Obscure Belarus looms large in European energy worries

By Tatiana Shebet' Jan 8, 2007, 17:29 GMT

Minsk - Belarusian President Aleksander Lukashenko is shunned at international gatherings, and banned from visiting most developed nations.

But just because the rich countries make you a pariah, doesn't mean you can't make them nervous.

A long-running and generally obscure energy pricing dispute between Belarus, by most standards Europe's last dictatorship, and the Kremlin broke out into the open on Monday.

Belarus and Russia accused each other of breaking treaties and negotiating in bad faith. Europe's main pipeline for Russian oil - the trans-Belarus Druzhba - was turned off.

Energy Ministers in Poland and Germany, the first two countries downstream from the empty Belarusian tap, were quick to claim the supply break was no big deal, that there are plenty of alternative sources of oil for Europe, and that Minsk and Moscow should just let bygones be bygones, and restore the flow.

Energy markets weren't impressed by those soothing words, the price of oil increasing by close to a dollar on most exchanges, within hours of news of the cut off. Druzhba carries roughly ten per cent of all oil consumed in Europe.

Some countries' dependence on Druzhba, especially in East Europe, exceeds 90 per cent. Germany receives 20 per cent. Belarusian dependence is total.

A top-level Belarusian delegation flew to Moscow on Monday evening, their mission: to iron out the oil pricing dispute that triggered the halt to Druzhba oil supplies to Europe. With so much money to lose, a quick agreement was likely, industry analysts said.

But already on Monday evening, Lukashenko had emerged as a clear victor in the dispute.

Moscow, as part of Russian President Vladimir Putin's long- standing policy of charging full price for energy supplies to former Soviet states, put into effect as of January 1 a 180-dollar export fee for every ton of oil sold to Belarus.

In friendlier past days, Moscow had not demanded the payment for oil bound for Minsk, as it had for oil en route to wealthy Europe.

That was then. The modern Russian position was, and remains: 'The Belarusians should pay full price, just like everyone else.'

The Belarusians argued a free-trade agreement between Moscow and Minsk meant Belarus should get a special rate, but the Russians - frequently suspecting the Belarusians of reselling duty free Russian oil in Europe at full price - stuck to their guns.

The hard Russian line on oil likely was strengthened by another conflict with Minsk. Ending a little more than a week ago in a near total Russian victory, a deal forced on Lukashenko's government doubled the price of natural gas sold to Belarus, and transferred control of Belarus' natural gas pipeline network to the Russian company Gazprom.

Lukashenko's energy plays in the wake of the gas defeat seem to have caught the Kremlin flat-footed. First, and without warning, Belarus as of the New Year imposed a 45 dollar 'surcharge' fee for every ton of Russian oil crossing Belarus, in excess of previously- agree-upon transit rates.

The Russians cried foul and violation of free trade agreements. A a week later, early on Monday morning, the Belarusians shut off the Druzhba oil line entirely, effectively holding one of Russian government's largest income streams hostage, and drawing to ignored little Belarus the undivided attention of energy ministers from the Adriatic to the Baltic.

Belarus' economy, due to Lukashenko's strong-arm rule and international efforts to punish him, is effectively isolated from Europe.

It is of course more dependant on trade with Russia, but - as Lukashenko predicted in a New Year's address to the nation - whatever anger the Kremlin will have towards Minsk will be muted, by Russia's need to keep the cash from energy sales to Europe flowing.

Ominously, in the same speech Lukashenko warned that Russian military installations in Belarus - including air defence and early warning - might also see a review in their land rental contracts.

'They want to charge us full price, fine,' Lukashenko said. 'Then we will charge them.'

'I have always said that our 'the strategic trump' of Belarus is our location,' he said. 'If we have to take advantage of it, we will.'