Belarus Makes and Russia Loses Billions on Oil

UNCLAS MINSK 000451

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EPET ECON ETRD PREL ENRG USTR BO
SUBJECT: Belarus Makes and Russia Loses Billions on Oil

Refs: (A) Minsk 364, (B) Minsk 381


1. Summary: During a recent seminar an energy expert from Belarus'
Ministry of Economics explained that Belarus buys crude oil from
Russia for well below market rates. With current high oil prices
the GOB stands to benefit by USD 3.9 billion this year (14% of
GDP),while the Russian budget could lose USD 3.5 billion on lost
oil export duties. However, the expert does not expect these
prices to go up, as Russian oil companies make an additional USD
370 million selling to Belarus, and these companies are proficient
in lobbying the GOR to allow such pricing and sales. In addition,
the expert confirmed that Moscow is pressing Minsk to raise oil
export duties to Russian levels and to reimburse the Russian budget
for previous losses for Russian crude imported to Belarus duty-free
and charged Belarusian duties upon re-export. He estimated that if
Minsk were forced to match its duties to Russia's, Belarus'
refineries would become unprofitable. End summary.


2. On April 19, Econoff attended a seminar on Belarusian trade
policy. Aleksandr Gatovsky, an analyst with the Ministry of
Economics Economic Institute, described in detail the factors
affecting the reduced price Belarus pays for Russian crude oil
imports. In 2005 Belarus imported 19.3 million tons of Russian
crude oil, up from 17.8 million tons in 2004. Belarus additionally
produced 1.8 million tons of oil from domestic sources in 2005.


Cheap Oil: Minsk and Russian Business Win, Moscow Loses
-------------- --------------


3. According to Gatovsky, in January Belarus paid USD 32 per barrel
for Russian crude. This compared to a world price for Urals crude
of USD 59.50/barrel. A main reason for Belarus' discounted price
is that Russian exporters do not pay Russian oil export duties for
crude shipped to Belarus. Russia charged USD 53.90 (including
export duties) for exports to other CIS states -- this price was
USD 29.30/barrel before the addition of Russian export duties and
excise taxes. Using January 2006 prices and the amount of oil
Belarus imported in 2005, Gatovsky estimated that Belarus could
benefit to the tune of USD 3.9 billion this year from Russian crude
priced below market levels. Of that amount, USD 813.7 million now
goes to the GOB in the form of VAT payments, since Russia and
Belarus switched to the country of destination principal in VAT in
January 2005.


4. Because exporters do not pay Russian oil export duties on crude
exported to Belarus, the Belarusian Ministry of Economy calculated
that the Russian budget could lose USD 3.5 billion this year on oil
exported through Belarus (USD 24.6/barrel, or USD 180/ton).


5. Despite these high Russian losses, Gatovsky claimed the GOB does
not expect Russia to raise the price it charges Belarus for crude.
He argued that Russian exporters earn USD 32/barrel selling to
Belarus, and only USD 29.30/barrel selling to other CIS states (the
price before oil duties are added). Therefore, Russian exporters
stand to earn an additional USD 370.6 million this year on exports
to Belarus above what they could earn selling to other CIS states
(and USD 1.49 billion more than they could make selling
domestically in Russia). Gatovsky said the Russian companies
exporting to Belarus are fully proficient in lobbying Moscow to
keep this situation as is, even though it results in a serious net
loss to the Russian budget. [Note: He also stated that Russia only
has one natural gas exporter to Belarus, Gazprom, which is
effectively a GOR entity. Therefore Moscow finds it easier to
raise gas prices for Belarus than it does oil prices.] Gatovsky
added that Russian dependence on Belarusian oil pipelines would
also serve to curb any price increases.


Russia Dependent on Belarusian Oil Pipelines
--------------


6. Unlike the situation with natural gas, where only 20% of Russian
gas exports transit Belarus (versus 80% through Ukraine),Gatovsky
explained that Russia is dependent on Belarusian pipelines. The
Druzhba pipeline system, which transits Belarus, carries 21.1% of
all Russian crude oil exports, representing nearly all Russia's
overland crude exports. Gatovsky said that the new oil terminal in
St. Petersburg is a means for Russia to decrease its transit
dependence on Belarus.


7. However, this dependence only goes so far. Gatovsky said that
even though the GOB owns the Druzhba pipelines inside Belarus, in
the case that Russia raised oil prices, he did not think the GOB
could raise oil transit prices to match. Gatovsky stated that oil
transit prices are set according to international norms, and that
Minsk would not be able to justify any sharp increase.



