Gazprom's Happy New Year

A Dec. 31 deal that more than doubles the price that Belarus will pay for gas is the latest notch in the Russian energy giant's belt

Belarus' last-minute agreement to pay Gazprom $100 for every 1,000 cubic meters in Russian gas supplies—more than double what the Belarusians paid before—marks the latest victory in Gazprom's year of tough negotiations with customers. If Belarus had not signed, the former Soviet Republic would have been cut off from its gas supply. In turn, Belarus had threatened to shut down the flow of gas through its territory from Russia to Western Europe.

The contract was signed just two minutes before the start of 2007, when Russian gas giant Gazprom was already getting ready for the worst-case scenario. Gazprom said the talks at the company's Moscow office on New Year's Eve resulted in the signing of a five-year gas supply and transit contract, offering Belarus a gradual switch to the market-based price for Russian gas. Until it signed the agreement, Belarus was getting the cheapest gas in Europe. By 2011, Belarus will be paying the full market price for Russian gas, as Russian domestic industrial consumers will do. As part of the deal, Belarus will sell a 50% stake in its gas pipeline business, Beltransgaz, for $2.5 billion to Gazprom.

For Gazprom, Belarus is one more notch in its belt. A year ago the Russian energy giant cut off gas supplies to Ukraine in a dispute that started when Kiev refused a demand for a fourfold price increase. Without a new contract with Ukraine, Gazprom cut supplies to the country on New Year's Day, with spillover effects for European consumers further down the supply line in the middle of one of the coldest winters recorded on the Continent.

Some Slack in the End

Russia also accused Ukraine of siphoning from an export pipeline gas that had been designated for Europe. The international furor that followed was deafening, yet Gazprom got the price hikes and sent a signal to the old Soviet republics that market prices would rule. Georgia, Moldova, and Azerbaijan also had to accept sharp price hikes in the gas they got from Gazprom.

The moves in Belarus are especially striking since Belarus' autocratic president Alexander Lukashenko had been very close to the Kremlin. Few expected Gazprom to get so tough with such a key ally. Yet Lukashenko's relations with Russia have cooled as plans to unite Russia and Belarus have failed to come off, and Moscow's annoyance with Lukashenko increased when he balked at Gazprom's demands for a price hike.

Gazprom, however, did cut Belarus some slack in the end. The Russian company agreed to a lower price hike in 2007 than it initially wanted. And Gazprom agreed to place a value of $5 billion on Beltransgaz, even though the Russians thought the Belarusian pipeline business was worth no more than $3.3 billion.

Despite the concessions, the Russians achieved their goals. It's been a great year for Gazprom's negotiators. They have wrung new, more lucrative contracts out of many customers. On another front, Gazprom got control of Shell Oil's Sakhalin II project. The get-tough stance is clearly paying off.

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