Who and How Won Russia-Belarus Hydrocarbon Wars

Energy conflicts between Russia and Belarus are not new.

Experts note that over the last decade there were two gas, two oil and one electricity war. On the eve of 2010 another hydrocarbon battle has erupted between the allies and it now that takes place on two fronts – oil and electricity.

However, the history of Belarusian-Russian energy relations shows that a very similar episode took place at the beginning of 2004. At that time, the situation seemed to be more critical, as at stake was the supply of all energy resources – gas, oil, and electricity.

First Gas War

It was in 2004 that for the first time since the collapse of the Soviet Union Belarus did not have a contract with Russia for gas deliveries. The Russian gas monopoly, Gazprom, and Beltransgaz were unable to reach agreement on the price of supplies and transit tariffs. Gazprom cut off Belarus' gas flow for one day and Alyaksandr Lukashenka lashed out at Moscow, comparing the attitude of the "brotherly nation" to the Nazis’ activities in Belarus during the World War II.

Gazprom resumed natural gas deliveries to Belarus after an almost 24-hour suspension, but without signing a contract. Until the spring of 2004, gas was supplied by independent companies – Itera, TNK, and Transneft – with Gazprom’s permission.

Russia Won

The price of gas was raised from US$ 29 to almost US$ 47 per 1 thousand cubic meters. During the negotiations in 2004, Russia forced the Belarusian side to agree to sell its transit company Beltransgaz and immediately accelerated all pre-sale preparations.

First Oil War

At the same time, the dispute drew Moscow’s attention to the failures of the agreements on the Customs Union and the Treaty on the Union State for the unification of export duties on oil and petroleum products. Due to rising oil prices, Belarus has become a fairly large exporter of petroleum products to the European market. There was a growing supply flow of duty-free low-cost crude oil from Russia into Belarus; and, this was of interest not only to the Belarusians but also to Russian suppliers. The reasons for this was the lower export tax that the exporter has to pay to the Belarusian budget. However, in January 2004, at the insistence of Russia, this fee was equalized.

Outcome: Belarus won

The tax remained equal only for 3 months. In April 2004, Russia raised it to US$ 31.5, and Belarus to US$ 30.5 dollars per 1 ton. With each new increase the difference in this fee was becoming greater, thus attracting cheap resources to Belarus and allowing to earn more on the export of petroleum products.

In 2004, oil imports in Belarus amounted to 17.8 million tons, while in 2005 it rose to 19.3 million tons. More crude oil meant more oil products for export. In 2004, exports of petroleum products totalled 12.9 million tons worth US$ 3.3 billion, and in 2005 - 13.5 million tons worth US$ 4.8 billion.

To stop this progressive transformation of Belarus into the largest European exporter of petrol and gas, there had to be another oil war. The conflict of 2007 led to the introduction of an export duty on oil supplied to Belarus.

First Electricity War

On 1 January 2004 electricity supplied by Russia’s "Inter RAO UES" was cut off after Belarus refused to pay the new price. The flow was resumed only in August 2004.

Result: Draw

No one was to benefit from this conflict. Russia's largest importer of electricity – Belarus – bought only 1.5 billion kWh in 2004, compared to 3,7 billion kWh that it imported in 2002 and 3.5 billion kWh in 2003. However, already in 2005, Belarus bought 4.5 billion kWh of electricity.

Second Gas War

Extra physical and mental effort was needed to resolve another gas conflict on the New Years’ eve that started in the late 2006. After long wrangling caused by Russia’s stated intention to commercialize its energy relations with all partners, Moscow and Minsk managed to find a consensus. According to the document signed on 31 December, gas prices for Belarus in 2008, 2009, and 2010 were going to be 67%, 80% and 90% of the European price, minus transportation costs and export duties, respectively.

Result: Draw

Although the fact that the price of US$ 47.6 per 1 thousand cubic meters rose at once to US$ 101.3, thereby leading to an increase in the cost of gas imports from US$ 1 billion to US$ 2 billion, Belarus has managed to wrest significant concessions. It was not the European gas prices, and there was a sufficiently long transition period towards new prices.

However, the terms of the contract, as practice of Belarusian-Russian relations in the energy sphere shows, will probably lead to another – third – gas war – towards the end of 2010, when the four-year agreement will be due for revision. The current situation with oil also points to the possibility of such a conflict. Temporary compromise, found by the parties after Russia introduced an export duty on oil to Belarus in 2007, has now turned into a new oil battle.

Second oil war

In December 2006, Russia, realizing the futility of its attempts to persuade Minsk to share the profits from selling oil products, introduced a customs duty on exports of strategic resource in Belarus.

The military action resulted in the termination of oil transit through Belarus to Europe.

Under the compromise agreement, signed on 13 January 2007, the fee should be levied on oil, which goes for processing and further export abroad in the form of petroleum products. Oil supplies used domestically were going to be duty free.

As a result, the Belarusian-Russian agreements established that the distribution of revenues from customs duties on oil exports between the two countries would be the following: in 2007 - 70% to 30%, in 2008 - 80% to 20%, and in 2009 - 85% to 15% in Russia’s favour.

Russia won

According to experts, Belarus lost about 40% of its revenues from oil exports. In an interview with Reuters, President Lukashenka stated that the amount of losses from Russia’s actions was approximately US$ 5 billion.