Publication: Eurasia Daily Monitor Volume: 4 Issue: 10

On January 12 in Moscow, Prime Ministers Mikhail Fradkov of Russia and Syarhey Sidorski of Belarus inked agreements on oil supplies and transit, eliminating part of Russia’s hidden subsidies to Belarus. By the same token, the agreement seems to preclude actions by Belarus that would provoke Russia to stop pumping oil to Europe via Belarus, as Transneft did during the second week of January. Initial reports do not fully clarify which parts of the agreements are final and binding and which are temporary or merely initialed, rather than finally signed.

Moscow agreed to begin negotiations on oil supplies to Belarus only after the latter had given up the transit tax, which it introduced on January 1 for Russian oil en route to Europe through the Belarus section of the Druzhba system. Minsk lifted the tax on January 10, which it had been unable to enforce because Russia’s Transneft interrupted the flow to Europe.

Under the January 12 agreements, Russia introduces an export duty on crude oil to Belarus at $53 per ton at Russia’s western border, effective from January 1 and applicable to the crude earmarked for refining in Belarus.

The export of Belarus-refined products to third countries shall be taxed at the “western” borders of Belarus as follows: Russia to receive 70% of the tax proceeds in 2007, 80% in 2008, and 85% in 2009, with Belarus correspondingly receiving 30%, 20%, and 15%, respectively, in those years.

Russia supplied 20 million tons of oil for consumption and is scheduled to supply the same amount in 2007. Crude oil to meet domestic requirements for refined products will continue to be supplied duty-free by Russia in 2007 to the tune of 6 million tons. The Russian export duty applies the other 14 million tons, the refined products that are to be exported.

Belarus extracts 2 million tons of oil annually in the country. It now has the option to export it with a duty of $180 per ton or refining it in the country. Russian officials are to be stationed on the “external border of the [Russia-Belarus] Union State” to record the flow of crude oil and oil products. Moscow reserves the right to raise its export duty on crude oil again to $181 if Minsk does not abide by the arrangement on sharing the tax revenue on its oil product exports.

The compromise is clearly weighted in Moscow’s favor on both counts. At least since 1995, Russian crude oil deliveries to Belarus were duty-free, enabling Belarus refineries to export oil derivatives at high prices from low-cost Russian crude. Since 2001, moreover, Belarus was taking 100% of the tax proceeds from the export of those oil products to third countries. Most recently, however, Moscow demanded an 85% share of those tax proceeds, effective immediately. On January 1, 2007, Moscow introduced a $181 tax on crude oil supplies to Belarus, ostensibly to recoup some $3.5 billion in annual revenue hitherto lost to the Russian budget.

Effective that same day, Minsk introduced a transit service tax of $45 per ton of Russian oil headed for European Union countries, reckoning with compensatory annual revenue of $3.5 billion for the transit service. Belarus had all along provided the transit service gratis and will apparently continue to do so, after Moscow threatened to counter-retaliate by closing Russia’s markets to Belarus’ industrial exports.

According to government officials from both sides, Russia’s budget stands to earn $1.1 billion in 2007 through the export duty on crude oil supplies to Belarus. By the same token, the Belarus budget stands to earn some $1.5 billion in 2007 through the export tax on Belarus-refined products from Russian crude. However, the Belarus tax share is set to decline year-by-year; and the cost of crude supplied to Belarus is rising substantially through the Russian customs duty, deeply cutting into Belarus’ profit margin from the export of derivatives.

The negotiations in Moscow continued late at night in the Soviet tradition and came to closure only after another telephone conversation between Presidents Vladimir Putin and Alexander Lukashenka — a follow-up to their January 10 telephone talk, which launched these negotiations on an emergency basis.

The Russian side realized that it did not hold all the cards, once the European Union reacted strongly against Russia’s interruption of oil supplies via Belarus. Some Russian officials including Fradkov and — most emphatically — Economic Development and Trade Minister German Gref openly acknowledged that Russia’s reputation as a reliable supplier to Europe has again been undermined through the stoppage of oil deliveries through Belarus. Alluding also to the January 2006 gas crisis over Ukraine, these Russian officials declared that such situations must never be repeated. Russia’s reputation in Europe must now be rebuilt, Fradkov and Gref declared even as the negotiations with the Belarus delegation were in progress.

On January 11 in Brussels, a special meeting of the EU’s expert group composed of representatives of the 27 member countries and EU agencies called on Russia and Belarus to remove all remaining impediments to transit and ensure reliable supplies of oil to EU countries. Russia had recommenced deliveries partly on January 10 and fully on January 11. The first volume to be pumped was the 79,000 tons that Homel-Transnafta — operator of the Druzhba pipeline’s Belarus section — had impounded in lieu of the Russian transit tax after January 4.

(Interfax, Belapan, Russian and Belarus televisions, January 11-14; see EDM, January 8-11)