SPEAKING in the Lithuanian capital Vilnius last month, Dick Cheney, the US Vice-President, accused Russia of being an energy blackmailer. The unspoken grounds for this criticism were clearly Russia’s decision last January to stop supplying natural gas to Ukraine to secure a higher price.

In reply to such criticism that Russia is using energy supplies for political ends, Russian officials have argued that, on the contrary, the highly subsidised gas prices which Ukraine and other former Soviet states had previously enjoyed were inherently political. By contrast, the new policy of asking customers in the former Soviet Union to pay for gas at the current European market price is the best way to de-politicise the region’s energy markets.

In principle, Russia’s shift to market pricing of gas rather than government price-setting makes sense. Back in January, Condoleeza Rice, the US Secretary of State, said that it behoved Russia as a G8 member to continue subsidising the Ukrainian economy for a transitional period of several years. This was an interesting addition to the qualifications for G8 membership.

The real weakness in the Russian “pro-market” position is the impression that it remains selective. Ukraine is required to pay the market price for gas, while other former Soviet states continue to enjoy cheap gas in return for political loyalty to Russia.

But Moscow has an answer to that too. Several former Soviet countries have been able to buy Russian gas at a 50 per cent discount to the European market gas price in return for letting Gazprom, the Russian gas monopolist, into the local gas distribution business. In this “downstream” segment of the gas market, suppliers mark up the price paid for gas at the border before selling it on to local end users.

Russia has been quite consistent in offering a discounted price for gas in return for giving Gazprom a share in local markets. Such arrangements are in place in countries ranging from traditional Russian allies such as Armenia to the Baltic States, which have a difficult and often tense relationship with Russia as the former colonial power. The gas price rise from $50 to $95 per thousand cubic metres which Ukraine finally agreed to last January was also consistent with this broader picture.

Until recently, the one glaring exception to this picture has been Belarus. Aleksander Lukashenko, the President and effective dictator of that country, has managed to keep the price of Russian gas supplies down to $50 per thousand cubic metres, on the grounds that Belarus is building an ever closer union with Russia. But President Putin now seems tired of exchanging subsidies for vague friendship. For the past few months, Belarus has been put on notice that it too will have to pay more for gas. Mr Lukashenko’s priority is to keep the cash price low, since this essentially finances his dictatorship. Instead he is offering Gazprom a 50 per cent equity stake in his country’s gas pipeline company which ships gas westwards into the EU. Similar such offers in the past have come to nothing over valuation disagreements. But the fact that Mr Putin is sending in western banks to do the valuation work shows that this time, he means business.

Christopher Granville is editor of Trusted Sources, a new online analytical service focused on China, Russia, Brazil, India and other emerging markets. www.trustedsources.co.uk

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