Bully bear

Druzhba means "friendship" in Russian, and the word is also the now-ironic title of the oil pipeline that runs from Russia through estranged ally Belarus. It is the same one Moscow shut down for three days this month in an energy feud with Minsk.

Energy feuds are becoming a New Year's ritual in Europe, which first suffered a natural gas supply disruption through Ukraine last year at this time. For Russia, the calculations are both political and economic: As the region's main energy supplier, it can bring its neighbors to heel and maintain its oil and gas industries. On the other end of the pipeline, however, European leaders-led by German Chancellor Angela Merkel-now realize they rely too much on a capricious Russia for energy.

If not for the European effect, the Russia-Belarus spat might only be a small tiff between two autocrats, Vladimir Putin and Alexander Lukashenko. Even after the Soviet Union's fall, Russia maintained steep energy subsidies to Belarus, and in 1999 the two leaders even agreed to unify the two nations.

That plan has gathered dust-Putin dislikes Lukashenko-and Russia has since decided to raise Belarus' oil prices closer to, though still barely half, market level. On Jan. 1, Russia included a $181 export duty per ton of crude oil for Belarus, and Belarus responded with a new transit tax. Furious, Russian leaders turned off the oil until Belarus backed down.

Belarus survives only because of the Russian subsidies, explains Elena Herold of the consulting firm PFC Energy. Lukashenko "was hoping for low oil prices forever," she told WORLD. "If you look at those countries where prices are lower, they're the only countries that didn't experience color revolutions."

Case in point: Kremlin-friendly Armenia. Within the past year, state energy giant Gazprom doubled the gas price for pro-Western, democracy-loving neighbors Georgia (home of the Rose Revolution) and Azerbaijan, to about $235 per 1,000 cubic meters. That is about what Western Europe pays Russia. Armenia, meanwhile, still pays only half of that figure.

But Moscow's considerations are not all political, says Clifford Gaddy, a Brookings Institution senior fellow. After an initial post-Soviet slump, Russia has revived its Siberian oil and gas industry in the last decade. In the last few years, soaring energy prices have bathed the country in petrodollars, spurring a building boom in Moscow and other cities.

The boom may soon deflate, however. Russia's oil and gas production have now plateaued, with little investment in the industries. "It was sort of predestined that it was going to reach this point," Gaddy said.

Now Russia is scrambling to meet its supply commitments, and that means saving oil and gas either at home, where Russians also enjoy subsidies, or abroad. Wanting to remain popular at home, the Kremlin chose the near abroad, resulting in the somewhat abrupt price hikes to neighbors. And after years of subsidies, Gaddy said, "their argument is, why should we sell for anything less than market price?"

Subsidies, however, may be the price to keep pro-Kremlin friends like the Belarussians around. Without cheap energy, "it would lead sooner or later to one of the color revolutions," Herold said. "It's better to have Lukashenko next door than [Georgia]."

For now, supplying the European Union with a quarter of its oil and gas means Russia can afford not to care about disruptions. What the Kremlin has not grasped yet is how much Russia's reputation as a supplier has been damaged.

Putin may "act like he's the CEO" of a large firm, Gaddy said, but he still does not know that "the company has to act as if its reputation with consumers is paramount. It doesn't matter whether Russia is right or wrong in these bilateral disputes." With Russia's arrogance in play, Merkel and other European leaders are finding they need new friends on the energy front.