The Energy Dynamic on the Borders of the EU Belarusian Russian Relations

1. The Energy Dynamic on the Borders of the EU Belarusian Russian Relations Ministry for Foreign Affairs of Finland 11th October 2006 Aleksanteri Institute Eurasia Energy Groupwww.helsinki.fi/aleksanteri/energy/

2. General Overview • Belarus is a challenge for EU as well as for Russia • This challenge is comprised of symbiotic political, economic, and military aspects; • We should avoid simplistic dichotomies: democratic/dictatorship; market/planned economy; EU / Union State; • We want to find new European approaches to the Belarus issue; • Now it is time for creating conditions for forthcoming changes in Belarus; and • The European Union should be in a position to be an active player when changes in Belarus occurs.

3. The Pathology of Lukashenka regime • Lukashenka is popular because of his model of transition; • Lukashenka is neither a communist, nor a puppet of Moscow; • Lukashenka utilises the Soviet legacy and incorporates nationalist rhetoric; • Lukashenka’s transition model has many economic deficits but it has provided the solution to many social problems; and • The Union State is to a large extent cheap talk of integration rather than a real political process.

4. An Exit Strategy for Lukashenka? • Lukashenka has avoided exit strategies before by extending his presidential term • Previously identified exit strategies for Lukashenka: • President of the Union State under the Yeltsin administration (failed) • President of the Union State under the Putin administration (increasingly unlikely) • President of the Union State after Putin in 2008 (highly unlikely)

5. Is time running out for Lukashenka? • Deadlines for Lukashenka: • Completion of the NEGP in 2010; and • When his presidential term ends in 2012. • By 2010, the EU should be in the position to diplomatically assist in creating the conditions conducive to an exit strategy for Lukashenka.

6. The Energy Aspect: Roots of the Gas War • Personalities: Yeltsin, Putin and Lukashenka; • Politics: Sovereignty & Unity; • Economics: Diversified Ownership of Soviet Industrial Core; • Finance: Weak Institutions, Barter Transactions, & Debt Service; and • CIS Member State Relations & Changing International Conditions.

7. The Energy Aspect: Overall Relations • Energy Dependence (84% imports 98% NG - 75% Oil RF) • Continuing Indebtedness to Gazprom (158m 01.2006 to 64.1mUSD as of 07.2006); • Interruptions in Gazprom service (40% reduction in 2000); • Lack of Asset Swap Agreement (BelTransGaz); • Stable Alternative Transit Country (Northern Lights & Yamal Europe Gas, & Northern Druzhba Oil Pipeline); • No documented siphoning or theft (Gazprom 720m USD Loss in Ukraine 1999); and • Low Domestic Level Gas Price (46.68USDmcm 2004) for Belarusian Consumers (10m).

8. The Energy Aspect: BelTransGaz • Cheap Gas & Asset Swap (April 2002); • Swap of BelTransGaz giving Gazprom 50% Ownership (BelTopGaz’s 6000 km of Domestic Pipeline Network & Northern Lights Gas Pipeline); • Russian Domestic Rates for Belarusian Consumers to 2007; • Agreement coincided with Union State Negotiations (Terms favourable to Russia & Putin); • Lukashenka reacts (BelTransGaz is not privatised); • Gazprom retaliates; does not fulfil contract 10.2bcm/18.5bcm; and • Crisis averted; BelTransGaz swap to go ahead; gas prices raised to 40USD/mcm in 2002.

9. The Energy Aspect: Outcomes • Signalling game tied to Union Treaty between the Kremlin & Minsk; • BelTransGaz asset swap cancelled / To be privatised; price tag now at 5bUSD (Lukashenka 29.09.06); • No Union State while Putin is President of RF (Lukashenka 29.09.06); • Prospect of increased gas prices for Belarusian domestic consumers (47USDtcm 2004 to 200USDtcm in 2007); and • Situation threatens optimal transit of gas to Europe through the Yamal Europe & Northern Lights Pipelines.

10. Cost of gas supply to EU 15 (USD per tcm) in 2004 Source: Ferdinand, Tochitskaya & Giucci (2004): ”Belarus as a Transit Country”. IPM Research Center, p. 3.

11. Transit fees, the competitive advantage of Belarus • Transit fees for Russian natural gas exports have been one fifth to one third lower via Belarus than through Ukraine • Transit fees: • Northern Lights 0.75$/1000m³/100km • Yamal Europe 0.46$/1000m³/100km • Lukashenka has threatened to raise transit fees for NG, if Gazprom raises the Belarus’ domestic gas prices

12. Diversification of the Russian NG export routes • Ukraine’s share of transit of the Russian natural gas exports to area outside the former Soviet Union (to Europe). • Before 1999 approximately 93-95% • 73% in 2005 (Yamal Europe & Bluestream (To Turkey)) • 66% after 2010 (NEGP) • Natural gas export routes/pipelines via Belarus have played an important role in Russia’s/Gazprom’s attempts to reduce the transit monopoly of Ukraine & diversify export routes.

