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BELARUS-RUSSIA: OIL AND GAS MADNESS
YAROSLAV ROMANCHUK,
President of the Minsk-based Mizes Center, Belarus
BLUFF AND RAGE
One should be on friendly terms with all the neighbors. The Belarusian authorities are ignoring this pre-Christian verity and find themselves conflicting with everybody: first Poland which had supported the Union of the Poles in Belarus came to be a threat, then Latvia fell into disgrace because it had held the NATO Summits. After that Ukraine became the nest of the “orange plague”. At last, Belarus spoilt relations with its largest neighbor, Russia. The gas conflict gave way to the oil conflict. Belarus is the first country in the world that has decided to impose duty on the goods that are neither produced nor consumed within the country. The reasons for that are simple: we are poor and are short of money. That’s why all the countries are our debtors and Russia that is rich in petrodollars, in the first place.
Integration by the rules of the underworld
The oil conflict also showed the extreme weakness of the regulatory framework of the bilateral relations between Belarus and Russia, lack of legal culture, and powerful potential for conflicts development. The Belarusian officials interpret many basic principles of law and international trade like they used to do in the days of the Soviet Union. Well, Russians also sin by conventional handling of the law, but they do it more gracefully. On November 13, 1992 Belarus and Russia came to an agreement to work in the free trade regime. This was a correct and forward-looking decision. True, they once again did it in a Soviet Union way, reaching a verbal agreement. Then the plot thickened.
Authorities of the both countries told their nations that the integration would be speeded up and signed the Agreement on the Customs Union between Belarus and Russia on January 6, 1995. The Protocol on Introduction of the Free Trade Regime without exemptions and limitations was also signed. The regime promised to provide conditions for the two countries to manufacture and sell goods, create new economic ties and brands and improve competitiveness of national economies. But the integration hand wheel didn’t stop at that. On April 2, 1997 the Treaty on Belarus-Russia Union was signed and on December 8, 1999 the Treaty on Establishment of the Union State was signed. In April 2003, the draft Constitutional Act was proposed. About 30 sessions of the Parliamentary Assembly of Belarus-Russia Union were held, thousands of the documents were adopted for regulation of the relations between the two countries. Early in 2007 it became clear that all that had been bluff and a house of cards that collapsed after the first oil and gas conflicts.
De-facto, for all that period of imitation of integration of Belarus and Russia even the free trade area without exemptions and limitations has not existed. The Customs Union was also precarious. The two parties created roadblocks in his customs space where they considered it necessary. Every party wanted to get its own back from the agreements signed. Russia made no secret of its ambitions to take grip of Belarus with the status of the Belarusian Soviet Socialist Republic. The authorities had the political ambitions of the Union scale. The government imitated the integration to receive cheap energy resources on the one hand, and to assure free access to the Russian market on the other hand. Russia has bought the integration futures contracts thinking that their date of repayment was ten years at most. It paid and rendered political and information assistance compliantly and regularly. The official Minsk also got its own back. After the 1998 default in Russia the free access to the Russian market was of great help to Belarus, and when the oil boom began Belarus regularly got its share of the energy rent. The protection of the domestic market from the Russian and European competitors assured the directorate and top bureaucracy’s support.
Before the presidential elections in 2006 everything in Belarus was virtually without a hitch. The oligarchs from the two countries collected their oil dividends. The politicians and officials examined the issues of friendship and integration and were happy with their commission and travel allowance. The both countries were sure of their financial stability. Hundreds of big Belarusian enterprises recollected the Soviet period when high salaries were paid regardless of the income volumes, financial discipline and the quality of the business plans. What is more, the neo-Soviet Belarusian system provided better chances for kickbacks and personal enrichment. The Russian government, in its turn, calmed itself that the grateful Belarusians will agree to the integration. But that did not happen. The number of the treaties and documents signed, meetings and promises failed to be converted into the real power transfer.
The Kremlin could not wait any longer. Even the experts close to the Kremlin said that the opportunity for integration had been missed. Minsk came to be nervous, too. In spring 2006, Aliaksandr Lukashenka was elected for the third term, legitimacy of which is quite arguable. Vladimir Putin decided to give Lukashenka the last chance. But he got no answer as before. The projects to introduce the Russian ruble in Belarus, to sell Beltransgaz and the oil refineries, the Constitutional Act were frozen for good. The stage of the integration by the rules of the underworld was finished. And the disintegration under the law began.
Disintegration under the law
When it became clear that Lukashenka was not going to clear off the political and economic futures contracts issued to Russia, Vladimir Putin together with the Russian government and Gazprom recalled the treaties signed. Before that the both parties had been violating the agreements for several years. Neither country put the question point-blank that it is necessary to pay for the violation of the rules of free trade and, particularly, the Customs Union. There is no court of arbitration between Russia and Belarus like the WTO court. That was the beginning of the disintegration.
