Poland, Belarus & Ukraine Report: June 7, 2006

POSSIBLE GAS-PRICE HIKE COULD END WARM TIES. For more than a decade, Russia's relations with Alyaksandr Lukashenka's Belarus have been a fairly predictable affair. Moscow provided cheap energy, and Minsk returned the favor with absolute political loyalty.

There were even moves to solidify the partnership by forming a union state -- a largely symbolic political marriage with elements of economic and military cooperation. But threats by Russia's state-controlled Gazprom to charge market prices for natural gas may upset the balance of the relationship -- and put at risk the generous social-welfare state that has kept Lukashenka popular despite his autocratic tendencies.

Barely two weeks had passed since authoritarian President Alyaksandr Lukashenka rode to reelection March 19 on promises to maintain economic stability and a social safety net in Belarus.

Then Gazprom made a worrying announcement. After years of generous gas subsidies, it was time for Belarus to face market realities and triple or even quadruple the price it pays for natural gas.

It's a threat Gazprom has made repeatedly with its CIS neighbors -- but with a difference.

When the gas giant earlier this year raised prices for Georgia, Ukraine, and Moldova, it was widely seen as punishment for those countries' pro-Western leanings.

Belarus, by contrast, has long been a loyal, pliant ally -- and has routinely been rewarded with cheap gas.

So what happened?

Fyodor Lukyanov, editor in chief of the Moscow-based journal "Russia in Global Affairs," says that Moscow is a little tired of subsidizing Belarus.

"They are letting Lukashenka know that Russia will not continue providing subsidies to support his social model forever. This situation is going to end," he says.

Lukyanov and other observers say Moscow has a dual motivation in threatening to raise gas prices for Belarus from the current $47 per 1,000 cubic meters to as much as $200 per unit.

One is Gazprom's long-term ambition to gain monopoly control over pipelines to Western Europe's lucrative energy markets. The other is an admission by the increasingly confident Kremlin that perhaps the time has come to alter its relations with politically awkward allies like Minsk.

Together, Gazprom and the Kremlin appear to be forcing Lukashenka to choose between two equally unpalatable options: either sell a 50-percent stake in Beltranshaz, the state-owned operator of Belarus's gas pipelines, or pay European market rates for natural gas.

Valery Karbalevich, an analyst with the independent Minsk-based Strategy Center for Political Analysis, says Lukashenka is reluctant to give up significant state property like Beltranshaz. On the other hand, a Gazprom hike will mean higher energy prices for Belarusian families used to paying an average of just $30 a month for utilities.

Either way, Belarus's economy will suffer -- as will Lukashenka's political standing.

"If this economic situation with the gas is not resolved, Lukashenka will be in a very difficult position. All of his social stability is based on the fact that Russia subsidizes him economically," Lukyanov says. "If this stops, the internal situation in Belarus will begin to change. And then we can expect a serious game to begin about who can be the real opposition to him."

Belarusian Energy Minister Alyaksandr Azyarets and Beltranshaz chief Dzmitry Kazakou are scheduled to arrive in Moscow on June 1 for negotiations. Minsk has threatened to raise Gazprom's transit fees to transport gas across Belarus. But there appears to be little more it can do to counter the Kremlin pressure.

Yevgeny Volk, director of the Heritage Foundation's Moscow office, says Russia's "economic stranglehold" strategy in Belarus is similar to earlier efforts in Ukraine. But while Ukrainian President Viktor Yushchenko could turn to the West for diplomatic support, Lukashenka's isolationist policies have left him with no powerful outside allies.

Lukashenka and other top officials are currently subject to European and U.S. travel bans following allegations of election violations in the March presidential ballot.

The sanctions come at a difficult time for Moscow, which is seeking to position itself as a global powerhouse during its G-8 and Council of Europe chairmanships this year. Volk says Lukashenka has proved such a pariah, in fact, that Russian President Vladimir Putin may be hoping to distance himself from a potentially embarrassing ally -- or even replace him altogether.

"I believe that Lukashenka irritates the Kremlin more and more because of his policies of suppressing liberties, suppressing opposition," Volk says. "They really cast a shadow on Moscow, which cannot boast respect for human rights either. But the respect for Lukashenka makes Putin and his regime more and more vulnerable to Western criticism." (Brian Whitmore)

U.S. NAVY STOPOVER SPARKS ANTI-NATO PROTESTS. Ukrainian opposition lawmakers have demanded the dismissal of the country's foreign and defense ministers, blaming them for allowing a U.S. naval ship to enter the port of Feodosiya in Crimea without the required parliamentary authorization.

Feodosiya residents have blockaded the port, protesting what they see as an unwelcome NATO intrusion into Ukrainian territory.

The U.S. cargo ship "Advantage" anchored in Feodosiya on May 27, bringing what Ukrainian Defense Minister Anatoliy Hrytsenko described as U.S. "technical aid." Seamen offloaded construction materials to build barracks for Ukrainian sailors at a training range near the town of Staryy Krym, not far from Feodosiya.

