BELARUS ACCEPTS DRASTIC CUT IN OIL SUBSIDY FROM RUSSIA

2010/02/03

by Vladimir Socor

On January 27 in Moscow, Belarus had no choice but to accept a drastic reduction in its traditional oil subsidy from Russia. The Russian government imposed this outcome through halting oil supplies to Belarus by pipeline almost completely since mid-January. The supply flow should now be restored, but at a far higher price overall, likely to set the stage for Russian takeovers in Belarus’ massive oil-processing industry, with processing capacities of up to 25 million tons per year (see EDM, January 5, 8, 15, 19).

First Deputy Prime Ministers Igor Sechin and Uladzimir Syamashka signed these agreements, four weeks after the December 31 deadline, in oft-interrupted negotiations and amid public polemics between Minsk and Moscow (Interfax, Belapan, January 27).

The agreement on oil deliveries to Belarus eliminates most of the traditional Russian subsidy. Until January 1, 2010, that subsidy took the form of cutting the Russian export duty on crude oil for Belarus to only 35.6 percent of Russia’s standard duty. That favor, granted uniquely to Belarus, ensured high revenues for its refineries and its state budget. Belarus was buying Russian crude oil cheaply and selling the refined products at market prices in Europe. The Russian oil producing companies involved almost certainly skimmed a portion of those extra profits. That system applied to an annual portion of approximately 20 million tons of Russian oil being processed in Belarus for export of derivatives, out of a total of some 25 million tons delivered annually to Belarus (the volumes in 2009 were 21.5 million tons by pipeline and another 4 to 5 million tons by road and rail transport).

Under the agreements just signed, Russia will levy the full standard export duty on the portion of Russian crude oil to be refined in Belarus for export of the derivatives. That portion is 15 to 16 million tons per year. Application of the full duty will increase the price heftily, from $ 380 per ton to $ 570 per ton, in terms of January 2010 prices.

Russia will maintain the old privileged arrangement, for the time being, on the portion of crude oil to be refined in Belarus for the country’s internal needs and those of Russia. This portion amounts to some 7 million tons annually, including some 6 million tons to meet Belarus demand and approximately 1 million tons to meet Russian demand of derivatives. Thus, of the total annual volume of Russian crude oil supplies to Belarus, only one third will continue to be low-priced. And this is the portion destined for the internal product market, which was not generating any significant profits.

The 6 million ton portion destined for Belarus’ own needs can be increased slightly, pegged to the country’s economic trends. Under the agreement just signed, the possible increase will be equivalent in percentage terms to the growth in Belarus GDPif there is growthas determined by October 1 of each year. This peg, however, is only agreed in principle, whereas its actual application is subject to further negotiation (RIA Novosti. January 27).

Under a separate agreement just signed, Russia will increase the fee it pays to Belarus for the transit of Russian oil to Europe. The increase is said to amount to 11 percent (Belarus TV First Channel, January 27). The fee in 2009 was $45 per ton of Russian oil pumped through the Belarus section of the Druzhba pipeline to Europe (Interfax, January 18).

Belarus had very little leverage in these negotiations. Russia is the monopoly supplier of oil and also the monopolist user of the oil transit service. Belarus was in no position to use the counter-leverage theoretically available to a transit country. To have done so would have gravely damaged Belarus’ relations with the European Union. The Druzhba pipeline carries more than 70 million tons of Russian oil annually to European countries.

Russia, however, was able to use the transit situation to its own advantage. When slashing oil deliveries to Belarus in mid-January, Moscow announced that it would switch those volumes from the Belarus supply system into the Druzhba transit system, toward Gdansk and Rostock, for further transportation to European customers. All sides involved (Russia, European consumers, and Belarus itself) proceeded from the assumption that Minsk would not interfere with the transit or the re-routing.

Belarus faces an immediate prospect of new indebtedness to cover the higher purchase price of Russian crude oil. According to National Bank Chairman Pyotr Prakapovich, Belarus will have to seek additional external financing for this purpose. It may apply first to the International Monetary Fund (IMF), as soon as Belarus’ stand-by arrangement with the IMF is completed at the end of the first quarter of 2010. The IMF reviewed Belarus’ performance favorably in December 2010 and approved the disbursement of a $688 million tranche to the country for the first quarter of this year (Belapan, January 27).

As a net outcome, the Belarus oil-processing industry and the state budget all face massive revenue losses. Russia’s introduction of the full duty will not only wipe out the high export profits of Belarus refineries but also undermine their competitiveness on European markets. The Belarus state budget‘s tax base will also take heavy hits. Revenue losses may well prevent the industry and the state from investing in the technological upkeep of these refineries, thus paving the way for ownership transfers to Russian oil companies.

–Vladimir Socor



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