VZCZCXRO3569
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHSK #0479/01 1240552
ZNR UUUUU ZZH
R 040552Z MAY 06
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 4342
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 02 MINSK 000479 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ECON PREL ENRG ETRD USTR BO
SUBJECT: The Gas Dance Begins 
 
Ref: Minsk 381 
 
¶1. Summary: Belarus and Gazprom have entered into negotiations of 
sorts on the price of gas for 2007.  Gazprom announced that Minsk 
can expect to pay USD 145/tcm (up from USD 466.68/tcm), while the 
GOB responded it could agree to an 11 percent price increase (to 
USD 51.81).  Other than consecutive public statements, there do not 
appear to be any actual negotiations underway.  According to a GOB 
press release, Lukashenko and Putin talked around the gas price 
issue at their April 28 meeting in St. Petersburg.  The GOB also 
continues to refuse to sell half of Beltransgaz to Gazprom, but 
Lukashenko reportedly told Putin Minsk could trade some Beltransgaz 
assets for access to Russian oil and gas fields.  End summary. 
 
¶2. On April 28, the same day Presidents Lukashenko and Putin met in 
St. Petersburg, Gazprom announced that the GOB had failed to 
provide a counter-offer to Gazprom's earlier announcement that it 
would raise the price Belarus pays for gas in 2007, and suggested 
Belarus therefore pay USD 145/thousand cubic meters (tcm).  [Note: 
Belarus currently pays USD 46.68/tcm.  In March Gazprom announced 
it expected the GOB to provide a counter-offer by the end of April 
(reftel).]  On May 3, Belarusian Deputy Prime Minister Vladimir 
Semashko told Interfax that Belarus would agree to a rise in gas 
prices for 2007 of between 10 and 15 percent, although he suggested 
11 percent.  Semashko claimed Belarus deserved such a low rate 
increase because Gazprom currently has a profit margin of 25 
percent, which Belarusian industries cannot match, and because 
Minsk has never cut-off Gazprom's transit to Europe. 
 
 
Lukashenko and Putin Talk Around the Issue 
------------------------------------------ 
 
¶3. Lukashenko's press service announced that Lukashenko and Putin 
did not discuss gas pricing on April 28, and instead expect their 
governments and companies to reach a pricing agreement by October. 
However, the press service announced that, "the Russian government 
has no intention of blackmailing Belarus and understands that our 
country is Russia's only true ally and partner."  An anonymous 
Russian source told RIA Novosti during the meeting that Belarus 
would have more luck paying for gas if it would adopt a common 
currency with Russia. 
 
¶4. Lukashenko's press service claimed that the two leaders 
discussed the fate of GOB-owned gas pipeline company Beltransgaz, 
at Lukashenko's insistence.  A press release specifically claimed 
Lukashenko did not offer to sell half of Beltransgaz, but that he 
suggested exchanging some Beltransgaz assets for Belarusian access 
to Russian oil and gas fields.  Lukashenko's spokesman claimed, 
"The Belarusian side received understanding and approval" for this 
idea. 
 
 
Negotiations Likely to be Tough 
------------------------------- 
 
¶5. Over the past month various GOB officials have publicly 
explained that Minsk does not expect gas prices to rise greatly, 
and that Belarus does not plan on selling half of Beltransgaz to 
Gazprom.  On March 31, Beltransgaz director Dmitry Kazakov told the 
press Belarus should pay less for Russian gas because Belarus is 
Russia's Union State partner.  On April 14, Lukashenko told 
reporters that Russia cannot sharply raise gas prices for Belarus 
because under the Union State agreement Belarusian and Russian 
companies should operate under identical conditions, meaning 
identical energy costs.  That same day Deputy Prime Minister Andrey 
Kobyakov told the press Belarus added a provision demanding equal 
conditions for companies in all member states to the draft 
agreement on a single oil and gas market for the Eurasian Economic 
Community.  Energy Minister Aleksandr Ageev meanwhile explicitly 
stated Belarus was not offering to create a Beltransgaz joint 
venture with Gazprom. 
 
 
Serious Repercussions for the Economy 
------------------------------------- 
 
¶6. On April 19, local World Bank analyst Marina Bakanova told a 
conference that Belarus would lose 13 percent of GDP if it is 
forced to pay market rate (USD 235/tcm) for gas.  A price rise to 
USD 110/tcm would cost Belarus four percent of GDP, and the country 
would lose 0.5 percent of GDP if prices rise only to Russian 
domestic levels for 2007.  She also estimated that the GOB could 
not compensate by raising gas transit rates as the most this would 
earn would be one percent of GDP.  The National Bank of Belarus 
(NBB) announced April 13 that any rise in gas prices above 10 
percent would result in a drop in currency proceeds and affect the 
exchange rate.  The NBB further stated that if gas were to climb to 
USD 95/tcm, the economy would suffer greatly, currency proceeds 
would drop, gold and foreign currency reserves would dwindle and 
 
MINSK 00000479  002 OF 002 
 
 
there would be problems with the exchange rate. 
 
 
Comment 
------- 
 
¶7. Minsk continues to challenge Moscow and Gazprom on both rising 
gas prices and the control of Beltransgaz.  Surprisingly, Belarus 
has succeeded in outmaneuvering Russia on these issues for the past 
several years.  This year, rather than waiting until mid-December 
to start negotiations, Gazprom is giving itself plenty of time to 
force what it wants (higher prices, Beltransgaz) out of Minsk. 
While it is unlikely that Belarus would be forced to pay USD 
145/tcm, a price that would cripple the Belarusian economy and 
possibly destroy Lukashenko's popularity, this time around Moscow 
seems determined to raise prices.  Whatever price increase the two 
sides agree to, the GOB will be less able to afford the social 
projects that keep the populace happy, to keep subsidizing bankrupt 
state enterprises, and Belarus' recent rates of high economic 
growth will decline. 
 
 
PHLIPOT