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Energy Wars: Russia’s Neighbors Get Even

A great write up on the recent gas dispute between Russia and Belarus, from TIME:

It is becoming a New Year’s tradition in Europe to wake up on January 1 with a big Russian headache. At the beginning of 2006 and 2009, Russia cut off energy supplies to Ukraine after a disagreement over natural gas prices, which subsequently caused fuel shortages in the European Union in the dead of winter. This January, all eyes are trained on Belarus, which has been having its own quarrel with Moscow over oil prices, threatening European energy supplies once again. But three weeks into the current standoff, there’s been a twist: Kazakhstan, another ex-Soviet republic, stepped in last week to offer Belarus its own oil. Now the Kremlin’s most reliable tool for controlling its neighbors — energy blackmail — is at risk of blowing up in its face.

The quarrel began typically enough. Belarus, like many ex-Soviet countries, has enjoyed subsidized oil and gas supplies from Russia for two decades, in part to ensure its loyalty after the collapse of the Soviet Union. It has even been allowed to buy Russian crude oil on the cheap, refine it at home and sell it on to Europe at a huge profit. But in the past three years, Belarussian President Alexander Lukahsenko has started to assert his independence in subtle ways. Following the 2008 Russia-Georgia war, Lukashenko declined to recognize the breakaway Georgian republics of South Ossetia and Abkhazia, despite pressure from Russia to do so. Lukashenko also joined the E.U.’s Eastern Partnership initiative, created in 2008 to strengthen ties between Europe and the ex-Soviet bloc, much to Moscow’s dismay. And last June, Belarus refused to attend a key security summit in Moscow after Russia slapped a ban on Belarussian dairy products. (See pictures of Russia celebrating Victory Day.)

Then late last year, the spat escalated when Russia decided that Belarus no longer deserved its energy subsidies. When the two countries’ existing oil contract expired on Dec. 31, Russia demanded additional payments of a whopping $2.5 billion, which amounts to about 5% of Belarus’ entire economy. The Russian government also hinted that in order to keep oil prices down, Belarus should give Moscow stakes in its energy infrastructure, namely the oil refineries it uses to process oil for re-sale to Europe. This would play into Russia’s larger aim of controlling the energy supply chain from the oil fields of Siberia to the gas stations of Western Europe.

But for weeks Belarus has refused to accept Russia’s conditions, putting relations between the countries on ice and threatening to leave swaths of Europe in the cold. Talks between the two sides eventually dissolved into an exchange of letters with competing demands. But despite the tough position Lukashenko staked out, analysts believed that Russia would get its way in the end — Belarus’ economy and security are still deeply dependent on Russia despite improved relations with the West. Lukashenko admitted as much last month when he said that severing ties with the Kremlin — as Ukrainian President Viktor Yushchenko has done — would bring about his “political death.” (See pictures of Vladimir Putin’s patriotic youth camp.)

Then, on Jan. 19, three weeks into the dispute, Kazakhstan stepped in with a game-changing offer. It said that if Russia refuses to provide oil to the Belarussian refineries, it would be happy to take Moscow’s place. The Kazakhs also said they would be willing to buy a stake in Belarus’ Naftan refinery, which Russia’s largest oil companies have coveted. “The demands of Belarussian refineries will be filled by Kazakh oil,” said Anatoly Smirnov, Kazakhstan’s ambassador to Belarus, adding that the two nations’ presidents had already discussed the idea and “no one has refused.”

In most parts of the world, this would seem like a completely normal arrangement for two countries to make. But this is Russia’s backyard. And Moscow, which has yet to react to the Kazakh offer, may not take too kindly to two of its former republics striking an energy deal behind its back. The offer demonstrates, however, that many ex-Soviet states might not care anymore if they anger their former benefactor. A sense of defiance has grown in the region since the Russia-Georgia war, which proved that Moscow would not stop at economic bullying in its efforts to maintain influence over its neighbors. (Read “Russia’s Gazprom Diplomacy: Turning Off Europe’s Heat.”)

“This [conflict] totally changed the defense paradigm. It became clear that having both true independence and national security was impossible in Russia’s sphere of influence,” says Anatoly Gritsenko who served as Ukraine’s Defense Minister from 2005 to 2007, when relations between Russia and Ukraine worsened considerably. One method of surviving in this environment, Gritsenko says, is to build closer security ties with other ex-Soviet states, as Georgia and Ukraine did after pro-Western leaders came to power in the two countries in 2004 and 2005, respectively.

If it does come to pass, a partnership between Belarus and Kazakhstan, two of Russia’s most loyal allies, could further weaken Russia’s influence in the region. But considering the dependence of both countries on trade with Russia, this still seems like a distant prospect, and some analysts say that Kazakhstan’s offer to Belarus is most likely a bluff. It would be costly and difficult for Kazakhstan to ship oil to Belarus, and Belarus could not afford to pay fair market prices anyway, says Denis Borisov, an analyst at Bank Moskvy, one of Russia’s largest banks. Kazakh companies could, however, undercut Russian bids for the Naftan refinery, he says, which would be a major blow to Russia’s energy strategy in Eastern Europe. (See pictures of the Russia vs. Georgia war.)

One thing is for certain — Russia is now watching both countries carefully. If Belarus and Kazakhstan go ahead with a deal, Moscow may need to find new ways to contain the rumblings of mutiny in its neighborhood.

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