Two days later, Feodosiya residents, mobilized by local chapters of the pro-Russia Party of Regions, the Natalya Vitrenko Bloc, as well as the Russian Community of Crimea, began to picket the port. Displaying anti-NATO slogans written in Russian, they are continuing to block the U.S. cargo from getting to its destination. The BBC reported that several hundred people were present at the demonstration.

The situation has angered many Ukrainians. According to the constitution, the deployment of foreign troops on Ukrainian territory must be approved by the parliament for each individual case.

The Party of Regions, led by former Prime Minister Viktor Yanukovych, has said in a statement that the disembarking of the U.S. naval ship in Feodosiya was an example of "brutal contempt" for the constitution manifested by the government. A group of opposition deputies has drafted a resolution to dismiss the Ukrainian defense and foreign ministers over the Feodosiya incident.

But Foreign Minister Borys Tarasyuk on May 31 denied that the government breached the law: "The authors of this political provocation claim that there has been a violation of the law about foreign military units crossing into Ukrainian territory. But there are no such units."

The government is planning to hold six separate military exercises in Ukraine in 2006 with the participation of foreign troops, including the multinational Sea Breeze 2006 exercise with a sizable NATO contingent. However, an authorization of these exercises by the Ukrainian parliament is still pending. In February, the previous Verkhovna Rada rejected a presidential bill on allowing foreign troops to take part in the maneuvers planned for 2006.

Tarasyuk assured journalists on May 31 that the government will obtain permission from parliament.

"The government will do everything necessary to ensure that the parliament, when it resumes its work, considers a bill allowing foreign troops into the country for taking part in military exercises," Tarasyuk said.

The newly elected Verkhovna Rada will resume its work on June 7, when the three allies in the 2004 Orange Revolution -- the Yuliya Tymoshenko Bloc, Our Ukraine, and the Socialist Party -- are expected to come up with a coalition accord to run a new government.

A potential parliamentary debate over the Feodosiya incident will most likely complicate the formation of a ruling coalition. It could set additional hurdles to approving the planned multinational military exercise in 2006, and exacerbate political divisions within the new legislature.

There are commentators in Ukraine who clearly see a "Russian hand" behind what is taking place in Feodosiya. Historian Mykhaylo Kyrsenko told RFE/RL's Ukrainian Service earlier this week that people in Feodosiya have been lured into anti-NATO protests by pro-Russian political forces to further Russian interests in Ukraine.

"Those who reject or block this [U.S.] aid are opposing Ukraine's interests and serving another country. Which country? It is not difficult to guess, once you see in what language they write their posters with," Kyrsenko said. "Therefore, I would make a distinction between these hapless, deceived people and the organizers of this provocation."

Foreign Minister Tarasyuk suggested that the anti-NATO demonstration in Feodosiya may be a cover for problems connected with the deployment of a Russian naval force in another port in Crimea, Sevastopol.

"I have one piece of advice for the initiators of this provocation -- they should turn their attention to the disgrace of the free use of land plots and buildings by units of the Russian Black Sea Fleet in violation of Ukrainian law and bilateral agreements," Tarasyuk said.

In a broader perspective, the Feodosiya protest may impair Ukraine's chances for a significant advance this year on its path toward NATO membership.

Some officials in Kyiv, including Foreign Minister Tarasyuk, hope that, at the NATO summit in Riga in November, Ukraine will be offered a Membership Action Plan. Action plans usually precede an official invitation to join the alliance. The outburst of anti-NATO sentiments in Feodosiya will hardly make NATO members more supportive of this advancement idea.

Sociological surveys in recent years show that Ukraine's official aspirations to join NATO are firmly supported by some 15-20 percent of Ukrainians and firmly opposed by some 55-60 percent of them.

There seems to be an informal consensus at present between the administration of President Viktor Yushchenko and the opposition that Ukraine's potential NATO entry should be approved in a nationwide referendum. But opinions differ on when such a plebiscite should be held. The Russia-leaning opposition forces would like to stage it as soon as possible, when Ukrainians are more likely to say "no" than "yes." Yushchenko says the referendum should be held in "due course" but has not specified a date.

Moscow, which officially does not object to Ukraine's NATO aspirations, would hardly remain unmoved if Kyiv was actually accepted by the alliance. Russian Ambassador to Ukraine Viktor Chernomyrdin was quite explicit about this on May 30.

"When a neighboring country becomes a member of the North-Atlantic military bloc, then I'm sorry -- then this strategic partnership [with Russia] should be viewed from a different angle and [it should be reviewed] whether this strategic partnership relationship should continue to exist at all," Chernomyrdin said.

