organization will not be well accepted in Ukraine, not by the Foreign Ministry or other institutions, or experts, or anybody," Sushko said.

Steffen Skovmand heads the political division of the European Commission's delegation to Ukraine, Moldova, and Belarus. He told RFE/RL that, contrary to remarks by critics, the proposals do not actually preclude Ukraine's eventual membership in the EU. "We are not talking about accession now. We are neither including it nor excluding it. What we are talking about is a new framework for a closer integration of Ukraine into the EU, and it is a very concrete proposal. It basically says: 'Get yourself ready to join our single market. Align your legislation. Let's work together. We'll support you. We'll draw up action plans together with you about what needs to be done. We'll have annual reviews about how you make this progress and what progress is made, and we will have money,'" Skovmand said.

Skovmand also said Ukraine's official goal of becoming a candidate country in a decade is in line with the EU proposals.

Stuart Hensel, a Ukraine analyst at the Economist Intelligence Unit in London, said the country has been offered the best deal it can reasonably expect. "It doesn't offer any prospects for any sort of immediate membership, in fact. It suggests that over the next 10 years the EU is not interested in looking at new members and that the most this deal offers Ukraine is access to the internal markets. That means perhaps greater concessions on trade terms, greater access for Ukrainian goods to get into the EU, greater access perhaps for Ukrainians to enter into the EU without visas, but that's about it," Hensel said.

Sushko said the proposals put Ukraine in a league with countries that will never be accepted into the EU, such as the North African states, which are also discussed in the "neighborhood" proposals. "Ukraine is put in the same league not only with Belarus and Moldova but also with Africa. Even taking into consideration all the advantages that North African countries enjoy in their relations with the EU, such an African option for Ukraine, on an emotional level, provokes misunderstanding," Sushko said.

Sushko said the document implies that Ukraine might never be accepted into the EU. "We have a suspicion that these [North African] countries are put into a single package with Eastern European countries in order to confer upon two groups a single status. This single status may mean a single prospect: exclusion from the possibility of integration, possible membership," Sushko said.

Sushko said Brussels is setting a double standard for EU neighbor countries. He said the situation in Ukraine is no worse than in Albania or Macedonia, whose future candidacy has already been declared by Brussels.

He said Balkan countries like Albania, Macedonia, and Serbia are also far from meeting the Copenhagen criteria -- the economic and political conditions for candidate countries set by the EU in 1993. But the EU is clear in its strategy toward them. "The EU has an aim to fully integrate those countries," he said. "It may happen in the distant future -- the precise dates have not been given -- but the [political] will in Brussels is clear."

Hensel said Ukraine itself lacks political will and has been slow with reform progress. "I think the main problem is a lack of willingness on the part of [Ukraine's] political class to embrace the sort of reforms that it knows the EU is looking for, and more technically, the incapacity of the administration in Ukraine to fulfill the sort of reforms required," Hensel said.

Hensel said Ukraine's foreign policy is fuzzy. Ukraine seeks closer economic ties with Russia on the one hand and with the EU on the other. He noted that last month, leaders from Ukraine, Russia, Belarus, and Kazakhstan signed a joint declaration stating their intention to create a free-trade zone.

RFE/RL correspondent Valentinas Mite wrote this report.

"We can [pursue integration with Russia] on equal terms only; we can go as far as Russia will go. This is my unalterable position. This is not a matter of Lukashenka or his presidential fate. What is Lukashenka in history? A small, invisible speck of dust." -- Belarusian President Alyaksandr Lukashenka to students in Minsk on 14 March; quoted by Belapan.