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RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHSK #0629/01 1651243
ZNR UUUUU ZZH
R 141243Z JUN 06 ZDK
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 4544
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 000629 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ECON PREL ENRG ETRD USTR BO
SUBJECT: Gas Negotiations Drag On, and On 
 
Ref: Minsk 479 
 
¶1. Summary: Gas price negotiations have continued behind closed 
doors between the GOB and Gazprom, with no deal apparently reached 
at the most recent session on June 1.  Russian media, quoting 
Gazprom officials, claim that Gazprom sent the GOB a contract 
listing USD 200 as the price for 2007, an increase of over 400%. 
Belarus has suggested a price of USD 51.80, and continues to resist 
privatizing its Beltransgaz pipeline network.  The GOB has 
suggested it could sell a 50% stake in Beltransgaz, but only in 
exchange for Gazprom assets that produce 10 to 12 billion cubic 
meters of gas a year.  Complicating things, in May the GOB started 
to reclassify Beltransgaz as a state-owned company (which it is de 
facto), which would prohibit any sale of shares.  Meanwhile, the 
GOB is trying to convert a greater share of its economy to using 
local fuels, especially firewood.  President Lukashenko has evaded 
Russian demands for controlling rights to Beltransgaz in the past, 
but given the unprecedented level of pressure from Russia, it 
remains to be seen whether Lukashenko will be successful this year. 
End summary. 
 
 
Gazprom Suggests Quadrupling the Price 
-------------------------------------- 
 
¶2. Gazprom and GOB officials have met several times to negotiate 
gas prices for 2007, most recently on June 1 in Moscow.  Neither 
side has said much publicly about the progress of those 
negotiations.  However, on June 9 Russian newspaper Kommersant 
reported that Gazprom deputy chairman Alexander Ryazanov told the 
paper that Gazprom recently sent the GOB a gas contract for 2007 
that listed a price of USD 200 per 1,000 cubic meters (tcm). 
Belarus currently pays USD 46.68/tcm.  Ryazanov reportedly added 
that once the contract has been sent, the price can only be changed 
by someone "higher than the corporate level."  Kommersant also 
reported, while not naming the source, that the June 1 talks, "were 
unproductive and added no small amount of new annoyances with Minsk 
for Moscow."  A source reportedly close to Gazprom's board told the 
paper that Belarus had been offered stabilization credits to offset 
the price increase, and a source in Russia's Finance Ministry said 
the GOR is working to solve the issue of payments to the Russian 
budget for petroleum products imported and re-exported by Belarus. 
[Note: Belarus has been levying export duties on this Russian 
petroleum, but not sharing any proceeds with Moscow.] 
 
 
Flies in the Negotiating Ointment 
--------------------------------- 
 
¶3. Belarusian independent press tried to confirm this Kommersant 
article, but Gazprom would neither confirm nor deny that such a 
contract had been sent.  Representatives of Belarus' Ministry of 
Energy and Beltransgaz both denied they had received such a 
contract or that Gazprom had suggested a gas price of USD 200/tcm. 
The Ministry of Energy reiterated that Belarus was ready to pay USD 
51.80/tcm in 2007.  Several GOB officials, including Lukashenko, 
have announced they are ready to pay any price for gas, as long as 
Russian domestic consumers pay the same.  The GOB insists Belarus 
deserves such preferential treatment as it is Russia's Union State 
partner. 
 
¶4. On May 12, the GOB confirmed to the press it had started the 
process of transforming Beltransgaz from a joint-stock company 
(which means interested parties can theoretically buy shares, 
although this is limited in practice) to a republican unitary 
company (100% state-owned).  One independent analyst told Econoff 
this is a strong sign the GOB is not ready to sell Beltransgaz. 
The same analyst also claimed that the GOB stopped work on the last 
compressor stations for Gazprom's Yamal-Europa pipeline.  Post 
cannot confirm if this is true.  A Beltransgaz spokesman announced 
June 9 that no date has been set for the next round of 
negotiations.  Despite such problems, on June 13 Gazprom deputy CEO 
Alexander Medvedev told the press he did not foresee any need for 
Gazprom to cut gas supplies to Belarus, as it did with Ukraine. 
 
 
Pipelines for Russian Assets? 
----------------------------- 
 
¶5. While Gazprom's main demand seems to remain privatization of a 
controlling stake in Belarus' state-owned Beltransgaz gas pipeline 
network, the GOB has been offering everything but giving over 
ownership.  In early May GOB officials mentioned they might 
consider selling a minority share of Beltransgaz in exchange for 
Russian oil and gas production assets.  On May 17, Belarusian 
Deputy Prime Minister (and main energy negotiator) Vladimir 
Semashko told the press the GOB would agree to a sale of 50% of 
Beltransgaz in exchange for ownership of Gazprom assets that 
produce 10 to 12 billion cubic meters of gas annually.  On June 9, 
Lukashenko told the press he would not sell Beltransgaz unless 
 
MINSK 00000629  002 OF 002 
 
 
Belarus received assets to develop hydrocarbon deposits in Russia 
(he did not specify oil or gas). 
 
¶6. The GOB also continues to suggest various joint projects with 
Gazprom, presumably to sweeten any gas deal.  On May 15, Belarus' 
Council of Ministers announced that Beltransgaz hoped to build an 
underground gas storage facility near Mozyr, as a joint project 
with Gazprom.  The GOB suggested using a salt mine to hold up to 
one billion cubic meters of gas.  At the same time the GOB also 
announced it had reserved land for a second Yamal-Europa pipeline, 
if Gazprom was interested. 
 
 
Belarus Preparing for the Worst 
------------------------------- 
 
¶7. Meanwhile, the GOB is working to increase use of domestic fuels. 
Lukashenko announced that local fuels should provide 25% of 
Belarus' energy needs by 2010, up from 11% now.  Belarus has small 
reserves of oil, as well as sizeable amounts of peat and wood.  At 
an energy conference in mid-May, the GOB announced its intention to 
increase the use of wood for heat and energy from 800,000 cubic 
meters in 2005 to three million tons by 2010.  To this end the GOB 
is starting to build a number of small wood-fired electrical 
generating stations across the country.  However, the Head of the 
Belarusian State Timber, Woodworking, Pulp and Paper Industries 
Concern, Vladimir Shulga, told the conference that wood is not an 
economic fuel as long as gas remains under USD 75/tcm. 
 
 
Comment 
------- 
 
¶8. Many observers in Belarus have commented that gas price 
negotiations are going nowhere, largely because Lukashenko refuses 
to compromise.  In past years he has been able to get away with 
such intransigence, as Russia seemingly did not want to cut-off its 
semi-loyal (or at least anti-western) ally.  Lukashenko's argument 
that Belarus deserves better treatment and cheaper gas because it 
is Russia's Union State partner rings hollow, especially since 
Lukashenko has been actively blocking development of the Union 
State for several years.  For the first time, this year Russia has 
started pressing Minsk hard on energy well before the current 
contract expires.  Whether the Russians are serious about this 
current effort or whether Lukashenko can once again escape with a 
last minute deal favorable to Belarus remains to be seen. 
 
KROL