Russian Oil Supply Cut Hits Belarusian Refineries

Moscow is tightening the squeeze on Belarus’ large-capacity, in the absence of an oil supply agreement for 2010, mainly on export-oriented refineries. The Mozyr and Navapolatsk refineries and other oil sector assets in Belarus are targets for Russian acquisition. The two refineries operate at only 60 percent of their normal operating rate since January 15, when Russia’s Transneft oil transport monopoly announced a freeze on any further contracts for oil delivery to Belarus by pipeline.

Crude oil processing in Belarus is down to 19,000 tons daily, compared with the traditional 30,000 to 31,000 tons per day as last recorded in December 2009 (Interfax, January 18). Apparently, the two refineries operate for the time being on dwindling stocks and possibly some meager oil volumes delivered by railroad and highway transportation.

Russia-Belarus negotiations on oil deliveries broke down in Moscow on January 9 and have been substituted by long-distance messages exchanged between Moscow and Minsk (a form of negotiations labeled “distantsionniye” in Russian bureaucratic parlance). At the highest level of these exchanges, Russian President Dmitry Medvedev and First Deputy Prime Minister Igor Sechin (responsible for the energy sector) reaffirmed Moscow’s uncompromising position in letters of reply to Belarus President Alyaksandr Lukashenka and First Deputy Prime Minister Uladzimir Syamashka on January 18 and 17, respectively.

Medvedev and Sechin took a long time to reply in a situation in which every passing day inflicts losses on Belarus’ oil-processing industry and the state budget (EDM, January 5, 8, 15). Lukashenka and Syamashka had written to their Russian counterparts on January 13 and 9, respectively. They had urged that the traditional preferential terms on oil deliveries to Belarus should be retained for several months, pending the re-negotiation of the terms (Interfax, Belapan, January 10, 14). The Russian leaders’ responses, however, merely certify for Minsk that the Russian government has already introduced the new terms on oil deliveries since January 1 unilaterally (Interfax, January 15, 18; Izvestiya, January 18).

Under the new arrangement, Russia is levying the same customs duty on oil exports to Belarus as to any other country. Prior to January 1, the Russian duty on oil exports to Belarus was only 35.6 percent of the standard duty. Belarus was the only country to enjoy this Russian favor. The favor trickled down to Russian oil producing companies that refined their crude in Belarus for export of the derivatives. The Russian side, however, is ending these arrangements. It now imposes the standard export duty (currently $267 per ton) on oil supplies to Belarus. This rate is slashing the profits of Belarusian refineries and threatening them with eventual insolvency, apparently in preparation for a Russian takeover bid.

Moscow is leaving room for negotiation with Minsk on one issue. It would reinstate the preferential terms on the crude oil portion to be refined in Belarus for the country’s internal consumption of oil derivatives. But it would only consent to this if Minsk accepts Moscow’s cancelation of the preferential terms on the oil portion to be refined in Belarus for export of the derivatives. The two annual portions are 6 million tons and 15 to 16 million tons per year, respectively. Should Belarus not accept this solution, Russia would cancel the preferential terms on the entire quantity of 21.5 million tons of crude oil delivered annually to Belarus by pipeline and also on the 4 to 5 million tons delivered by railroad and highway transportation.

The demand for Minsk’s acceptance has a subtext amounting to an additional demand. It implies that Belarus should desist from raising the transit fee for Russian oil en route to Europe through the Belarus section of the Druzhba pipeline. During the negotiations with Moscow, and after they broke down, Minsk asked for a substantial raise in that transit fee, as a compensatory measure. Minsk’s counter-move hints at its possible use of the transit country’s leverage on a monopolistic supplier country. It is, however, not a credible option for Minsk to interfere with the oil transit to European countries.

Minsk takes the position that any Russian customs duties are incompatible with the Russia-Belarus-Kazakhstan Single Economic Space and Customs Union, which Belarus joined in 2009. This union is due to take effect officially in mid-2010. The oil export duty is the only one being levied by Russia on any goods thus far. As Lukashenka and other Belarusian officials constantly point out, export duties in general and this one in particular would make a mockery of the Customs Union. Moreover, Minsk is concerned that an exception for oil could serve as a precedent for Russia to declare similar exceptions on other export commodities and impose export duties on them, regardless of the Customs Union.

Indeed, Moscow has always introduced exceptions in its favor when trying to create free trade zones and customs unions in the CIS (or bilaterally with Ukraine) during almost two decades. All these projects have been negated by Russian exemptions from the duty-free treatment. Moscow imposed duties on its commodity exports and introduced barriers to partners’ exports to Russia, notwithstanding those declared customs union or free trade zones. Given this experience and the current predicament, Lukashenka is asking aloud (Interfax, Belapan, January 10-16) whether Belarus should join this latest Customs Union at all.