Russia, Belarus oil tiff resolved — for now

KIEV, Ukraine — Russia and Belarus ended a month-long standoff over oil tariffs this week, signing an agreement that officials touted as striking a middle ground between Minsk and Moscow. 

But the accord was in fact a victory for Russia, observers said, revealing the weakness of Belarus’s position, and may point to more difficulties to come between the two Slavic “brother nations.” 

At issue was the Kremlin’s sudden cancellation of a long-standing arrangement to provide cheap oil to Belarusian President Aleksander Lukashenko’s authoritarian regime. Russia exported more than 20 million tons of oil to Belarus annually, which under the two nations’ customs union, was subject to only one-third of the usual export tax. 

Belarus used about 6 million tons domestically. The rest it processed at its two oil refineries and exported to Ukraine and western Europe, charging the usual export tariff and pocketing the difference. 

Moscow refused to renew the contract when it expired on Dec. 31 and demanded that Minsk pay the full export tax for the oil it sold abroad. The new terms potentially meant a loss of $2 billion to $3 billion dollars — an enormous sum for the cash-strapped Lukashenko government, which has counted on cheap Russian oil and gas to subsidize its post-Soviet welfare state. 

“In the past the oil has been a massive earner [for Belarus] — more important in many ways than the cheap gas,” said Andrew Wilson, senior policy fellow at European Council on Foreign Relations in London. “It put money in the regime’s pocket — its political slush fund.” 

In their negotiations, the two sides played a game of political chicken. Russia threatened to decrease if not completely cut off the oil it supplied to Belarus’s domestic industry; Belarus for its part has the power to potentially block all Russian oil traveling through the Druzhba pipeline, which crosses its territory and supplies about 10 percent of Europe’s oil. 

Neither side, however, carried out its threats, real or implied, and in the end the two sides reached a compromise of sorts. Russian Deputy Prime Minister Igor Sechin and Vladimir Semashko, Minsk’s first deputy prime minister, signed an agreement Wednesday whereby Belarus would received 6.3 million tons of oil duty free for domestic use, but the amount could increase after September, depending on whether the country’s economy recovers from its recession. Tariffs would rise by 11 percent over the original reduced rate on the remaining oil that crosses Belarus, agencies reported. 

“The position of the Belarussian side was very harsh for us. We agreed to a number of compromises, bearing in mind the special relationship with a brother republic, with the people of Belarus,” Sechin said in published comments.

The full scope of the contract is unclear however. Some analysts at first glance declared Belarus nevertheless the loser. Minsk it seems is receiving less now that it was before. This, no matter how you look at it, is a blow to Lukashenko’s government, which is finding it increasingly difficult to meet its financial obligations. 

Semashko for his part said that Belarus’s “budget losses will not be as high as was envisaged very recently,” the Russian Interfax news agency reported. 

The defeat is linked to the fact that Lukashenko, who, it is said, takes pride in his ability to overcome any political obstacle — and who faces re-election in February 2011 — finds himself with ever decreasing space to maneuver. 

Chris Weafer, senior strategist for Uralsib Bank in Moscow, said that Lukashenko, having long pursued a policy that turned its back on the West, “hasn’t developed the relations and therefore now doesn’t have any other international options.” 

“He’s backed himself into a corner,” Weafer added. “Belarus needs that subsidy.” 

Lukashenko could weather his financial problems, observers say, by striking further bargains with Moscow. The Kremlin can provide money (the last $500 million tranche of a stand-by loan has been frozen for instance) but most likely Moscow officials would require choice pieces of the Belarus economy in return. Russian oil interests have been eyeing increased stakes in Belarus’s pipeline network and its two marquee refineries, Mozyr and Naftan. 

Making matters worse, Belarus’s negotiating ace-in-the-hole — its ability to close down the Druzhba pipeline — may soon be obsolete as well. Russia has long planned to build by 2013 a spur to its Baltic Pipeline System that bypasses its Slavic neighbor and supplies Europe directly. 

On the other hand, Lukashenko could turn his back on Russia’s money and open up his country to western investment. Washington and Brussels are requiring political reform, however, and western companies are waiting for economic restructuring before they commit to sinking major funds into Belarus. Lukashenko has made a number of political and economic gestures in the last year, freeing political prisoners and discussing major privatizations. He appears either unwilling or unable to undertake further significant reforms, however, most likely because this could entail weakening his grip on power. 

Ultimately, Russia, Belarus and Kazakhstan are supposed to form a single customs space by mid-2011. This date, however, is constantly being pushed back — a victim of such thorny issues like how to tax Russian oil exports. For this reason, some observers believe the disputes between the two countries will become not better, but worse. 

“As long as they are joined in a union, relations between Russia and Belarus will not be normal,” said Vitali Silitski, director of the Belarusian Institute for Strategic Studies in Minsk. “Like with any problem family, the solution can only be divorce.”