New year - new "war"

The resolution of the traditional New Year's gas conflict only for a short moment created the impression in Moscow that a new round of energy hassle in Russia's relations with its Western neighbors had been avoided. No such luck, the gas “war” turned into an oil war. And this is all the more offensive since the gas negotiations ended on time.

The renegotiation of gas contracts, unfortunately, is confined to the annual cycle. And every December in Eastern Europe the hassle begins - who will have to pay what and what, and, accordingly, will receive what. Apart from Russia, only a few receive it - Turkmenistan, Azerbaijan, Kazakhstan. These countries benefit from rising prices for their gas, which are pushed by Gazprom, just as Bobby Fischer once pushed through fees for chess players. Gazprom usually gets all the big shots. Over the next year, grateful experts around the world, journalists and politicians will search for deeper meaning, split their hair and communicate their opinions to each other at conferences on “energy security”, which have become more numerous than football matches. Discussing the economic and political consequences of Gazprom’s actions, suspecting it of long-term intentions, subtle calculations and gross miscalculations, no one will notice or admit their old mistakes and miscalculations - this is how the world works. Gazprom will pat itself on the pocket with satisfaction and think what to do now with its image as a Leviathan in gas rivers. Gazprom's countless critics in Europe will gradually become less horrified by the fearlessness with which it carries its image as a tough negotiator, and more likely to regret that they were not hired to soften it.

The signing of a system of contracts between Gazprom and Belarus gave us a new measure of time - the “gas year”, which is very similar to the calendar year, but starts two minutes earlier! The significance of this reference point is much broader than it might seem - it was at this time that Gazprom's contracts were concluded with Moldova and Georgia, Ukraine and Azerbaijan, even if in fact this happened somewhat earlier.

The chain of consumers in Moldova, Romania, Bulgaria and further in the Balkans is gradually switching to European prices. High prices came to the Caucasus via the Erzerum-Tbilisi-Baku gas pipeline: it gave Caspian gas access to a rich market. Now foreign companies developing Caspian fields are counting on corresponding profits. Azerbaijan is becoming a potentially large source of gas for itself and its neighbors, but at EU prices minus delivery. Gazprom immediately responded to this, expressing its readiness to supply the missing gas at $235 per thousand cubic meters. Georgia also fell into this trap, which, presumably, would have happened even with better relations between our countries. It will be able to gradually abandon Russian gas, but it is unlikely that anyone will take on gas subsidies. Diversification of energy sources provides greater security only with reliable sources, but this does not bring low prices.

Gazprom's contracts with Belarus were concluded after many months of negotiations and several extremely nervous days. Neighbors received gas for $45 per thousand cubic meters and sold it to their consumers for about $60. Throughout 2006, at Gazprom conferences, they reproached Belarus for its preferences over Ukraine as politically motivated. One would think that these comments will now be replaced by a discussion of Gazprom’s readiness to equalize the conditions for gas sales to all consumers.

Gas imports to Belarus reached 21 billion cubic meters (and re-exports increased to approximately 3 billion) - this is more than Ukraine per capita. The difference is largely due to the fact that 50% of Ukrainian electricity is produced at nuclear power plants, while in Belarus gas dominates in electricity production. A price of $100 per thousand cubic meters is a significant increase that will require serious adaptation in the economy, although the Russian economy is moving in approximately the same direction. Compensation for the Minsk treasury will be the purchase of a 50% stake in Beltransgaz for $2.5 billion over four years. These payments, as well as the increase in transit payments ($1.45 per 100 km per thousand cubic meters), will become Gazprom’s permanent expenses, even if gas prices fall. For Gazprom, Beltransgaz at these negotiations is a chance to settle not only “near Belarus” with its Yamal-Europe pipeline, but also to create an operational base near the EU for future projects.

Fortunately for European gas consumers and Gazprom, the financial losses of the Belarusian side are relatively small compared to the lost revenues from Russian oil exports. And despite the oil “war,” one can hope that the era of gas conflicts is over. However, the consequences of the “special” political relations that formed in the post-Soviet space in the 1990s-2000s have not yet been brought to a commercial norm.

If we look at the relations of major world powers with those states to which they would like to provide significant financial assistance, then the main thing in this is clarity of what the essence of the relationship is and for what financial assistance is provided. This is how the United States operates the “most favored nation” regime in trade. This is how other countries promote trade relations through their Exim Banks. Finally, countries can issue grants - for example, the United States gave Georgia a $300 million grant from a special fund.

The problem with the oil export duty is that when it entered the Belarusian budget, it was not tied to any “bilateral” indicator. In fact, financial injections from Moscow to Minsk were determined by world market prices. This duty grew “on its own,” automatically increasing financial subsidies. This in itself is neither good nor bad, if that is what was intended. But let's imagine that prices fell and the export duty disappeared. This would mean an automatic reduction in subsidies to Belarus on literally the same scale that we see today. The current situation is precisely a model of relations based on the fact that world prices have fallen to such a level that the duty would be zero. Is Moscow right to apply this model in real life without any transition period?

It is in the medium-term interests of Belarus to have stable payments under contracts that do not depend on world market conditions. And a budget shock in a neighboring (friendly) state is hardly in Russia’s interests.

Leonid Grigoriev, President of the Institute of Energy and Finance