Belarus: falling between two stools [NGW Magazine]

Belarus imports all its gas and nearly all its electricity from Russia, which cramps its style if it wants to liberalise the market and enjoy the benefits of competitive gas prices.

By the same token it makes it harder for it to diversify its imports. And energy efficiency measures, which would allow it to import less, cost money and take time to pay off. But the country’s politicians have at least been introduced to these concepts and are showing interest in what others have to say on the subject.

In late January, Belarus’ energy ministry invited EU4Energy officials to the capital, Minsk, to provide recommendations on the country’s natural gas market reform. Deputy minister Vadim Zakrevski praised the entity’s “insightful ideas” and it was not its first trip there, having earlier given advice on district energy management. 

EU4Energy is a regionally-focused programme implemented by the​ International Energy Agency and the European​ Union, along with the Energy Community and the Energy Charter.

However, EU4E energy unit head Bilyana Chobanova told NGW: “At this stage, there are still a number of uncertainties with regard to the future natural gas market both in Belarus and the Eurasian Economic Union (EAEU).”

EU4E is intended to support 11 countries in the Caucasus, eastern Europe and central Asia in their aspirations to implement sustainable energy policies, although three decades after the Soviet Union broke up, there has been no meaningful attempt at liberalising energy markets in most of these non-EU member states.

There are few obvious advantages attached to energy liberalisation for host governments who are used to cheap energy and the range of opportunities it offers. And in the case of Belarus, the country’s gas industry is dependent on infrastructure that was built in Soviet times and, once in place, might as well continue in service. Belarus sits on the major Yamal-Europe gas line and it has only small pipeline connections with the former Soviet Baltic states. Its demand is about 20bn m3/yr.

Belarus, generally regarded as an ally of Russia, has been seeking a reduction in the price it pays Gazprom for some years. Friction has also grown over oil deliveries. In parallel, the two autocratic leaders have been holding -- so far -- fruitless talks on some form of national reunification, its capital to be Moscow. But this has divided the population of Belarus. Many would prefer to follow Ukraine and form stronger political ties with the European Union instead and demonstrated on the streets of Minsk early last December.

In May, Belarus’ prime minister Sergei Rumas told reporters that his talks with Russia on the gas price did not include the possibility of discount for any political membership of a potential Russian-based union.

This makes for a geopolitical stalemate, Mikhail Krutikhin, a partner in the independent RusEnergy consulting agency, told NGW.

The whole issue of liberalisation of Belarus' gas market is 100% political, he said. Cheaper gas would only be on offer were Belarus to agree to Moscow’s vision of a closer union. “There is no way that Gazprom will allow Belarus to liberalise its market, even to the least extent. Even if the long-time Belarusian president, Alexander Lukashenko, miraculously loses the presidential election in August, his successor will not be able to change the situation in Belarus' gas market,” he said. “Changes would have to be implemented simultaneously in both the Russian and Belarusian gas markets, but they are out of the question today."

Until the recent drop in oil, and hence gas, prices and the Covid-19 pandemic, Belarus had imported gas at the lowest prices in Europe, paying more only than Russian domestic consumers themselves.

For Belarus, aiming at a more sustainable and thus more efficient energy market, one of the key considerations appears to be the role of the government, Chobanova says.

“Each specific regulatory detail needs clear, detailed and binding rules… In both EU and the US, the effectiveness of various regulatory solutions has been tested several times. These experiences need to be adapted somehow…. There is no ready-made solution in this respect,” she said.

After selecting a suitable market model, Belarus has to create a specific legal framework supporting the model, she says. Of paramount importance would be a clear and non-discriminatory third-party access regime, but the pipelines are controlled by Gazprom, which also supplies the gas.

This would make it difficult for Belarus to adopt detailed common rules on access pricing and congestion, her third recommendation. Fourth, it has to enact detailed regulations to support those principles, then it has to specify the tasks of all actors in the market and last, create an independent regulator to oversee the observance of the rules.

