Belarus Accepts Drastic Reduction in Oil Subsidy From Russia

On January 27 in Moscow, Belarus accepted a drastic reduction in its traditional oil subsidy from Russia. The Russian government imposed this outcome through halting oil supplies to Belarus by pipeline almost completely since mid-January. The supply flow should now be restored, but at a far higher price, likely to set the stage for Russian takeovers in Belarus’ massive oil-processing industry, with processing capacities of up to 25 million tons per year (EDM, January 5, 8, 15, 19).

First Deputy Prime Ministers Igor Sechin and Uladzimir Syamashka signed these agreements, four weeks after the December 31 deadline, in oft-interrupted negotiations and amid public polemics between Minsk and Moscow (Interfax, Belapan, January 27).

The agreement on oil deliveries to Belarus eliminates most of the traditional Russian subsidy. Until January 1, 2010, that subsidy took the form of cutting the Russian export duty on crude oil for Belarus to only 35.6 percent of Russia’s standard duty. That favor, granted uniquely to Belarus, ensured high revenues for its refineries and its state budget. Belarus was buying Russian crude oil cheaply and selling the products at market prices in Europe. The Russian oil producing companies involved almost certainly skimmed a portion of those extra profits. That system applied to an annual portion of approximately 19 million tons of Russian oil being processed in Belarus for export of derivatives, out of a total of some 26 million tons delivered annually to Belarus (21.5 million tons by pipeline and 4 to 5 million tons by road transport).

Under the agreements just signed, Russia will levy the full standard export duty on the portion of Russian crude oil to be refined in Belarus for export of the derivatives. The full duty will not only wipe out those high profits, but also undermine the competitiveness of Belarusian refineries on European markets. The Belarus state budget will also take heavy hits.

Russia will maintain the old privileged arrangement, for the time being, on the portion of crude oil to be refined in Belarus for the country’s internal needs and those of Russia. This portion amounts to some 7 million tons annually, including some 6 million tons to meet Belarus demand and approximately 1 million tons to meet Russian demand of derivatives. Thus, of the total annual volume of Russian crude oil supplies to Belarus, only one third is low-priced. However, this is the portion destined for the internal product market, which was not generating any significant profits.

The 6 million ton portion destined for Belarus’ own needs can be increased slightly, pegged to its economic trends. Under the agreement just signed, the possible increase will be equivalent in percentage terms to the growth in Belarusian GDP, as determined by October 1 annually. This peg, however, is only agreed in principle, whereas its actual application is subject to further negotiation (RIA Novosti. January 27).

Under a separate agreement, Russia agrees to increase the fee it pays to Belarus for the transit of Russian oil to Europe. The increase is expected to total 11 percent (Belarus TV First Channel, January 27). The fee reportedly amounts to $45 per ton of Russian oil pumped through the Belarus section of the Druzhba pipeline to Europe during 2009 (Interfax, January 18).

Belarus had very little leverage in these negotiations. Russia is the monopoly supplier of oil and also the monopolist user of the oil transit service. Belarus was in no position to use the counter-leverage theoretically available to a transit country. To have done so would have gravely damaged Belarus’ relations with the European Union. The Druzhba pipeline carries more than 70 million tons of Russian oil annually to European countries.

Russia, however, was able to use the transit situation to its own advantage. When slashing oil deliveries to Belarus in mid-January, Moscow announced that it would switch those volumes from the Belarus supply system into the Druzhba transit system, toward Gdansk and Rostock, for further transportation to European customers. All sides involved (Russia, European consumers, and Belarus itself) proceeded from the assumption that Minsk would not interfere with the transit or the re-routing.

As a net outcome, Belarusian refineries and the state budget all face massive revenue losses. Moreover, Belarus faces an immediate prospect of new indebtedness to cover the higher purchase price of Russian crude oil. According to the National Bank Chairman Pyotr Prakapovich, Belarus will have to seek additional external financing for this purpose. It may apply first to the International Monetary Fund (IMF), as soon as Belarus’ stand-by arrangement with the IMF is completed at the end of the first quarter of 2010. The IMF reviewed Belarus’ performance favorably in December 2010 and approved the disbursement of a $688 million tranche to the country for the first quarter of this year (Belapan, January 27).