06MOSCOW12963, RUSSIAN ENERGY: WINTER GAS, BELARUS, AND THE

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Reference ID Created Released Classification Origin
06MOSCOW12963 2006-12-18 12:00 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO7631
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #2963/01 3521200
ZNY CCCCC ZZH
O 181200Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5898
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 012963 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 12/14/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: WINTER GAS, BELARUS, AND THE 
CAUCASUS 
 
REF: MINSK 1244 
 
Classified By: Ambassador William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) Summary.  This year is no exception to the rule that 
Gazprom's annual gas tariff negotiations with its CIS 
customers are blunt instruments, and generally go down to the 
wire.  Deals have not yet been cut with Belarus, Azerbaijan, 
and Georgia.  Gazprom did manage to ink one with Ukraine, 
thus avoiding a repeat of last year's New Year's cutoff. 
Gazprom has threatened to increase tariffs for each country, 
but the greatest danger this winter may be a cutoff to 
Belarus.  Continued pursuit of alternatives where they are 
commercially viable remains a strong and always-smart energy 
policy for nations dealing with Gazprom, especially while 
Gazprom feels more heat at home over inadequate supplies and 
investment.  End Summary. 
. 
SUPPLY CONCERNS 
--------------- 
. 
2. (C) Gazprom, struggling with a now well-documented 
production problem of its own, is employing stop-gap measures 
in order to weather this winter's cold.  Shawn McCormick 
(protect), VP for government relations at TNK-BP, told us 
that Gazprom spread the word to its industrial customers 
about six months ago that, at temperatures colder than -15 
Celsius, the gas company would begin reducing supplies to 
this segment of the market.  As a result of this 
announcement, these companies began stocking up on fuel oil 
as an alternative to gas.  McCormick said that Gazprom did 
this to ensure it could meet its deliveries to the lucrative 
European market and avoid any further tarnishing of their 
reputation as a reliable supplier. 
. 
THE DEMAND SIDE -- BELARUS... 
----------------------------- 
. 
3. (C) Gazprom's negotiations with Belarus hinge on coming to 
agreement on the value of Beltransgaz (BTG), the Belarusian 
pipeline operator (ref A).  Gazprom indicated that they would 
charge USD 200/thousand cubic meters (tcm) unless Belarus 
turned over a 50 percent stake in BTG, the value of which 
would then be shaved off of the tariff.  Most contacts we 
have canvassed view a cutoff to Belarus as unlikely and, at 
worst, expect the two sides to agree to disagree and come up 
with an artful way of allowing themselves more time to reach 
some sort of agreement on BTG.  One variant we have heard 
would be for Russia and Belarus to extend the current gas 
price with the understanding that any subsequently-negotiated 
increase would be retroactive to the beginning of the year. 
 
 
4. (C) However, Vladimir Milov, former Russian Deputy 
Minister of Energy, warned that there is a real risk of a gas 
cutoff being repeated with Belarus (which had been cut off 
two years earlier for a brief period).  He agreed that such 
an outcome would have great reputational costs for Putin. 
However, he added that many senior energy policymakers and 
Gazprom officials do not put a premium on Russia's 
international standing and are driven by more parochial 
interests, in this case taking control of BTG.  For domestic 
political reasons, Milov predicted that Lukashenko will not 
be able to give in to Russian demands for BTG and, if the gas 
is cutoff, he will simply take transit volumes destined for 
Europe and divert them for domestic consumption.  Some 
investment analysts believe the recent ante-upping moves over 
the valuation of BTG by "independent" assessors is partly 
negotiation tactics but is also a serious stab at making the 
math and the politics work out to everyone's relative 
satisfaction. 
. 
...AZERBAIJAN AND GEORGIA... 
---------------------------- 
. 
5. (C) Gazprom's stance toward its Caucasus neighbors is 
markedly different than that toward Belarus.  Belarus holds 
some cards -- transit volumes to lucrative markets -- while 
Azerbaijan and Georgia do not.  As a result, most people we 
have spoken to believe Gazprom will not hesitate to raise 
prices and, if no agreement is reached, withhold volumes to 
the latter pair.  Milov noted that, if discussions between 
 
MOSCOW 00012963  002 OF 002 
 
 
Turkey, Azerbaijan, and Georgia end up ensuring that Georgia 
gets enough gas to make it through the winter, then Russia's 
decision is irrelevant.  In particular, he said President 
Aliyev's public comments about sending Azeri oil through BTC 
was an indication of Russia's waning influence on energy 
issues in the region.  He called Aliyev's handling of the 
situation "brilliant" in neutering Russia's ability to extend 
any gas-related pressure on either of the two Caucasus 
countries. 
. 
COMMENT 
------- 
. 
6. (C) Russian energy policymakers are increasingly fix
ated 
about dealing with the looming production crunch and ensuring 
that they fulfill Gazprom's contractual obligations to their 
European customers.  We get the sense that Russian 
policymakers are expending much more mental energy thinking 
about gas flows to and through Belarus than to the Caucasus, 
in spite of the still widespread hostility toward Georgia 
among senior officials.  Gazprom is playing a much longer 
game with Belarus than it is with its southern neighbors, who 
will rely much less (if at all) on Russia energy when Caspian 
gas volumes start flowing in earnest next year.  Russia still 
believes it can win the Belarusian game -- and continue 
dominating the European market -- but it is slowly dawning on 
them that Azerbaijan and Georgia have a better hand than in 
the past. 
RUSSELL

Wikileaks

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