Wholesale gas prices would be based on competition and trading, whereas retail prices could be differentiated for certain customer groups, she said.

Belarus would also need to follow supranational rules on transit and transit pricing and consider alternative sources of gas and supply routes, she said.

The market liberalisation process would need to be inclusive, including large users of natural gas in the debate she said, in order to allow different opinions and different interests to be considered.

Nuclear option

A director of social and economic think-tank CASE Belarus, Ales Alachnovic, told NGW that the enormous dependence on Russia made liberalisation difficult.

“I interpret it as a striving to decrease the gas consumption per the same amount of GDP. There are several factors that might decrease it in Belarus. In the short-run, Belarus will soon launch the first Belarusian nuclear power plant. Two nuclear reactors of total capacity 2.4 GW are planned to start working in 2020-2021. According to the official estimate, this should reduce annual gas imports by about 5.5bn m³, or over 25% of its consumption,” Alachnovic pointed out.

In the long-run, a further modernisation of the economy and change of its structure – for example, increasing the share of the services sector at the expense of heavy industry – will naturally reduce the demand for gas, Alachnovic said.

“This process needs to be supported by the elimination of communal services subsidies for households, to encourage people to use gas and electricity more rationally and install domestic energy conservation equipment. The latter process is supported among others by the World Bank. Last but not least, Belarus has still unrealised potential in renewable energy, as the share of electricity generation from renewable sources is only 1% in Belarus,” he said.

The generous, often lower-price Russian support for Belarus has allowed it to run an inefficient economic system without needing to introduce market reforms. Because of this reliance, Minsk has not merely benefited from Moscow’s cheaper services, but it has condemned itself to bitter trade disputes in the gas sector too. Belarus is reportedly paying Russia $127/’000 m³ of gas.

Rauf Mammadov, a resident scholar on energy policy at The Middle East Institute (MEI), told NGW there was no “silver bullet” to make Belarus’ gas market more efficient. A solution directed towards higher sustainability and efficiency requires a general, systematic approach. For that, the government needs to open up the market to private companies, the analyst said.

“Market liberalisation is a must. The Belarusian leadership needs to re-evaluate its approach to the markets in order to improve efficiency. Unbundling its major stakeholders such as Beltopgaz and the minimisation of state intervention in the form of regulations, tariffs, and subsidies could be a good start,” Mammadov said.

But opening the market could eventually lead to a flood of Russian capital into its natural gas sector, which could eventually result in losing the control of its critical assets. Russian companies already own some of the major energy assets such as Mozyr refinery owned by Slavnet, a Rosneft, and Gazpromneft subsidiary, while Beltransgaz, Belarus’s gas pipeline operator, is owned by Gazprom.

Catch-22

Belarus is also in a stalemate with its efforts of decarbonisation. “Sustainable decarbonisation requires modern and effective regulation of tariffs and the elimination of the subsidised tariff system. This could serve as a major hurdle for Belarus as its leadership could be hesitant to disturb the well-developed welfare system of the country,” Mammadov said.

Wojciech Jakobik, a Warsaw-based energy security analyst, believes that Minsk should follow the footsteps of Kiev when it comes to making the internal gas market more efficient. “Ukraine decided to integrate its energy and gas market with the European Union and it is a good example for Belarus, but the problem is Russia that has an overwhelming clout over Belarus’ foreign and energy policy,” he told NGW.

He says natural gas can play a role in Belarus decarbonisation efforts, but Minsk is out of money. “It is hard to expect quick changes without co-operation from the IMF, European Commission or the US and, furthermore, to expect approval for that from Russia,” Jakobik said.

Although Belarus has lately hinted that it wants to form closer ties with the West on the energy front, no long-term decisions have been made. Moreover, even gloomier times may loom for Belarus ahead after it loses its Russian oil business in 2025. One of its main economic advantages is its role in transiting oil and products to Europe, he said.