Moscow Using Oil Export Duty to Pressure Belarus

Effective January 1, Russia has drastically reduced its traditional subsidy to the oil processing industry in Belarus and, thereby, to President Alyaksandr Lukashenka’s government. That industry in Belarus is processing Russian crude oil and exporting the derivatives to European Union markets. Some Russian oil producing companies rely heavily on the Belarus state-owned refineries. Moreover, Belarus provides transit for the lion’s share of Russian crude oil exports by pipeline to Europe.

Politically, Moscow’s move is a retaliation against Lukashenka’s recent, tentative rapprochement with the EU. Withdrawal of Russian preferential arrangements for oil hits heavily at the state budget of Belarus. From a business perspective, Moscow’s move seeks to pressure Belarus into ceding its oil-processing plants to Russian companies, such as Rosneft and Lukoil. That goal forms part of a wider intention to “privatize” the economy of Belarus through Russian state-connected oligarchic entities. Lukashenka has resisted thus far.

The Russian government and companies are hurrying to force a takeover during the present economic recession, while prices for oil-processing plants have hit rock-bottom. The Belarus refineries could fetch realistic market prices after a general recovery from recession (unless Russia simply cuts the oil supplies, as it did earlier against Lithuania). Belarus, while reluctant to part with its refineries, seeks at least to wait out the recession and thus improve its negotiating position vis-à-vis Russia.

Russia has hitherto subsidized Belarus through deep cuts in the price of crude oil deliveries for many years. As a unique favor, Moscow has been charging only 35.6 percent of the standard export duty on Russian crude oil, correspondingly reducing the acquisition costs paid by Belarus. Thanks to this differential, Belarus has been earning multibillion dollar profits annually by exporting oil derivatives to EU countries, at the market prices prevalent there. The Russian oil companies involved have almost certainly received their cut from Belarus for these arrangements, which the Russian government now threatens to end.

Moscow is clearly the initiator of this dispute, which is not its first with Minsk regarding oil. In January 2007, Russia briefly halted all deliveries when Belarus attempted to introduce a more realistic transit fee for Russian oil en route to the EU via the Belarus pipelines. Moscow’s stoppage affected a number of EU countries downstream, necessitating emergency measures there.

The current dispute can potentially affect EU countries’ supplies of crude oil from Russia and oil derivatives from Belarus, if Moscow chooses to pressure Minsk through another halt in deliveries. This is not the case thus far. In public statements since January 1, Moscow has assured both Minsk and European consumer countries that oil deliveries to and via Belarus would continue while Moscow and Minsk negotiate a solution to their bilateral dispute. Russian Prime Minister Vladimir Putin, Deputy Prime Minister Igor Sechin (in charge of the energy sector), as well as spokesmen for the Energy Ministry and for Transneft have all gone on record with such assurances (Interfax, January 1–4; Russian Television, January 4).

Those assurances to Europe seem credible. Russia and its oil companies can ill-afford any loss of revenue and a further loss of reputation through a temporary halt in oil exports via Belarus to points west. The assurances to Minsk, however, are questionable, given Moscow’s intentions to pressure Belarus into ceding those refineries. Moscow can even threaten to switch some oil export volumes away from Belarus to other destinations by other routes into Europe.

Belarus currently transports a whopping 70 million tons of Russian crude oil per year through the HomelTransnafta pipelines, which form the Belarus state-owned section of the Druzhba pipeline system that supplies Europe. Additionally, 4 to 5 million tons of Russian oil entered Belarus in 2009 by rail and highway transportation. Belarus itself uses some 21 million tons of Russian oil annually for processing in Belarus –a figure that has remained constant in recent years (21.5 million tons in 2009). Of this amount, 5 to 6 million tons are being allocated each year to meet Belarus’ internal requirements for oil derivatives. The remaining 16 million tons are being processed for export of derivatives to Europe, according to Russian government officials (RIA Novosti, December 31; Interfax, January 1).

The Russian government is now abolishing the preferential export duty it has hitherto applied to the oil volume that Belarus processes for export of derivatives. Moscow is imposing its standard export duty on that volume, thus almost tripling that duty from its present level of 35.6 percent of the standard. This move would erase the profits that the Belarus refineries had been earning thanks to that unique preference. The change would also cut severely into the Minsk government’s tax base.

Moscow proposes to maintain its preferential export duty only on the oil volume that Belarus processes for domestic requirements of oil derivatives. Should Minsk reject this solution, Russian government officials threaten to impose the standard export duty on all the oil deliveries to Belarus, including the volumes needed for domestic supply of derivatives (Belapan, January 3, 4; Interfax, January 1–4).

Negotiations held in Moscow during December 2008 ended in deadlock. The negotiations are expected to resume shortly in Moscow. The Russian government can either inflict severe damage on the Belarusian economy through these measures, or desist at least partly in return for political and business concessions from Minsk. Some Russian oil producing companies may suffer along with Belarus while other Russian companies hope to take over that country’s oil processing sector and other industries.