BELARUS NEWS AND ANALYSIS

DATE:

10/01/2007

Russia, Belarus in dispute over oil

By HENRY MEYER

Russia and Belarus remained at loggerheads Wednesday in a damaging dispute which has severely disrupted the flow of Russian oil to Europe as a news report said that Moscow was considering major retaliatory steps to force its neighbor into submission.

Some Russian media and analysts said that the Kremlin appeared determined to tough it out, despite the damage to Russia's reputation as a key energy supplier to the European Union, which has strongly criticized the shutdown of a pipeline that transports crude to Germany and much of Eastern Europe via Belarus.

Taking a harsh stance Tuesday, Russian President Vladimir Putin ordered his government to work out a set of measures aimed at Belarus to protect the national economy.

Putin also ordered his Cabinet to consider a possible reduction in oil output -- an indication the standoff could drag on. Russia has a limited capacity for refining oil and would have to cut crude output if its exports decrease suddenly.

On Monday, Russia stopped pumping oil to Europe via the Druzhba, or Friendship, pipeline that crosses Belarus, accusing its neighbor of siphoning off oil, and by Tuesday, the stoppage had affected supplies to Ukraine, Germany, Poland, Hungary, the Czech Republic and Slovakia.

The dispute centers over Russia's decision to impose a hefty duty on oil exports to Belarus, with Moscow complaining that the previous duty-free regime has been costing the Russian budget up to US$4 billion (euro3.1 billion) a year.

Minsk, whose isolated regime is tied to Moscow through a loose, union treaty and relies on cheap Russian energy and duty-free trade with Russia, hit back by slapping duties on Russian oil pumped across Belarus to Europe.

Analysts say that Putin has grown tired of supporting authoritarian Belarusian leader Alexander Lukashenko, who has been dubbed the "last dictator in Europe" by some Western governments for his undemocratic rule and crackdown on dissent.

Talks between Belarus and Russia broke up in failure Tuesday after Moscow insisted that Minsk annul the oil transit fee. A Belarusian delegation remained in Moscow a day later, but Russian officials said that negotiations could only resume if Belarus met this condition.

The Vedomosti business daily reported Wednesday that Russia was planning to impose duties on more than half of Belarusian imports, in what would deal a heavy blow to Belarus' inefficient, state-dominated economy.

The newspaper quoted an unnamed government official as saying that from February onward, Russia could levy import duties on Belarusian goods that are worth US$6 billion (euro4.6 billion) annually that currently have a duty-free status under a customs union agreement.

This would include Belarusian goods, 80-100 percent of which are exported to Russia, including meat and meat products, milk and dairy products, televisions and furniture.

Trade and Economic Development Ministry spokeswoman Alla Borisenkova said that she could neither deny nor confirm the report. "Such measures are theoretically possible but the ministry is not working on such steps," she told The Associated Press.

Russian Energy and Industry Minister Viktor Khristenko on Tuesday hinted at similar measures. "The trouble which we have seen concerning the transit of oil could be the reason to more thoroughly analyze the preferential regime on other commodities," he said.

Some Russian media interpreted Russia's actions as signaling a decision to take an uncompromising stance.

The Nezavisimaya Gazeta daily in a front page story headlined "This is War" commented that "the president's harsh words left no doubt that in the oil war with Minsk, the Kremlin will go right to the end."

"The Kremlin wants to resolve the situation from a position of force," Natalia Milchakova, an analyst from Moscow brokerage Opening, was quoted as saying by the Gazeta.ru online news site.

She said the halt to oil deliveries to EU nations through Belarus was highly damaging for Russia's reputation.

"Belarus is seen in the West as a part of the Russian-Belarusian single economic space and if we can't influence Lukashenko through civilized methods, Europe will blame us," Milchakova said according to Gazeta.ru.

The disruption of Russian oil to Europe came a year after a price dispute with Ukraine led to a natural gas cutoff for Kiev and brief shortages of Russian gas pumped to several EU nations. The incident alarmed European officials and lead to calls for energy diversification. Russia currently supplies a quarter of the EU's oil and over two-fifths of its natural gas.

But Putin's calculation appears to be that Lukashenko will have to climb down in a matter of days when his country runs out of oil reserves, analysts said.

Source:

http://www.businessweek.com/ap/financialnews/D8MIC88G1.htm

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