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  • Russia-Belarus Oil and Gas Dispute: Problems and Prospects*

    06.07.2017 | Comments | Energy | 60 Lidiya Parkhomchik

    On March 7, 2017, the Prime Ministers of the Eurasian Economic Union (EEU) member states held a meeting of the Eurasian Intergovernmental Council in Bishkek in order to discuss prospects to strengthen mutual trade and ways to remove barriers for the development of the internal market of the EEU. However, during the meeting, the parties could not avoid tensions caused by growing contradictions between Russia and Belarus over a wide range of issues including the oil and gas dispute. In fact, on the sidelines of the Council’s meeting, the Prime Minister of Belarus, Andrey Kobyakov, stated that over the past three years the price for natural gas from Russia had experienced a two-fold increase which negatively affected the Belarussian economy.  In return, the Prime Minister of Russia, Dmitry Medvedev, on his part, declared that due to the discount agreement between Russia and Belarus, Belarus had an opportunity to buy the Russian gas at lower prices compared to the European gas prices, however, it could be easily changed.

    In fact, the price for natural gas set by the Russian state-owned company Gazprom amounted to $132 per 1,000 cubic meters. However, due to the decline in global energy prices, the Belarussian authorities claim that the fixed price is too high and demand to decrease the price to $73 per 1,000 cubic meters. Based on this statement, since the beginning of 2016 Minsk has started to pay less for the natural gas deliveries from Russia accumulating $425 million of debt by the end of the year. As a result, in an attempt to put pressure on Minsk, in the third quarter of 2016 the Russian oil pipeline monopoly Transneft decreased the volume of oil shipments to Belarus by 40% compared to the second quarter of the year. It was initially planned that Russia would supply 24 million tons of oil in 2016. However, due to the gas dispute that started in January 2016, the supply volumes of oil reduced from 5.5 million tons and 5.3 million tons in the first and second quarters, to 3.5 million tons and 3 million tons in the third and fourth quarters of 2016, respectively.

    In response, the Ministry of Antimonopoly Regulation and Trade of Belarus approved a decree dated September 28, 2016, according to which the tariffs on transit of the Russian oil through the Belorussian territory via the Druzhba pipeline[1] were increased by an average of 50%. It was planned that the decree was to come into force in October 11, 2016. In fact, the operator of the Belarussian section of the pipeline, namely, Gomeltransneft Druzhba, submitted respective notifications to Transneft. (The Indian Subcontinent, 2016)

    Taking into account the fact that in 2016 Gomeltransneft Druzhba transported over 64 million tons of the Russian oil, which accounts for over 30% of total oil export of Russia (Gomeltransneft Druzhba, 2017), it is essential for Moscow to prevent the increase of the transit costs of the Russian oil exports to the European markets. Therefore, the parties entered the negotiation process and reached a consensus on oil and gas matters on October 10, 2016. For instance, Russia and Belarus agreed that the Belarusian authorities would cancel 50% increase in charges for the Russian oil transit via the Druzhba pipeline and would pay back its $300 million of debt (as of October 2016). In turn, the Russian authorities would have to leave the decision to reduce oil supplies in the third and fourth quarters and to compensate Belarus’s losses that occurred as a result of the implementation of the agreement to buy the Russian gas at a fixed price. According to the agreement, the volume of the gas subsidies for Minsk could have reached $400 million in 2016 with further growth to $800 million in 2017. (Kłysiński & Kardaś, 2016)

    It is worth mentioning that Russia preferred to introduce the mechanism of the inter-budget compensations instead of modifying the gas price formula because it may set a precedent for the solution of the gas dispute that could affect Russia’s negotiating position in its gas dispute with Ukraine. On the other hand, restoring the process of oil supplies from Russia to the Belarus was of great importance for the Belorussian economy. Belarus has a developed oil processing industry and oil products remain the country’s main export commodity, making a third of the country’s export revenues. For instance, a sharp drop in oil prices together with the reduction of oil deliveries from Russia caused a significant decrease in the Belorussian export revenues in 2016. Thus, the oil revenues fell from $12 billion in 2013 to $7.8 billion and $6.1 billion in 2015 and 2016, respectively. (Smok, 2017) Therefore, the agreement which was reached to restore the previous volume of supplies, namely, up to 24 million tons annually, could be definitely regarded as positive result for Minsk. However, as of the end of October 2016, the Deputy Prime Minister of Russia, Arkady Dvorkovich, announced that Belarus has not made any payment for the consumed gas. As a result, Russia did not resume the oil supply in set volumes.

