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Shifts in market to shift power

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Shifts in market to shift power

Looming shale gas revolution may be a harbinger of a political change in Belarus.

The development of shale gas technology and liquefied natural gas (LNG) infrastructure has the potential to strongly undermine Russia’s financial capabilities to support its political satellites. The incumbent Lukashenka regime in Belarus is the primary candidate to suffer the consequences.

Belarus’ unwieldy Soviet-style command economy has only been able to survive through Lukashenka’s 20 years in power by heavily relying on Russia. The support has been coming in the form of preferential oil and gas prices, cheap loans and direct subsidies. By Forbes’ estimates, between 2001 and 2011 alone Russian subsidies to Belarus accounted for over $60 billion. The funds have been provided in exchange for loyalty and political allegiance. To the Lukashenka regime this means being able to maintain the domestic social contract: the government provides perceived stability, growing salaries and pensions, and in return gets the population’s silent consent to concede their civic and political freedoms. However, this soon may change.

Just like Belarus’ economy is highly dependent on Russia, Russia depends on high oil and gas prices. Over a half of the country’s revenues comes from selling hydrocarbons. The Russian budget is so heavily reliant on incomes from oil and gas that ordinary market fluctuations are capable of causing economic and political instability within the country. That is where it gets tricky for the Kremlin, since the development of shale gas and accompanying infrastructure has the potential to bring about far-reaching market shifts.

The strategic planning of Gazprom, Russian monopolist gas exporter, was based on the assumption that conventional gas prices would keep on growing. Investing in new technologies, like shale gas or LNG, was a priority at the time when there was still a chance for the company to enter the market. Russia was too euphoric on soaring oil and gas prices in the mid-2000s – early 2010s, and effectively missed the opportunity to take its own piece of the pie.

Having realized it is too late, Gazprom has little left to do, but to invest in PR campaigns aimed at discrediting the very technology which it disregarded. Their approach is two-fold: to present the shale gas development as harmful to the ecology in countries, where public discourse is especially sensitive to this issue; or cost-inefficient, in countries that prioritize market considerations. The company is saying “It is expensive and dangerous”, but what they actually mean is “If we don’t get it, no one should” in a desperate attempt to protect their market share.

They have good reasons for doing that. According to the Energy Information Administration (EIA), US independent statistical agency for energy information, shale gas’ price will be four times lower than the one in Gazprom’s long-term contracts. Not only will the fuel be cheaper by itself, but also the increased supply will force the market down. When this happens, oil price will follow the same pattern, since the two are substitute goods. This all is a bad news for Russia’s budget, which will see a significant plunge in revenues.

Despite all Gazprom’s efforts, shale gas development is on the rise. The US now completely covers its domestic consumption and has turned from an importer into an exporter of liquefied natural gas. Accordingly, a number of large exporters that used to sell LNG to the USA, for example Qatar and Algeria, have now redirected their supplies to Europe. In its turn Europe, Russia’s chief market, is actively seeking to diversify its energy supplies and developing the LNG infrastructure. The latter is an especially dire signal to Russia, which transports its gas exclusively via pipelines and simply lacks technical capacities to face the challenge of the new technology.

The final blow to Russia’s energy domination in Europe and to its surplus profits may come, when European countries start developing their own shale gas deposits. The continent’s largest reserves are located in Poland and Ukraine, which will be happy to break away from Russia’s energy grip. Once they have seen a chance to achieve their energy independence, both countries will most certainly take it. Exploration is also underway in UK, Germany, Romania, Denmark and Hungary, while the European Commission has stated that commercial drilling could start as early as in 2015.

Low oil and gas prices as well as a loss of a market share will pose two kinds of political challenges for the Kremlin. One is domestic: an economic recession could lead to public discontent or even civil unrest, while the heavily subsidized separatist regions, like Chechnya, may bring the security threat back to the agenda. The other challenge lies in the domain of foreign policy: lacking financial resources to fix holes at home, Russia will hardly be able to keep supporting its allies.

For Belarus this means that the government will stop receiving “friendship benefits”, which will significantly undermine its domestic standing. Without feeding on Russian resources, the authorities will no longer be able to maintain the population’s living standards, and the economy will fall into recession. Between 70 and 80% of the country’s economy is state-run, which means that a possible rise in unemployment rates, wages cuts and delays in payments will be directly attributed to the government’s failure.

Public discontent may lead to popular protests: if the government no longer delivers on the social contract, the people are likely to try and seek their rights and freedoms by pushing the government for economic and political liberalization. A similar situation already emerged during the financial crisis of 2011. Frequent street manifestations, significant deterioration of the economy, hyperinflation and a drastic decrease in the standards of living forced the government to speak out about the necessity of reforms. It was only due to another loan from Russia that the reform agenda was pushed back yet again.

When another crisis comes, Russia may be short of cash and too busy with its own problems to come to Lukashenka’s rescue. Under public pressure and without support from Moscow the government will have to either start the long overdue reforms, or step down.

Either way, economic hardships will trigger political changes. In the case of Belarus they may well derive from where no one expected – an energy market shift, brought about by shale gas development.

Ales Charniakovich, specially for charter97.org

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