Why Belarus cannot replace Russian crude?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

File photo. A worker turns a valve at the first pump station on Belarus territory of the Druzhba pipeline, near the village of Bobovichi, Belarus, 11 January 2007. [Andrei Lyankevich/EPA/EFE]

A month has passed since Russia withheld its regular oil supplies to Belarus, and the country is not out of the woods yet. Mateusz Kubiak argues that any diversification is likely to remain limited.

Mateusz Kubiak is an oil and gas expert with Warsaw-based consultancy firm Esperis.

A month has passed since Russia withheld its regular oil to Belarus. Although Belarusians seek alternatives, in reality they remain dependent on Russian crude and subsidies provided by the Kremlin.

At first glance, the whole situation might seem surprising. Belarus is naturally presumed as a traditional ally of the Russian Federation, which also leads to its limited engagement with the European Union.

Yet in reality, bilateral relations between Moscow and Minsk for many years now have resembled a game of tug-of-war, in which each side seeks to maximise their own benefits.

For Russians, such benefits would be measured in political influence, while for Belarusians – in currency. As long Moscow pays the part of sustenance costs of Belarusian regime, the political flexibility for the latter remains limited, including the cooperation with EU states.

That applies to diversification of oil and gas supplies as well.

Russian subsidies

The Belarusian economy is heavily subsidised by the Russian Federation and duty-free oil shipments are one of the fundamental instruments in that regard. Such a scheme has resulted in savings reaching hundreds of millions of dollars per year for Belarusian treasury. This form of subsidy is however gradually reduced due to the tax reforms in Russia, leading to the replacement of crude oil export duty fees with a mineral extraction tax.

As a result, faced with Moscow’s unwillingness to present new mechanisms of compensation, Belarusian refineries slowly lose their competitive advantage, which in turns leads to frictions between the two states.

Initially, it seemed that both parties should be able to reach an agreement. On one hand, Russia was determined to set up new supply framework and proceed with the signing of in-depth integration agreement with Belarus (initially scheduled for December, 2019). On the other, Belarusians lack any alternative supply source, which could outprice Russian crude (even with reduced subsidies).

Despite that, common ground could not be found. Minsk has declared that Belarus will buy Russian oil only with exclusion of the supplier’s premium (10 USD per tonne under current contracts), what is obviously seen as unacceptable by Russia. The only exceptions in this regard are the companies owned by Mikhail Gutseriyev, an oligarch and a long-time acquaintance of Lukashenka, developing also different businesses in Belarus.

Limited production, limited exports

What has changed in practice? In January Belarus received 487 thousand tonnes of oil, which constitutes only a 1/3 of the country’s monthly imports in 2019.

The vast majority of imported crude (app. 407 thousand tonnes) came from the aforementioned M. Gutseriyev, while the remainder was supplied under the spot contract (crude has been delivered through Lithuanian Klaipeda). Halting the export of domestic oil provided the country with additional 100-150 thousand tonnes per month, but Minsk also resorted to using the stockpiles (up to half a milion tonnes at the beginning of January).

Consequently, Belarusian refineries had to significantly limit their output, focusing on supplying domestic market and limiting (even temporarily halting) fuel exports.

This is a major blow to the country’s trade balance, as petroleum products make for more than a half of the total value of Belarusian exports to the EU. What is more, it is the export that makes the whole industry profitable, as the domestic sales are subsidized by the state (the current price is about 0,75 EUR per liter).

What is the alternative?

For a few years Belarusians have been mentioning the willingness to diversify their oil supply, but up to now these announcements did not lead to any actual contracts being signed with non-Russian suppliers. The main limitation, aside from insufficient (and uncompetitive) transit options from the other directions, seems to be – money. Crude oil from Russia, even with reduced subsidies, is still much cheaper than what others can offer.

This applies to Caspian, Norwegian, Middle Eastern or even US supplies. The latter is particularly important in the context of the recent visit to Belarus by US Secretary of State Mike Pompeo.

The latter declared that USA could provide up to 100% of Belarusian oil demand at a competitive price. This might be true, but only if the point of reference would be the global market price, instead of the Russian de facto subsidized offer.

As long as the Russian subsidies remain in place (they should be discontinued within next 4 years), diversification of Belarusian supply is expected to be very limited, and event then to create significant burden.

This applies also to the broadly understood „diversification” in Minsk’s foreign policy. When possibilities are explored for increased EU-Belarusian cooperation, a potential counter-offer from Russia needs always be taken into account, as it would constitute the primary point of reference for the Belarusians.

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