BELARUS NEWS AND ANALYSIS

DATE:

15/01/2007

Russia and Belarus Resolve Their Oil Conflict

Russia and Belarus have formally resolved their dispute over oil exports, a conflict that has been raging since the beginning of the year. In place of Russia's original $3.6-billion demand, Moscow agreed to accept a little over $1 billion a year from Minsk, and Belarus has agreed to bring its export tariffs on oil and petroleum products up to the level of Russia's. Though the two sides managed to resolve the stickiest points of the issue, however, the conflict between them is still likely to simmer on. Yesterday, Belarussian President Alexander Lukashenko launched a public campaign against one of Russia's most ambitions projects: the construction of the Northern European gas pipeline.

Late on Friday evening, Russian Prime Minister Mikhail Fradkov and his Belarussian counterpart Sergei Sidorsky put to rest a two-week conflict surrounding the delivery of Russian oil to Belarus. The negotiations and two telephone conversations between Vladimir Putin and Alexander Lukashenko yielded a brief, three-page document in which the two countries agree "on ways to regulate their trade and economic cooperation in the export of oil and petroleum products."

The agreement (a copy of which was obtained by Kommersant) addresses three principle questions. On the first page, the two sides acknowledge that oil from Russia that is delivered to Belarus is subject to customs export duties. Page two sets the amount of the duties in relation to Russian export tariffs on crude oil: a factor of 0.293 in 2007, 0.335 in 2008, and 0.356 in 2009. Given Russia's current export tariffs on oil, the country stands to make $1.08 billion annually in revenue from deliveries to Belarus. Theoretically, Russia could oblige Belarus to pay $3.6-3.7 billion per year for oil exports, of which $1.08 billion represents less than a third.

The agreement includes only one concession from Belarus: page three discusses the necessity of equalizing the export tariffs levied on oil and petroleum products exported from the two countries. Russia will not receive extra revenue from that, since, as deputy minister of economic development Andrei Sharonov explained to Kommersant, no one is considering sharing customs revenues between the budgets of the two countries - Russia will get its fair share from its own export duties.

According to Galina Balandina, the head of the government regulatory office for foreign trade and customs in the Russian Ministry of Economic Development, the $53 per ton that Russia will now collect from Belarus is approximately 70% of the amount dictated by the 1992 agreement that is supposed to define Russia's share of the revenues collected by Belarus on exports of Russian oil.

Ms. Balandina also noted that "the Belarussian 'off-shore' [loophole] for Russian companies is closing, but Belarus will still be able to buy oil on more favorable terms than is the case for Ukraine and will even be able to decide for itself which is better - to keep the petroleum products on the domestic market or to export them and earn additional revenues for [the country's] budget from export tariffs." Attractive conditions for the delivery of Russian oil will now exist only for Kazakhstan, which pays no import duties, since Russia has decided to punish Belarus for refusing to pay the agreed-upon portion of export duties on Russian oil and petroleum products by dropping the subsidies that Belarus used to enjoy on these imports. In other words, import duties for deliveries of Russian oil and petroleum products to Belarus will now be $180.7 per ton ($180.2 starting February 1, 2007).

Russia will still be paying nothing in rent to Belarus for the land under the Yamal-Europe gas pipeline and the West-Transnefteprodukt petroleum pipeline, as well as for its military bases in Belarus (the Vileika radar station and the Baranovichi junction, which are part of Russia's missile early-warning system). Russian Trade and Economic Development Minister German Gref also signed an agreement with his Belarussian counterpart Andrei Kobyakov that requires Belarus to repeal approximately 40 presidential decrees and 20 acts of legislation by the government that concern export limits for Russian companies. This agreement mainly concerns the removal of restrictions on purchases by the Belarussian government; these restrictions limit the access to the Belarussian market enjoyed by Russian companies selling sugar, fish, cars, and medicines.

All of the revisions underway of the financial relations between the two countries will naturally lower revenues for the Belarussian budget. If the current tax regime on Russian oil exports had remained operational in Belarus in 2007, the revenues from the export of petroleum products would have been approximately $970 million (without the return of VAT). Up to December 2006, Belarus was due to receive revenues from customs duties of up to $650 million without VAT. Now that the two countries' export duties on petroleum products are being equalized, Belarus will receive $1.65 billion (at the median export tariff - approximately $108 per ton). However, since the country must now pay $53 per ton for Russian oil imports, Russia will take $1.08 billion from that total, leaving Belarus will just $570 million in revenues from oil refining. Thus, Russia is walking away from the argument with around $1 billion for 2007 at the current price of oil, while Belarus is losing 40% of its profits from oil exports.

Under such conditions it is not surprising that Alexander Lukashenko, despite the optimistic pronouncements of Belarussian officials concerning the agreement on oil, had fresh harsh criticism for Russia only two days after the agreement was signed. Yesterday he called the Northern European pipeline the "stupidest project in the history of Russia." Sources from the Kremlin's Interfax news service replied that "these words only underline the necessity of building a gas pipeline." The degree to which the two sides succeeded in resolving their differences should become clear in the near future, when the two will meet again to discuss the delivery of Belarussian sugar to Russia. The negotiations start this week.

Petr Netreba, Natalia Grib, Denis Rebrov, and Dmitry Butrin

Source:

http://www.kommersant.com/p733940/r_528/