BELARUS NEWS AND ANALYSIS

DATE:

08/01/2007

Russian oil stops flowing in Belarus

Steven Lee Myers

MOSCOW: Russian crude oil stopped flowing to Western Europe through a major pipeline across Belarus, officials here and in Europe said.

It was not immediately clear who turned off the tap. The head of Russia's oil pipeline monopoly today accused Belarus of illegally siphoning off oil beginning on Saturday, escalating a dispute between Russia and Belarus over customs duties and transit fees for energy shipments.

Belarus's foreign ministry acknowledged that the flow in the pipeline had been halted, but it denied that Belarus was responsible, suggesting instead that Russia cut it off at their common border. Other officials in Belarus, however, were quoted in news reports saying that the country had indeed cut the flow.

Regardless of the cause, the disruption along the pipeline - whose name, Druzhba, means friendship - affected supplies of crude oil headed to Poland, Germany and Ukraine.

In the short term, at least, it should have minimal effect on refiners in those countries, because they maintain reserve stocks of crude. But a prolonged disruption could be worrisome.

World oil prices, which had been falling lately, rose on the news, and were up about $1 a barrel as the American trading day began.

The dispute has rekindled concerns in Europe about the reliability of energy supplies from Russia.

"This shows us once again that arguments among various countries of the former Soviet Union, between suppliers and transit countries, mean that these deliveries are unreliable from our perspective," Poland's deputy economics minister, Piotr Naimski, said in televised remarks, according to The Associated Press.

The shutdown of Druzhba, one of the world's largest oil pipelines, came a week after Russia and Belarus negotiated a last-minute agreement on supplies of natural gas to Belarus and their prices. The deal came after a tense period of brinkmanship by both sides that raised the specter of disruptions of natural gas supplies across Europe, like the one last year that stemmed from a dispute between Ukraine and Russia.

Belarus, a former Soviet republic led by an autocratic president, Aleksandr G. Lukashenko, has reacted furiously to the terms of the just-concluded natural gas deal, and to Russia's tactics in the talks that led to it. Last week, Mr. Lukashenko, often called the last dictator in Europe, called Russia's conduct shameless.

Russia has responded by saying that it has simply raised its prices for oil and gas to market levels, after decades of giving Belarus and other former republics of the Soviet Union deep discounts compared with Western European customers.

"Belarus has cast prudence to the wind," Andrei V. Sharonov, a Russian deputy economic development minister, said in remarks on Ekho Moskvy, referring to what he, too, called the illegal siphoning of oil. "This looks like a trade war."

He later said that Russia would suspend all oil shipments via Belarus, blaming it for the initial disruptions. His remarks suggested the disruption could last indefinitely.

For the last decade, Russia and Belarus - two countries bound by history and by deep ethnic, cultural and social ties - had been moving haltingly toward the creation of a political union, with open borders, a common currency and eventually a full merger into a single state, as negotiated in a 1996 treaty between Mr. Lukashenko and the Russian president at the time, Boris N. Yeltsin.

The union has not come to fruition under Mr. Yeltsin's successor, Vladimir V. Putin. And in the last month, the two countries have appeared instead to be negotiating the terms of a divorce, which, like many divorces, is becoming nasty.

Under the new agreement, on New Year's Day Russia began charging Belarus $100 for every thousand cubic meters of natural gas, more than double the $46 it charged in 2006. The new agreement calls for the price to go on rising steadily through 2011 to reach the level now charged to Western European countries, which now pay an average of $265 for each thousand cubic meters.

As negotiations over that deal dragged on bitterly, Russia also imposed a separate new duty of $180 a ton on the crude oil it sells to Belarus at steeply subsidized prices. Mr. Lukashenko's government responded to the oil duty last week by imposing a fee of $45 a ton for oil shipped across Belarus on its way to Europe.

The duties and fees are at the heart of the dispute that apparently has shut down the pipeline.

Mr. Sharonov, in his radio interview, said that Mr. Lukashenko's government had begun seizing oil from the pipeline in payment for the transit fee.

The head of Russia's pipeline monopoly, Semyon M. Vainshtok, said in a statement today that Belarus had taken 79,900 metric tons of oil from the pipeline since Saturday "without warning anyone." "Transit is a sacred cow," Mr. Vainshtok said, vowing to ship oil to European customers by other means.

On Sunday, prosecutors in Belarus filed suit against Mr. Vainshtok, accusing him of violating customs agreements by refusing to pay the new transit fee for oil. But a hearing on the case scheduled for today was cancelled.

In Belarus, there were conflicting reports about what had unfolded.

While the foreign ministry denied responsibility, an official from the Druzhba pipeline operator there told Russian news agencies that operations were halted on orders from Belneftekhim, Belarus's national pipeline monopoly. Neither the ministry nor the companies would elaborate.

Belarus has used its access to cheap supplies of oil and gas from Russia to shore up a Soviet-style economy and to earn hard currency by refining crude oil and exporting the refined products. For Mr. Lukashenko's government, a shift in the economics of the country's energy supply could weaken his iron control on the country, with a population of 10 million.

"The Belarussian people may not realize the extent to which they have been propped up by Russian energy, the extent to which the Belarussian miracle that Lukashenko talks about was built on legs of clay," said Rory MacFarquhar, an economist with Goldman Sachs in Moscow.

He noted that Russia's new export duty could cost Belarus $3.5 billion to $4 billion a year - more than 10 percent of the country's gross domestic product. He added that Belarus's tit-for- tat oil transit duty, which is significantly higher than most countries charge for oil transshipments, was an attempt to cover most of those losses.

The impact in Belarus, where news is tightly controlled by the state, remains uncertain.

Pavel Daneyko, the director of the Institute for Privatization and Management, a business consultancy in Minsk, said that Mr. Lukashenko's government now faced a difficult choice: either liberalize the country's economy or wage a populist propaganda war against Russia.

"If there is a clear war with Russia," he said by telephone, "then the society may be able to weather the situation."

Source:

http://www.iht.com/articles/2007/01/08/news/web.0108oilC.php

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