USD 2.5 BILLION IN RUSSIAN SUBSIDIES IN 2005

C O N F I D E N T I A L MINSK 000364

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/15/2016
TAGS: ECON EPET PREL ENRG ETRD BO
SUBJECT: USD 2.5 BILLION IN RUSSIAN SUBSIDIES IN 2005

Classified By: Classified by Ambassador George Krol for Reasons 1.4(B,D
)


1. (U) Summary: According to the best numbers available,
Russia provided approximately USD 2.531 billion in subsidies,
mostly energy, to Belarus in 2005. Of that, USD 1.236
billion came from the sale of discounted natural gas, USD
1.149 billion from the sale of discounted crude oil, and USD
146 million in the form of a governmental loan. This amounts
to 9.5% of GDP (just under USD 27 billion in 2005, according
to GOB estimates). In addition to this total, the GOB
demands that any company supplying crude oil to the two
Belarusian refineries must sell a set portion of the refined
product to Belarusian enterprises, many of whom are state
owned, at discounted prices. End summary.


2. (C) Estimates of Russian subsidies to the GOB vary
greatly. Economic analyst and former head of the National
Bank of Belarus Stanislav Bogdankevich recently told the
Russian press that Belarus receives more than USD 4 billion a
year from Moscow in subsidies. Citing a report by Moscow's
Trust Investment Bank, Bogdankevich claimed the GOB earns
nearly USD 3 billion from the resale of under-priced Russian
crude oil. In contrast, Valery Dashkevich, an economist with
Minsk's BelGazpromBank, told Econoff that Russian subsidies
are closer to USD 1.1 to 1.3 billion per year.


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Natural Gas, USD 1.236 billion
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3. (U) The largest source of Russian subsidies is the sale of
natural gas to Belarus. The GOB buys natural gas solely from
Russia's Gazprom, paying a steeply discounted price of USD
46.68 per thousand cubic meters (tcm). In contrast,
Lithuania pays USD 120/tcm and Ukraine USD 230/tcm (to
Gazprom, although its average cost is lower after Turkmen gas
is added). (Note: these countries are roughly the same
distance from Russia's gas fields as is Belarus.)


4. (U) Compared to Lithuania, Belarus pays USD 73.32 less per
tcm. Since Belarus consumed 20.12 billion cubic meters (bcm)
of Russian gas in 2005, that subsidy totals roughly USD 1.475
billion a year.


Minus Discounted Transit
--------------


5. (U) One of the justifications for paying less for gas is
that Belarus also charges less than Ukraine does for gas
transit. Using 2006 rates for comparison, Ukraine charges
USD 1.60/tcm per 100 kilometers. Belarus has two pipeline
systems, the Gazprom-owned Yamal-Europa (YE) pipeline and the
GOB-owned Beltransgaz pipeline network. The GOB charges USD
0.46/tcm/100 km on YE and USD 0.75/tcm/100km through
Beltransgaz. (Note: For calculating charges, we assume both
pipelines are 575 kilometers long (the length of YE.)
Beltransgaz's length varies depending on destination country.
Sources differ on whether the GOB treats all transit through
Beltransgaz as if it were 575 km or whether it measures
actual pipeline length.)


6. (U) In 2005 Belarus transited 24 bcm of gas through YE,
earning USD 63.48 million, and 16.8 bcm through Beltransgaz's
network, earning USD 72.45 million, for a total of USD 135.93
million earned through transiting Russian gas exports to
Europe. (Note: Unless gas transit increases, Belarus will
earn less transit money for 2006. In 2005 Gazprom added
compressor stations to YE, boosting its throughput. In the
first two months of 2006 transit volumes through YE are up
57.8% on the year, and down through Beltransgaz by 16.4% as
Gazprom shifts gas into the cheaper network.)


7. (U) If the GOB charged the same rate as does Ukraine for
transit (USD 1.60/tcm/100 km in 2006),it would have earned
an additional USD 239.43 million. Therefore, taking this
difference in transit prices into account, the GOB's total
gas subsidy from Russia drops to an annual USD 1.236 billion.


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Oil: The (Relatively) Simple Picture, USD 1.149 billion
-------------- --------------


8. (U) According to GOB statistics, in 2005 Belarus imported
19.232 million tons of crude oil from Russia at an average
cost for the year of USD 218 per ton. (Note: assuming 7.3
barrels per ton, this comes to USD 29.86/barrel.) The Moscow
Times reported that the 2005 average price for Russian Urals
blend was USD 50.50/barrel, or USD 368.65 per ton.


9. (U) According to GOB statistics, Belarus' two refineries
owned 7.549 million tons of this crude themselves (Mozyr 3.64
million, Novopolotsk 3.909 million). (Note: While the GOB
owns 99.8% of the Naftan refinery in Novopolotsk, it only
owns 55% of the Mozyr refinery (43% is owned outright, and
12% is owned by the MNPZ association, which the GOB took over
through the Golden Share in 2005). Russia's Slavneft owns
another 42.5% of the Mozyr refinery. Therefore, we can only
consider 2.002 million tons of the Mozyr-owned crude to be
the property of Belarusian interests.)


