"Friendship" in Name Only: Belarus Dispute Hits Russian Oil Exports to Europe

Friendship Strained as Pipeline Deliveries Halted

After last January's "gas war" between Russia and Ukraine, Russia now finds itself ensconced in an "oil war" with Belarus. Only 10 days ago, it seemed that Russia would kick off the New Year by cutting off the gas supply to Belarus, but the conflict was resolved at the last minute (see CIS: 2 January 2007: Gazprom, Belarus Strike Last-Minute Gas Deal to Avoid Cut-Off).

A separate dispute on customs duties on Russian oil supplies to Belarus, however, has moved to centre stage over the past week. Yesterday's (8 January) decision by Russia to halt oil exports via the Druzhba ("Friendship") pipeline via Belarus in response to Belarus's imposition of oil transit tax means that the oil war has fully eclipsed the long-feared implications of a potential gas dispute between the two countries (see Belarus: 8 January 2007: Belarus Blocks Russian Export of Oil to Poland and Germany). Russian Deputy Economic Development and Trade Minister Andrei Sharonov said that the halt in oil exports threatened the fulfilment of oil supply contracts between Russian and European companies, declaring force majeure due to the "onset of unavoidable circumstances". European refineries in Slovakia, Hungary, Germany, Poland, and the Czech Republic are reporting interruptions or full stoppage in oil supplies from the Druzhba pipeline.

Psychology and Strategy

Although European Union (EU) Energy Commissioner Andris Piebalgs assured nervous member states and European consumers that the Druzhba halt entailed "no immediate risk to the supply of oil to the EU", officials throughout central and eastern Europe voiced concern for the stability of oil shipments from Russia.

EU refineries are obliged to hold 66 days' worth of crude reserves, and thus the Russia-Belarus dispute will have more of a psychological impact than a physical supply impact on European refineries—assuming the two sides quickly resolve their differences and Russian crude oil shipments via the Druzhba pipeline are resumed. After Russia's gas exports to Europe last January were interrupted in a fierce price dispute between Gazprom and Ukraine, European companies and governments were quick to place blame on the current dispute on Russia, apparently assuming the worst in Russia's intentions. While this is hardly a fair assessment, particularly given Russia's long history of stable oil supplies via the Druzhba pipeline, Russia is nevertheless likely to suffer the consequences in the court of European public opinion.

Yet, the Russian government seems prepared to pay the price of losing its reliable reputation to finally derail its relations with Belarus from political onto a purely economic basis. Since 1995, Belarus has unwaveringly followed the Russian foreign policy ship, and the Belarussian president's avid rhetoric of integration and rejuvenation of the former glory of the Soviet Union was music to Russian ears. The cost Russia paid for this loyalty was the commitment to energy supplies at reduced prices, preferential purchases of Belarussian goods, and the loss of transit taxes. These boosted the Belarussian economy, providing much of the material basis for the stability of President Alexander Lukashenka's regime. With the passage of time, the outspoken Belarussian ally turned from an asset to embarrassment, Russia acquired a stronger sense of grandeur and confidence of its own, and became increasingly annoyed with subsidising a satellite state that did not bring it much political or economic value. Since 2002, Russian President Vladimir Putin has emphasised that Belarus should either become a part of the Russian Federation, or face the suspension of all economic preferences. Impressively, the Belarussian government was able to keep economic assistance from Russia for another four years, until the Russian government became so annoyed with being financially milked that it decided to draw the line at all costs.

Although there is little sympathy in Europe for Belarus in this crisis—Lukashenka is typically referred to as "Europe's last dictator"—Belarus also has little to lose and everything to gain in standing up to Russian energy price rises. Although Belarus transports only around 5% of Russian gas to Europe, it does about 12% of oil through the Druzhba pipeline, which is Russia's main overland oil export route, thus having a unique leverage in the current dispute. Belarus was looking to spend some US$1.8 billion on Russia's oil export tax, and its retaliatory oil transit tax would bring in some US$3.6 billion. There is little wonder Russia refused to pay. The Belarussian side is standing firm—its governmental delegation sent to Moscow to negotiate said that they would demand a complete withdrawal of the Russian oil export tax, while the Belarussian president deftly presented the Russian actions to domestic and international audiences as nothing less than a threat to state sovereignty and independence.

Outlook and Implications

Russia has reduced itself to bullying tactics, but has not yet shown any clear strategy for achieving its goals. Leaving Belarus without oil supplies puts a big crack in the economic pillar of Lukashenka's presidency in Belarus, and yet, the Russian side shows no signs of seeking to undermine his regime or replace him with a more loyal ally. Although the Belarussian opposition has cautiously estimated Russian economic demands as fair, there have been no apparent moves from Russia to support Lukashenka's opponents. Rather, it seems, Russia takes the Belarussian leader so seriously that it is ready to face the indignation of five European states for the sake of bringing him into obedience.

The Belarussian leadership, however, is unlikely to oblige Russian preferences in full. By playing the victim of Russian bullying, the country's government may try and seek favours with the EU, but it is most likely to close the country down North-Korea style. Due to Lukashenka's clever and intensive ideological work, the Belarussian population is ready to stand behind him and endure economic difficulties, if he credibly establishes that their source is the former friend-turned-enemy, Russia.

While expectations are for a quick resolution to the crisis—perhaps with a mutual cancellation of the Russian customs duty and the Belarussian transit tax, precipitating a resumption of Russian oil supplies to Europe via the Druzhba line—the dispute has already run counter to the consensus view, so all bets are off. The conflict has already started to spill off into other trade areas. The gas issue could once again come into play if Belarus attempts to sabotage Russia's energy supply reputation with Europe. A full-fledged oil and gas war between Russia and Belarus—previously inconceivable, still perhaps improbable, but no longer completely dismissible—could yet erupt, putting supplies in Europe at risk and putting an end once and for all to the notion of a Russia-Belarus "union state".