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RUSSIAN LEGISLATURE SLAMS UKRAINIAN CUSTOMS RULES. The Russian State Duma approved a resolution on March 10 denouncing Ukraine's new customs regulations requiring all cargo on the Transdniestrian stretch of its border with Moldova to be cleared by Moldovan customs officers, Russian news agencies reported (see "RFE/RL Newsline," March 8, 2006). Ukraine says that the regulations, which are backed by the European Union, are aimed at curbing illegal trade. The Duma resolution claims, however, that the Ukrainian authorities are seeking to put political pressure on the breakaway Transdniestrian republic. Oleg Morozov, who is the Duma's first deputy speaker, said that "the actions of the Ukrainian-Moldovan side regarding Transdniester have neither economic nor political justification. Instead, they are aggravating the situation in the region." PM

GEORGIAN PRESIDENT ALLEGES 'IDEOLOGICAL WAR.' Addressing representatives gathered in Tbilisi on March 9 of those states (Georgia, Ukraine, Lithuania, Latvia, Estonia, Romania, Moldova, Slovenia and Macedonia) that founded the Community of Democratic Choice in December 2005, Mikheil Saakashvili claimed that "very influential, very rich, very important forces" have launched what he termed an ideological war with the aim of discrediting Georgia in the eyes of the international community, Caucasus Press reported on March 9. He did not elaborate. LF

UKRAINIAN PRESIDENT VOWS TO HOLD FAIR ELECTIONS. President Viktor Yushchenko told students at the Shevchenko National University in Kyiv on March 9 that the authorities "have done everything to secure democratic, honest, and transparent elections," the presidential press service reported. Yushchenko also said he finds it deplorable that the people who just 18 months ago were engaged in "shadow politics" -- an apparent reference to the manipulation of the presidential vote that sparked the Orange Revolution and his eventual election -- are now calling on the nation to turn to the past "behind the backs of political leaders." "It is not about choosing colors, it is about a way of life and whether we want to turn back or not," Yushchenko said about the upcoming parliamentary elections on March 26. JM

The "Belarusian economic model" seems to defy economic theory. An economy entirely consisting of the old, unreformed Soviet industrial base, manages to churn out high single digit growth in gross domestic product (GDP), provides guaranteed monthly income and full, if not always full-time, employment, even as it remains in a state of complete isolation from the modern world. It is this model that causes Belarusians to feel fearful of changes that may unleash a chaos, criminality, and suffering associated with reforms in Russia and Ukraine -- the reference countries for the average Belarusian.

The model is based on three foundations: a favorable valuation of Russian energy, efficient internal controls, and supply-side problems that beset the rest of the former USSR, where most Belarusian output is exported.

Russia charges Belarus $47 per 1,000 cubic meters of gas and $27 per barrel of oil compared to world prices of $230 and $60, respectively. For a country consuming about 20 billion cubic meters of gas per year and 250,000 barrels of oil per day this amounts to direct fiscal support of $6.6 billion annually. Besides consuming oil for its own needs, Belarus is also reselling it in the form of refined products processed at the two refineries whose capacity far exceeds the country's internal needs. Statistics confirm that the country imports about 100,000 barrels a day more than it consumes.

The overall usage of oil began to increase from 2002, the time of the first jump in oil prices, and has continued upward since. According to a study by Belarusian economic expert Leanid Zaika, in 2005 the share of Belarusian exports to Russia and the Commonwealth of Independent States was only 45 percent, compared to the stable 80 percent in the preceding decade. The main user of Belarusian exports (36 percent) is now Europe, by way of buying refined petroleum. Purchased at $27 and sold at $60, this petroleum yields 100 percent profits, or $1.3 billion a year of not even a subsidy, but pure disposable income to the state.

The total effect of the energy price discount amounts to over $7 billion a year, or 30 percent of the nation's GDP. This is a staggering proportion -- even in the United Arab Emirates this share is under 10 percent -- but is it really a subsidy? President Vladimir Putin of Russia thinks so. Marshall Goldman, a Harvard economist, quotes him as affirming the use of energy subsidies for political influence in the near abroad. President Alyaksandr Lukashenka of Belarus disagrees. "The notion that I am supported by the Kremlin is absolutely absurd," he stated earlier this year. According to him, the discount on the Russian fuel is really a barter payment for transit through Belarus, for which Russia nominally pays very little.

Simple arithmetic can check this hypothesis: the $183 per 1,000 cubic meters that Russia loses by selling gas to Belarus equals a transit charge of $18 per 1,000 cubic meters per 100 kilometers. The European average is $2.5. So, by bartering $183 away from the price they could charge, the Russians effectively pay Lukashenka seven times the European average cost of gas transportation. Figures for oil are not readily available, but it is reasonable to expect a comparable valuation.

