“Belarusian Tiger“ Fell into Oil Trap

Belarus and Russia’s leadership saw the New Year in traditionally – in the nerve negotiations. At this time the stumbling block was oil, or rather Russia’s introduction of 100% tax on hydrocarbons not intended for Belarusian consumers. For the official Minsk this threatens not only the loss of billions of dollars in foreign trade, but also ruin of petroleum refining industry which profitability in recent years did not exceed 5-7% even with government subsidies.

Each year the Belarusian oil refineries get more than 20 million tons of oil from Russia at subsidized prices. Meanwhile, the Republic’s demand in petroleum products is, according to various sources, from 6 to 8 million tons. The rest of the products all these years have been successfully sold on western markets, primarily in the Netherlands and the UK, as Belarusian.

According to independent experts, by this simple operation the Government of Belarus got up to $ 3.5 billion for the budget annually. Many Western analysts began calling Russia "a raw materials appendage" of Belarus. Such oil offshore existed until 2007 when Vladimir Putin forced Alexander Lukashenka sign an agreement on the division of duties on petroleum products from Russia's oil. Under the agreement, 30 % of income had to be left for Belarus in 2007, 20% in 2008, and 15% in 2009.

However, later it was decided to change this formula and to charge Russia's share of the Belarusian export duties on oil products at the border with Russia. The size of the duty was calculated by multiplying the Russia's duty on the reduction factor. The factor is the product of Russia’s share in the Belarusian export duties (0,85), the share of oil exports in total supplies (about 0.7) and the ratio between the amount of duties on oil and petroleum products (0.6). In 2009 the reduction factor was 0.356.
The agreement expired on December 31, 2009. The Kremlin, in view of the establishment of the Customs Union of Russia with Belarus and Kazakhstan, offered the official Minsk to fully meet the needs of the Republic in the hydrocarbon raw materials at domestic prices. All the rest of the oil was to be delivered on common grounds.

"Belarus continues to enjoy energy prices which are the most favourable in the CIS, and in the world, without exaggeration. This applies to natural gas as well. The cheapest fares and the cheapest gas prices are in Belarus. There are also reduced dues on oil which enable Belarusian oil refineries to be loaded with work and carry out large volume of exports which brings significant revenue in hard currency to the Belarusian budget," mentioned Russia’s Prime Minister Vladimir Putin on October 6 during a meeting with his Belarusian counterpart Siarhej Sidorski. At the same meeting the two Governments were charged to prepare a new agreement for co-operation in the energy sphere.

In December the Deputy Prime Minister of Russia’s government Igor Sechin voiced the amount of tax-free oil that Russia was ready to deliver to Belarusian oil refineries – 8.9 million tons. But the Belarusian authorities continued bargaining and demanded to extend the benefits to the entire volume of oil supplied to Belarus (21.5 million tonnes).

The negotiations lasted three months and ended in failure. December 31 the Belarusian delegation left Moscow with a demarche. Upon arrival in Belarus the government's press office issued a statement blaming Russia for "unprecedented" pressure put on the members of the delegation during the negotiations.

Meanwhile, the official media began to bombard the media space with commentaries of experts in international affairs. Their essence boiled down to one – Russia violated earlier agreements:
"If you take the side of Russia that the agreement of January 12, 2007 on oil supplies is not in force, then the question arises on what basis can export duty be levied," said the doctor of law, professor Valery Tsihinia in an interview with BelTA.

Independent experts disagree:

"Russia acts in accordance with the signed agreements. If a new agreement on the division of duties on oil is not signed, nothing can prevent them from imposing a duty. The Belarusian side believes that due to the fact that since 2010 an agreement on the establishment of the Customs Union comes into force, there should be no duties on oil. The positions are incompatible and the question is about who will give up in this conflict," said the director of the Research Centre Mises Jaraslau Ramanchuk in an interview with www.udf.by.

The expert noted that if in 2009 Belarus had paid customs duty on crude oil in full, $ 5.6 billion would have been missing from the treasury, which is 11% of the GDP.

"At the same time revenues from exports of oil products amounted to about $ 5.6 billion. It is not difficult to calculate that the transition to 100% payment of oil taxes will make Belarusian oil industry bankrupt", concluded the expert.

In this situation, according to J. Ramanchuk, the president Lukashenka has few options: either to agree to sell refineries and petrochemical plants, or to admit that macroeconomic performance for 2010 will fail, and Belarus will enter into the election year not as a "strong and prosperous" country, but as a country on the verge of bankruptcy, with plenty of unresolved economic problems.