Gazprom's corporate headquarters in Moscow
Gazprom has announced plans to quadruple the price it charges Belarus for gas this winter, raising rates from $46 per thousand cubic meter (tcm) to $200/tcm. The move comes as a surprise to some Western analysts who view Gazprom's actions solely through the prism of politics, since Belarusian President Alexander Lukashenko is still viewed as a loyal ally of the Kremlin. But the move does not surprise energy analysts who have been closely following Gazprom's frequent statements about the need to modernize its pricing structure.
As Russia Blog reported this time last year, the very brief interruption of natural gas deliveries to Ukraine on New Year's 2006 was exacerbated by politics, but the decision was fundamentally driven by economics. Gazprom wanted to end the siphoning of natural gas from the pipelines it uses to export gas to Western Europe that cross Ukrainian territory. The fallout from the Orange Revolution gave Gazprom the political cover it needed from the Kremlin to act in a way that it knew would be unpopular in the West. But after all the hype about Russia flexing its muscles as an energy superpower, the end result was a compromise that pushed prices in Ukraine closer to European levels. And while Europeans were reminded of their growing dependency on Russian natural gas, the alternative sources for the Continent - the Greater Middle East and West Africa - aren't likely to be more stable suppliers than Russia anytime soon.
Russian President Vladimir Putin lights Russian Orthodox candles with Belarussian President Alexander Lukashenko while Kazahk President Nursultan Nazarbayev looks on
A brief glance at Gazprom's own charts showing how much gas it is legally obligated to sell at discounted rates implies that if the company wants to meet its ambitious export goals, it must start raising prices now. It is much easier for Russian politicians to charge foreigners higher prices (even Russian allies like Belarus and Armenia) than to accelerate the painful process of moving towards market rates for gas back home. Gazprom is expected to double wholesale gas prices inside Russia from the current $40/tcm to $90/tcm by 2010, but the limits on how quickly it can raise prices at home are determined by Russian law. Some analysts believe that any major price increases will be put off until after Russia's presidential election in 2008.
According to RIA Novosti, Belarus will receive $7 billion in subsidies this year from Russia in the form of cheap natural gas and duty free crude. Today Belarus pays only $46.67/tcm for Russian gas, while most European countries pay prices closer to $215-$230/tcm. After the price dispute between Moscow and Kiev last winter, the Ukrainian government agreed to pay Gazprom $130/tcm in 2007. President Lukashenko wants to negotiate a similar compromise for Belarus, but to do so he may have to sell off half of Belarus' prized state pipeline company, Beltransgaz.
In order to continue to receive subsidized gas for a few more years, Gazprom has told all of the former Soviet republics that they must sell stakes in their pipelines and other energy infrastructure to the Russian gas monopoly. The Georgian government has been the fiercest critic of this proposal, arguing that because Georgia is a conduit for relatively cheap natural gas from former Soviet Central Asia, it should receive lower prices. The Russians have countered by reducing gas deliveries to Georgia's neighbor Azerbaijan, so that the Azeris cannot resell their surplus to the Georgians. Both the Azeri and Georgian governments have said that they will continue to negotiate for lower prices while importing more gas from Iran to meet the shortfall this winter. Armenia has already agreed to sell its natural gas pipeline network to Gazprom in return for some reprieve, but it too will be importing more gas from Iran this winter.
To read more Russia Blog coverage of Gazprom, click on the links below, or just scroll down the index of articles in the Energy section:
Gazprom Expands U.S. PR and Investment Campaign
Can Russia Substitute More Coal for Natural Gas?
Gazprom is warning Belarus not to siphon gas from the Yamal-Europe export pipeline that crosses its territory on the way to Lithiuania, Poland and Germany if Gazprom cuts deliveries to the former Soviet republic on January 1.
Some Western commentators view Gazprom's demands for price increases as the latest example of Russia blackmailing its neighbors with energy. In response, Russia Profile's Dimitry Babich asks: why should Russia continue to subsidize Lukashenko's government with cheap gas?