BELARUS NEWS AND ANALYSIS

DATE:

15/01/2007

Russia, Belarus agree on oil, oil product duties

MOSCOW. Jan 15 (Interfax) - The trade conflict between Russia and Belarus, as a result of which Russia - to avoid oil being taken illegally - had to suspend oil transit via the Druzhba pipeline for two days, can be considered to be over. After long and tense talks, the countries reached agreements that should prevent a repeat of the January crisis.

CONFLICT BACKGROUND. Belarus from 1998 did not abide by an agreement whereby 85% of duties on exports, including oil products, produced in Belarus with Russian raw materials, should be paid to the Russian budget and 15% to the Belarus budget. There were many attempts to resolve the situation but they were unsuccessful. Russia drafted an agreement in September 2006 that, as with the previous system, stipulated that 85% of oil product duties should be paid to the Russian budget and 15% to the Belarus budget. The document was submitted to Belarus for signing.

"In response, Belarus initially proposed 85% for itself, then 75% and then a 50%/50% split. We said more than once that this was not acceptable and at the end of November there was an official announcement on the introduction of export duties for oil going to Belarus," a source from the Russian negotiation delegation told the press Saturday.

Russia introduced an oil export duty of $180.7 per tonne for Belarus on January 1 2007. Previously, Russian oil was exported to Belarus duty-free.

Analysts said Russia loses about $4 billion a year due to the difference in export duty in Belarus and Russia for petroleum products produced using Russian oil. The Russian duty for the export of light distillates and gas oil as of December 1 was $134 per tonne, compared with $75.8 in Belarus, and the duty for the export of fuel oil, lubricants, and petroleum products was $92.9 per tonne, compared with $72.2 in Belarus.

In response to the export duty for oil to Belarus, the government imposed duty on oil transported through Belarusian pipelines at $45 per tonne. Belarus abolished the duty on January 10.

The Belarus Council of Ministers resolution named Transneft (RTS: TRNF) as the payer of the duty. The duty was to be paid before oil was transited, and if payment was not made or the liability was not responsibly met, the payer would be liable in accordance with Belarusian tax legislation.

Russia called the step, unprecedented in world practice, illegal and refused to pay the "transit duty." In response, Belarus began to illegally take Russian oil from the Druzhba pipeline, through which oil is transported to Europe, and Transneft was forced to suspend transit.

A source in the Russian government said the Transneft central office immediately registered that Belarus had illegally taken oil, as the company had "through its long experience come across such situations in the past."

AGREEMENT. The conflict, which not only affected its direct participants, but also European countries, required an immediate resolution. Belarusian officials were constantly arriving to Moscow from January 8 and the delegation level began to get higher and higher. However, for talks to officially begin, Russia set the condition that Belarus had to lift the "transit duty."

"Russia's trade partners supported Russia in that the introduction of transit duties is a very dangerous precedent," a source from the Russian negotiation delegation said. "Countries located amid large trade flows would test the patience of cargo owners in order to make extra money," the source said. "We told the Belarusian prime minister that a similar duty could be introduced for them. Russia would never do this, but a large volume of Belarus trade turnover from Asian countries comes through us," he said.

Russian President Vladimir Putin spoke to Belarus President Alexander Lukaschenko on the phone on January 10. On the same day, Gomeltransneft Druzhba began pumping the 79,000 tonnes of delayed Russian oil to Europe and on Thursday, supplies to Belarus and Transneft were fully reinstated.

But for the conflict to be over, Russia and Belarus had to resolve a series of disputed issues linked with energy resource supplies.

The countries' prime ministers talked for 16 hours on January 12, during which an agreement was reached.

Russia will charge an export duty of $53 per tonne of oil exported to Belarus in 2007, Prime Minister Mikhail Fradkov said following negotiations with his Belarusian counterpart Sergei Sidorsky in Moscow on Friday.

"In fact we, for instance, will have $53 per each tonne of crude shipped to Belarus in 2007," Fradkov said.

The sides agreed on a common approach implying that "we will charge an export duty on crude shipped from Russia at a rate equal to a corresponding share of an export duty on oil products exported from Belarus and produced from Russian crude," he said.

"These parameters result in a duty to be charged on exports of Russian crude," he said.

The proportion between the rates of the export duty on Russian oil exports to Belarus and the duty on exports of oil products from Belarus will be 70% for Russia and 30% for Belarus in 2007, 80% and 20% in 2008, and 85% and 15% in 2009, he said.

If Russia, for instance, sells Belarus 20 million tonnes of crude, then it will receive $53 in the form of an export duty per tonne, "and it will be calculated equivalent to the share in the export duty on oil products obtained from this crude and shipped by Belarus to third countries," he said.

Russian Finance Minister Alexei Kudrin explained that Belarus would be subject to a coefficient of 0.293 of the general Russian export duty on crude, which is about $180 per tonne. The general export duty will be revised every two months, but the 0.293 coefficient for 2007 will remain unchanged, Kudrin said. In 2008, this coefficient will be 0.335 and in 2009 - 0.356, he said.

The export duty on crude at the western border of Belarus will be equal to the Russian export duty of $180, he said.