Whether this is a fair deal is in the eyes of the beholder, but it is the valuation on which the entire Belarusian economy is based. It supports the second main feature of the Belarusian model -- its relatively effective management. Lukashenka, who portrays himself as an anticapitalist crusader, is in fact the country's chief businessman. He presides over a company that has reached the scale of a nation. Almost all Belarusians work for the state enterprise, run by the "vertical," a hierarchy of administrators appointed by the president. This state-owned corporation, Belarus Inc., is a multiline conglomerate with revenues of about $25 billion that would place it in the top segment of the Fortune 500 list. It employs over 4 million workers and controls the services, health-care, and education sectors.

While controls disintegrated in Russia and Ukraine, in Belarus they were preserved and even improved by introduction of the vertical and appointment of the personally loyal corps. As Zaika points out, for some time this created a competitive advantage -- while the dilapidated Russian competitors went through catastrophic reforms, their output fell, creating a gap in supply of low-quality, cheap goods, which Belarusian enterprises were able to fill. Exports to Russia were stable throughout most of the Lukashenka reign, helped in part by an arrangement that some payment for Russian energy comes in the form of Belarusian products.

Two significant risks threaten this model. First, is the risk of a repricing of the energy valuation if Russia gains a controlling stake in Beltranshaz, Belarus's gas-transport company. Deprived of its transit monopoly, Belarus would lose a key bargaining advantage and could be forced to pay higher rates. In practice, however, the current valuation is likely to continue, as political considerations will likely prevail as long as Belarusian policies remain in the Russian wake. Even so, Lukashenka has made statements implying that he fully understands his dependency on Russian energy and is seeking solutions with nuclear reactors and more frugal energy use.

A greater risk comes from within the system. In the 12 years of Lukashenka rule there has been no investment to modernize the 1950s asset base that is now 80 percent worn out. The oil windfall of recent years has been spent, not invested in the future. In the meantime, Russian competitors are beginning to gather fruits of the painful restructuring, and foreign competitors produce in low-cost locales. This is beginning to show in the numbers -- Zaika's study cites 2005 decreases between 10 percent and 70 percent in key Belarusian exports to Russia, and inventories of unsold products are growing. As the industrial output declines, the Belarusian GDP relies increasingly on refining Russian oil for speculation.

This opens the future for several scenarios. One could be called "Singaporization." Lee Kwan Yu ruled Singapore for 30 years as a dictator but he also opened the country up for trade, welcomed foreign investors, guaranteed their rights, and achieved the level of living that surpassed that of Britain by using a mix of market economy and state planning. The Belarusian regime is well positioned to do the same, more likely seeking partners in the East than in the West, but its insecurity about foreign investors and bad reputation may impede this scenario.

Another scenario is a complete change of power. Besides being unlikely, it also poses the danger of energy repricing, as in Ukraine. The disintegration of internal controls that scenario would provoke could mean a delayed period of chaos and potential return to populism.

Finally, conserving the current arrangement is also possible, as long as Russia does not challenge the status quo in exchange for political subservience. This would not remove the problem of the worn-out assets and obsolete technologies, but it seems to be the bet the Belarusian president is making at the moment.

(Siarhej Karol, a chartered financial analyst, is a financial manager at American International Group (AIG), a global financial services company.)

RUSSIA'S NUCLEAR AMBITIONS HEATING UP. While European policymakers cautiously watched the recent Ukrainian-Russian gas conflict, debating among themselves if Russia was a reliable supplier of energy, policymakers in the Kremlin were busy preparing for an even greater role in the world energy market. Their attention, however, was concentrated not on gas or oil, but on preparing the country's nuclear power industry for its future role.

Russian federal authorities are considering creating a state-controlled company, one that would embrace all enterprises operating in the nuclear sector.

In an article on March 7, "The Moscow Times" reported that Viktor Opekunov, chairman of the State Duma subcommittee for nuclear energy, said the industry restructuring "would involve 'privatizing' all of Russia's nuclear enterprises -- in other words, incorporating them into joint-stock companies -- with the state becoming their only shareholder."

"The Moscow Times" identified the main components of Russia's nuclear industry as Rosatomenergo, which runs all power stations; Tvel, which owns a controlling interest in Russia's key nuclear fuel-manufacturing enterprises; Atomstroieksport, which builds nuclear power stations abroad; and Tekhnabeksport, the export arm trading in nuclear machinery and fuel.

All four groups are currently supervised by Rosatom, Russia's federal atomic energy agency, led by former Prime Minister Sergei Kiriyenko. And all would continue to operate under the new umbrella organization proposed by Russian federal authorities.

The nuclear power industry in Russia continues to play an ever-increasing role in Russia's energy balance and is destined to play an even more significant one in the future. Russia's energy strategy for 2020, adopted in 2003, forecasts that by 2020 nuclear power is expected to increase its share to 25 percent of Russian electricity generation, up from 16 percent in 2004, as the share from hydrocarbon-fired generators drops.

