Talks Frozen in Belarus Oil Dispute

ReutersAn oil refinery on a branch of the Druzhba pipeline near Mozyr, Belarus, where supplies were halted for two days.

Negotiators from Belarus have returned home after rejecting Russia’s terms for a new oil trade agreement Saturday, further stoking fears that the dispute could disrupt crude flows to Europe.

Moscow and Minsk are fighting over duties on imported oil that Belarus reexports to Europe, which is a key source of revenue for the country’s economy.

The spat is the fourth time in five years that Russian energy supplies through Belarus or Ukraine have come into question around the New Year’s holidays. In January 2009, large swaths of Europe were left in the cold after gas transit through Ukraine was interrupted.

Both sides have expressed their willingness to continue the talks, a Belarussian government spokesperson said, without specifying when they might resume. Oil supplies have continued to Belarus, even though the previous supply agreement expired Dec. 31.

Urals, Russia’s main oil blend, has surged 5 percent since the start of the year, an upturn believed to stem — at least in part — from the standoff. Cold weather throughout Europe has also increased demand for fuel.

Russia wants to charge Belarus the full export duty after providing a 36 percent discount last year. Under the proposal, the duty would affect crude that Belarussian refineries handle for reexport, while Moscow would drop the duty for 6.3 million metric tons of crude that Belarus needs for domestic consumption — a $1.8 billion bonus at the current rate.

Belarus, however, is demanding that all of the crude it imports be duty-free, citing a customs union that the two countries and Kazakhstan began Jan. 1. Prime Minister Vladimir Putin said Jan. 4 that the union would only regulate energy trade from July 1.

“Belarus is holding back the negotiation process. Russia has made unprecedented and very comfortable proposals about duty-free oil supplies. … But Belarus is demanding more,” Energy Ministry spokeswoman Irina Yesipova told Reuters.

“The Russian side has de facto ignored arguments and calculations presented by the Belarussian side,” a Belarussian government spokesman told Interfax, adding that the Belarussian delegation had returned home.

Deputy Prime Minister Igor Sechin, who led negotiations on the Russian side, said Jan. 4 that Moscow would continue shipping its crude through Belarus to European customers, including Germany and Poland. Deliveries to two Belarussian refineries, Naftan and Mozyr, resumed Jan. 3 after a two-day interruption, he said.

“The Russia-Belarus oil dispute is of growing concern, not only in Europe but in the wider global market,” Andrew Neff, an analyst at IHS Global Insight in Washington, said in a note. “With both sides standing firm now, the dispute could get worse before it is resolved.”

Urals rose to $80.37 per barrel in Friday spot trading, its highest price since October 2008.

Germany relies on Russian crude for 15 percent of its needs, while Poland buys from Russia to fill 75 percent of its market, Neff said.

The European Commission has not reacted to the standoff as of Sunday.

On Jan. 4, Belarus threatened to stop electricity transmissions from Russia to the Russian exclave of Kaliningrad. Belarussian authorities said the countries had no transit agreement, but stressed that the warning was unrelated to the oil dispute.

“From the Belarussian perspective, this is simply turning the tables and giving Russia a taste of its own medicine,” Neff said. “Belarussian officials feel that Russia is being similarly spiteful in attempting to impose export tariffs on crude oil supplies.”

After a similar disagreement with Belarus in 2007, which resulted in a brief cut in oil supplies to Europe, the countries came to an agreement that granted Belarus the export duty discount. Last year, Moscow allowed Minsk to import 20 million metric tons of oil, of which 14.5 million metric tons Minsk reexported to Europe.

The crude export duty is $267 per metric ton as of Jan. 1.

Belarus also threatened to raise the transit rate for its European customers more than 10-fold, from $3.9 to $45 per metric ton, if Moscow did not agree to its conditions, an unidentified oil expert familiar with the talks said, RIA-Novosti reported.

Sergei Kolchagin, a senior fellow at the Russian Academy of Sciences’ Institute of Economics, praised the Russian offer of duty-free exports for the Belarussian market as a good solution.

“The compromise offered by Moscow looks reasonable,” he said, adding that Russia was right in defending the duty for the rest of supplies. “Now tell me, how long will Moscow use its money to fill the Belarussian budget?”

Minsk’s revenues on oil reexports topped $10.7 billion in 2008 and decreased to $6.5 billion in 2009, accounting for 35 percent of the country’s total exports, according to estimates by Yaroslav Romanchuk, head of the Belarussian Scientific Research Mises Center, a think tank.

If Russia prevails in the dispute, Belarus would earn $3 billion to $4 billion less this year, causing its gross domestic product to contract by 6 percent to 8 percent, he said.

The revenues earned by Minsk on Russian oil reexports have been widely seen as one of the pillars of the regime of President Alexander Lukashenko, who has been in power since 1994.

Finance Minister Alexei Kudrin said last summer that Moscow would cease lending to Minsk because it could be insolvent by the end of the year, prompting an angry response from Lukashenko.

Kolchagin said Minsk would most likely accept Moscow’s offer because Lukashenko has few other options.

Minsk could seek to pressure Moscow by threatening to withdraw from their common air border security and air defense system pacts, he said, although it seemed unlikely that the bargaining would go that far.

Russia and Belarus signed an agreement on common air border control and an air defense system in February 2009. The document was ratified by Russian lawmakers and approved by President Dmitry Medvedev last month, but Belarus has not given final approval.

Another possible solution would be if Belarus allowed Russian companies to buy into its refineries, Energy Minister Sergei Shmatko said late last month.

Staff writer Anatoly Medetsky contributed to this report.

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