Russia, Belarus oil supply talks mired in deadlock

08:15, January 12, 2010      

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Russia and Belarus failed to clinch a new oil supply deal during their talks on Saturday, which was the latest attempt to resolve a pricing dispute.

Though both sides have expressed their willingness to continue negotiations, the standoff has raised concerns over potential supply cuts to Belarus and the European Union.

Belarus imported about 20 million metric tons of Russian oil last year at only 35.6 percent of the current crude export duty, which stood at 267 U.S. dollars per metric ton as of Jan. 1. The transit country consumes about a quarter of the Russian oil deliveries with the rest processed and pumped to the West.

Belarus was seeking a similar discount for 2010 but failed to strike a new agreement with Russia before the previous accord expired at the end of December.

Russia said it has offered to continue "preferential" terms this year, which allow Belarus to buy 6 million tons of crude for domestic consumption without tariffs but demand full import duties on some 14.5 million tons of oil bound for European markets.

Belarus insists all Russian crude should be duty-free, citing an agreement on customs union signed late last year. However, Russian Prime Minister Vladimir Putin argued last week that energy deliveries to Belarus were not covered by the customs union between the two countries and Kazakhstan, which came into effect on Jan. 1.

As negotiations repeatedly broke down over the New Year period, Russian oil flows to Belarusian refineries, Naftan and Mozyr, suffered a brief interruption before they resumed on Jan. 3.

The spat, coming as Europe is gripped by freezing weather, fueled fears about a repeat of disruptions three years ago, when Russia suspended supplies via Belarus to Germany and Poland.

Russian Deputy Prime Minister Igor Sechin, who led the Russian delegation at the talks, earlier pledged unaffected oil supplies to European customers while Moscow and Belarus were working on a new pact.

The dispute is the fourth time in five years that Russian energy supplies through Belarus or Ukraine have come into question around New Year holiday. Russia cut off gas deliveries to Ukraine about a year ago, leaving tens of thousands of Europeans without heating gas in the depths of winter.

The West accused Russia of using its vast resources to bring its former Soviet neighbors to heel, while Moscow said it wants simply to raise energy prices and transit rates to market levels after subsidizing its neighbors for many years with preferential terms.

"With both sides standing firm now, the dispute could get worse before it is resolved," Andrew Neff, an analyst at IHS Global Insight in Washington, was quoted as saying by Russian daily the Moscow Times.

Minsk's revenues from oil re-exports hit 10.7 billion dollars in 2008 and plunged to 6.5 billion dollars in 2009, accounting for35 percent of the country's total exports, according to estimates by Yaroslav Romanchuk, head of the Belarusian Scientific Research Mises Center, a think tank.

It is estimated that Russia's new offer means a 2.5-billion-dollar increase in costs for Belarus, or 5 percent of the country's gross domestic product.

If Russia prevails in the dispute, Belarus will earn 3-4 billion less this year, resulting in an economic shrinkage of 6-8 percent, Romanchuk said.

The dispute has also contributed to the oil price's surge to a 15-month high above 83 dollars per barrel recently. Urals crude, Russia's main export earner, rose to 80.37 dollars a barrel on Friday, its highest price since October 2008.

Germany and Poland are believed to be hit hardest once Russia halts shipments through the Druzhba pipeline. Germany depends on Russian crude for about 15 percent of its total consumption, and Poland buys from Russia to meet 75 percent of its market demands.

Minsk has threatened to raise the transit fee for its European customers more than tenfold, from 3.9 dollars to 45 dollars per metric ton, should Moscow not agree to its conditions, RIA Novostinews agency quoted an unidentified expert close to the talks as saying.

Belarus last week even warned of stopping electricity transmissions from Russia to its Baltic enclave of Kaliningrad in an apparent retaliation at the duty hike.

Sergei Kolchagin, a senior fellow at the Russian Academy of Sciences' Institute of Economics, said Minsk is highly likely to accept Moscow's terms since it has few other options.

Belarus would exert pressure on Russia by threatening to withdraw from their common air border security and air defense system pacts, Kolchagin said, although it seemed unlikely the bargaining would go that far.

Another possible solution would be Russian firms' acquisition of the Belarusian refineries, a Russian proposal that has so far received no response.

Source: Xinhua
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