BELARUS NEWS AND ANALYSIS

DATE:

10/01/2007

Belarus cancels Russia oil shipments tax

By YURAS KARMANAU

MINSK, Belarus

An oil pipeline dispute that prompted relations between Russia and Belarus to plummet -- and fueled doubts across Europe -- edged toward resolution Wednesday as the Belarus government backed down and canceled a transit tax on Russia oil shipments.

A top Kremlin official said the decision was "cause for restrained optimism," but it remained unclear when pumping would resume across the 2,500-mile-long Druzhba pipeline network, which feeds Germany, Poland and other East European nations.

The spat between the two formerly close, ex-Soviet republics showcased the Belarus regime's reliance on cheap Russian energy imports, and stoked doubts in European capitals about Russia and its dependability as an energy supplier.

"The disruptions in oil supplies have yet again undermined Russia's efforts to establish itself as a reliable source of fuel supplies to Europe," Deutsche UFG analysts wrote in a note to investors.

The dispute, now in its third day, centered on Russia's decision last month to impose a hefty duty on oil exports to Belarus, with Moscow complaining that the previous duty-free regime cost the Russian budget up to $4 billion a year in lost revenues. Belarus reaped billions in revenues by refining cheap Russia oil products and selling them at hefty profit to European markets.

Minsk -- whose centrally controlled economy is heavily reliant on cheap Russian energy and duty-free trade with Russia -- responded last week by slapping $45 per ton tax on Russian oil pumped across Belarus to Europe.

On Monday, Russia stopped pumping oil to Europe via the Druzhba pipeline -- whose name translates as "friendship" -- and accused its neighbor of siphoning off oil. By Tuesday, the stoppage had affected supplies to Ukraine, Germany, Poland, Hungary, the Czech Republic and Slovakia.

With the European Union voicing alarm and criticism and Russia threatening an all-out trade war against its former ally, the two countries' presidents -- Vladimir Putin and Alexander Lukashenko -- held talks by telephone Wednesday.

Soon after, Belarus' government announced the cancellation of the $45-per-ton duty, and Prime Minister Sergei Sidorsky announced he would fly to Moscow on Thursday for meetings with his Russian counterpart.

"I hope that within two days we will be able to overcome all disagreements -- on oil, oil products and other sensitive groups of commodities on the Russian and Belarusian markets," he said.

In Moscow, Kremlin spokesman Dmitry Peskov told The Associated Press that the announcement was "cause for restrained optimism," and said more talks between the two sides were expected.

Putin's top economic adviser, meanwhile, reasserted that Russia was a dependable energy supplier. "We act as a reliable partner, and we would like to do so in the future," Igor Shuvalov said.

"We need to understand that that kind of behavior very close to blackmailing can't be accepted by the Russians. If we do accept it this time, than the future can't be secured," he said. "Now we need to act together, the Europeans and the Russians, to avoid this kind of situation in the future."

It was unclear when exactly oil would resume flowing through the pipeline. The top official at Russian state-controlled pipeline operator OAO Transneft said in televised comments that oil that had been siphoned off and stored in Belarusian holding tanks would enter the pipeline sometime overnight, and pumping could resume soon after.

European Union leaders have strongly criticized the disruptions, which came one year after a price dispute between Russia and Ukraine led to a brief interruption of EU natural gas imports from Russia.

Putin took a harsh stance at a Cabinet meeting Tuesday, and told ministers to consider a possible reduction in oil output. Russia has a limited capacity for refining oil and would have to cut crude output if its exports decrease suddenly.

Analysts say that Putin has grown tired of supporting the Belarusian leader, who has been dubbed "Europe's last dictator" in the West for his authoritarian rule and crackdown on dissent. But the disruption of Russian oil to Europe one year after the Ukraine gas cutoff alarmed European officials and led to renewed calls for energy diversification.

Russia currently supplies a quarter of the EU's oil and over two-fifths of its natural gas.

Yevgeny Volk, a Moscow-based analyst with the U.S. Heritage Foundation think-tank, said the Belarusian leader may be playing a complicated game with Russia.

"Lukashenko knows Russia is under immense pressure from the West and the Russian image has suffered tremendously from the interruption of oil deliveries," Volk said.

Associated Press writers Vladimir Isachenkov and Alex Nicholson contributed to this report from Moscow.

Source:

http://www.businessweek.com/ap/financialnews/D8MIJ9B02.htm

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