BELARUS BACKS OUT OF ITS OIL JAM, FOR NOW

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000037

SIPDIS

SIPDIS
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF/PISCITELLI/TILLER

E.O. 12958: DECL: 01/15/2017
TAGS: EPET PGOV PREL BO RS
SUBJECT: BELARUS BACKS OUT OF ITS OIL JAM, FOR NOW

REF: A. MINSK 013

B. 06 MINSK 1283

Classified By: Ambassador Karen Stewart for reason 1.4 (d).

Summary
--------------


1. (C) On January 12, Belarus and Russia signed an agreement
on oil, giving both sides some of what they wanted. While
Russia will finally see budget revenues from its oil exports
to Belarusian refineries, Lukashenko has preserved, albeit in
a weakened form, his country's status as an offshore
destination for Russian oil firms. Minsk's readiness to
break the impasse stemmed from Belarus' dwindling oil
reserves and the prospect of losing 40 percent of its exports
if it failed to reach a compromise with Russia. However,
from oil alone, the Belarusian budget stands to face a
half-billion dollar shortfall in 2007 and Lukashenko's
political security remains under threat. End summary.

Russia Sticks Belarus, but It Could Have Been Worse
-------------- --------------


2. (C) As a precondition for negotiations to begin in
earnest, Belarus dropped its USD 45/ton duty on Russian oil
transiting to Europe (ref A). Once Moscow was assured
Russian oil was again flowing normally through the Druzhba
pipeline, the parties began haggling over the main item on
the agenda -- Russian export duties on oil. Lukashenko had
publicly declared he would agree to split the duty
fifty-fifty with Russia, but only one analyst to whom we
spoke, Mikhail Zalesskiy, a former Belarusian Ministry of
Economics official, believed this was achievable. In the
end, Minsk and Moscow agreed in 2007 Russia would impose an
export duty equivalent to 70 percent of Belarus' export duty,
i.e. USD 53/ton (but subject to bimonthly adjustment per
changes in the price of oil). This was the rate predicted
last year (ref B) by Yaroslav Romanchuk, Director of the
Mises Center. As a result, Russia will collect almost USD
1.1 billion in 2007 if the price of oil stays unchanged.
This will hit both Russian oil companies
and the Mozyr and Novopolotsk oil refineries (and thus the
GOB budget).


3. (SBU) Earlier in 2006, before Russia announced it would
begin imposing an export duty on oil for Belarus, Belarusian
officials had mentioned 70 percent of Belarus' export duty as
a possible compromise figure. The sides disagreed over
whether the duty would be collected directly by Moscow (or by
Belarusian customs with Moscow's share then transferred to
the Russian treasury),and over the base export duty rate
(with Russia requesting Belarus raise its export duty,
currently roughly a third of Russia's). Essentially, Moscow
won on the former point, but Belarus conceded very little on
the latter. The USD 53 export duty represents 70 percent of
Belarus' existing duty, but only 29 percent of Russia's duty.


4. (SBU) The percentage will increase yearly, rising to 80
percent of Belarus' export duty in 2008 and 85 percent in

2009. Also, Belarus reportedly agreed not to charge Russia
rent for the land under the Yamal-Europe pipeline or for
Russia's two military bases in Belarus. In what could serve
as a recipe for future disputes, Belarus is supposed to
gradually raise its own export duties on the export of
refined oil products to approximate Russian levels. If
Belarus follows through, similar export duty levels would
kill the incentive for Russian oil companies to export crude
to Belarus.

Lukashenko's Bluster Exceeded His Oil Reserves
-------------- -


6. (C) Despite Lukashenko's statement to reporters that
Belarusians could live off the land if the dispute with
Russia continued, in reality Belarus would have found itself
in trouble had negotiations dragged on. Beginning January 6,
Belarus siphoned at least 79,000 tons of oil from the Druzhba
pipeline. Tatyana Manenok, energy reporter for the weekly
"Belarusy i rynok" told Econoff the decision was taken when
oil reserves fell. Directors of Belarusian refineries feared
the consequences of disobeying Lukashenko's orders to run at
full capacity. Zalesskiy added it was not at all out of the
ordinary for directors of large state firms to face jail
terms if they failed to follow orders from above. According
to Manenok, the original reserve of roughly two weeks
(confirmed by other analysts) was depleted at over double the

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normal rate due to Lukashenko's "incompetent" management.


7. (C) Yaroslav Romanchuk, Director of the Mises Research
Center, believed Belarus' oil reserves could have lasted only
until January 15. At that point Belarus would have faced
domestic shortages and/or foregone the 40 percent of its
exports that come from refined oil products. In addition to
facing possible retribution from Lukashenko if production
dropped, Zalesskiy noted the refineries would have suffered
costly substantial technical difficulties if they had to go
offline.

Comment: Lean Years to Bring New Challenges for Lukashenko
-------------- --------------


8. (C) Some analysts believe Lukashenko's public support has
received a boost from the recent spats. Opposition leader
Milinkevich estimated the dispute over gas had caused
Lukashenko's popularity to rise by ten percent. Zalesskiy
compared Lukashenko's behavior as that of a drunk itching for
a fight.


9. (C) This popularity boost will be short-lived as soon as
Belarusians feel the consequences of increased energy prices.
From oil alone, Belarus' economy will miss out on roughly
USD 500 million in expected revenue in 2007, with the amount
increasing yearly; nearly as much will be lost as a result of
the GOB's deal with Gazprom. Few believe the economy
Lukashenko has created can deal as successfully as Ukraine
has with the move to market energy prices. Poland's Charge
Aleksander Wasilewski predicted wage arrears. He said
Belarusians had just become accustomed to improving standards
of living, and the historical lack of mobility was the only
thing preventing mass emigration in the future. Wasilewski
also saw a devaluation of the Belarusian ruble, currently
pegged to the dollar, as a real possibility. (Note: On
January 15, the Chairman of Belarus' National Bank denied a
devaluation was planned for this year. End note.)


10. (C) Keeping the inner circle on board will be of more
immediate concern to Lukashenko than the disenfranchised man
in the street. Zalesskiy told Poloff when it was claimed
Belarusian oil refineries would have been unprofitable with
Russia's high export duty, what was really meant was those
profiting illicitly would suffer. Wasilewski added it was
uncertain how the nomenklatura would react to a shrinking pie
of profits. He claimed Moscow was increasingly looking for
an alternative to Lukashenko, including giving support to
Aleksandr Voytovich, a former President of the Belarusian
Academy of Sciences who at one point had sought to run
against Lukashenko and opposition coalition leader Aleksandr
Milinkevich in Belarus' 2006 presidential elections.

Stewart