Jan. 15 (Bloomberg) -- Russian President Vladimir Putin will cut energy subsidies to Belarus this year as the Kremlin increases pressure on the regime of President Alexander Lukashenko, who the U.S. called Europe's last dictator.

The country will ``significantly'' reduce aid to Belarus, Putin said today. Recent agreements on gas and oil deliveries are ``an acceptable compromise for both sides,'' he said at a Cabinet meeting, in remarks broadcast by state television.

Belarus, sandwiched between Russia and the European Union, is in a loose political and economic alliance with Russia and Lukashenko has advocated merging the former Soviet state back under the control of Moscow. Relations hit a low last week after Russia shut off oil shipments to Belarus for three days.

``Russia has undermined Lukashenko but retained Belarus's dependence on Moscow,'' Chris Weafer, chief strategist at Alfa Bank in Moscow, said in an interview. ``Regime change is inevitable. It's just a question of when.''

Belarus and OAO Gazprom on Dec. 31 signed an agreement on gas prices, barely avoiding a cut-off to Europe that would have had a similar impact as the halted oil supply.

Russia blamed that on its western neighbor, saying Belarus was stealing crude from the Druzhba, or ``friendship'' pipeline, the country's main export link. The disruption to the route affected refineries across central Europe.

``The main result of talks was the transition to market relations with our Belarusian partners, mainly in the energy sector,'' Putin said today.

Growing Up

The total gain for the Belarusian economy this year will be $5.8 billion, or 41 percent of the country's budget, he said.

``That's a lot. But it's Russia's payment for a calm, soft, transition to market relations,'' Putin said. ``Let's look at this seriously like grown-ups, without a fuss or emotions.''

Lukashenko, in power since 1994 and described as ``Europe's last dictator'' by U.S. Secretary of State Condoleezza Rice, has maintained economic stability in the country of 10 million thanks to cheap Russian gas and oil.

He won 82.6 percent of the vote in a March 19 election, gaining a third term in a vote that U.S. and European observers said was neither free nor fair. Putin congratulated Lukashenko and said the result was an endorsement of his popularity.

Russia's policy of supporting Lukashenko has ``backfired,'' Russian Energy Minister Viktor Khristenko said on state television on Jan. 9, as talks on the oil duty appeared to stall.

``Lukashenko's days are numbered,'' said Vlad Sobell, a Russia specialist at the London-based Daiwa Institute of Research. ``He can't win an economic war with Russia.''

Politics, Not Money

Russia agreed on Jan. 12 to reduce a new export duty on oil to Belarus to $53 a ton, from $180. Belarus will in turn pay Russia 70 percent of the export duty it receives for refined products made from Russian crude that it sells abroad. That figure will rise to 80 percent in 2008 and 85 percent in 2009.

Under the Gazprom agreement reached on New Year's Eve, Belarus will incrementally pay more for Russian gas until 2011, when the price will approach European levels.

``It was less about money and more about politics,'' said Maciej Janiec, an independent energy analyst in Krakow, southern Poland. ``The Russian approach toward Belarus is changing.''

Neighbors of Belarus like Poland and Lithuania, which joined the EU in 2004, are pushing for a consolidated European approach to bringing the country out of its isolation, Janiec said.

``It's a preemptive move to prevent the EU from increasing its influence in Belarus,'' he said. ``The Russians are chess players. They're planning several moves in advance.''

Putin's decision to undermine the economic basis of Lukashenko's regime is laying the foundation for a new pro-Russian leadership in Minsk, Sobell said.

``It'll be a pro-Moscow regime, someone who's more pragmatic than Lukashenko,'' said Sobell at the Daiwa Institute. ``Russia's not interested in maintaining a dictatorial regime on its border. It wants a stable country.''

To contact the reporters on this story: Lucian Kim in Moscow at lkim3@bloomberg.net; Michael Heath in Moscow at mheath1@bloomberg.net

Last Updated: January 15, 2007 12:22 EST