The Duck of Minerva

The Duck Quacks at Twilight

Gas pains

August 6, 2007

Gazprom has a problem.

We often read about Russia wielding its energy power as a political tool, cutting off energy supplies hither and thither to punish political foes. Last winter’s dispute with Belarus did not fit the usual template. Although the script was similar to the dispute with Ukraine–Gazprom looks to double energy prices in new contract–the scenery was rather different. Belarus has been one of Russia’s closest most reliable allies in recent years–there’s even been serious, highest level talks on unification between Russia and Belarus.

So why would the Kremlin allow Gazprom to potentially destabilize (or, at the very least, smear egg all over the face of) the Lukashenka regime?

To answer this question, you have to leave the realm of politics and head straight for economics.

Yes, Gazprom wanted to double gas prices for Belarus. But under the old contract, Belarus was paying about 1/4 of the market price paid by European customers. But, you, say, isn’t Russia an energy superpower, with nearly limitless supplies of oil and gas?

Ah, and here we arrive at Gazprom’s not-so-little problem.

See, Russia’s gas production is not only not limitless, it’s actually falling. Both domestic and export demand are rising–and some experts estimate as soon as 2010, Russia may not be able to meet both its domestic needs and its export contracts.

In this context, continuing to provide Belarus with as much gas as they can consume at 1/4 market price is clearly not a Good Thing for Gazprom. After a tense few weeks last winter, they came up with a deal: Belarus agreed to pay higher gas prices, while coughing up a significant share in its pipeline operator, Beltransgaz, to cover the costs. This suited Gazprom well, which has sought to shore up its control over pipelines (and thus over exports, which must pass through the pipelines) whenever and wherever possible.

Then last week, Belarus suddenly refused to pay the bill. A Belarusian delegation made its way to Moscow, to plead for a loan to help it make the payment. If Russia would no longer subsidize Belarus via Gazprom, perhaps they would be willing to do so directly–it’s hard to read this as anything other than an attempt to back out of an unfavorable deal. But no dice. Russia’s political arm refused to clean up after the problems created by the economic arm. Belarus then tapped reserved to pay a portion of the bill, promising to make the remaining payment by August 10. Belarus is, of course, in a tight spot. The regime is both economically and politically isolated, and, as a result, it is pretty much at Russia’s mercy. There is little outrage expended on behalf of the Lukashenka regime when Russia flexes her muscles at its expense. Russia doesn’t need to placate Belarus, because there isn’t really anywhere else to turn.

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