Moscow Tightens Squeeze on Belarus Oil Industry

The Russian government threatens Belarus with an imminent cessation of oil supplies to the country’s two big refineries, Mozyr and Navapolatsk (aggregate capacity at least 25 million tons annually). The declared trigger of this threat is the dispute over Russian taxation of oil deliveries to Belarus (EDM, January 5). The undeclared motivation, however, is to pave the way for a Russian takeover of Belarus refineries and, in a follow-up stage, Russian control of the Belarus Druzhba oil transit pipelines to Europe.

According to Russian pipeline monopoly Transneft’s chief spokesman Igor Demin, oil supply volumes from Russia are running out at this week’s end for the Mozyr refinery, and one week later for the Navapolatsk refinery. At that point “there will be nothing to pump,” the spokesman warned. Russian oil producing companies have stopped submitting applications to transport their oil to Belarus through Transneft pipelines (Interfax, January 13, 14).

Russian oil companies use the Belarus refineries for processing more than 20 million tons of Russian crude annually. Rosneft and Lukoil (in that order) are the main users in terms of annual volumes. The Russian government and companies have pressed Minsk since at least 2008 to negotiate the terms of transferring the refineries to Russian control. Russian First Deputy Prime Minister Igor Sechin, who coordinates the ongoing negotiations with Belarus on oil supplies, is concurrently the chairman of the board of Rosneft.

Effective on January 1, the Russian government has withdrawn most of its indirect subsidies to the Belarus oil processing industry. Those subsidies came in the form of slashing the Russian export duties on the oil delivered to Belarus refineries (EDM, January 8).

Russian oil companies had almost certainly received their share of profits from Belarus’ highly lucrative exports of oil derivatives in recent years. The Russian government’s move on export duties, however, indicates that it seeks outright control of that industry in Belarus. By withdrawing the previous form of subsidy on crude oil, Moscow would drastically cut the Belarus refineries’ profit margins and turn them into easy targets for a Russian takeover.

If this scenario unfolds as apparently intended, Belarus would no longer earn the necessary revenue for upkeep of the Druzhba oil transit pipeline’s Belarus section. Minsk would have to turn to Moscow for financing that pipeline’s maintenance and modernization. That section carries a staggering amount of more than 70 million tons of Russian oil annually to European Union countries. Moscow would like to control the transit pipeline itself for added leverage in Europe.

The Belarus state holding Belnaftakhim owns the refineries and the Druzhba pipeline on Belarus territory. If deprived of revenue from the processing plants, Belnaftakhim could end up in the same situation as Naftohaz Ukrainy: unable to invest in the transit pipelines’ modernization and vulnerable to Russian takeover of the transit system.

President Alyaksandr Lukashenka’s government has tried to resist a Russian takeover of the refineries and, as a fallback position, to bargain over the terms. Moscow escalated the crisis on January 1 by cutting deeply into the refineries’ income, and thus also into Minsk’s tax base. It now threatens a further escalation through a possible suspension of oil supplies altogether.

Russia-Belarus inter-governmental negotiations over the oil export duty broke down in Moscow on January 9. Three days later, Lukashenka sent an explanatory letter to Russian President Dmitry Medvedev (Interfax, January 12). Belarus state media describe the situation less diplomatically:

    “Russian officials are impervious to any arguments, they only pressure the [Belarus] negotiators: ‘sign, or the terms would be worse tomorrow.’ Certain people in the Russian government are resorting to a typical raiding [reyderstvo, Russian underworld expropriation] operation … Russian companies dream of privatizing the two Belarus refineries by Russian methods, for a song and without any further commitments. Moreover, Moscow is interested in controlling our [oil] transit pipelines” (Belarus state radio, January 11).

Moscow proposes to maintain the low export duty on the oil volume necessary for Belarus’ internal requirements only; and to impose the full export duty on the much larger oil volume being processed in Belarus for the export of refined products. The two volumes are 6 million tons and 15 million tons, respectively, per year. Should Minsk reject this arrangement, Moscow threatens to subject the aggregate quantity of 21.5 million tons to the full export duty. The negotiations broke down at that point on January 9. Moscow is now escalating further by threatening to suspend all deliveries.