Russia Shores Up 'Near Abroad' With Belarus Oil Deal

Matt Stone

In the ongoing saga of Russian energy diplomacy -- intimately tied to Moscow's attempts to consolidate its influence in its "near abroad" -- the Dec. 9 oil-trade agreement with Belarus goes down as an important marker of Russia's reinvigorated authority in its immediate neighborhood. With President Viktor Yanukovych now exercising increasingly authoritarian control in Ukraine, and Belarus no longer flirting with the West, Moscow can safely assume that the two-decade era of Western institutions and influence expanding eastward has been put on hold indefinitely.

This turning point is concurrent with a thawing of relations between Russia and many Western countries, most notably the United States and Poland. It appears that, in return for Moscow's acquiescence to increased economic and political pressure on Iran over Tehran's nuclear program, the West has ceded Ukraine and Belarus as zones of geopolitical competition. (Whether this implicit bargain also applies to the South Caucasus, especially Georgia and Azerbaijan, remains debatable.) Belarus had toyed with closer relations with the West beginning in 2007. But Minsk has now clearly turned in Moscow's direction following the oil-trade agreement and a flurry of Western condemnation over the government's crackdown on opposition protestors after the Dec. 19 presidential election.

In the first instance, the oil-trade agreement stemmed from the fiscal pressures that both Russia and Belarus are enduring. Primarily due to the fall in oil and natural-gas prices from late-2008 onward, the Russian government's budget tipped into deficit in 2009 and is expected to stay there unless oil prices rise well above $100 per barrel. As a result, subsidized oil and gas exports to neighboring countries like Belarus are no longer affordable for Russia, prompting Moscow to attempt to raise oil and gas export prices.

Belarus was also hit by the economic downturn, with the IMF estimating that Minsk's 2010 budget deficit amounted to 4 percent of GDP. With little to export to earn foreign currency, Minsk has historically relied on importing cheap Russian crude oil, refining it domestically and exporting the resulting petroleum products to lucrative European markets. This scheme was acceptable to Moscow as long as Belarus stayed out of the West's orbit and Russian oil exports could fetch a high price elsewhere.

In January 2010, Russia and Belarus instituted an oil-trade arrangement that reflected the economic pressures the two countries were under at the time. The agreement stipulated that Belarus would import 126,000 barrels per day of Russian crude oil duty-free to cover domestic demand. Additional imports, approximately 281,000 barrels per day, would be subject to the full Russian export duty, undermining the cost-competiveness of Belarusian petroleum-product exports to Europe.

The January deal prompted Minsk to seek alternative sources of crude-oil supply, including Venezuelan and Azerbaijani crude imported via the Ukrainian Black Sea port of Odessa and shipped northward by rail and pipeline. Minsk also explored options to import oil by way of the Baltic states. While these sources would not have significantly eaten into Moscow's share of the Belarusian crude oil market, they served to give Belarus some leverage in the late-2010 oil trade negotiations.

The Dec. 9 agreement is a good deal for Belarus economically and a better deal for Russia politically. As of the new year, Moscow has rescinded all export duties on crude oil to Belarus. In return, Minsk will levy export duties on petroleum-product exports at the same level as Russia's and transfer the resulting revenues to the Russian treasury. Problems with monitoring the agreement will probably lead to future disputes: It is not unreasonable to expect Belarus to conveniently fail to transfer to Moscow the entirety of export duties collected or to export some petroleum products to Europe without levying duties. Indeed, it may be an economic imperative for Belarus to cheat on the agreement. To raise additional revenue Minsk also plans to increase tariffs on the transit of Russian crude oil, which may provoke a bilateral spat.

To Moscow's benefit, as part of the pact, Belarus agreed to join an ill-defined customs union with Russia and Kazakhstan. Russia had pressed for Minsk's participation throughout 2010, but Belarusian President Alexander Lukashenko held out for a more comprehensive deal that would signal a rapprochement with Russia. With a presidential election imminent and an opposition emboldened by a slight thaw in the domestic political environment, Lukashenko apparently calculated that early December was the right time to shift eastward.

The deal is indicative of an opportunistic embrace between Russia and Belarus, and the foundations of the agreement are less than sound. Minsk is likely to cheat on the agreement's terms, precipitating a crisis or a new round of negotiations. Lukashenko's personal relations with Russia's President Dmitry Medvedev and Prime Minister Vladimir Putin are widely regarded as fractious. And the two countries are not united by any semblance of ideological solidarity -- unless kleptocracy is its own ideology. However, Washington and Brussels are uninterested in a geopolitical chess match with Moscow, and the West is now fully spurning Belarus following the post-election violence there. Lukashenko is without alternatives, and as a result, Russia has successfully brought both Belarus, and Ukraine, to heel.

Matt Stone is an energy consultant and commentator on international affairs. Based in Washington, D.C., and Arizona, his expertise is the politics and energy market dynamics of Central Asia, Russia, Turkey and the Middle East; global gas; and U.S. foreign policy.


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