Author: Vladimir Socor, Eurasia Daily Monitor

On May 18 in Minsk, Russia’s Gazprom and the Belarus government’s State Property Committee signed agreements to turn the Belarus state-owned gas pipeline company Beltransgaz into a Russia-Belarus joint company. Betransgaz handles both the transit of Russian gas to European Union countries and the internal distribution of Russian gas in Belarus.

Under the sale-and-purchase agreement, Gazprom shall acquire a 50% stake in Beltransgaz in four stages, beginning immediately and due to be completed by March 2010. Meanwhile, the Beltransgaz board of directors is to be replaced by July 2007 with a new board to include Gazprom’s representatives. The agreement rules out the possibility of Belarus issuing a “golden share” that would give Minsk a veto. At Moscow’s insistence, President Alexander Lukashenka concurrently signed a decree forfeiting that right on behalf of Belarus.

The sides agreed to assess the value of Beltransgaz at $5 billion. Gazprom shall pay $2.5 billion for the 50% stake in four installments of $625 million each: the first by June 1, 2007, then by February 1 of each year in 2008, 2009, and 2010. With each payment, Gazprom will be acquiring a 12.5% stake in Beltransgaz, completing the 50% takeover by March 1, 2010. For a small silver lining from Minsk’s standpoint, any disputed issues are to be resolved in Belarusian courts.

Further under the agreement, Beltransgaz shall add a commercial surcharge to its wholesale deliveries to gas consumers in Belarus (municipal utilities, industrial enterprises, and local distribution networks). Gazprom insisted on this surcharge in order to increase its profits from the joint company at the expense of Belarus consumers.

The May 18 agreement executes the terms of the December 31, 2006, protocol with Gazprom, which Belarus signed under the Kremlin’s duress. Moscow threatened to charge $140, then $200 per 1,000 cubic meters of Russian gas in 2007, which would have more than quadrupled at one stroke the then-existing “fraternal” price of $46.68 per 1,000 cubic meters. Belarus was forced to sign off a 50% stake in Beltransgaz as compensation for a gradual, instead of sudden, price hike on Russian gas. At each step of the price escalation and then de-escalation, Gazprom portrayed its price as “market-determined.”

That protocol stipulated the creation of a joint Russia-Belarus gas transport organization on the basis of Beltransgaz. It gave Belarus until June 1, 2007, to start handing over the 50% stake of Beltransgaz in four annual tranches.

Under the December 31, 2006 protocol, Belarus is paying $100 per 1,000 cubic meters of Russian gas in 2007, supposedly amounting to some 40% of the “average” price charged by Gazprom to its European customers. The protocol stipulates that Belarus shall pay 67% of the “European price” in 2008, 80% in 2009, 90% by 2010, and 100% by 2011. The actual price shall be adjusted annually according to a “formula” that would factor in the sale prices of Russian gas in Europe, overall market trends, and the price of the “oil products basket” at the moment of signing the annual delivery contracts. The “formula” seems vague enough to allow ample scope for price manipulation and political leverage.

Russia has contracted for transiting a huge 46.7 billion cubic meters of gas to European Union countries via Belarus in 2007. Of that amount, 30 billion are to flow through the Yamal-Europe pipeline, the Belarus stretch of which is Russian-owned. Another 15.7 billion cubic meters is to flow through the Beltransgaz transit pipeline, which now passes from Belarus into joint Belarus-Russian ownership. The annual transit volumes through the Yamal-Europe line are incrementally mounting as that line reaches its design capacity of 33 billion cubic meters. Conversely, the annual volumes handled by the Beltransgaz transit pipeline to Europe are gradually declining from the 20-billion-cubic-meter level of previous years.

Belarus receives a transit fee of only $1.45 per 1,000 cubic meters of Russian gas per 100 kilometers of pipeline in Belarus in 2007. While very low by European standards, it almost doubles the $0.75 transit fee that was in effect for some years (coupled with the deeply discounted price of Russian gas for Belarus) until the end of 2006. Meanwhile, the transit service for Russian gas through the Yamal-Europe pipeline apparently remains constant at a mere $0.46 per 1,000 cubic meters per 100 kilometers. Minsk wanted this fee slightly raised in order for the increment to accrue to Belarus.

Gazprom is delivering almost 22 billion cubic meters of gas for internal consumption in Belarus in 2007, amply covering the country’s requirements (as well as its inefficiency and waste of energy). The annual delivery volume has slightly steadily increased each year (it was some 21 billion cubic meters in 2006).

The economy of Belarus will not easily adjust to the price hikes. Gazprom’s sharing in Beltransgaz’s revenue may force the latter into deficits, setting the stage for further inroads by Gazprom. The European Union’s energy security has suffered a fresh setback with the passage of yet another transit avenue under Kremlin control.