On a Collision Course: Russia, Belarus

Just minutes before the Kremlin's Spasskaya Tower clock struck midnight on December 31, 2006, Gazprom and Belarus managed to agree on gas pricing. Alas, the agreement's ink had barely dried when the impulsive Belarusian president, Aleksandr Lukashenko, decided to start charging Russia for the transit of Russian oil through its territory. That oil has traditionally been exempt from any duties.

The warning that started it all was delivered to Lukashenko in May 2006, right in the middle of a gas price campaign in the former Soviet republics. Belarus was informed that as of January 2007, it would have to pay Gazprom three times more for its gas than it had in 2006. The new price would be about $200 per thousand cubic meters. At the time Belarus nonchalantly reminded its giant neighbor that Russia and Belarus were supposedly building a union, and that Gazprom's actions were not exactly brotherly.

But money-hungry Gazprom saw a solution: Belarus would give them a 50 percent ownership stake in Beltransgaz, the local gas transportation and distribution company. In exchange, Gazprom promised a discount on the gas. Negotiations then stalled over the price of the company. According to Austrian evaluating bank ABN-Amro, the asset did not exceed $4 billion, though Lukashenko kept insisting publicly that its true market value was $10 billion. Then Belarus went silent until several days before the New Year, when the two had to resume the dialogue. Gazprom even scheduled a press conference for January 1, to officially shut the valves. Without any alternative gas sources, Belarus agreed to the new prices and signed the agreement only two minutes before midnight. But apparently Lukashenko held a deep grudge.

The State of Putin and Lukashenko's Friendship

Several nights of negotiations resulted in a gas price for Belarus of $105 per thousand cubic meters. In addition, Gazprom got a 50 percent stake in Beltransgaz valued at $5 billion. But tempestuous Lukashenko's final reaction could never have been predicted. He decided to fight back, introducing a $45 per ton customs duty on the transit of Russian oil, which is pipelined to Europe at the clip of 80 million tons a year. This would mean an unexpected yearly cost of $3.6 billion for Russia.

According to the Russian Ministry of Economic Development, "Such behavior of Belarus was outrageous and has no analog in the international practice. Traditionally transited products are exempt from customs duties." In an interview on national television, Lukashenko accused Russia of getting rich on "oil dollars." He also warned that even though Belarus had agreed to higher gas prices, it would retaliate, and that the new customs duties were just the beginning.

Following the refusal of the Russian oil transportation monopoly, Transneft, to pay the exorbitant customs duties, Lukashenko ordered a halt to Russian oil transit through Belarus. In response, the Russians threatened to impose duties on all of the goods Belarus sells to Russia - a market worth some $6 billion per year to Belarus. The situation continued escalating until January 11, when Putin phoned Lukashenko and the two apparently agreed to end their feud. The next day, Belarus capitulated and all bans and duties were lifted.