06MOSCOW13174, RUSSIA ENERGY: DOWN TO THE WIRE ON BELARUS GAS

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Reference ID Created Released Classification Origin
06MOSCOW13174 2006-12-29 16:08 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO6755
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3174/01 3631608
ZNY CCCCC ZZH
O 291608Z DEC 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6187
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE IMMEDIATE
RUEHXD/MOSCOW POLITICAL COLLECTIVE IMMEDIATE
RHEBAAA/DEPT OF ENERGY WASHDC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 013174 
 
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: 12/27/2016 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA ENERGY: DOWN TO THE WIRE ON BELARUS GAS 
STANDOFF 
 
REF: MOSCOW 12963 
 
Classified By: AMB William J. Burns.  Reasons 1.4 (b/d). 
 
1. (C) Summary. Lukashenko's two-year saga to avoid higher 
gas prices and the sale of 50 percent of Beltransgaz (BTG - 
the Belarusian gas pipeline operator) appears to be coming to 
a close, and he is standing firm on both accounts.  Gazprom 
has dropped its insistence that BTG be part of the deal, and 
is saying that $105/tcm is its final offer.  Both Gazprom and 
its European customers say they are prepared for supply 
disruptions, but now that seems less likely.  The MFA claims 
"fierce" efforts for a "successful" negotiation are in play, 
with an eye to avoiding last year's New Year's gas cut off. 
This may explain Gazprom's significant concessions over the 
last 24 hours on both BTG and price.   Russia's energy tug of 
war with Belarus, first over oil export duties, and now over 
gas, appears part of Putin's increasingly tough stance 
towards Lukashenko, who is characterized by some Russians as 
"disloyal" and "too independent."  End Summary. 
 
BTG STAKE NO LONGER A FACTOR 
---------------------------- 
 
2. (SBU) December 29 marks a shift in the high-rhetoric 
atmosphere since talks broke down between Russia and Belarus 
on December 26.  This week has seen Belarus threatening to 
cut off Gazprom supplies to Europe, and Gazprom CEO Alexey 
Miller responding that Gazprom was under no obligation to 
supply gas to Belarus if an agreement is not reached by New 
Year's.  Gazprom now appears to have significantly backed 
down.  Gazprom spokesman Sergey Kupriyanov said the firm was 
no longer insisting on acquiring a stake in BTG, and was 
willing to accept a price of $105/tcm for 2007 deliveries. 
This is more than double the 2006 rate of $46.7/tcm, but 
significantly below the rates being charged to Georgia 
($235/tcm) and Moldova ($170/tcm) and Ukraine ($130/tcm). 
 
3. (C) For weeks, the two sides have stumbled over the terms 
of financing a possible 50 percent stake for Gazprom in BTG. 
Belarus insisted Gazprom pay for the $2.5 billion BTG stake 
up front in cash; Gazprom was looking to arrange longer term 
financing, essentially reducing the price of gas to Belarus 
over four years by roughly the same $2.5 billion (at a rate 
of roughly $80/tcm for at least 2007).  Belarus claims 
Gazprom reneged on a previous deal to sell gas to Belarus in 
2007 for $75/tcm and pay the full $2.5 billion up front in 
cash for the stake in BTG, and pushed for any discussion of 
joint management of the pipeline to be put off until the 
first quarter of 2007. Gazprom's Director for Foreign 
Relations Ivan Zolotov told us December 28 that without BTG 
as part of the deal, Gazprom wanted to raise the 2007 gas 
price to Belarus to $230/tcm. 
 
4. (C) In a separate December 28 conversation, former Deputy 
Energy Minister Vladimir Milov characterized the commercial 
negotiations as a struggle over control of BTG.  Lukashenko 
has avoided concrete discussions about Gazprom's purchase of 
a 50 percent in BTG for over two years.  Yushchenko's success 
last year in taking Gazprom's bid for a stake in Ukraine's 
pipeline off the table may have emboldened Lukashenko's 
steadfast reluctance to sell a stake in BTG to Gazprom. The 
current negotiations are another attempt by Lukashenko to 
delay a decision on BTG until next spring when more favorable 
terms might be negotiated. 
 
