Russia/Belarus economy: Pipemail
FROM THE ECONOMIST INTELLIGENCE UNIT
Russian oil exports to Europe have been disrupted by a stand-off between Russia and transit-state Belarus, prompted by the latter’s imposition of an oil transit tax in response to Russia slapping an export duty on oil supplies to Belarus. Although the episode could further harm Russia’s reputation as a reliable energy supplier, Belarus will shoulder much of the blame, and the impact on European states of the oil supply cut will be much less severe than the cessation of gas supplies via Ukraine one year ago. Still, the incident underlines the risks associated with heavy reliance on Russian energy, and the doubts over the sustainability of Belarus’s economic and political model without cheap Russian gas.
Deliveries of Russian crude oil to Poland and Germany via the Druzhba pipeline—which carries approximately 20% of Russian oil exports to Europe—were halted late on January 7th as a result of a dispute between Russia and Belarus over oil transit taxation. On January 3rd Belarus imposed an oil shipment tax on Russian crude, in response to Russia’s decision to impose a duty of US$180 per tonne on crude supplies to Belarus (which until then had refined cheap crude and exported it to European states at a considerable profit). The Belarusian oil transit levy, at US$45 per tonne, will yield some US$2.5bn in revenue; it will thus precisely offset the US$2.5bn that Russia will gain through its export duty.
Russia’s government demanded on January 6th that Belarus immediately rescind the tax, but the Belarusian side refused to do so until Russia lifted its own duty on crude supplies to Belarus for its “domestic needs”. It is not clear which side instituted the supply cut late on January 7th, which continued on January 8th. German refiner OCK Raffinerie reported receiving intermittent deliveries on January 8th; Poland’s pipeline operator said these supplies were of Polish origin, as deliveries to Poland via Druzhba had not resumed.
Tit for tat
Belarus and Russia only very recently agreed a new gas deal, whereby Belarus accepted that the gas price would double to US$100 per 1,000 cubic metres in 2007 and that it would rise strongly over the next five years until reaching “European” levels. For Belarus, this represents a huge and expanding strain on the state budget, as the government will have to increase subsidies for household supplies in order to maintain its “social contract” with the population.
At the same time as demands on the budget rose, revenue was threatened by Russia’s imposition of an oil export duty. Belarus earns US$4bn-5bn per year from the practice of importing cheap Russian crude, refining it and exporting products westward. Faced with pressure from two sides, the Belarusian authorities have sought to offset the negative revenue effect of the Russian export duty through the imposition of the oil transit tax. The sum involved, US$2.5bn, is equivalent to 15% of the consolidated budget. It seems certain that the Belarusian demand for a lifting of the export duty refers to the entire Russian crude supply to Belarus, rather than simply the volumes necessary to meet Belarusian domestic consumption.
Belarus 2007 isn’t Ukraine 2006
Although Europe is a large consumer of oil, the supply cut at present is less significant for European economies than was the cessation of Russian gas supplies via Ukraine at the start of 2006. There are several reasons for this.
First, Ukraine accounts for 80% of Russian gas supplies to Europe. By contrast, barely a third of Russian oil supplies to Europe go via Belarus. Second, unlike gas, all European states have sizeable oil reserves stored for contingencies such as this. Poland, for instance, has stocks equal to 80 days’ consumption, according to Deputy Economy Minister Piotr Naimski. Third, Poland and Germany—in common with other EU member states—have the infrastructure for large-scale seaborne imports of oil from Russian and other suppliers. As a result, the 2007 oil supply disruption is much less threatening than the 2006 gas supply cut for the smooth-running of EU economies.
Blame Minsk, mostly
Although Russia’s oil customers are reasonably well prepared to weather short-term problems, the incident nevertheless renews the focus on Russia’s reliability as an energy supplier. At this stage, most of the blame is likely to focus on Belarus. Its government does not enjoy much sympathy in the EU, unlike the pro-Western administration that ran Ukraine in early 2006. Moreover, it triggered the current stand-off by imposing the oil transit tax on top of the regular transit fee for use of its pipelines.
To the extent that blame can be attached to Russia, it will centre on its tactics. With regard to the gas price, Belarus’s economy will face a major shock in the next few years—but it will have more time to adjust than any other state in the CIS, and in 2007 it is paying by some way the lowest price of any former Soviet state. The questionable element of its approach centres on oil export duties: by imposing a duty of US$180 tonne at short notice, Russia has undercut Belarus’s budget revenue at the same time as demands on the budget (thanks to Russian actions) have increased.
