Russia and Belarus Enter a New Phase in Their Energy Relations

Presidents Alyaksandr Lukashenka and Vladimir Putin met in the Russian resort town of Sochi, on February 7, to resolve the multi-layered energy pricing disputes between them (see EDM, February 11). These talks were ultimately not as fruitless as their numerous summits in 2019 (Tut.by, February 7). However, energy relations between the two countries are now on a new track—but not one Minsk had hoped for.

By the end of last year, Belarus and Russia failed to negotiate the terms of further oil and natural gas supplies. The sides managed only to freeze the 2019 gas price ($127 per 1,000 cubic meters) for January and February, to effectively postpone the talks, but no oil contracts were signed. As a result, Russian oil companies halted the delivery of crude oil to Belarus on January 1. The only exception was petroleum sold by the conglomerate Safmar, owned by Mikhail Gutseriev, a personal friend of President Lukashenka (Tut.by, February 5).

The roots of the bilateral disagreements are political. In late 2018, the Russian leadership conditioned the continuation of preferential of energy supply terms for Belarus on deeper integration between the two countries. But in the course of 2019, it became evident that Minsk and Moscow have entirely different projects in mind. Belarus agreed only to harmonize some laws, without establishing new supranational bodies or a single currency; while Russia specifically wanted to advance the latter (political) dimensions of the union (Naviny.by, December 19, 2019). Moreover, Minsk demanded that the oil and gas issues be resolved before committing to any further integration; whereas, Moscow wanted the process to proceed the other way round (TASS, December 23, 2019).

Heading to the Sochi summit, Lukashenka described it as a “moment of truth” in relations with Russia (see EDM, February 11, 2020). The negotiations themselves produced mixed results. The gas price was fixed at $127 until the end of 2020. This is significantly higher than Minsk requested. According to a long-standing Belarusian position, the country is entitled to the same price as the nearest Russian region of Smolensk—which is about $75 plus transportation costs.

Since 2017, Minsk has also been receiving an extra six million tons of duty-free crude oil from Russia as a compensation for this elevated (as compared to domestic Russian rates) natural gas price. This allowed Belarus to re-export that oil and collect the export duties at about $500 million–$600 million per year. But in 2020, Moscow did not renew this scheme. Hence, Minsk is left with the old gas price, which it considers unfair, and without any compensation for it.

While the gas-related argument is at least temporarily set aside, the situation with oil remains complicated. Both Belarusian and Russian officials acknowledge that, from now on, Minsk will be receiving oil for its refineries on market terms. It means that Belarus failed to secure compensation for its eastern partner’s so-called “tax maneuver”—the reform of taxation in the Russian oil industry, which gradually deprives Minsk of cheap oil. In 2020, Belarus will have to pay 83 percent of the global market price, but it does not want to continue paying a $10-per-ton premium (adopted in 2011) to Russian oil companies. Even after the Sochi meeting, the Kremlin continues to distance itself from the dispute and invites Minsk to negotiate the purchase contracts with the Russian oil companies themselves (Interfax, February 7).

Meanwhile, in January, Belarus received only 500,000 tons of Russian oil, which is four times less than Belarusian refineries planned to obtain (Tut.by, February 11). The export of oil products produced by those Belarusian refineries, normally amounted to about a quarter of the country’s overall sale of goods abroad. But it had to be suspended this year to cover the needs of the domestic fuel market. Minsk initiated talks with a number of potential alternative suppliers, including Kazakhstan, the United States and Azerbaijan; and it even purchased 80,000 tons of oil from Norway, delivered via the Lithuanian port of Klaipeda (Interfax, January 26).

However, it is evident that Russian oil remains the cheapest option due to the remaining 17 percent difference from the world price and the simplest possible logistics for its delivery—via pipeline. After last week’s Sochi summit, Belarusian Deputy Prime Minister Dmitry Krutoi reluctantly admitted that Minsk will have to negotiate new contracts with Russian companies (Government.by, February 10). According to him, oil imports might have to be decreased.

The new energy relations with Russia may have profound implications for the whole trajectory of Minsk-Moscow ties. With oil and gas benefits gradually evaporating, so does the Russian lever in integration bargaining. In all likelihood, the dialogue on deeper integration is now frozen for good because Belarus no longer has economic incentives to continue it. Even moderately pro-Russian commentators in Minsk agree that bilateral integration within the so-called Union State is now highly unlikely to advance (Ukraina.ru, February 11).

On the domestic front, the Belarusian authorities will continue to pursue a pro-sovereignty agenda. It is safe to expect that such rhetoric will become a centerpiece of President Lukashenka’s own reelection campaign later this year. Economic problems inside Belarus will be blamed on Russia’s unfriendly behavior.

At the same time, the need to diversify energy, trade and political relations with Western countries is unlikely to cause any meaningful political liberalization domestically. On the contrary, Lukashenka keeps repeating that he sees the upcoming economic turbulence as a time for mobilization (Belta.by, December 4, 2019). This explains the restrictive conduct of the last parliamentary campaign at the end of 2019 and the appointment of senior KGB officer Igor Sergeenko to head Lukashenka’s administration (Tut.by, December 5, 2019).

These developments raise a tough dilemma for Western policymakers. On the one hand, Belarus is not likely to follow their desired path of domestic political reforms any time soon. But on the other hand, Minsk requires the maximum possible support to withstand the economic and political pressure coming from Russia.