NOT YET A DONE DEAL 
------------------- 
 
5. (SBU) Should the negotiations still come to a showdown 
over the next two days, it is pretty clear how a cutoff would 
manifest itself.  BTG is one of two trunk lines, 
Gazprom-owned Yamal-Europe is the other, through which 
Gazprom sends gas to Europe via Belarus.  Approximately 44 
bcm of Russian gas to Europe transit Belarus (by comparison 
30 bcm transits through the Yamal-Europe pipeline and 14 bcm 
through BTG).  Belarus buys 20 bcm annually, and this is 
delivered solely through the BTG.  For technical reasons, 
Gazprom cannot completely shutdown the BTG, but could reduce 
the pressure through the pipeline to a rough equivalent of 14 
bcm -- or the amount needed for European deliveries. If it 
wanted, Belarus could take this 14 bcm for itself, leaving 
 
MOSCOW 00013174  002 OF 003 
 
 
European customers short.  Belarus could also disrupt gas 
supplies to Europe through the Yamal-Europe line by shutting 
down three of the five compression stations that the two 
lines share.  Belarus has stockpiled fuel oil to replace 
Russian gas supplies for power generation, which could meet 
the country's needs for as long as two months, according to 
Milov.  On the Russian side, Stanislav Belikovskiy from the &#x0
00A;Institute of National Strategy told us that Russia would not 
be able store unsold Belarus gas for long, since it has only 
17 days of storage capacity, which is almost completely full. 
 
6. (C) According to Zolotov, Gazprom began preparing its 
downstream customers for the possibility of a supply 
disruption as early as July.  Storage facilities in Germany 
and Latvia could offset supply interruptions, according to 
our German and Latvian Embassy contacts.  A German Embassy 
official told us that they had reserves for 70 days.  The 
Polish Oil and Gas Company claims that it is ready as well, 
having filled its storage capacity.  Poland receives 35% of 
its gas through Yamal.  Belikovskiy told us that Russia 
cannot afford another gas crisis. 
 
BELARUS POLICY AT A CROSSROADS 
------------------------------ 
 
7. (C)  The energy tug-of-war with Belarus this year is seen 
by many as part and parcel of a broader cooling in relations 
with Lukashenko.  The Kremlin-friendly director of the Europe 
Institute, Sergey Karaganov, who has advocated Russia,s 
embrace of an alternative to Lukashenko, told us that he was 
hopeful that Moscow,s policy toward Belarus would change. 
The Russian bottomline remains the same, he emphasized, as it 
seeks a Belarusian leader who is "dependent on and loyal to" 
Moscow (and, in return, receives subsidized oil and gas). 
The absence of chemistry between Putin and Lukashenko fuels a 
tougher line toward Belarus; however, Russia,s policy is 
complicated by the absence of an attractive alternative to 
Lukashenko.  Milenkevich, Karaganov argued, lacks national 
appeal.  The GOR, he noted, has good contacts within the 
opposition and diaspora communities, adding that most 
Belarusian opposition political material is published inside 
Russia in neighboring Smolensk. 
 
8. (C)  Karaganov claimed the US had complicated the 
Kremlin,s efforts to disengage from Lukashenko, noting that 
Russia was damned if it did or didn,t pressure Lukashenko to 
change.  The US decision to raise the hunger strike by 
Belarusian opposition leader Kozulin at the UN Security 
Council angered the Russian leadership, he added, and fed 
into a growing consensus that the US was intent on scoring 
press points against Russia,s reemergence as a world leader. 
 In Karaganov's view, Belarus had two choices: to remain with 
Russia, or join the West. 
 
GOR SEEKING COMPROMISE 
---------------------- 
 
9. (C)  Russia is making "fierce" efforts for successful 
negotiations with Lukashenko to avoid a deja-vu New Year's 
Eve gas cutoff according to government officials.  MFA,s 
Viktor Sorokin, Director of the Second CIS Department said 
although Gazprom,s conditions should be "comfortable" to 
Belarus, Moscow will push for a compromise to escape an 
escalation into a cutoff.  This official view was seconded by 
Moscow Belarus watchers.  Andrey Grozin, CIS Institute, told 
us that the change in Russia,s overall foreign policies 
necessitates a different energy policy towards Belarus -- 
closer to market-based conditions and pricing.  He did not 
envision a confrontation as it happened with Ukraine last 
year.  Like MFA officials, Grozin, predicted a last-minute 
compromise. 
 
COMMENT 
------- 
 
10. (C) With Gazprom's latest offer of $105/tcm, and 
agreement to take discussions about BTG off the table (at 
least for now) it appears that Gazprom has stepped back from 
its original game plan.  Lukashenko may have called it right; 
digging in his heals on BTG, and betting that the GOR would 
pressure Gazprom to back off its high price demands has paid 
off.  A gas cutoff now seems increasingly unlikely, but from 
 
MOSCOW 00013174  003 OF 003 
 
 
our Moscow perspective it appears that Lukashenko could still 
provoke a last-minute confrontation.  If a showdown comes, 
the most likely scenario would be for Gazprom to reduce gas 
flows on January 1, and for Belarus to respond by 
interrupting the transit of gas through the Yamal-Europe 
pipeline. 
BURNS

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