Georgia and Belarus face long winter

By bne IntelliNews November 15, 2006

Nicholas Watson in Prague -

Ukraine will be spared a cut-off in its gas supplies this year after reaching a deal with Gazprom; Georgia and perhaps also Belarus face a colder winter.

Winter is coming and it's time for Gazprom to turn the screws on its neighbours. At least that's how it seems as Gazprom repeated threats that it made to Ukraine last year (and carried out) to cut off its gas supplies unless it accepted a doubling in prices, this time to Georgia and Belarus.

Happily for last year's victim Ukraine, newly re-elected Prime Minister Viktor Yanukovych has managed to secure gas supplies through to 2007 at a fixed price of $130 per thousand cubic meters (cm) in October.

However, Georgia is unlikely to fare as well. On Tuesday, Georgian President Mikhail Saakashvili told reporters during a visit to the European Parliament in Strasbourg that Gazprom's intention to immediately double the price that Georgia pays for its gas to ”market prices” of around $230 per 1,000 cm in 2007 was unacceptable.

"Let me make it clear, we are not willing to pay $230," Saakashvili was quoted by newswires as saying.

Russia was widely condemned for cutting off gas supplies to Ukraine at the start of this year in what was widely seen as political sour grapes after the Kremlin's blatant attempts to push Ukrainian voters into supporting the establishment candidate (now PM Yanukovych) not only failed, but ended in a popular uprising. This year the same criticism will doubtless be raised as Moscow's relations with Tbilisi have recently fallen to an all-time low.

President Saakashvili's tough talk will cut little ice with Gazprom, which only turned Ukraine's gas back on once it had agreed to almost double the price it pays to $95 per 1,000 cm in what turned out to be a temporary deal.

Ominously for Georgia, on November 9 Gazprom's Deputy CEO Alexander Medvedev said: "If there is no contract [with Georgia], there will be no supplies."

Saakashvili is making many of the same points that Kyiv highlighted in protest to Gazprom's strong arming last year, pointing out that some CIS states pay just $56 per 1,000 cm. Certainly Russia despises the pro-Western administration of Saakashvili, a mood that worsened after a spy scandal in September caused Russia to slap an embargo on Georgian goods and deport several hundred Georgians from Russian. But while the intended hike to Western rates of around $230 per 1,000 cm may be extreme, no states of the former Soviet bloc are being spared these price rises by Gazprom.

"Despite the clear political component to the price increase, there is an underlying commercial basis for Gazprom's decision to raise prices to Georgia, considering that the gas giant has decided to end price subsidies for the gas supplies it provides to former Soviet countries," says Andrew Neff, an analyst with the consultancy Global Insight.

No one spared

Also facing Western prices are the Baltic states. Analysts reckon Estonia, Latvia and Lithuania will probably pay in the region of $180-$200 per 1,000 cm for Russian gas imports in 2007 – prices that will rise again to Western European levels of over $230 in 2008.

As Global Insight's Neff points out, at least these states can afford it; cash-strapped Belarus, however, isn't in such a fortunate position.

Belarus currently pays that ultra-low price of $56 per 1,000 cubic meter, but Gazprom wants to raise this to around $200 per 1,000 cm. Russia is well aware that Belarus can't afford this sort of hike and is using the increase as a lever to convince Minsk to cede control of its national gas transport company Beltransgaz in return for lower prices

The Russian daily Kommersant quoted a source involved in the gas talks as saying that Gazprom would be willing to offer Belarus $1.5bn-$2bn for a 100% of Beltransgaz this week. However, Belarussian President Alexander Lukashenko retorted on Monday that Moscow should pay market prices if it wants to take over part of Belarus' gas transport system, arguing Beltransgaz could be worth as much as $17bn.

Smug and snug

Still, Gazprom has in certain cases softened its stance somewhat since last winter; like Ukraine, Armenia looks to have spared itself a winter devoid of Russian gas.

Armenia essentially locked in a low price of $110 per 1,000 cm for its gas by doing what Gazprom wants Belarus to do, namely give up control of its pipelines. As part of this, on November 8 the Times newspaper reported that Gazprom took control of a gas pipeline being built between Iran and Armenia by increasing its stake in the joint venture, called ArmRosGaz, to 58% from 45% for $119m.

Azerbaijan also looks secure, as its days as a gas importer will be numbered when the offshore Shah Deniz field starts pumping out its gas at the end of this year, beginning of next.

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