Out of options
The fact that the two sides failed to reach a compromise before oil supplies were interrupted is a worrying development. Nevertheless, it is difficult to envisage that the dispute will escalate much further or last much longer. When the gas deal was signed, the two sides seemed well on the way to reaching a compromise over the oil export duty and there are grounds for believing that this will happen. For Russia, the interruption of oil exports is costly and the publicity is highly unwelcome. For Belarus, the stakes are much higher: the government cannot afford to let its refineries go without crude supplies, nor can it risk a full-blown economic war with Russia. The Belarusian economy is hugely dependent on Russia as a market, and the budget needs the restoration of the revenue from refined products exports—even if this is only at 50% of the previous level.
More generally, Belarusian President Alyaksandr Lukashenka cannot afford a rupture in relations with Vladimir Putin, his Russian counterpart. The withdrawal of cheap energy is a blow, but Russia remains a steadfastly supporter of Mr Lukashenka’s authoritarian practices and it keeps its market open to Belarusian goods. A reorientation in Mr Lukashenka’s foreign policy is inconceivable—the EU is not minded to aid “Europe’s last dictator” in any form. Even if it was, the experience of Ukraine’s Orange government suggests that this would be a very poor substitute with regard to the direct political and financial support that Mr Lukashenka needs.
At the other end of the pipeline
If the dispute is soon resolved, what will the episode signify? First, it will serve as a further reminder to European states of the underlying risks inherent in heavy exposure to Russia as an energy supplier. In this instance, the risk arises from the fact that EU states are hostage to occasionally volatile relations between Russia and the two major transit states that lie between it and the EU: Belarus and Ukraine. This is a separate matter from concerns over whether Russia will produce enough oil and gas in the future to meet EU demand, and whether supplies in the future will become politicised.
Second, Belarus’s surprisingly tough response to Russia’s oil duty is a sign of severe distress on the part of Mr Lukashenka now that the era of cheap gas is coming to an end. Mr Lukashenka’s intransigence on the oil export issue is most likely because the new energy pricing policies gave him a glimpse of what is, for him, an apocalyptic future. As the gas price rises towards US$200 per 1,000 cu metres, Belarusian industry will be unable to compete in its core Russian market and the Belarusian budget will struggle to keep gas affordable for households. Without market reforms of the kind that are anathema to Mr Lukashenka, the Belarusian economic model will sooner or later implode. For the EU and particularly its eastern members, this is potentially a much more serious threat than the short-term disruption of oil supplies.
Russian oil exports to Europe have been disrupted by a stand-off between Russia and transit-state Belarus, prompted by the latter’s imposition of an oil transit tax in response to Russia slapping an export duty on oil supplies to Belarus. Although the episode could further harm Russia’s reputation as a reliable energy supplier, Belarus will shoulder much of the blame, and the impact on European states of the oil supply cut will be much less severe than the cessation of gas supplies via Ukraine one year ago. Still, the incident underlines the risks associated with heavy reliance on Russian energy, and the doubts over the sustainability of Belarus’s economic and political model without cheap Russian gas.
Deliveries of Russian crude oil to Poland and Germany via the Druzhba pipeline—which carries approximately 20% of Russian oil exports to Europe—were halted late on January 7th as a result of a dispute between Russia and Belarus over oil transit taxation. On January 3rd Belarus imposed an oil shipment tax on Russian crude, in response to Russia’s decision to impose a duty of US$180 per tonne on crude supplies to Belarus (which until then had refined cheap crude and exported it to European states at a considerable profit). The Belarusian oil transit levy, at US$45 per tonne, will yield some US$2.5bn in revenue; it will thus precisely offset the US$2.5bn that Russia will gain through its export duty.
Russia’s government demanded on January 6th that Belarus immediately rescind the tax, but the Belarusian side refused to do so until Russia lifted its own duty on crude supplies to Belarus for its “domestic needs”. It is not clear which side instituted the supply cut late on January 7th, which continued on January 8th. German refiner OCK Raffinerie reported receiving intermittent deliveries on January 8th; Poland’s pipeline operator said these supplies were of Polish origin, as deliveries to Poland via Druzhba had not resumed.
Tit for tat
Belarus and Russia only very recently agreed a new gas deal, whereby Belarus accepted that the gas price would double to US$100 per 1,000 cubic metres in 2007 and that it would rise strongly over the next five years until reaching “European” levels. For Belarus, this represents a huge and expanding strain on the state budget, as the government will have to increase subsidies for household supplies in order to maintain its “social contract” with the population.