These measures will bring from $2.5 to $3 billion to the Russian budget annually, Kudrin said.

In accordance with the agreements on measures to regulate trade and economic cooperation in oil and oil product exports, Russia will receive 70% of duties and Belarus 30% in 2007, 80% and 20%, respectively, in 2008, and 85% and 15% in 2009. When oil and oil products, including liquefied gas, are exported from Belarus to third countries, the export duties are automatically set at the rates applied in Russia and with the same procedures as those in force in Russia, in full and in accordance with Russian legislation, Kudrin said.

Russia can, with these measures, compensate about $1.58 billion of the $3.5 billion - $4 billion in losses faced annually due to the lack of export duties.

The agreement with Belarus will be long-term, and Russia will levy the export duties on its own, the source said. "We do not want to receive the payments from the Belarusian budget and will collect them ourselves," he said.

Russia agreed to accommodate Belarus and took into consideration the size of the critical financial burden on it so as "not to put it into an extreme situation," he said.

Belarus has committed itself to impose duties on oil and oil products equal to Russia's, he said.

"Russia has safeguarded itself from possible non-payments from Belarus and does not depend on the Belarusian budget or the Belarusian government's mood," he said.

DOUBTS EXIST. Although the main agreements between the two countries have been reached, Russia is not completely confident that Belarus will follow these rigorously.

"Our confidence that Belarus will follow its obligations has been undermined and we told the Belarus prime minister that there should be a guaranteed mechanism for their implementation," a source from the Russian negotiation delegation said.

Belarus will independently select such a mechanism, he said.

The main guarantee that Belarus will follow its obligations will be the duty mechanism. "The first warning for them [Belarus] will be $1 billion a year, and if they violate the provisions once again, the full export duty rate will be imposed," Kudrin said.

Belarus is satisfied with the agreement reached with Russia on Friday that ended the protracted oil trade dispute between the two countries, Belarusian Deputy Prime Minister Andrei Kobyakov said on Saturday.

"These terms satisfy both sides and are normal terms for the distribution of the margin that emerges in the course of oil refinement," Kobyakov told reporters.

"This is a balanced agreement, it is a civilized way of solving a dispute," he said, crediting the Russian government with being cooperative and thanking it for that.

Kobyakov said Belarusian refineries would still enjoy favorable terms for refining and that Belarus would import 20 million tonnes of oil in 2007 as planned.

He said the original target for the volume of crude to be supplied to Belarusian refineries in January would be met.

Kobyakov said Russian oil to be imported for domestic consumption would be practically exempt from the duty.

Belarus consumes 6 million tonnes of crude a year and refines 14 million tonnes for export.

LIFTING ALL RESTRICTIONS. The problems of Russian-Belarus economic relations do not end with energy issues. Russian companies from different industries have been in an unequal situation with their Belarus competitors for many years: they were virtually not allowed into the neighboring state, while companies from Belarus had competitive advantages through government subsidies and inexpensive energy resources.

The January crisis enabled the issue of changing this situation to be raised. As a result, Belarus has agreed to lift trade restrictions from Russian companies, a source close to the negotiating process told journalists on Saturday.

"Belarus will invalidate about 40 presidential decrees and 20 government directives, which imposed export restrictions, particularly on Russian companies, and it has also vowed to harmonize its trade regulations with WTO standards," the source said.

"We asked Belarus to sign a number of measures aimed at eliminating discriminatory and other restrictions against Russian business," the source said. Russian oil and chemical companies alone are subject to four types of duties in Belarus, the source said. Russia also urged Belarus to lift quotas on supplies of its beer, chocolate, and other products.

"An agreement was initialed yesterday, under which Belarus committed itself to lift these restrictions and harmonize its trade regulations with the WTO," the source said. The two governments will be authorized to sign this agreement within the next few days, he said.

"Experts have estimated that this is worth about $0.5 billion for Russian businesses," he said.

CONFLICT CONSEQUENCES. Russia will seek to diversify the routes of its energy exports, a source close to Russian-Belarusian negotiations regarding supplies and transit of energy told journalists on Saturday.

"The [confidence] that we enjoyed has been undermined to a certain extent, and it must be mended. And who can measure damage to one's reputation? We perfectly understand the damage that we have suffered," the source said.

As regards the diversification of energy flows, Russia gives priority to the construction of the North European Gas Pipeline and the East Siberia Pacific Ocean pipeline. "We need to think hard what to do to maintain the positive image we've enjoyed over 30 years. Our supplies should depend solely on us," he said.

Meanwhile, Russian trade minister German Gref told Russia's NTV television that the agreements between Russia and Belarus announced on Saturday put an end to the oil dispute between the two countries and mean that Russia has "completed building logical market relations with all countries of the former USSR."

"The start of 2007 is groundbreaking for Russia in this respect because we have completed the building of logical market relations with all countries of the former USSR. This process has been particularly difficult in regard to Belarus, as was expected," Gref said.

"Now these negotiations [with Belarus] are over definitively. They are over definitively in the interests of both countries. Our chief gain is stable terms for supplies of Russian energy up to 2020," he said.

Source:

http://www.interfax.com/3/230956/news.aspx