No more cheap gas for Russia’s neighbors

Gazprom, Russia`s major natural gas producer and exporter, is starting another campaign to drive up prices for the gas it supplies to the Baltic states and the Commonwealth of Independent States (CIS).

For the third year running the gas giant has been trying to go over to market prices for its neighbors. And every time the talks have run into difficulties.

Russia`s desire to practice pragmatism in its dealings with former Soviet republics has set its partners on edge. But with present world energy prices Russia cannot afford to sell its gas cheap. Even to its best friends.

In a few days Russia is to commence talks over gas prices with Latvia and Estonia, and in October with Belarus and Ukraine.

Lithuanian distributors have already received offers to buy Gazprom gas at $280 per 1,000 cubic meters (the current price is $190). The same price is going to apply to the other Baltic countries. Belarus is most likely to pay $125-150 for Russian gas in 2008 (it is paying $100 now).

The price for Ukraine is expected to be raised to $180 from the present $130.

Currently, Russia`s closest neighbors, former Soviet republics, are paying about 40-70% of the average European price. And these prices are set by the market, not by the gas monopoly.

Prices for European consumers are set by the so-called "European formula", which depends entirely on world oil prices, and are pegged to Rotterdam bourse oil quotes.

The price varies from country to country, depending on transportation costs and agreements with local wholesalers and retailers. Long-term supply contracts with European countries are usually concluded at $280-320 per 1,000 cubic meters.

It is important to bear in mind that Gazprom is not the only supplier to the European market, and other companies charge about the same prices.

Russian gas on the post-Soviet space is heavily underpriced, but three years ago practically none of Russia`s neighbors paid even those low rates. In the early 2000s, when European consumers were paying $200-250 per 1,000 cubic meters, prices for the Baltic and CIS countries swung between $55 and $100.

For a long time Gazprom exported gas to CIS countries at a loss, with Russia subsidizing neighboring economies for 13 years after the break-up of the Soviet Union.

At the end of 2005, Russia decided to gradually introduce market prices. There were a number of reasons for such a sweeping change. The Russian authorities found that a policy of supporting neighbors with cheap energy was bringing no dividends.

They did not rally into a viable alliance, nor did they turn into Russia`s friends. And then, it was argued, why export gas close to home at one-third the market price, when Europe was willing to pay two to three times more.

The changeover to market prices for CIS countries was not smooth. In most cases, Russia`s partners gave up cheap gas grudgingly.

A doubling of the price for Ukraine early in 2006 (from $55 to $100 per 1,000 cubic meters) involved disruptions in supplies to Europe. The agreement with Belarus was signed in the last minutes of 2006.

Ukraine and Belarus are major consumers of Russian gas, with 56 billion and 21 billion cubic meters respectively. Talks with other countries were less difficult. In negotiations with the Baltic countries (Lithuania, Latvia and Estonia), as European Union members, Russia agreed to a three-year transition period starting from 2005.

Today these countries are paying $190-200 per 1,000 cubic meters. Other buyers have accepted the new prices, too, although unwillingly. Armenia is buying Russian gas at $110, Moldova at $170, and Georgia at $235.

As soon as Russia began increasing energy prices for its closest neighbors, it was accused of using economic pressure against them. And this was at a time when the European countries had been paying higher rates for years. Does it mean Russia has been dominating Western Europe, too?

Gas prices in Europe and the rest of the world are firmly pegged to world oil prices, and cheap gas is no longer a prospect. Nor is Russia going to subsidize its neighbors any more.

"Competition" rather than "commonwealth" is now the operative word to describe the situation on the post-Soviet space. Former Soviet republics quickly forgot about the Soviet Union. They will have to do the same about cheap Russian gas, too.

OPINION & ANALYSIS: By Mikhail Khmelev

RIA Novosti economic commentator

This article was monitored by the Action Ukraine Monitoring Service for the Action Ukraine Report (AUR), Morgan Williams, SigmaBleyzer, Editor.