UPDATE 2-Russia and Belarus agree on oil, avoid row
* Steps will avert risk of oil supply cuts to Europe
* Belarus ready to return product export duties to Russia
* Agreement seen as improvement in bilateral relations
(Adds details, quotes)
By Denis Dyomkin and Lidia Kelly
MOSCOW, Dec 9 (Reuters) - Russia and Belarus reached a deal on oil exports duties on Thursday, cooling fears of an energy standoff that could have hit supplies to Europe and rekindling relations that had gone cold.
Russia said it would drop duties on crude oil exports to Belarus from next year if Minsk hands Moscow all the duties it gets from exporting products made from Russian oil.
The agreement, which comes just over a week before a presidential election in Belarus that incumbent Alexander Lukashenko is widely expected to win, could save Minsk up to $4 billion, according Russia's economy ministry.
The deal removes a key hurdle in the full accession of Belarus to the Common Economic Space, a free-trade zone, that is set to enter into force as of 2011 between the two countries and Kazakhstan.
The creation of the free trade zone, the Belarussian leader told a press briefing, would allow the countries to "psychologically and legally enter a new phase of formulating our relations."
Russia's crude oil deliveries to Europe via Belarus -- over 40 million tonnes a year -- had been hanging in the balance as Moscow and Minsk haggled over the terms of pipeline transit across the former Soviet state to export markets in Europe.
Not only does Belarus enjoy cheaper oil from Russia for its own use, it has also been importing cut-price crude for its plants to process into oil products that are exported westward, meaning Moscow has been subsidising the Belarus refining sector.
Now Belarus has agreed to Moscow's demand that oil products it sells abroad should bear the Russian 100-percent export duty rate and the tax revenues from this should go back into the Russian budget.
"We have agreed to cancel oil export duties. We will supply Belarus with duty-free crude oil while the fees on oil products will be imposed on the outer borderline and sent to Russia," Russia's economy minister, Elvira Nabiullina, told reporters.
She was speaking after a meeting between Lukashenko and Russian President Dmitry Medvedev in Moscow.
"Oil duties are set to be cancelled from Jan. 1 when Belarus will ratify all the documents on the (customs union)," she added.
Lukashenko later said at the press briefing that Belarus would indeed meet the terms by the start of next year.
GAS PRICES FOR BELARUS UNCHANGED
Nabiullina said Russian natural gas prices for Belarus in 2011 will not be changed.
Minsk's shaky finances depend greatly on cheap energy and on income for transit across its soil of energy from its wealthy neighbour and long-time ally.
But relations in the past couple of years have been full of tensions as Lukashenko, in power since 1994, has distanced himself from Moscow.
Rows over pricing and other issues between the Kremlin and both Ukraine and Belarus, through which pipelines take Russian oil and gas exports to Europe, have led in recent years to disruption of vital supplies to European Union countries.
Russia briefly cut oil supplies to Belarussian refineries in January in a pricing dispute.
The agreement reached on Thursday is good for both sides, probably avoiding another row and saving Russia a headache, said Kirill Koktysh, a political analyst in Moscow focused on Belarus.
"It's a win for Belarus because it shows that Lukashenko has managed to break the recent trend of Russia's bad diplomacy towards Minsk," Koktysh said. "If Russia weren't ready to accept Lukashenko as the winner of the (upcoming) election, there would be no agreement." (Additional reporting by Vladimir Soldatkin; Writing by Lidia Kelly and Vladimir Soldatkin, editing by Anthony Barker)