At the same time as demands on the budget rose, revenue was threatened by Russia’s imposition of an oil export duty. Belarus earns US$4bn-5bn per year from the practice of importing cheap Russian crude, refining it and exporting products westward. Faced with pressure from two sides, the Belarusian authorities have sought to offset the negative revenue effect of the Russian export duty through the imposition of the oil transit tax. The sum involved, US$2.5bn, is equivalent to 15% of the consolidated budget. It seems certain that the Belarusian demand for a lifting of the export duty refers to the entire Russian crude supply to Belarus, rather than simply the volumes necessary to meet Belarusian domestic consumption.
Belarus 2007 isn’t Ukraine 2006
Although Europe is a large consumer of oil, the supply cut at present is less significant for European economies than was the cessation of Russian gas supplies via Ukraine at the start of 2006. There are several reasons for this.
First, Ukraine accounts for 80% of Russian gas supplies to Europe. By contrast, barely a third of Russian oil supplies to Europe go via Belarus. Second, unlike gas, all European states have sizeable oil reserves stored for contingencies such as this. Poland, for instance, has stocks equal to 80 days’ consumption, according to Deputy Economy Minister Piotr Naimski. Third, Poland and Germany—in common with other EU member states—have the infrastructure for large-scale seaborne imports of oil from Russian and other suppliers. As a result, the 2007 oil supply disruption is much less threatening than the 2006 gas supply cut for the smooth-running of EU economies.
Blame Minsk, mostly
Although Russia’s oil customers are reasonably well prepared to weather short-term problems, the incident nevertheless renews the focus on Russia’s reliability as an energy supplier. At this stage, most of the blame is likely to focus on Belarus. Its government does not enjoy much sympathy in the EU, unlike the pro-Western administration that ran Ukraine in early 2006. Moreover, it triggered the current stand-off by imposing the oil transit tax on top of the regular transit fee for use of its pipelines.
To the extent that blame can be attached to Russia, it will centre on its tactics. With regard to the gas price, Belarus’s economy will face a major shock in the next few years—but it will have more time to adjust than any other state in the CIS, and in 2007 it is paying by some way the lowest price of any former Soviet state. The questionable element of its approach centres on oil export duties: by imposing a duty of US$180 tonne at short notice, Russia has undercut Belarus’s budget revenue at the same time as demands on the budget (thanks to Russian actions) have increased.
Out of options
The fact that the two sides failed to reach a compromise before oil supplies were interrupted is a worrying development. Nevertheless, it is difficult to envisage that the dispute will escalate much further or last much longer. When the gas deal was signed, the two sides seemed well on the way to reaching a compromise over the oil export duty and there are grounds for believing that this will happen. For Russia, the interruption of oil exports is costly and the publicity is highly unwelcome. For Belarus, the stakes are much higher: the government cannot afford to let its refineries go without crude supplies, nor can it risk a full-blown economic war with Russia. The Belarusian economy is hugely dependent on Russia as a market, and the budget needs the restoration of the revenue from refined products exports—even if this is only at 50% of the previous level.
More generally, Belarusian President Alyaksandr Lukashenka cannot afford a rupture in relations with Vladimir Putin, his Russian counterpart. The withdrawal of cheap energy is a blow, but Russia remains a steadfastly supporter of Mr Lukashenka’s authoritarian practices and it keeps its market open to Belarusian goods. A reorientation in Mr Lukashenka’s foreign policy is inconceivable—the EU is not minded to aid “Europe’s last dictator” in any form. Even if it was, the experience of Ukraine’s Orange government suggests that this would be a very poor substitute with regard to the direct political and financial support that Mr Lukashenka needs.
At the other end of the pipeline
If the dispute is soon resolved, what will the episode signify? First, it will serve as a further reminder to European states of the underlying risks inherent in heavy exposure to Russia as an energy supplier. In this instance, the risk arises from the fact that EU states are hostage to occasionally volatile relations between Russia and the two major transit states that lie between it and the EU: Belarus and Ukraine. This is a separate matter from concerns over whether Russia will produce enough oil and gas in the future to meet EU demand, and whether supplies in the future will become politicised.
Second, Belarus’s surprisingly tough response to Russia’s oil duty is a sign of severe distress on the part of Mr Lukashenka now that the era of cheap gas is coming to an end. Mr Lukashenka’s intransigence on the oil export issue is most likely because the new energy pricing policies gave him a glimpse of what is, for him, an apocalyptic future. As the gas price rises towards US$200 per 1,000 cu metres, Belarusian industry will be unable to compete in its core Russian market and the Belarusian budget will struggle to keep gas affordable for households. Without market reforms of the kind that are anathema to Mr Lukashenka, the Belarusian economic model will sooner or later implode. For the EU and particularly its eastern members, this is potentially a much more serious threat than the short-term disruption of oil supplies.
posted by Marko at 1/09/2007 08:45:00 AM
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