GOB SEARCHES FOR EASY MONEY AS OIL EXPORTS VANISH

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000188 SIPDIS SIPDIS STATE FOR EB/ESC/IEC GALLOGLY AND GARVERICK DOE FOR HARBERT/EKIMOFF/PISCITELLI/TILLER E.O. 12958: DECL: 03/04/2017 TAGS: EPET PGOV PREL BO RS SUBJECT: GOB SEARCHES FOR EASY MONEY AS OIL EXPORTS VANISH REF: A. MINSK 037 ¶B. MINSK 072 Classified By: Ambassador Karen Stewart for reason 1.4 (d). Summary -------------- ¶1. (C) Two months after the loss of Belarus' privileged status as a de facto offshore for Russia oil companies, the GOB has yet to find a way to sustain the economy. The duty on refined oil product exports from Belarus, established at Russia's behest, currently makes refining oil profitable only for the domestic market. In addition to depriving the GOB of 40 percent of its exports, the new scheme cuts intermediaries who used to kickback money to the regime out of the oil trade equation. The GOB's search for a stopgap measure includes requesting loans from Russia, Austria's Raiffeisen bank, and possibly China, and privatizing state-owned enterprises. End summary. Oil Exports Drop Off Dramatically ... -------------- ¶2. (C) For January and February of 2006, Belarus exported approximately one million tons of refined oil. The GOB hoped to keep exporting, albeit at a markedly reduced profit margin after resolving its oil dispute with Russia (ref A). Instead, this year's exports have dropped to an almost symbolic 20,000 tons, according to both Irina Tochitskaya, Deputy Director of Research for the Institute for Privatization and Management, and Tatyana Manenok of the reputable independent weekly "Belarusy i Rynok." Under the current export duty that the Russian government insisted upon, Russian oil companies cannot turn a profit on oil refined in Belarus for export. According to Tochitskaya, the sharp decrease in exports has deprived the GOB of hard currency just when the country is trying to reverse a 2006 trade deficit of USD 1.66 billion, making an economic crisis certain if the government does not find a solution soon (ref B). ¶3. (C) Tochitskaya explained the new oil price formula agreed upon by Russian oil companies and Belarus January 30 lowered prices for February. However, the formula tracks world prices and in the future Belarus could end up paying even higher prices (or trying to break the agreement to abide by the formula). ... Leaving Kickback-paying Middlemen in the Lurch -------------- -------------- ¶4. (C) Roman Osipov of Uniter Investment Company told Deputy Pol/E Chief in January the new export duties would force trading companies serving as intermediaries between Russian oil companies and Belarusian refineries out of business. Meetings with two such trading companies, Belrosneft and Miralex, confirmed Osipov's predictions. Valeriy Kirpichnikov, General Director of Belrosneft, said his company had not received a quota from the GOB to seek to import part of the oil Russia agreed to sell Belarus. Miralex's Deputy Director General, Yuriy Tarasov, confirmed that the company, which makes donations to some of Lukashenko's favorite causes, had received a quota but had not been able to find a Russian company willing to sign a contract. ¶5. (C) Although both Tarasov and Kirpichnikov claimed the situation would improve later in the year, Manenok reported that contracts for March oil purchased have not yet been signed. Manenok said the board of Belneftekhim met for a week straight to try to come up with a solution. The GOB may decide to subsidize oil refineries to make oil exports once again profitable. Yaroslav Romanchuk, head of the Mises Research Center, described such a policy as just a short-term measure and Tochitskaya said it was not certain the GOB could come up with a scheme to make exports viable. Refining Oil for the Domestic Market Profitable for Now -------------- -------------- ¶6. (C) Until this year Russian oil companies were forced to sell oil to refine for the Belarusian domestic market at a loss in order to obtain the right to export oil at a profit. Beginning in February, excise taxes on gasoline were dropped 250%, making production for the domestic market profitable. Both Manenok and Tochitskaya said companies have started MINSK 00000188 002 OF 002 importing refined oil products from Russia into Belarus, weakening the position of Belarusian refineries. According to Manenok, the government will likely raise excise taxes again. The GOB is portraying the move as an attempt to stimulate export, but Tochitskaya said the GOB is just hoping to raise revenue as exports would still turn a loss. She estimates that as a result Belarusian oil refineries will process only about half the volume they handled in 2006. How to Plug the Budget Deficit? -------------- ¶7. (C) The GOB has sought to dampen rumors it would privatize companies on the cheap. Deputy Economics Minister Aleksandr Tur recently stated that out of a list of companies that could be privatized, only a sewing machine factory was available immediately. On February 28, Prime Minister Sidorskiy told press the GOB was open to foreign investors as long as they did not expect to get something for nothing, worked with the government, and did not lay off workers. Tochitskaya expected the GOB would sell breweries first, other food processing plants next, and oil refineries only as a last resort. Yaroslav Romanchuk commented to Deputy Pol/Econ Chief that authorities must settle significant issues, such as labor force regulations, before finding reputable investors to successfully privatize even breweries. ¶8. (C) On February 23, press reported the Belarusian Ministry of Finance requested USD 1.5 billion in credits from Russia. Tochitskaya told us the GOR would eventually agree in order to maintain Belarus' high level of dependence on Russia. Romanchuk, however, averred that the decision makers had not yet weighed in, and the announcement may simply have reflected bureaucrats' eagerness to impress that they were looking for solutions to the economic difficulties. Analyst Valeriy Karbalevich told Pol/Econ Chief discussions between Austrian bank Raiffeisen and the regime on a possible USD 1 billion worth of credits will help soften the impact of reduced cash flow. (Comment: A loan of that volume from the EU - even if from a commercial bank -- would obviously undercut joint EU-U.S. pressure on the regime. End comment.) Press speculated the GOB is also seeking over USD 1 billion in loans from China. Comment: Should You Borrow USD 1.5 Billion from a Friend? -------------- -------------- ¶9. (C) The privatization of breweries could theoretically bring the government several hundred million dollars, but not the kind of money needed to make up for the shortfall brought on by the end of oil exports. A USD 1.5 billion loan from Russia or elsewhere would buy more time. The government would then have money to subsidize oil refineries to make export profitable once again, albeit much less so than in the past. This would reduce the trade imbalance and allow some middlemen to get back into the business of helping the regime hide oil profits abroad. Thus, Lukashenko might willingly soften his anti-Russia rhetoric a touch in return for some extra cash to spread around. Stewart