Moscow Pressing Minsk on Duties
--------------


8. Gatovsky confirmed an April 10 Russian newspaper Kommersant
article that in late March the Russian government sent a letter to
the GOB insisting Belarus implement Article 4 of the Russia-Belarus
Customs Union Treaty of 1995, and for Minsk to reimburse Moscow for
money lost from Belarus earning oil export duties on Russian crude
imported duty free. Article 4 literally calls on Russia and
Belarus, as well as Kazakhstan, to implement "a single order for
regulating external economic activity." Elena Rakova, energy
specialist with the Institute of Privatization and Management,
explained to Econoff that Russia argues Article 4 stipulates the
two countries share the proceeds from Belarusian oil export duties
on Russian crude imported duty free, and that now Moscow wants to
be reimbursed for lost revenue. Rakova claimed that several years
ago the GOB unilaterally decided that Belarusian refineries add
enough value to Russian crude to justify Minsk keeping the entire
sum of export duties. Gatovsky admitted that under the treaty
Belarus must share a portion of its oil export duty revenue with
Russia, but claimed that Minsk has never given Moscow any of this
money. In response to a question, Gatovsky refused to answer what
share of oil export duties the GOB is obligated to give Russia.


9. Gatovsky admitted that recently Moscow has been pressuring
Belarus to raise its oil export duties to the level of Russia's and
for Minsk to reimburse the Russian budget for losses caused by
Belarus' lower oil export duties. Despite recent press
announcements to the contrary (ref A),he explained that Belarus
still charges considerably lower oil export duties than does
Russia. In January, Belarus' duties on crude export were 77.4%
lower than Russia's, for diesel fuel, gasoline and kerosene it was
76.5% lower, and for heating oil 34.4% lower. Belarus' weighted
average for oil duties (crude and refined oil products) was USD
48.60/ton, compared to USD 180/ton in Russia.


Equal Duties Would Hurt Belarusian Refining
--------------


10. Gatovsky explained that Belarus' duties were lower to boost
demand for Belarus' two refineries. He argued that if duties go up
to match Russian levels, refining in Belarus could not compete with
Russia, demand for Belarusian oil products would drop, and the
Belarusian budget would lose a major source of revenue. Using
January 2006 figures, Gatovsky claimed that Belarus pays USD
234/ton of crude and the GOB adds an average of USD 42 in duties on
the exported refined oil products (this differs from the figures
above since it excludes duties on crude exports). Russian
refineries buy crude for USD 157/ton and Moscow charges USD
93.60/ton in duties. Even with higher Russian duties, Russian
refined oil products now cost USD 25.40/ton less than do similar
Belarusian products. This difference would grow if Belarus were
forced to charge the same duties as does Russia, resulting in
Belarus' refineries -- one of the GOB's largest sources of revenue
-- becoming unprofitable.


Oil Very Profitable for Minsk, Now
--------------


11. Gatovsky stated that 81% of Belarus' 2005 growth in exports was
caused by the growing volume and cost of oil product exports. Oil
and oil products now make up one-third of all Belarusian exports.
Independent media sources claim that oil exports are managed by
trading houses under the control of the Presidential
Administration's Property Management Department and the state
concern Belneftekhim. In late March, Lukashenko ordered that
Belneftekhim be placed directly under the control of his
Presidential Administration (septel),giving him greater control
over this lucrative revenue stream. Gatovsky gave one example of
how the GOB profits from the oil trade. He explained that the GOB
uses profits from the sale of lubricants refined at the state-owned
Naftan refinery to pay salaries and operating costs. The GOB uses
the profit from Naftan's refining of gasoline, diesel fuel and
mazut to support various unprofitable state-owned enterprises. The
GOB also uses other oil revenue for "investment" as well. For
instance, profits from the state-owned oil companies Belarusneft
and Gomeltransneft Druzhba were used to fund Euro 47.9 million in
modernization at the state-owned Belshina tire company.


12. According to the World Bank's Minsk office, Belarusian exports
of oil and oil products grew 400% between 2001 and 2005. In 2005
such exports made up 16.4% of GDP, 30% of all exports and 63% of
exports to the European Union. This despite the fact that Belarus
itself must import 93.6% of its domestic oil needs.


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


13. Belarus is in perhaps the unique position of being almost
entirely dependent on imported oil, but massively benefiting when
oil prices rise. In the past several years the GOB has invested
heavily in its two refineries, and now oil products are the
country's largest export and the GOB's largest cash cow. While
domestic lobbyists may prevent Russia from raising prices on crude
oil, Moscow seems intent on recouping some of its massive losses
caused by Minsk importing Russian crude duty free and earning both
revenue and export duties on its re-export. As with natural gas
(ref B),Minsk may be about to fall off the energy gravy train.


KROL