A “Strange War”

Monday, 06 August 2007
By Vitali Silitski
The last stage of the Belarus-Russia gas conflict broke out on 1 August 2007, when the Russia’s gas monopoly Gazprom declared about its intention to cut gas supplies to Belarus by 45 percent. The conflict, which many analysts accepted as a sign of the imminent collapse of the Belarusian economy, did not last for long, though. In fact, the very talk about the recent stage of the gas conflict as a sign of collapse or even crisis was misplaced. Yet, the stubbornness with which the government of Belarus was refusing to pay back its debts also confirmed that the economic difficulties could not be ruled out in the future, and that the correction of the overall economic course by the official Minsk may be inevitable.
According to the agreement signed by prime minister of Belarus with Gazprom on 31 December 2006, Belarus would pay Gazprom 100 USD per 1000 qubic meters of gas in 2007 (as opposed to 260 USD – the price normally paid by the European consumers), and that the price for Belarus would gradually converge with the European one until 2011. In exchange for this willingness to phase in the transition to the world gas prices, the Belarusian side would sell Gazprom a 50 percent stake in its gas distribution and transportation company by 2010. Belarus received this spring the first installment of 625 million USD for the 12.5 percent of Beltransgaz shares to be transferred to Gazprom in 2007. At the same time, Gazprom allowed the Belarusian side to pay 55 percent of the price in the first half of 2007. Official Minsk promised to pay off this newly-accumulated debt of 456 million USD by 23 July 2007, but failed to do so. After the two week-long negotiations on the rescheduling of this debt between Belarus and Russia, Gazprom announced on 1 August 2007 its decision to cut gas deliveries to Belarus by 45 percent starting from 3 August 2007.
The new stage of the Belarus-Russia protracted gas conflict seemed to be developing according to a similar scenario that could have been seen back in February 2004 and in December 2006-January 2007. First, there was a strong anti-Kremlin and anti-Gazprom rhetoric of the Belarusian president, who claimed that Gazprom was going to privatize “not just Beltransgaz, but the entire Belarus” and once again promised that “Moscow would not put him on his knees” (Belarusian TV Channel 1 broadcast, 21.00 2 August, 2007). Second, the booming industry of forecasting the apocalypse of the Belarusian economy once again reached its full capacity. For example,  the Global Insight decreased the ‘sovereign rating’ of Belarus, considering the country to be at the edge of ‘possible collapse’. Similar predictions mushroomed in the Belarusian, Russian, and the Western press.  
But this stage of the gas conflict was far more different from previous confrontations in other, far more substantial, ways. First, while it is a commonplace inside Belarus (and outside it) to interpret gas conflicts as a sign of Gazprom’s and Kremlin’s encroachment on sovereignty of neighboring states, there was very little evidence that Gazprom had any other hidden agenda except for its straightforward demand to pay back the debt. Second, the ease with which the Belarusian authorities agreed to repay the outstanding debt was atypical for the Belarus-Russia relations.
In a broader sense, the very talk about the recent stage of the gas conflict as a sign of collapse or even crisis was misplaced. Indeed, Belarus finished the first half of 2007 with a gigantic budget surplus of some 800 million USD, or 5 percent of GDP.  With money received for the sale of the stake in Beltransgaz, Belarus had more than enough money to cover its obligations to Gazprom.  Last but not least, the gas sold by the Belarusian government agencies to private and corporate consumers was paid in the first half of 2006 in full (100.7 percent). Hence, not only the recent episode of the gas war between Belarus and Russia was not caused by financial difficulties on the Belarusian side, but it appears that the Belarusian economy in general did cope with the first stage of gas price hikes (it has to be remember, however, that the Belarusian consumers still pay for the gas about 30% of what is paid by private customers in Baltic countries). The ‘technical default,’ as the non-payment of the debt arrears by the Belarusian government was called in the press, was a political, rather than economic, phenomenon. 
