Publication: Eurasia Daily Monitor Volume: 2 Issue: 11

Belarusian President Alexander Lukashenka has accused Russia of failing to fulfill its agreement on prices for gas delivered from Russia to Belarus and has threatened to retaliate by amending the prices for the transit of Russian gas through Belarusian territory.

The dispute has once again raised tension between Belarus and Russia , after some six months of relative harmony. Last August at a meeting with Lukashenka in Sochi, Russian President Vladimir Putin emphasized that the two major companies involved — Russia’s Gazprom and Beltransgaz of Belarus — had eliminated various problems in the energy sector and were working out an agreement for 2005 (Russia Journal, August 23, 2004).

The agreement was elaborated in late December. Gazprom, which holds a monopoly over gas exports from Russia , agreed to supply Belarus with a minimum amount of 19.1 billion cubic meters of gas, with the amount rising possibly to 20.5 billion. The accepted price was $46.68 per thousand cubic meters (Interfax, December 22). One week later, the two countries formally signed the agreement, and Russia established electricity, oil, and coal deliveries to its western neighbor (Interfax, December 28).

The key problem concerns the addition of VAT, which is not included in the agreed price for 2005. According to Belarusian economist Yaroslav Romanchyk, the real price of the gas is thus $65, i.e., an increase of 18% over the level for 2004. Romanchyk added that 2005 is the first year in which Russia is effectively charging Belarus “foreign” prices for its resources, thus ending a period of virtual Russian subsidies to its partner in the Russia-Belarus Union (Narodnaya Volya, January 5). The presidential press service has assessed the real price at $72 (Interfax, January 11).

Lukashenka reacted angrily to the news, arguing that Russia had violated its agreements, and that the prices in Belarus should be identical to those in Russia . He stated that he might consider the possibility of raising tariffs for gas transit by 20%, and that he would respond in kind to these sorts of measures from Gazprom. He hinted that he might be forced to raise the extra funds needed by taxing the profits of companies such as Belenergo, Beltopaz, and Beltransgaz (Interfax, January 11).

What the Belarusian president is requesting, in effect, is an 18% reduction on the price of gas to compensate for the addition of VAT. An economic expert from NIISEPS, Valery Dashkevich, responded to Lukashenka’s outburst by noting that Belarus was not in a position to change the transit delivery rate, since it signed a contract agreeing to the current rate, which is to remain at the same level as 2004. Dashkevich also observed that Belarus continues to purchase gas at levels lower than the world average: Ukraine , for example, has agreed to pay $58 per thousand cubic meters for gas from Turkmenistan (Narodnaya Volya, January 13; EDM January 6). Even the Smolensk and Bryansk regions in western Russia are paying base prices for gas higher than those in Belarus ($48.50 compared to $46.68) (Charter 97, January 14).

Ultimately the burden for paying the higher prices for Russian gas is likely to fall on the Belarusian consumer, and it is this fact that has placed Lukashenka on the defensive. For some years now, Belarusian apartment dwellers have been heavily subsidized by the state, which in turn could negotiate cut-rate prices for gas and oil from Russia . Although Russia stopped supplies several times in past years for nonpayment, the system has worked to the benefit of Belarusian citizens. However, Romanchyk believes that the population could end up paying some 90% of the real costs for heating bills in 2005, as opposed to the government’s plan for 60% (Svobodnye Novosti Plus, January 12-19).

The Belarusians are paying the price for both the relative paucity of energy resources on their own soil and the failure to develop adequately a domestic energy industry. Further dependence on Russian resources is likely following decommission of the first unit of the Ignalina nuclear power station in Lithuania, an RBMK-1500 reactor, which supplies electricity to several regions of Belarus, and the projected closure of the second unit by 2009 (Baltic Times, January 6; EDM, January 11).

Initially, however, payment for the additional VAT on gas deliveries may be delayed due to collection problems and the need to rely on Belarusian tax agencies to acknowledge the entry of goods into Belarus . Russia will switch in 2005 to a system of imposing VAT according to the “country of destination” principle, and several observers posit that the new system will be very complicated and impose particular burdens on the Russian partner (Interfax, January 11).

For the Belarusian government, the latest dispute with Russia is a further sign that the Union agreement is not working to the benefit of Belarusians. Belarus ‘ reliance on Russia in the energy sphere has reached a critical level (including the scheduled repayment of debts over a prolonged period), and while Lukashenka may complain and threaten, he is not in a position to revise the existing prices. Indeed, he is most responsible for the one-dimensional economic policy that has tied his country to the energy monopolies of Russia .