Gazprom has proposed a new contract to supply gas for $200 per 1000 cubic meters. The government headed by Mikhail Fradkov demanded the division of the export customs duty on oil products that goes to Belarus in the ratio 85:15 in favor of Russia. The Kremlin, the Foreign Ministry and the State Duma proposed the low energy prices in exchange for the signing the Russian version of the Constitutional Act, that is for the transfer of most of political and economic power. Suddenly, the Russian authorities awoke to the fact that Belarus exerted pressure on the Russian manufacturers in its market, dumped its goods in Russia and that the competition between Russia and Belarus was unfair (what a discovery!). The parties preferred to pass over in silence that the competition had never been fair. Sugar, sweets, confectionery, agricultural equipment, TV sets and hundreds of other goods came to be hotly discussed and subjects of trials.
Russia decided to use Gazprom to remind Belarus of the law and the agreements signed. The gas monopolist had been keeping the initial price and only several weeks before the end of 2006 it reduced the price to $105. The price could be partially paid with 50% of Beltransgaz shares. Belarus stood its ground: $55 per 1000 cubic meters and not a cent more. 2 minutes before 2007 the parties came to an agreement: for gas Belarus doesn’t pay more than $100, Russia pays for transit $1.45 per 1000 cubic meters for 100 kilometers, Russia gets 50% of Beltransgaz shares for $2.5 billion in cash during four years. The plan for Belarus to be charged the world gas prices by 2011 was approved.
Moscow considerably softened its position on the gas price so that the West does not accuse it of politically blackmailing the independent Belarus. Actually, it is difficult to take issues with Gazprom on the agreements. $100 is a lower price than that for any other CIS country. Russia is performing the conditions before its joining the WTO and equalizes the prices for both the foreign buyers and the domestic market. Russia agreed to increase the gas transit price by 93%, up to $1.45 for 1000 cubic meters for 100 kilometers. Of course, one can have a number of issues on the Beltransgaz shares deal. The privatization took place without a bidding, tendering and participation of other potential investors. It is easy to prove that it was stricken under pressure. The future and, quite possible, current Belarusian authorities will discuss the legitimacy of Beltransgaz sale. However, the agreement is signed by Belarus too. If a seller offers something, a buyer can buy it.
Bluff and rage
The official Minsk reacted to the agreements nervously and crossly. It appears that Belarus has saved Gazprom’s honor before the EU. The Belarusian negotiators thought about the future of the Russian enterprises that faced the threat of acquiring more expensive Belarusian goods. Unlike the conflict that occurred two years ago, Lukashenka failed to endure the threat to cut off gas even for several minutes of 2007. The psychological resource was close to zero. The West-oriented Belarusian propaganda blaming Russia for gas imperialism has virtually failed. This time Gazprom took into account the lessons of the Ukrainian and previous Belarusian crises.
Belarus signed the agreement since it couldn’t wring anything from Russia neither politically, nor economically. Cutting off gas and tapping it from the transit pipeline would be interpreted by the EU and the USA as the Belarusian rather than Russian blackmail. The Belarusian regime was not ready to be fully isolated. So, the treaty was singed, but to make sure, the Prime Minister and the President said that the transaction was disadvantageous for Belarus. Theoretically it is possible to acknowledge the deal invalid. As a matter of fact, the transaction is not so flat. $100 is not $230 that Georgia is charged, neither it is $130 that Ukraine pays. There were no such options as $55 or $75, that would only be possible in the case of the country’s political marriage. The transitional period up to 2011 is also quite a realistic deal, especially taking into account the growing probability of oil and gas prices’ dropping in the next couple of years.
In 2007 Minsk is to pay $2 billion at new prices for 20 billion cubic meters of gas, but it will receive $625 million tranche from Gazprom and additional $100 million for transit. In 2006 it paid about $980 million for gas and got about $110 million for transit. It is by $395 more than Belarus paid Russia in 2006. It is 1% of the GDP or 2.3% of the budget’s revenue of 2006. The figures are far from being marginal, if to believe that last year the economic growth was almost 10%.
However, the official Minsk was so unhappy because it was aware of the second, much more unpleasant part of the energy blow delivered by Russia – an oil part. It was difficult to make PR through it before the New Year: it was too evident that the truth and the law were on the Russian side. Nobody made the Belarusian leaders sign the treaties where they undertook to share the incomes from the export customs duty on oil products with Russia fifty-fifty. Russia has an air-tight alibi. It turned a blind eye to the oil offshore while hoping that Belarus will join it. But after the 2006 presidential elections in Belarus, the Kremlin demanded its share. Belarus did not believe that the Kremlin would abolish extremely advantageous schemes since they were actively lobbied by the majority of the Russian oil and political beau-monde. However Putin and his closest advisers decided otherwise. The conflict between Lukashenka and Putin was beyond the economic and political pragmatism. Things began to take off.
Law-governed states resolve their controversies at the round-table talks within the framework of international regulations and conventions. But neither the Belarusian top-down command structure nor Putin’s managed democracy are dominated by the rule of law. Thus the conflict resembles a fight of two urban districts with considerably different potential. Russia, while introducing export duty on crude oil to Belarus at $180.7 per metric ton, doesn’t dare to denounce the Union State treaty or even the customs union. Formerly these papers were of little importance to the both sides, and today Russia and Belarus hide behind these documents.