    In order to compensate for the deficit of oil supplies, Belarus launched negotiations with Azerbaijan and Iran. As a result, Minsk imported 85,000 tons of the Azerbaijani oil in fall 2016. However, it was just a one-time deal. Moreover, there was no progress in reaching an agreement with Iran. Taking into account the fact that the Belorussian refineries need over 24-25 million tons of oil per year on average, the alternative supplies from Azerbaijan were not sufficient to replace the oil shipments from Russia. Therefore, in order to establish the bargaining conditions in negotiations in November 2016 for the second time in a year, Minsk declared its plans to increase the price for Russia’s oil transit via the Belorussian section of the Druzhba pipeline. The Belorussian Gomeltransneft Druzhba informed Transneft about its plans to increase the Russian oil transit price by 20.5%. As a result, in December 2016 the parties held the second round of talks on the solution of oil and gas dispute.

    Despite the fact that Gomeltransneft Druzhba announced that starting from February 1, 2017, the transit price for the Russian oil would be increased only by 7.7% (instead of 20.5%), the parties failed to reach an agreement. Moreover, in January 2017 the Russian authorities declared that in the first quarter of the year Transneft would cut oil supplies to Belarus from 4.5 million tons to 4 million tons. Therefore, there is no guarantee that Belarus will receive its planned 18 million tons of oil from Russia in 2017.

    In fact, it is not the first time when the relations between Moscow and Minsk entered the phase of so-called hydrocarbon war. For instance, Belarus even resorted to import oil from Azerbaijan and Venezuela in 2010-2011 receiving over 1.5 million tons of oil by sea via the Ukrainian port of Odessa. (Smok, 2017) However, current situation clearly shows that Belorussian economy became much more vulnerable to the reduction of the oil supplies from Russia. In fact, hydrocarbon imports from other countries (except Russia) are not economically profitable. Therefore, despite the fact that the context of the current Belarus-Russia disagreement has changed significantly since 2011, it is still in the interest of both parties to continue negotiations in order to find a mutually acceptable solution to the oil and gas dispute. 

    Actually, Russia and Belarus always could manage to solve disputed issues if the heads of the states are directly involved in the negotiation process. Therefore, it was not surprising that during his official visit to St. Petersburg held on April 3, 2017, the President of Belarus, Alexandr Lukashenko, and the President of Russia, Vladimir Putin, agreed to settle issues in the oil and gas sphere within 10 days. For instance, the parties found opportunities to agree on the oil shipments not only for 2017 but also for 2018 and 2019. It was announced that after making payment of its $726 million debt (accumulated as of April 2017) to Russia, Belarus would have opportunity to receive the discount for gas supplies. In fact, Gazprom will provide discount to Minsk with a step-down coefficient to the price calculation formula for the period from 2018-2019. (Belsat, 2017) Therefore, there is a chance that the oil and gas dispute between Russia and Belarus is finally solved.

    References

    Belsat. (2017). Russia, Belarus Have no Issues Unsettled: Lushashenko, Putin Solve Oil and Gas Conflict. Retrieved from http://belsat.eu/en/news/russia-belarus-have-no-issues-unsettled-lukashe...

    Gomeltransneft Druzhba. (2017). General Information. Retrieved from http://www.transoil.by/about/general/

    Kłysiński, K., & Kardaś, S. (2016). Russia and Belarus Reach Agreement on Oil and Gas. Retrieved from https://www.osw.waw.pl/en/publikacje/analyses/2016-10-12/russia-and-bela...

    Smok, V. (2017). Does Belarus Stand A Chance In A New Oil War With Russia? Retrieved from http://belarusdigest.com/story/does-belarus-stand-chance-new-oil-war-rus...

    The Indian Subcontinent. (2016). Belarus to Hike Price for Russia’s Oil Transit Starting 2017. Retrieved from http://news.theindiansubcontinent.com/russia/item/325727-belarus-to-hike...

     


    [1] The Druzhba pipeline starts in Tatarstan collecting the Russian oil from western Siberia, the Urals and the Caspian Sea. It runs to Belarus, where it splits into a northern and southern branch. The northern branch crosses Belarus across Poland to Germany, while the southern branch runs through Ukraine where it splits into lines to Slovakia and to Hungary.  

    *Published in the July 2017 No. 19 issue of the "Asya Avrupa: Haber-Yorum" journal.

    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

     

    Tags: Energy, Russia, Belarus, Oil, Gas

Author

  • Senior Research fellow

    Lidiya Parkhomchik

    Lydiya Parkhomchik (nee Timofeyenko) was born on February 9, 1984 in Zelenodolsk city, located at the territory of the Republic of Tatarstan (Russia). Since 1986 she became resident of the Republic of Kazakhstan.