Making Ukrainians like NATO rather than fear it seems to be only a part of the tricky job Yushchenko has to do in order to fulfill his ambitions of Euro-Atlantic integration. A no less tricky task will be to persuade his compatriots that NATO membership for their country does not necessarily mean a disastrous break with Russia. (Jan Maksymiuk)

GAS-PRICE INCREASE COULD CAUSE SEVERE PROBLEMS. Ukraine's energy problems seem to be never ending. Now, less than half a year after Gazprom briefly cut off gas supplies to Ukraine, the Russian gas monopoly is threatening to raise the price again.

On May 22, Aleksandr Ryazanov, Gazprom's deputy CEO, told the "Komersant Ukrayiny" daily that on July 1 the price of gas to Ukraine is to be increased from $95 per 1,000 cubic meters to $120-$130.

The current price for a "mixed basket" of Russian and Central Asian gas was agreed upon in January during the course of tense negotiations that ended in the cut off.

If Gazprom follows through on its threat, the impact on the Ukrainian economy could be huge.

The economy is already in trouble. A recent European Bank for Reconstruction and Development (EBRD) projection said that Ukraine's GDP growth rate could halve from 2.4 percent in 2005 to 1.2 percent in 2006. According to the report, the likely cause is the higher prices Ukraine is already paying to import gas. Add to that the worsening disarray in the country's state-owned energy sector, which is sliding into greater debt.

If Gazprom manages to get its way and increase the price of gas, this might mean an additional bill of $625 million-$875 million from July-December.

On May 31, the Ukrainian government announced that beginning on July 1, domestic consumers will pay $82.80 for 1,000 cubic meters of gas, a 50 percent increase. Raising it again in the near future might prove difficult.

In the first six months of 2006, the increased cost of energy has seen consumer prices rising at an annualized rate of 19 percent. A further increase in the price of gas is likely to exacerbate inflation.

A severe economic downturn could bring down a pro-Yushchenko government and force the president to appoint a government from the pro-Russia Party of Regions.

Ukraine has few, if any, options to avoid the price increase or to retaliate. The transit fee for Russian gas going through Ukrainian pipelines was set for 10 years in the January agreement and is unlikely to be raised before then.

Increasing the rent for the Russian Black Sea fleet based in Sevastopol is unlikely, largely due to Yushchenko's reluctance to anger the Kremlin.

Some energy conservation efforts have only begun being implemented, but will not produce significant savings for another five or 10 years.

One option could be Ukraine handing over control of its pipeline system and underground storage system to Russia in return for cheaper gas. That, however, is highly unlikely to happen as Yushchenko has often stated that he will not give these up.

Why has Russia chosen to make the decision to raise prices now?

The simple answer is the fact that, according to Moscow, the contract signed in January is up for review in six months.

"In our contract, the price was agreed upon for the first half of 2006," Gazprom deputy head Aleksandr Medvedev told RIA Novosti on May 26. "The end of this period is approaching and both sides will discuss the price for the following period."

But Ukraine seems to understand the terms of the contract a little differently. Yushchenko has made numerous assurances to his countrymen that the price agreed upon in January will remain at the $95 level for five years. Now that his promise has been challenged by Gazprom officials, the Ukrainian government might well feel the need to protect the image of the president and put up fierce resistance to any price rise.

It's also possible that policymakers in the Kremlin are timing their decision to increase gas prices for Ukraine to coincide with the upcoming Group of Eight industrialized economies (G-8) meeting in July.

That could be Russia's signal to the West that it will conduct business in the CIS to promote its own geopolitical interests, regardless of how any of the G-8 members might react.

Another possible explanation for the thinly veiled threat to raise gas prices for Ukraine is that this is a form of pressure being applied by the Kremlin to prevent the appointment of Yuliya Tymoshenko as prime minister. During her short term as premier in 2005, Tymoshenko was outspoken about the need to remove RosUkrEnergo, the controversial middleman for gas deliveries from Central Asia, from the Ukrainian market.

After Tymoshenko left office, RosUkrEnergo, reportedly at the insistence of the Kremlin, was given a lucrative role to play in the delivery and sale of gas to Ukraine. The January contract provided for RosUkrEnergo to create a joint venture company with Naftohaz Ukrayiny, the state-owned oil and gas monopoly,named UkrHazEnergo. The newly created company recently announced that it is expanding and intends to drill for gas in Ukraine and Russia.

If Tymoshenko is appointed prime minister, Moscow fears she might exclude UkrHazEnergo and RosUkrEnergo from the Ukrainian market.

On May 30, Russian Ambassador to Ukraine Viktor Chernomyrdin linked the gas issue with political relations. Chernomyrdin was quoted by Interfax as saying that Ukrainian-Russian relations were affected by relations between Ukraine and NATO, the problems with the Russian Black Sea Fleet, Kyiv's "search for democracy," and the creation last month of the "Organization for Democracy and Economic Development-GUAM."

He also said that Kyiv and Moscow could settle the problem of a possible gas-price rise with an improvement of political relations. (Roman Kupchinsky)