A sneaky Russian Bear shutting off the gas to the European Union
Cartoon from the May 4, 2006 issue of The Economist

It is clear to the Russians that they can no longer afford to subsidize their neighbors with cheap natural gas while continuing to meet Russia's export obligations to the rest of the world. For months, the Russian state-owned gas monopoly Gazprom has telegraphed its resolve to make every former Soviet republic -- whether they are Russian allies, like Armenia, or less friendly states, like Georgia -- start paying higher prices. The price Belarus reluctantly agreed to on New Year's Eve, $105 per thousand cubic meters, is still just half of what Western Europeans pay. After experiencing a similar price hike last New Year, Ukraine's economy still grew at more than 6% in 2006.

Gazprom's critics can point to the fact that the Russians are raising rates on their neighbors while still subsidizing their own industries at home. However, Gazprom is restricted by Russian law from raising domestic gas rates above one quarter of the export price. Furthermore, Russia is hardly the only major energy producer in the world to subsidize its people with cheaper electricity and heat. Nonetheless, Gazprom is planning gradual price increases beginning next year with the goal of doubling domestic natural gas rates by 2010.

Arguing that Moscow's neighbors should avoid relying on Russia as an energy supplier at all costs often leads commentators to ignore economic reality. For example, one commentator recently wrote in Newsweek International that Azerbaijan can easily purchase gas from Iran instead of agreeing to Moscow's exorbitant price ($200 per thousand cubic meters - about what Gazprom customers in Germany and Poland pay).

Unfortunately, the author of the Newsweek piece forgot to mention that last month Iran had to suspend its already meager natural gas exports to Turkey. The Iranian Oil Ministry blamed a cold winter for an unexpected spike in domestic natural gas demand -- but everywhere else in the Northern Hemisphere, oil and gas prices are falling due to one of the warmest winters on record. Yet somehow, in spite of the increasingly evident decay of Iran's oil and gas infrastructure, the Islamic Republic is still viewed by some commentators as a more reliable supplier to the Caucuses republics than Russia.

In North America, the equivalent to this absurd position would be insisting that Mexico seek energy independence from the U.S. by relying instead on Hugo Chavez's Venezuela. Like Iran, Venezuela's oil production has declined in recent years due to political instability and neglect. Meanwhile, last summer Russia quietly surpassed Saudi Arabia to become the world's largest oil producer and is currently investing tens of billions into developing vast gas fields in the Arctic.

When it comes to Russian energy, why do so many American politicians and certain editorial boards in Washington engage in wishful thinking to support their position of "anybody but Moscow"? Could it be that the politics of Russian energy in the West are still tied to the mental baggage leftover from the Cold War?

Russia is accused in the U.S. and Great Britain of wanting to hang on to its former Soviet empire, even when the evidence suggests that Russians just want their neighbors to pay European market prices for gas. At any rate, the days of dirt cheap Russian gas for the former Soviet republics are over. To the extent that higher prices will lead to more conservation and energy efficiency across the former USSR, the West should welcome this development.

UPDATE - January 24, 2007: World Politics Watch has republished my article and today Russia Profile also has more details about the agreement reached between Moscow and Minsk.