Russian policy is to gradually phase out the use of coal, oil and gas to fire electricity generators. According to a December 2005 study by the Uranium Information Center in Australia, "Rosatom's long-term strategy up to 2050 involves moving to inherently safe nuclear plants using fast reactors with a closed fuel cycle and MOX fuel."

MOX, mixed oxide fuel, is a process of using plutonium left in spent reactor fuel and from nuclear warheads to generate energy. It is essentially a recycling process and is used in some 30 nuclear reactors in Europe.

MOX is not the only answer to reactor fuel. The Executive Intelligence Review reported on 10 February that "on January 25, Nikolai Sevastyanov, head of the Energia Russian Space Company, outlined an ambitious plan to obtain fuel for the next type of nuclear power: thermonuclear fusion. He said Russia should mine helium-3 (which is rare on Earth) on the moon."

Presently, Russia has 31 operating reactors, which generate about 147 billion kilowatt-hours per year. Six new reactors are under construction and 16 more are planned. According to the U.S. Energy Information Administration, Russia's nuclear power facilities are aging. "Fifty percent of the country's 31 nuclear reactors use the RBMK design employed in Ukraine's ill-fated Chernobyl plant. The working life of a reactor is considered to be 30 years: nine of Russia's plants are between 26 and 30 years old, and six are between 21 and 25 years old" the EIA reports.

Thermal power (oil, natural gas, and coal-fired) currently accounts for roughly 63 percent of Russia's electricity generation, followed by hydropower (21 percent) and nuclear (16 percent).

Russia's future role as an international nuclear power leader, a concept which the current leadership is promoting, is ambitious and far-ranging.

In February, Russian President Vladimir Putin announced that Russia would like to reestablish the former Soviet nuclear energy bloc in Eurasia. Speaking at the St. Petersburg summit of the Eurasian Economic Community (EES), in early February, Putin said Russia was "firmly determined" to widen its cooperation with the EES, and that a priority would be collaboration in the "peaceful uses of nuclear energy."

Rosatom announced plans to rejuvenate the Russian nuclear industry, mainly through cooperation with Ukraine, Kazakhstan, and other countries which once were part of the Soviet nuclear power space.

On January 20, Putin met with Kiriyenko, who stressed that nuclear power will need to receive an increase in government funding. "We need to build two nuclear reactors per year, beginning in 2011 or 2012," Kiriyenko was quoted by Interfax that day. In order to raise the needed funds for such a project, Rosatom will become a joint stock company, but will remain under government control. Kiriyenko also stated that he intends to build 60 atomic reactors abroad.

How feasible Kiriyenko's plans are is difficult to judge in light of the fact that there have been substantial delays in the construction of the six reactors presently being built. Only two or three are expected to meet startup target dates due to funding problems.

The other problem facing the nuclear program is the rapid depletion of uranium in Russia. At present, Russia produces some 2,900 tons of uranium, but deposits are rapidly dwindling.

Uzbekistan, which has an extensive reserve of uranium ore, was brought into the emerging nuclear partnership during the EEC summit and Putin announced that the Uzbeks would provide Russia with "additional long-term possibilities for the building of a stable nuclear fuel energy base," "The Moscow Times" reported on 8 February.

Russia has also expressed interest in becoming a hub for supplying nuclear fuel and services for existing reactors in former Soviet bloc countries in Central Europe. During his recent trip to Hungary and the Czech Republic, Vladimir Putin stressed that Russia will take part in bids to upgrade existing nuclear reactors such as the Czech plant in Dukovany and the Hungarian Paksi Atomeromu plant which supplies 40 percent of Hungary's power needs.

The Arms Control Association reported in November 2000 that Russia and India signed a secret memorandum of understanding on October 4, 2000 to pursue future "cooperation in the peaceful uses of nuclear energy." The memorandum was one of several agreements, including a declaration of strategic partnership, signed during Putin's October 2000 visit to New Delhi.

In an apparent move to counteract this agreement, the U.S. signed an agreement in Delhi in March of this year to supply India with fuel and nuclear technology for peaceful purposes.

The very day when U.S. President George W. Bush signed the pact with India, Putin told a press conference in Prague that Russia would fight any restrictions placed on its atomic energy operations in Europe.

"Unfortunately, we are facing certain restrictions, attempts to limit our operations in nuclear energy and in power engineering on the European market," Interfax quoted Putin as saying on March 1. "We are not dramatizing this, but we will strive for equality."

Unlike its gas, Russia does not possess a near monopoly on nuclear fuel in the region and will face stiff competition on the European market from France. How this might affect Russia-France relations is uncertain. In the case of the former Soviet republics and Central Europe, the Russians certainly do enjoy a nuclear advantage and could use it as they presently use gas, as a lever to achieve their political goals. (Roman Kupchinsky)