Oil supplies from Russia as most effective tool to influence Belarus’ leadership

On September 17^th, the Russian Energy Ministry reported that in Q4 2013, 3.1 million tons of Russian oil will be supplied to Belarus.

Following the Russian Energy Ministry’s announcement to reduce the oil supply in Q4 2013, Belarus said it could extradite the Uralkali CEO to Russia, which implies that it has realized the consequences of the ‘potash conflict’ escalating further. A reduced oil supply in Q4 may significantly affect the performance of Belarusian refineries, the main donors to the 2013 budget. Russia may offer to maintain the volume of oil supply in 2014, but under the condition that it may acquire assets.

After the visit of Rosneft Head, Sechin, Belarus hoped that the supply of oil in Q4 2013 would be 5.5-5.7 million tons, making it circa 22 million tons in 2013 (i.e. 1 million tons less than originally planned). By late October, the Mozyr Refinery will have finished repairing its catalytic cracking unit which reduces the need for the crude oil by about 0.8-0.9 million tons.

However, the Russian Energy Ministry threatens to reduce oil pipeline supplies to Belarus to a minimum. Shipment of oil by rail is limited by existing capacities (300 thousand tons per month) and higher costs. Therefore, refineries might face a significant reduction in capacity utilization, which is extremely undesirable given the growing budgetary hole.

For these economic reasons Belarus had to change its tone while talking about the ‘potash conflict’. Belaruskali is running at half its capacity, and preliminary estimates indicate that the exports of potash fell in August to 44,000 tons, much lower than the average monthly export volume in H1 2013 (550,000 tons). Claims by Rospotrebnadzor against dairy and meat products, coupled with potential significant reductions in crude oil refining, threaten the Belarusian economy with an uncontrolled collapse. Potentially, the country’s gold reserves could be used to alleviate the situation, but their level is insufficient and might reduce even further if the ‘potash conflict’ escalates. The Belarusian authorities have no choice but to try to solve the conflict concerning the Uralkali CEO’s arrest peacefully.

The situation is not in Belarus’ favour. Statements about Uralkali’s ‘bankruptcy’ may have a significant impact on reconciliation negotiations between former partners in the Belarusian Potash Company (BPC). The Russian government has adopted the 2014 – 2016 budget, which envisages cuts in spending on social programmes. Belarus needs to find a very strong argument to keep the supply of oil in 2014 at the required level, since Russia may seek to gain additional budgetary proceeds via reorientating its oil exports (increase exports of oil to third countries, which, unlike Belarus, make full duty payments). The sale of a Belarusian oil refinery asset could be such an argument. Alternatively, the volume of duty-free supply of oil to Belarus might be substantially reduced.

By reducing the supply of oil to Belarus, Russia has efficiently solved the ‘Belarusian’ problem. Belarus has no alternatives for oil imports on favourable terms and desperately needs financial resources, making the privatization of some large state-owned enterprises inevitable.