The Russian President Demitry Medvedev has ordered Gazprom to begin cutting natural gas deliveries to its neighbour Belarus by 15 percent. The rationale behind this move was to force Belarus to pay outstanding debts claimed by Moscow amounting to $192 Million. Mr. Medvedev has instructed Gazprom to continue cutting gas deliveries by an additional 15 percent each day until the amount reaches 85 percent of Russian supplies to Belarus’ state-run economy or an amount equal to the outstanding debt. Gazprom is the largest gas producing company in the world, generating approximately 20 percent of global production and, by government mandate, is the exclusive exporter of Russian gas. Gazprom transports gas to Europe via two main pipelines – via Belarus and Ukraine. The Belarus pipeline transports approximately 20 percent of Russia’s gas exports to Europe; while the Ukrainian pipeline transports 80 percent of Russian gas exports to Europe. Europe relies on Russia for approximately 25 percent of its natural gas needs; consequently, any reduction or stoppage in the flow of gas is a concern to European gas consumers. Medvedev and Gazprom’s actions come at a contentious time in Russian and Belarus relations. It has been reported that Russia is losing patience with Belarussian President Alexander Lukashenko, once a loyal supporter of Russian policy, who is now pursuing partnerships with the West – recently agreeing to join the European Union’s Eastern Partnership. Moreover, Mr. Lukashenko has refused to join a Belarus-Kazakhstan-Russia customs union, demanding duty-free Russian oil as the price of further cooperation, and provided refuge to ousted Kyrgyzstan leader Kurmanbek Bakiyev allegedly against
Kremlin wishes. There is prior precedent for Russia’s recent actions. While pro-Western former Ukrainian President Viktor Yushchenko was in power, Russia and Ukraine had repeated gas disputes culminating in Russia increasing Ukraine’s energy prices to the same rates paid by its Western European customers. Oddly enough, since February when Mr. Yushchenko was replaced by Victor Yanukovich, a leader much more sympathetic to Moscow’s policies, Russia has made a series of new agreements with Kiev including the granting of a 30 percent discount on the price of gas in return for Russia’s continued use of naval bases on the Crimean peninsula. This most recent dispute once again raises questions as to Russia’s reliability as a key gas supplier to Europe. Although, Russia has gone out of its way to reassure European customers that supplies would not be affected, citing low consumption in the summer months and the ability to transport through Ukraine, European consumers are right to be concerned based on Russia’s past track-record as well as the potential for this dispute to escalate. Whether Russia is utilising gas exports as a political tool is not our concern, except for how these actions might affect gas prices for our clients. It is our view that this most recent Russian gas dispute will not have a long-lasting effect on European gas pricing unless it is allowed to continue until the end of summer or escalates into a significant stoppage of the flow of gas through Belarus. At present, we believe that it is in Russia’s own interest to downplay and quickly resolve this dispute and not allow it to materially impact its European customers – the very same customers it has been trying to repair relations with since the last Ukrainian gas dispute (January 2009) which resulted in 18 European counties reporting major falls or cut-offs of their gas supplies from Russia. We will be watching this situation carefully and reporting any further developments.