Publication: Eurasia Daily Monitor Volume: 4 Issue: 5

Russian Prime Minister Mikhail Fradkov

Effective January 1, the Russian government introduced an export duty of $181 per ton of crude oil delivered to Belarus. Those deliveries had been duty-free until now. Signed by Prime Minister Mikhail Fradkov on December 8, 2006, the decision places oil deliveries to Belarus under the same customs regime as the deliveries to countries that are not members of the CIS Customs Union/Eurasian Economic Community (EurAsEc, which includes Belarus). If those organizations have existed largely on paper until now, they may begin losing even their paper existence as a result of such Russian measures. By raising the cost of oil supplies to Belarus sharply at one stroke, this measure hits heavily at Belarus, but also at Russian oil-producing companies that refine their oil in that country.

On January 3, the Belarus government retaliated by introducing a customs tax of $45 per ton on Russian crude oil in transit to the West through Belarus pipelines, effective also from January 1. The transit had been tax-free until now. President Alexander Lukashenka authorized the introduction of the tax during a cabinet meeting he chaired that same day, televised live. Denouncing Russia’s “extremely unfriendly steps,” Lukashenka remarked, “They are choking on petrodollars, but they have decided to hit at Belarus” (Belarus Television, January 3).

Belarus transited an estimated 80 million tons of Russian oil to European Union territory in 2006, down by some 10% on the 2005 figure, but still more than a third of Russia’s crude oil exports to EU countries. A switch of some Russian oil volumes to Primorsk and the deliberate cessation of Russian deliveries to Lithuania since mid-2006 (and earlier to Latvia) account for the decline in the transit through Belarus in the year just past.

The Belarus Ministry of Foreign Affairs has given public assurances that the tax will not physically affect the transit of Russian oil to EU countries. The EU Commission’s spokesman has taken note of those assurances.

The Soviet-era Druzhba pipeline system remains critical to Europe’s oil supplies in the absence of a diversification strategy. The mainline originating in Russia branches off in three directions from Belarus: one branch northward to Lithuania and Latvia, another westward to Poland and onward to Germany, and another branch across western Ukraine to Hungary, Slovakia, and the Czech Republic.

According to the management of Russia’s pipeline monopoly Transneft, which operates the Druzhba system in Russia, the transit tax just imposed by Belarus is to be levied on Russian oil-producing companies. However, the Belarus Customs Committee on January 6 launched a court case against Transneft for failing to declare goods in transit to third countries and failing to pay customs tax on those goods — that is, the oil being pumped from the Russian into the Belarusian sections of Druzhba. The Belarus Customs Committee has summoned Transneft president Semyon Vainshtok to appear in the Homel court within 48 hours (Belapan, Interfax, January 6).

Russian oil-producing companies supplied Belarus refineries themselves with more than 20 million tons of crude oil in 2006 (some 17.5 million in the first three quarters of the year), topping the 2005 figure of 19.3 million tons. The leading suppliers in 2006 were Surgutneftegaz with some 30% of the total deliveries to Belarus, Rosneft with 25%, Sibneft (acquired by Gazprom during 2006) with 13%, Lukoil with 11%, Slavneft with 10%, and smaller companies delivering the remainder (Interfax, December 14). Those volumes are traditionally destined for processing at the Mozyr and Navapolatsk refineries in Belarus.

This arrangement has been highly lucrative both for Russian oil-producing companies and for Belarus. The Russian companies, taking advantage of the duty-free export, sent low-priced volumes of crude oil for refining in Belarus, which in turn exported the refined products to Europe at market prices, with high profit margins for the Russian suppliers and the Belarus refineries. Moreover, Belarus charged export duties on the refined products, thus earning a windfall for the state budget. Even so, the Belarus export duties on various types of refined products were all along far lower than Russia’s export duties for the same types of products refined in Russia.

With Russia chronically short of in-country refining capacities, it was logical for Russian producers to use the refineries in Belarus. The hitherto-existing customs and tax arrangements made this practice particularly profitable. According to Russian Industry and Energy Minister Viktor Khristenko, Russian oil-producing companies were “scrambling and elbowing each other in order to use this tax shelter” in Belarus (Interfax, December 12). For its part, the Russian government claims to have been losing $4 billion annually in 2005-2006 in tax and customs revenue to the state budget.

Minsk has notified Moscow on January 3 and thereafter that Belarus is ready to revoke the oil transit tax if Russia revokes the oil export duty. Minsk calls for resuming negotiations (interrupted since last November) on sharing the proceeds from the Belarus export duty on the oil derivatives refined in Belarus. It calls for sharing the latter on a 50% to 50% basis and for completing the negotiations within this month.

For its part, Russia wants Belarus to raise its export duties on the refined products to the level charged by Russia and to pay 85% of the proceeds into the Russian state budget.

(Interfax, Belapan, NTV, Belarus TV, January 1-7)