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Price of Gas to Double for Georgia

Gazprom said Thursday that it would more than double its gas price to Georgia as talks between the two sides' foreign ministers failed to resolve the simmering monthlong dispute.

"I cannot call the talks a breakthrough," Georgian Foreign Minister Gela Bezhuashvili told reporters after a meeting in Moscow with Foreign Minister Sergei Lavrov. The talks were the first at a senior level since relations between the two countries broke down in late September.

The gas price hike would severely affect Georgia, which is already struggling under a full travel and trade blockade imposed after Tbilisi expelled four Russian military officers it accused of spying.

If Gazprom gets its way, Georgia will start paying $230 per 1,000 cubic meters starting in January -- more than twice the $110 it currently pays. If agreed, the price would be the highest for any former Soviet republic so far.

"Russia must show us the formula by which they got this price. We must know where this price came from and why it is the same as Western Europe's," Bezhuashvili said, Interfax reported.

"We have suggested a price of $230, but this is not the end of talks," a Gazprom spokesman said. "The negotiation process is continuing."

A spokeswoman for the Georgian Energy Ministry said it had received no official notification from Gazprom.

Ina Mdivana, spokeswoman for Georgian gas importer Energy Invest, said the company had also received no notice, and that negotiations were due to wrap up in December.

Gazprom's announcement raised the specter of last winter's dispute with Ukraine, when Gazprom briefly shut the flow of gas to Ukraine in an effort to force the country into accepting the $230 price tag one year after the election of pro-Western President Viktor Yushchenko.

Bezhuashvili said he had gotten "an assurance from the Russian side that gas and electricity will not be cut off.

"I do hope there is less politics in these gas prices than commercial logic," he added.

Gazprom has long been seeking to end subsidies to its former Soviet neighbors, but often seizes upon political disputes to push the deals through, analysts said.

"The decision itself is commercial," said Tanya Costello, an analyst with Eurasia Group. "The pace at which CIS countries have been pushed to paying higher prices has depended on the political relationship with Moscow."

Yet she added that "the attention Gazprom pays to Georgia doesn't fit with the size of the Georgian market, so that does suggest political motivation."

Georgia represents one of Gazprom's smallest markets, importing just 1.3 billion cubic meters of gas per year. Germany and Ukraine take in over 37 bcm each.

Relations between Moscow and Tbilisi began their downward spiral with the January 2004 election of President Mikheil Saakashvili, a decidedly pro-Western politician who has sought to extract his country from Russia's grip and hopes to have it join NATO by 2008.

The new price will be "the price we pay for our choice," Bezhuashvili said.

Gazprom was reported last month by Georgian officials to have asked for from $170 to $250 for 2007. If agreed, the $230 price would put Georgia on a par with Gazprom's customers in Europe, who pay from $230 to $250 for their gas. Countries with more pro-Moscow policies pay significantly less. Belarus, for example, pays just $47.

Standard & Poor's forecast that effects of the price increase would be "modest," shaving 1.1 percentage point off Georgian gross domestic product in 2007.

Georgia had "expected such a hike and taken precautionary measures to ensure alternative sources of gas are available," the rating agency said in a research note.

Bezhuashvili said Tbilisi was in talks with Azerbaijan, Turkey and Iran on replacing its Russian supply. Gazprom provides the bulk of Georgia's gas, supplying 1.3 bcm per year to the country, which has an annual demand from 1.5 and 1.8 bcm.

Georgia first began looking abroad last January, after explosions at a pipeline in North Ossetia disrupted gas shipments and highlighted the country's reliance on Russian gas. Georgian officials accused Russia of orchestrating the explosions, a charge rejected by Moscow.

During that dispute, Georgia increased imports from Azerbaijan and took emergency supplies from Iran.

"Russia's tendency to use energy sources as a political instrument against Georgia meets strong opposition ... thus delivery of gas to Georgia by Gazprom becomes less attractive," the Georgian Energy Ministry said in an annual report published in May.

Georgia currently gets 400 million cubic meters of gas per day from Azerbaijan. That amount is due to jump next year by about 300 million cubic meters next year, with the completion of the South Caucasus Pipeline from Baku to Erzerum in eastern Turkey, which passes through Georgia.

The current standoff -- which has seen thousands of Georgians deported from Moscow, and rail, air and postal links cut -- has provoked international rebuke.

Yet analysts warned that the outcry seen during Ukraine's pricing dispute, which helped bring a swift resolution to the crisis, was unlikely to be repeated in the case of Georgia.

"Europe will not be affected, so this won't raise the same questions regarding Russia's reliability as a gas supplier," said Costello of Eurasia Group. Ukraine acts as a major transit route to Europe, while pipelines through Georgia carry Russian gas to Armenia.

Ukraine refused to cede to Gazprom's demands in late 2005 that it pay $230 per 1,000 cubic meters, a significant increase from the $50 it had been paying. The two sides eventually settled on a price of $95, but not until after Ukraine saw its supplies briefly cut in the middle of winter.

Bezhuashvili said that while talks failed to defuse the crisis, the two sides had agreed to "calm down the belligerent rhetoric."

"The two countries are ready to sit down and engage in a dialogue. That is good news," he said.

The Kremlin "has made it pretty clear that Gazprom will eventually be getting all its customers to pay market price," said Chris Weafer, chief strategist at Alfa Bank. "But ultimately, the pace at which they're allowed to do that is a political decision."

James Nixey, an analyst on Russia and the CIS at London-based think tank Chatham House, agreed.

"Russia is correct when it says that if Georgia and Ukraine want a Western orientation, they should pay market prices," Nixey said. "But even if there is a good economic position behind it, the key factor is always political."

Yet Gazprom is also facing price hikes of its own. Both Uzbekistan and Turkmenistan have recently said they would raise their gas export prices to Russia from $55 to $100 starting Jan. 1.

Despite its standing as the world's largest gas company, Gazprom has to import gas from neighboring republics to meet its supply commitments as development of new fields lags.

Analysts warned that tough negotiations lay ahead.

"I think this will lead to cutoffs because Georgia is not ready to pay so much," said Vladimir Milov, head of the Institute of Energy Policy.

"The prices are being determined by the Kremlin, they can't be market prices in principle," he said. "That the Europeans agree to pay such high prices is their choice -- they have an alternative."


(The Moscow Times 06.xi.06)

 
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