Energy Spat Worsens with Belarus's Threat to Russian Electricity Transit to Kaliningrad

Haven’t We Heard This Song Before?

For the fourth time in five years, Russia is entering a new year in dispute over energy supply terms with one of its neighbours. In 2006 and 2009, Russian gas giant Gazprom engaged in stand-offs with Ukraine over gas prices and supplies, resulting in disruptions in Russian gas exports to Europe, while in 2007, Russia and Belarus faced off over oil export duties and transit tariffs, leading to a three-day stoppage in Russian oil exports to Europe. This year, Russian oil pipeline operator Transneft halted oil flows to Belarusian refineries on 1 January, only to resume shipments yesterday, albeit in the absence of a new agreement on supply terms. Even in 2008, when Russia entered the year free of disputes, Gazprom later reduced gas exports to Ukraine in a row over payments.

The threat of a repeat of January’s gas war between Russia and Ukraine hung heavy over the countries’ energy relationship for much of 2009, only for an oil transit dispute to steal the headlines in the waning days of the year. Thankfully, a deal was quickly struck to avert a disruption in Russian oil transit via Ukraine, and while a gas dispute may still be in the offing—depending to a large extent on Ukraine’s timely payment by 11 January for its December gas imports—the likelihood of a new "gas war" has been greatly reduced via a series of political deals and the determination of the state-run gas firms on both sides to avoid another damaging stand-off. Thus, it is more than a bit disheartening that the situation with Russian oil supplies to and via Belarus is quickly degenerating, raising fears of a potential interruption of Russian oil exports to Poland and Germany via Belarus.

Yesterday, Russian officials said oil supplies to Belarusian refineries at Naftan and Mozyr had resumed, insisting that the dispute—echoing the January 2007 disagreement over crude oil export tariffs—will not affect Russian oil transit to Poland and Germany (see "Related Articles" below). Belarusian officials, for their part, said that there had not been any noticeable drop in crude supplies sent via the Druzhba pipeline since the start of the year. Nevertheless, instead of abating, the tension seems to be increasing, as Russian officials said that there was still no agreement on supply terms covering oil shipments to Belarus for 2010, while Belenergo, the state-run Belarusian utility, upped the ante for both sides, saying that it could reduce Russian electricity transit to the Kaliningrad exclave in the absence of a new 2010 agreement on the conditions for the transit of electricity via Belarus.

Not Entirely a "Single" Economic Space

Boris Zverev, a spokesman for Russian power trader Inter-RAO UES, told RIA Novosti that the Belenergo warning was tantamount to blackmail, claiming that the Belarusian side had, in violation of earlier agreements, demanded to increase the electricity transit tariff nearly 2.5 times. From the Belarusian perspective, this is simply turning the tables and giving Russia a taste of its own medicine. Belarusian officials feel that Russia is being similarly spiteful in attempting to impose export tariffs on crude oil supplies to Belarus, in violation of the customs union that the two countries (and Kazakhstan) were supposed to launch from 1 January.

Russian policymakers say that they are seeking to limit the profits that have accrued to Belarus from that country’s practice of importing duty-free Russian crude, refining it, and then exporting the oil products at a profit to European consumers. Belarus imports about 20 million tonnes of Russian crude per year, with only about 25% of that total intended for domestic consumption. Belarus says that the new customs union agreement entitles it to be able to import all its Russian crude feedstock duty-free, while Russian officials are aiming to impose a "two-tier" system under which Belarus would only be able to import duty-free the oil that is intended for domestic consumption; the remaining supplies would be slapped with a 100% export duty. Russia slightly lowered its crude oil export tariff to US$267/tonne from 1 January.