13. Yamal Europe (Yamal I) gas pipeline • Construction started 1994; • Inaugurated in September 1999; • The route runs from Western Siberia through Belarus and Poland to Germany; • 575 km in Belarus territory; • Construction estimated to be completed at the end of the 2006; • Pipeline owned by Gazprom, but serviced by BelTransGaz; • Land on which the pipeline is built belongs to Belarusian state; • Land is leased to Gazprom on long term contract; and • More compression stations are needed to enable the pipeline to operate at full capacity

14. From Yamal Europe to NEGP • Yamal Europe increased Gazprom gas exports through Belarus from 7% to 15%; • Yamal Europe increased the role of Belarus as a transit country, but didn’t end disputes with all CIS transit states; • Interruptions in deliveries to Europe through Yamal Europe pipeline in early 2004 and other frictions between Belarus and Poland gave Gazprom the incentive to began planning for a new alternative gas pipeline that would by-pass transit countries (NEGP); • Earlier there existed plans to build the Yamal II pipeline that would have doubled Gazprom’s NG export capacity via Belarus; but • That project has so far been put on hold by the priority given to the NEGP.

15. Gazprom NG export pipelines through Belarus Figures from: Heinrich (2006): ”Gazprom – A Reliable Partner for Europe’s Energy Supply?”, Russian Analytical Digest, 1/2006, p. 4.

16. The role of the NEGP for Belarus gas transit • With the NEGP operational after 2010 Belarusian routes share of Gazprom’s total export capacity drops from: • 22.2% (in 2005) • 19.8% (after 2010) • The NEGP’s capacity (28 billion m³) is the same as the Yamal Europe pipeline • Option to build another pipeline which would double the NEGP NG transport capacity exists • Both NEGP and Yamal-Europe transport natural gas to Germany (Western Europe) • In case of soured relations between RF and Belarus the NEGP could completely substitute the Yamal-Europe • In such a scenario the remaining Belarus export pipeline (Northern Lights) would account for only 10.5% of the Gazprom’s total exports

17. Oil export pipelines • Belarus has also been a major transit country for Russian oil exports; • The Northern Druzhba oil export pipeline goes through Belarus to Poland and Germany, with a branch line to Ventspils oil export terminal in Latvia; • In 2003 approximately 50% of Russian oil exports to Europe were transported via Belarus; and • Due to a leak in the line, Northern Druzhba is at this time under repairs & out of commission for the foreseeable future.

18. EU’s Security of Energy Supplies • One of the main principles of EU energy policy alongside markets and competition, and sustainability • Springs up from the EU’s relative and worsening energy poverty and amplified throughout 2006 after the often misrepresented Russian-Ukrainian ‘gas war’ • Key issues: • New energy crisis management rules and storage systems • Solidarity in energy crises • Energy savings and efficiency • Concerns of the existing energy mix • Diversification of supplies only a recent but a major concern, and can in practice pursued only partially

19. Belarus in EU’s Security of Supplies Puzzle (I) • New energy crisis management rules and storage systems: mostly an internal EU measure not overcoming dependency on external supplies and transit countries; Belarus not needed • Solidarity in energy crises: mostly an internal EU measure not overcoming dependency on external supplies and transit countries; at best, some assurances from Belarus for not illegally siphoning gas intended for EU market from its transit pipelines in any possible Russia—Belarus ‘gas war’ a la the Russia-Ukraine case in 2005—6 • Energy savings and efficiency: mostly an internal EU measure in the absence of its effective export to the ‘east’; reduced Belarus consumption through extensive EU technical aid and info campaigns would relieve some Russian resources for export to the EU area

20. Belarus in EU’s Security of Supplies Puzzle (II) • Concerns of the existing energy mix: Gas likely to remain key part of EU consumption due to the expensively built infrastructure, long-term supply agreements and sustainability principle; Belarus pipelines one part of the strongly interdependent Russia—EU gas grid • Diversification of supplies: Ventspils scenario possible with the NEGP by 2010 and other new pipelines; Belarus can potentially play a role as a transit state for diversifying EU supplies outside Russia, although no such projects are currently planned

21. Conclusion • In the short to mid-term, Belarus likely to remain one part in the EU security of supplies puzzle • Non-cooperative Belarus can damage energy security of individual EU countries disproportionately in the short-term • Cooperative Belarus can best be ensured by not repeating the same mistakes made in the early 1990s with Russia; • This means a Europe of principles and values must be complemented by a ‘wider Europe’ of geography, pipelines, joint interests, movement of people, information gateway. • Belarus should be provided the prospect of a step-by-step integration with thus understood ‘wider Europe’