10. (U) In addition, Belarusian state-owned companies
delivered additional crude supplies to the refineries.
Belorusneft supplied 1.511 million tons (of which 441,000
tons was domestically produced, leaving 1.07 million tons
purchased from Russia),Belneftekhim supplied 527,000 tons of
Russian crude, and the Gomel-based oil transport company
Druzhba supplied another 40,000 tons. These companies
contributed a total of 1.637 million tons of additional
Belarusian-owned Russian crude. The Belarusian company
Triple is also believed to purchase discounted Russian crude,
but no data was available.


11. (U) The GOB therefore owned 7.629 million tons of the
Russian crude that it imported. Purchased at a per ton
discount of USD 150.65, this shows Russia subsidized
Belarusian crude oil consumption and re-export of refined
crude to a total of USD 1.15 billion.


12. (U) (Note: Belarus regularly imports far more crude than
it can consume domestically. In 2005, Belarus refined and
re-exported 13.487 million tons of Russian crude (495,000
tons to CIS countries and 12.992 million tons to non-CIS
states). In recent years it was profitable for Russian oil
companies to ship crude to Belarus, where it was refined,
before exporting it westwards. Russia did not charge oil
export duties on crude going to Belarus, and Belarusian
duties were usually lower than Russian ones, allowing Russian
companies to pay lower export duties by shipping through
Belarus. However, in early 2006 the GOB finally matched its
oil export duties to Russia's, eliminating this loophole.)


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Oil: The More Complex Picture
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Crude Suppliers Must Sell Refined Products at a Discount
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13. (U) In addition to receiving Russian crude at a discount,
the GOB also demands that all companies that supply crude oil
to Belarus' two refineries sell a portion of the refined
product inside Belarus at discounted rates, which are set by
the GOB. The quantities change, but as of December the GOB
insisted that any company supplying crude oil to the Naftan
refinery:

--Sell all paraxylene produced to the GOB-owned concern
Belneftekhim;
--Sell all benzene produced to Khimvolokno, a Grodno-based
joint venture (partially state owned) that produces
artificial fibers;
--For every ton of crude supplied, the company must sell on
the Belarusian market 80 kilograms of Normal-80 gasoline, 3
kg of fuel oil, 2 kg of A-92 gasoline, and 114 kg of diesel
fuel (the only exception is when the crude is delivered by
rail, then the supplier must sell 25 kg of Normal-80 gasoline
rather than 80 kg);
--For every ton of crude the supplying company must also sell
5 kg of oil products to Belarusian agricultural companies for
below market value.


14. (U) The GOB demanded that any company supplying crude to
the Mozyr refinery:

--Sell on the Belarusian market 34 kg of Normal-80 gasoline,
69 kg of fuel oil, 46 kg of A-92 gasoline, and 30 kg of
diesel fuel;
--For every ton of crude the supplying company must also sell
5 kg of oil products to Belarusian agricultural companies for
below market value.


15. (SBU) Post was not able to determine what rates the GOB
sets for the sale of the above products, as this information
is classified. However, the rates are low enough that
gasoline remains cheaper in Belarus than in most of the rest
of Europe, and these rates do not fluctuate with the
international price of crude. For instance, A-92 gasoline
has remained at BYR 1400 (USD 0.65) per liter for at least
six months, with absolutely no fluctuation after Hurricane
Katrina. Post cannot estimate the value of this additional
energy subsidy for the GOB.


Oil Sold Through Shell Companies
--------------


16. (C) Independent economist Jaroslav Romanchuk and energy
specialist Elena Rakova of the Institute for Privatization
and Management separately told Econoff that the situation
with oil subsidies is much more muddled. Russian oil
companies are ostensibly private, but still sell crude to
Belarus at up to a 2/3rds discount. Romanchuk and Rakova
both explained that Russian companies sell to Belarus'
refineries, which process the crude and ship it to the
Belarusian border, where it is again sold to a variety of
Russian and Belarusian front companies in Europe before being
sold again in reputable markets, such as the London Petroleum
Exchange. This set of front companies allows various people
in Russia and Belarus to take extra commissions and cuts of
the profits. While the numbers above are accurate, it is
unknown who exactly profits from the import and re-export of
cheap Russian oil. It is probably that a sizeable portion of
this money is going into private hands (Belarusians
well-connected with the Lukashe
nko regime),as well as to some Russians, rather than into
any GOB accounts.


17. (C) Romanchuk said that a similarly muddled series of
front companies and transactions exists regarding Belarusian
imports of unprocessed metals.


--------------
Loan, USD 146 million
--------------


18. (U) While not exactly a subsidy, Moscow is lending money
to the Lukashenko regime. To offset a modest increase in
natural gas prices in 2004, the GOR provided Belarus with a
loan of USD 175 million. Moscow again provided Minsk with a
USD 146 million loan in December 2005. Under the terms of
the loan, the GOB will have to repay the loan after five
years. Interest is calculated at the Libor three-month rate
(currently just under 5%) plus 0.75%.


Comment
--------------


19. (SBU) USD 2.5 billion in Russian energy subsidies, plus
whatever the GOB makes on the forced sale of refined oil
products at discounted prices, makes up close to 10% of GDP.
This has been a tremendous boost to the Belarusian economy
and has been a great aid to largely inefficient Belarusian
industry. Even while receiving heavily subsidized gas and
oil, energy accounts for on average 9.8% of the production
cost of Belarusian goods (according to the World Bank). If
Russia were to raise the price for gas, as many believe will
happen in the next few months, the GOB would be faced with
both the difficulty of higher energy costs, as well as the
decreasing competitiveness of Belarusian industry.
Krol