Why, then, were Belarusian authorities trying to avoid paying off the debt they could easily cover (and which they promptly began paying off after 3 August 2007)? President Lukashenka himself explained his position by the attempt of his government to maintain the Belarusian hard currency reserves at the level that would ensure stability of the national currency. As BISS experts repeatedly noted, maintaining the stability of the Belarusian ruble is the government’s foremost policy objective, as the population’s confidence in the national currency is the cornerstone of the government’s income policy and the implicit social contract that exists between the population and the regime. Yet, the Belarusian banking system has enough liquidity (even foreign banks have provided loans to their Belarusian counterparts), and devaluation of the national currency does not appear to be a short-term threat (we stick to our forecast that the stability of the Belarusian ruble will be ensured at least until 2010).
Yet, while Belarus is fully capable of paying its debts as of now, the Belarusian government attempted to stock up hard currency to ensure economic and political stability in the next several years. The artificially created gas debt to Russia has to be connected, in our opinion, to the request of 1.5-2 billion USD loan that Belarus solicited from Russia since January 2007.  The rationale beyond the actions of the official Minsk can be the following: portrayal of indebtedness created by the first stage of gas price hikes could convince the government of Russia that Belarusthe intergovernmental loan could have been received on far more favorable conditions than any sort of private borrowing. Moreover, borrowing seems to be a more preferable tool of rising cash for the official Minsk than selling allowing Belarusian companies to be privatized. Without this debt, Belarusian authorities simply did not have a rationale to request such a big loan from Russia. was facing severe difficulties even at that stage, and that it had to borrow to cover its obligations. If this was successful,
Yet, Gazprom was well aware that the Belarusian side had money to pay its debt. Perhaps, the Belarusian authorities lingered on with the payment, hoping to wait until the beginning of the election campaign in Russia (which kicks off in September) so that any such move as reduction of gas supplies automatically turned into unwelcome for Kremlin political issue. With parliamentary and presidential elections in Russia going one after another, it could have been months before Gazprom would even have had a window of opportunity to raise the issue again. Also, it is not excluded that the election campaign could have been used by the official Minsk as a factor forcing Kremlin to agree to extend the loan. This theory neatly explains why Gazprom acted so swiftly and decisively in the conflict. Ironically, it appears that the conflict served Gazprom as well. As some Baltic countries are currently trying to block the construction of a Nordic gas pipeline over the bottom of the Baltic Sea, Gazprom could present another evidence to its European partners that the existing transit routes were not reliable.
Moreover, the Belarusian authorities obviously miscalculated the political will to pressure Belarus  that existed on the Russia’s side. President Lukashenka did try once again to derive political benefits from the conflict by escalating his anti-Kremlin rhetoric. Yet, there are certain limits to pursuing and extracting such propaganda benefits. The Belarusian public can grow tired of endless threats of economic calamity, and, far from being approving of Russia’s actions, may eventually question the ability of the regime to ensure stability and protect their well-being. (It should be remembered that while the public overall backed Lukashenka over the last “gas conflict” in December-January 2007, the public also grew increasingly pessimistic about the future of the economy following the brawl, and, according to some studies, Lukashenka’s own popularity somewhat decreased).  Furthermore, as the Belarusian authorities has to care not only about the public image at home, but also about credibility in the eyes of potential lenders and investors. The fact that they chose not to protract the current stage of the gas conflict and opted for a quick repayment of at least a part of the accumulated debt testifies that the use of the gas conflict as a propaganda exercise is probably reaching its limits.
Overall, the recent stage of the Belarus-Russia gas conflict showed that the Belarusian has yet to adjust to the new realities on the ‘Eastern Front:’ some of its actions  have been pursued as if the official Minsk still hopes that Moscow’s commitment to phase out energy subsidies for Belarus and “marketize” economic relations between two states could be reversed. At the same time, a stubborn attempt to extort a loan from Russia and postpone debt payments can be interpreted as a sign that the official Minsk does not take the current economic stability for granted, and, furthermore, is not entirely confident about whether the situation will be held under control in the future.