Belarusian officials are pointing to the problems in working out the logistics of a two-tier duty system, not to mention worrying what such a system would cost the country’s already stagnant economy. In addition, imposing duties on Russian crude oil supplies to Belarus would undermine the concept of a single economic space incorporating Belarus, Russia, and Kazakhstan, further opening the door to tariffs on other energy supplies and commodities. Indeed, the Belarusian warning of a potential reduction or halt to Russian electricity transit to the Kaliningrad exclave has highlighted this issue, as well as threatening to widen the burgeoning dispute over oil supply terms between the two countries.

Outlook and Implications

The Russian-Belarusian oil dispute is developing as a virtual replay of the January 2007 dispute, which rapidly escalated into a disruption to oil exports via the Druzhba before the two sides reached a deal to end the three-day supply halt. That episode—which, it is worth remembering, was preceded by acrimonious talks on gas price terms that resulted in the New Year's Eve deal according to which Gazprom secured the right to buy 50% in Belarusian gas pipeline operator Beltransgaz—ultimately prompted Transneft to push ahead with plans to build a "Belarus bypass" oil pipeline. Construction of Unecha-Ust-Luga "BTS-2" pipeline was initiated last year.

The agreement that resolved the January 2007 dispute was an imperfect compromise, leading to the resumption of Russian oil transit via Belarus to Europe but leaving both sides unhappy. The fact that Russia and Belarus are again at loggerheads, over essentially the same issues, has made that abundantly clear. While Russia is sticking to the principles from that 2007 deal, under which Belarus is supposed to pay 100% of the Russian export tariff on its oil imports as of 2010, Belarus is standing on principle that it should not have to pay duties on any of its oil imports, lest the idea of a customs union and a single economic space be exposed as a sham. Belarusian media reports are taking the line that the 2007 oil transit and customs deal was illegal in itself, anathema to the customs union agreement.

With about 350,000 b/d of Russian crude sent via the Druzhba to Germany (accounting for approximately 15% of Germany’s needs) and another 400,000 b/d sent to Poland (equal to 75% of that country’s daily consumption), the Russia-Belarus oil dispute is of growing concern, not only in Europe but in the wider global oil market. The threat of a disruption to Russian oil transit via Belarus, together with colder temperatures in the United States, contributed to NYMEX oil prices climbing above US$81/b yesterday, the highest level in two months. Russia’s determination to impose duties on crude oil supplies used as feedstock by Belarusian refineries to process into petroleum products that are then re-exported will make it difficult to resolve the impasse, particularly with Belarusian insistence on importing all oil duty-free, in the spirit of the customs union. One potential solution could see Belarus sell one or both of its refineries to Russian buyers as part of a new compromise, but with both sides standing firm for now, the dispute could get worse before it is resolved.

Related Articles

• Russia - Belarus: 4 January 2009: Russia Halts Oil Shipments to Belarusian Refineries; Transit Volumes to Europe Unaffected So Far 
• Russia - Belarus: 21 December 2009: Russian Deputy PM Offers Belarus Limited Volume of Duty-Free Oil Imports in 2010
• Russia - Belarus: 14 December 2009: Russia Agrees to Extend Gas Price Discounts for Belarus Beyond 2011
• Belarus: 16 November 2009: Government Seeks Oil Pipeline Deal as Part of Potential Belarusian Refinery Stake Sale
• Russia - Belarus: 11 June 2009: Russia Begins Construction of Oil Pipeline that Will Bypass Belarus
• Belarus: 15 January 2007: Russia Reduces Oil Export Tariff for Belarus in Deal to Resolve Dispute
• Belarus - Russia - Europe: 11 January 2007: Belarus Cancels Oil Transit Tax; Druzhba Oil Deliveries Resumed
• Belarus - Russia - Europe: 9 January 2007: "Friendship" in Name Only: Belarus Dispute Hits Russian Oil Exports to Europe
• Belarus - Russia: 4 January 2007: Belarus Retaliates in Oil Export Tariff Dispute, Slaps New Duty on Russian Oil Transit
• CIS: 2 January 2007: Gazprom, Belarus Strike Last-Minute Gas Deal to Avoid Cut-Off