VZCZCXRO8750
RR RUEHDA RUEHDF RUEHFL RUEHKW RUEHLA RUEHLN RUEHLZ RUEHROV RUEHSR
RUEHVK RUEHYG
DE RUEHSK #1549/01 3630749
ZNR UUUUU ZZH
R 290749Z DEC 05
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 3529
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHVEN/USMISSION USOSCE 0805
RUEHBS/USEU BRUSSELS
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 02 MINSK 001549 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON ETRD PGOV BO
SUBJECT: Russia Gives the Gift of Cheap Gas 
 
Refs: (A) 04 Minsk 0193, (B) Minsk 1448 
 
¶1. Summary: At a time when Gazprom is abrogating its supply 
contracts with other countries and raising gas prices for the 
recently democratic (Ukraine, Georgia), Belarus remains on the 
Gazprom gravy train for another year.  On December 27, Gazprom and 
Beltransgaz (Belarus' domestic gas monopoly) signed a supply 
contract for 2006.  Gazprom agreed to continue to supply Belarus 
with cut-rate gas, USD 46.68 per thousand cubic meters (tcm), and 
agreed to guarantee the delivery of 19.5 billion cubic meters 
(bcm), plus another 1.5 bcm as "technically" possible.  End 
summary. 
 
¶2. On December 27, after several months of negotiations, Gazprom 
and Beltransgaz signed a 2006 supply contract that retains 2005's 
bargain basement price of USD 46.68 per tcm.  This contract also 
increases gas deliveries to an expected 21 bcm in 2006 (19.5 bcm 
guaranteed, 1.5 bcm is technically possible), up from the 19.1 bcm 
guaranteed and 20.15 actually delivered for 2005.  Belarus had 
hoped for 21.5 bcm.  Gazprom and Beltransgaz also agreed to retain 
the same tariffs for transit across Belarus: USD 0.75/tcm per 100 
km in the Beltranzgas pipeline network, and USD 0.46/tcm per 100 km 
in the Gazprom-owned Yamal-Europa pipeline.  [Note: For purposes of 
establishing prices, both networks are considered to be 575 km 
long.] 
 
 
"No, that Really is Market Rate" 
-------------------------------- 
 
¶3. Despite USD 46.68/tcm being a far cry from the USD 230/tcm 
Gazprom is demanding from Ukraine, or even the USD 110/tcm Georgia 
is paying, Gazprom and GOB officials all insist Belarus is paying 
"market rate" for gas.  Gazprom's press release on the contract 
stated, "When determining the gas supply and transit price for 
Belarus over 2006, Gazprom has taken into account the following 
circumstances:" Belarus and Russia are creating a union state; 
Gazprom owns the Yamal-Europa pipeline; in 2006 Gazprom expects 
Belarus to grant Gazprom a long-term lease for the land under the 
pipeline; and Russia and Belarus resumed negotiations to privatize 
Beltransgaz, which would allow Gazprom to control a share of this 
pipeline network. 
 
¶4. On December 21, Gazprom's vice CEO Alexander Medvedev also 
listed the above factors to explain, "Gazprom's policy on Belarus 
is quite market-oriented; it is economically justified and is to 
the benefit of all our shareholders, both the state and private 
investors.  On December 26, President Lukashenko argued that USD 
46.68/tcm reflects market rates and is justified, since Belarus 
charges significantly less than Ukraine for transit, because 
Belarus will not join NATO, buys all its weapons from Russia, and 
is not charging rent for Russian bases in its country. 
 
 
The Official Quid Pro Quo 
------------------------- 
 
¶5. In return for dirt cheap gas, Belarus charges Russia less for 
transit.  From the Gazprom press release, it also appears the GOB 
has promised to give Gazprom a long-term lease on the land under 
the Yamal-Europa pipeline.  More significantly, once again the GOB 
has promised to sell part of Beltransgaz to Gazprom.  The GOB 
agreed to do so in 2002 and 2003, but in each case Gazprom accused 
the GOB of reneging (ref A).  Gazprom wanted to buy at least 50% of 
the company, while the GOB offered to sell at most 49%, and that at 
a price Gazprom claimed was highly inflated.  To block any deal 
with Gazprom, in 2004 the GOB sold 0.1% of Beltransgaz to the 
company's employees.  The twoQdes agreed to have an outside 
company evaluate Beltransgaz's true value, but could not agree on 
which Deloitte & Touche office to hire. 
 
¶6. According to press reports, on December 6 Gazprom CEO Alexey 
Miller and Belarusian Deputy Prime Minister Vladimir Semashko again 
discussed creating a Gazprom-Beltransgaz joint venture.  On 
December 19, the Russian and Belarusian Prime Ministers discussed 
the sale of Beltransgaz, and Russian PM Mikhail Fradkov told the 
press that medium- to long-term gas cooperation depended on solving 
transit issues.  On December 24, Deputy Gazprom CEO Medvedev said 
he expects a deal on privatizing Beltransgaz to be reached within 
two or three months.  He added, "The sooner we strike a deal on 
Beltransgaz, the easier it will be to plan prices for Belarus in 
the future.  The special price for Belarus is effective in 2006 
only."  This pressure may have been effective (or Belarus put on a 
show for Gazprom); starting in October Beltransgaz bought back the 
0.1% of itself that had been owned by employees.  The company is 
now fully state-owned.  Deputy PM Semashko told the press that 
Belarus could now sell 50% to Gazprom (ref B). 
 
 
 
MINSK 00001549  002 OF 002 
 
 
Comment: What's the Real Quid Pro Quo? 
-------------------------------------- 
 
¶7. After being burned twice by the GOB, it is doubtful Gazprom 
agreed to low gas prices simply on the renewed promise the GOB 
would finally sell a share of Beltransgaz.  Instead, the terms of 
this gas contract indicate that the GOR continues to use gas prices 
to leverage its foreign policy in the neighborhood.  Under the 
guise of demanding market rates from all buyers, Gazprom is raising 
rates for Ukraine and Georgia, the scene of two recent pro- 
democratic revolutions.  Belarus' gas negotiations were much more 
contentious in 2003 and 2004, to the point where Gazprom briefly 
turned off Belarus' gas.  Now that the neighborhood has changed, 
Belarus has escaped with no raising of gas prices.  It also seems 
likely President Putin has offered cheap gas to help support 
Lukashenko in the March presidential elections.  However, World 
Bank Country Manager for Belarus Vladimir Voronin told Emboffs he 
expects gas prices to rise sharply in 2007, with or without Russian 
WTO accession. 
 
 
PHLIPOT