Moscow realizes that the “oil blow” heavily undermines Belarusian state-planned economy. The price margin between the sums that Belarus paid in 2006 and those it is charged now amounts to 8 – 9 % of the republic’s GDP which is unbearable for any economy. Lukashenka with all his top-down command structure simply lost his nerve and instead of thinking how to act in response started to act without thinking. Belarusian Prime Minister Syarhey Sidorski and his team were quick to count their losses and counterstroke with a $4 billion. The Belarusian Council of Ministers was unanimous to introduce December 31, 2006 by the resolution № 1791 a new fee $45 per cubic meter of the transit oil.
Before the unprecedented resolution issued by the Belarusian government, the customs fee was imposed only on the goods that were either produced or consumed within the country, which is the practice accepted world-wide. But what is more bizarre is that when adopting the bill № 1791 that became a new word in the international trade, the official Minsk invoked all the same pseudo-integration-documents (the treaty introducing the free trade regime signed in November 1992 and 1995 protocol on the customs union).
Too much is at stake in this economic fight. And Lukashenka understands it perfectly. It seems that he intentionally pushes Russia to denounce the agreements that suddenly became so important. Lukashenka then will have a chance to lay the blame for his own political failures on the Russian authorities. The Belarusian president doesn’t dare to denounce the agreements himself – once he was renowned as an “integrator” and doesn’t want to undermine his own legitimacy.
Scenarios for the future
The oil raw has continued after the Christmas holidays. Russia has never before stepped back at the face of such an explicit blackmailing, and under the present circumstances international arbitrage will approve of its stance. But legal proceedings may last for years while the Belarusian customs office has already raised a claim against “Transneft” though they haven’s revised the scheme of payments for Russia. It is ridiculous to think of “Transneft” transferring funds to the accounts of the Belarusian customs office. It seems that Belarusian authorities, too, find this compensatory scheme invalid for soon after it has been adopted they announced their readiness to start negotiations on oil deliveries to Belarus.
The Belarusian negotiators strive to get at least half of the sum from the export of oil products that will be processed in Belarus in 2007 for they clearly understand that there is no talking about returning to the offshore schemes. $1,7 – 2 billion are at stake if Russia lifts the export duty on crude oil. To get this money they initiated the whole deal with the duties for the transit of the Russian oil. Under the pressure of external circumstances and searching to preserve the myth about the union state, Russia – in the first place its oil companies particularly reliant on the Belarusian offshore – is most likely to compromise, too. Belarus’ proposal of 50:50 share and Russia’s 85:15 are most likely to meet at 70:30 or 75:25. Hoping to save the face before the European partners, the both parties are most likely to make agreement during the first business week after the Christmas.
Belarus simply doesn’t have resources for a long stand-off. Its actual reserves of cheap oil will have run out by the end of January. After that Belarus will have to either illegally siphon oil from the transit tube or buy the crude oil for $430 – 450 for cubic meter. Either of these options is less profitable for Belarus than the “oil peace” granting money from the export of oil products. That’s what the common sense suggests. But whether the Belarusian authorities will be ruled by the common sense in resolving the energy raw is a question. Some have already proposed to revise all Russian property on the territory of Belarus and to bill Russian for all the services it gets here in Belarus. Here numbers might be incredibly high judging by the customs duty on the oil transit.
The Kremlin hasn’t reacted yet to the new proposals concerning further integration of the sisterly nations. But shipping of the Belarusian sugar from Russia can be the first sign of the protectionist policy against the Belarusian producers. Once again this will be done with reference to the integration documents and the rules of the WTO.
Trade wars haven’t brought prosperity to any state; they are especially ruinous for a small opened economy. Lukashenka and his government have put themselves into a corner. The Belarusian president has burnt his bridges back to Russia. But didn’t he know that Russia is the main and maybe the only consumer of the goods produced in his country?
Given the current political situation it is impossible for Belarus to get the West’s attention and contribution. Here also the bridges have been burnt. Of course, the Belarusian authorities will do their utmost to save the day. They will appeal to the West and say that Russia increases the gas prices, imposes the export oil duty (though the Russian exporters pay it) in order to annex Belarus. Under the circumstances the WTO membership would be of help to us, but the Belarusian government did not consider it to be a priority even now.
Belarusian politicians, ideologists and spin doctors have a reputation card against Russia. It will be raffled by the official Minsk. In 2007 Lukashenka will tell us how to behave with enemies. Their number will allegedly be increasing, and they will appear within the country. The answers to the question “who is to blame” are ready: Gazprom, oil oligarchs, the Russian government and the Kremlin. The Belarusian TV is working on the new enemy image. However, the current government cannot answer the question “What to do?”. The dozens of the government officials are longing to gain favor with their leader who is struggling for disintegration and independency.
January 10, 2007
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