TCS Daily

Gas Pains

By Evgeny Morozov - April 10, 2006 12:00 AM

As of April 1, Moldova and Armenia were to start paying $110—twice the 2005 price—for a thousand cubic meters of gas bought from Gazprom, the Russian energy behemoth. This was part of Gazprom's campaign of fighting "price socialism," as Aleksei Miller, the company's CEO, termed the subsidized sale of Russian gas to countries of the former Soviet bloc.

What really happened in Moldova and Armenia before, on, and after April 1 proved that Gazprom's intentions are not grounded in the realms of free-market thinking, but aim to support the new reconfiguration of Russian foreign policy, in which the Russian energy base serves as a powerful way to restore the country's position in the world. This reconfiguration surfaced as early as 1999, when President Vladimir Putin wrote that "Russia's emergence from its deep crisis and restoration of its former power" is preconditioned on the state's use of the country's natural resources. Now, seven years later, the crisis is over; it is restoration time.

This explains why a few days before the April 1 deadline, Moldova agreed to continue buying Russian gas at the 2005 price for yet another quarter in exchange for creating more joint projects with Gazprom. Gazprom already has a majority of 50 percent plus one in Moldovagaz, the joint Russian-Moldovan venture responsible for gas shipments of Russian gas to the country. Gazprom has also been trying to increase its share to 75 percent, and might as well succeed even by the end of the year.

Armenia chose a different path and accepted the higher price. However, its government is in talks with Moscow to alleviate the burden by entering another "property in exchange for debt" agreement, which would swap the energy debt for a transfer of state-owned property to Russia (Armenia already used this scheme once; thus, five of its companies, predominantly in the science and energy sectors, are now controlled by Russia).

This time, the "exchange" might include the under-construction Iran-Armenia pipeline and/or the fifth block of the Hrazdan Power Plant. Without the exchange, the Armenians will have a hard time coping with the burden of increased gas prices (beginning April 10, Armenia increases its gas tariff by 52.2 percent for residents, by 85.2 percent for companies, which would have a dire effect on the economy).

Lithuania, which as a member of the EU might be tempted to feel safer than Armenia or Moldova, faced another Russian take-over of its Mazeikiu Oil Complex, part of the Yukos heritage in the country. The bidding process started by the Lithuanian government to sell the Mazeikiu to foreign investors was hampered on March 29, when the Moscow Arbitration Court gave a ruling in favor of the state-owned Rosneft to claim Mazeikiu as part of its campaign to settle the Yukos "tax arrears" to the state. The situation has been so grave that the Lithuanian government is considering nationalizing Mazeikiu based on a threat to national security clause.

Pro-Russia Belarus, which already struck a deal with Moscow over of gas supplies until 2020, hoped that the same agreement could have been made about the prices. However, the cunning Kremlin caught Belarusian President Alexander Lukashenko when he was most vulnerable: amidst an intensifying protest campaign (with the biggest protest planed for April 26, the 20th anniversary of the Chernobyl disaster) and reportedly in bad health (Lukashenko suddenly disappeared for two weeks and rescheduled his inauguration for no apparent reason).

Now, Gazprom wants what it had been trying to get for almost a decade: either form a joint-venture or obtain full ownership of the Beltransgaz pipeline, one of the two pipelines that carry the Russian gas to Europe through Belarus (the second pipeline is Yamal-Europe, and it is fully owned by Gazprom, with Belarus only leasing the land on which it is built). With the North European Gas Pipeline looming on the horizon, Lukashenko has little bargaining leverage (this pipeline might make the Beltransgaz route even less relevant). The most likely outcome in his gas war is that Belarus gives up the Beltransgaz pipeline, and Russia tries to recapture what it has lost in Ukraine through the murky deal with RosUkrEnergo.

The growing bonhomie along the Beijing-Moscow axis is also worth noting. Among the 22 contracts that the 800-member Putin's team had signed in Beijing in late March, the most important ones had to deal with the creation of two natural gas pipelines (each about 1,800 miles long) from Russia to China. This would place Russia at the top of China's energy suppliers.

What impact can it have on Europe? In the words of Sergei V. Kupriyanov, a Gazprom spokesman, "Gazprom will fulfill all its current contracts and obligations to Europe. However, the future increases in gas supplies to Europe -- in response to its growing demand -- will be subject to arbitrage between China and European countries."

It appears that Moscow has a grand strategy of pitting Western and Eastern Europe and Asia all against each other. Judging by the recent developments in Moldova, Armenia, Lithuania, Belarus, and China, it might be more disruptive than many in Brussels, Warsaw, or Beijing are prepared to realize.

The author is a columnist for the Russian newspaper Akzia.


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