Belarus and Russia agreed on new terms of oil supplies

In 2012 Belarus will be supplied 21.5 million tons at a price lower than in 2011 by USD 20-40. Direct subsidy is estimated at USD 500-700 million a year. However, regardless of the positive impact on the trade balance, the subsidy will affect structural reforms and the overall competitiveness of the Belarusian economy.

The Belarusian State Petrochemical Industry Concern (Belnaftakhim) successfully finalized negotiations on the delivery of Russian crude oil to Belarusian refineries. Major Russian oil producers and Belarusian customers on December 15 signed a protocol on the terms for the supply of crude oil to the Belarusian refineries in the next four years. The document was signed in Moscow by the heads of Russia’s Gazprom neft, Lukoil, Rosneft, Surgutneftegaz and TNK-BP, and Belnaftakhim and the Mazyr and Navapolatsk refineries.

The Russian ministries of energy and economic development and the Belarusian economy ministry also signed a crude oil and petroleum products supply plan for 2012, which provides for Belarus to receive 21.5 million tons of oil from Russia next year, or 3.5 million tons more than this year.

According to sources in Belnaftakhim, the parties agreed to abolish awards to Russian companies. As a result, the price will be reduced by USD 20 to 40 per ton as compared with the price of 2011. Belarus assessed its economic benefits under the agreement as reaching USD 1.5 billion over a 4-year period.

Russia has fulfilled its obligations under the energy resources trade agreement and improved import conditions concerning gas and oil to Belarus. The overall effect by the end of the year could be estimated at about USD 3 billion. Moreover, the new conditions have the financial viability of deliveries of Belarusian oil products to Russia. Therefore in 2012 Belarus might be able to change the situation with its negative trade balance at the expense of Russian preferences, rather than due to quality improvements.

There are a few negative moments however. Firstly, the time frames of the new oil agreements are not yet clear, ergo neither the stability of their effect. Secondly, by knocking out preferences from Russia, the government preserves the existing structure of the economy, where exports of petroleum products make about 40% of the total exports. Thirdly, the economy’s reliance on Russian subsidies has increased significantly. Fourthly, such policy significantly reduces the investment attractiveness of the country, as investors will be discouraged by explicit and implicit dependence of the Belarusian authorities on Russia. Fifthly, the competitiveness of exports (except petrochemicals) will be reduced, increasing the overall risks and vulnerability of the Belarusian economy in the long run. Sixthly, the new preferences will significantly undermine the incentives for market and structural reforms.

The generosity of Russia is strictly limited. Belarus requested an increase in shipments up to 23 million tons and Alexander Lukashenko said that Belarusian refineries were able to handle up to 30 million tons. However, the volume of supplies will be maintained at the level of 2011, while half of the exported oil will remain the property of Russian suppliers.

One more significant effect of the oil agreements in question is that all alternative oil supplies to Belarusian refineries lose economic sense.