MINSK Belarus has dodged about $1 billion in customs duty payments to Russia this year by exporting gasoline and other oil products under the guise of solvents and thinners, official data shows, infuriating Moscow.
Authorities in the small ex-Soviet republic say that, after a sharp rebuke from Moscow, they have now ended the practice.
A Russian government source, however, told Reuters in Moscow that Belarus was still violating the terms of its preferential trade status.
The affair will strain even further Belarus's on-off relations with its former Soviet master, whose energy supplies keep its economy afloat. But Russia, which has a strategic interest in keeping its troublesome ally in its sphere of influence, may either quietly kiss off the loss or hold the affair as a trump card to play in future dealings.
Russia, which collects hefty export duties from sales of crude oil, does not levy duty on oil supplies to Belarus and Kazakhstan because they are foreign trade allies in a Moscow-led customs union.
In return, however, these countries are expected to repay to Russia most of this duty if they refine the imported oil and export it as fuel and other oil products. The duty repayable on gasoline exported to world markets is 90 percent of that for crude.
But, in a move highlighting the unusual political and economic relationship between the two countries, Belarus this year began exporting oil products which figured in cross-border customs documentation as "complex organic solvents", the Russian government says.
Under customs union regulations, solvents and thinners can be exported to world markets duty-free.
According to data published by Belarus' Customs Committee this month, the former Soviet republic exported 3.276 million metric tonnes (3.611 tons) of goods which were described in customs documentation as "other chemicals" in January-July this year. This was a five-fold increase year on year.
Data from the state Statistics Committee for the same period shows that of that volume, solvents and thinners accounted for 3.243 million tonnes.
All was exported to the European Union area: ninety-two percent going, in equal parts, to the Netherlands and Latvia, while the remainder was shipped to Lithuania and Estonia.
If this had been subject to the normal level of gasoline export duties - which averaged about $378 per metric tonne in January-July - this year's additional export volume could have incurred about $984 million in duties.
Russian Prime Minister Dmitry Medvedev complained when he visited Minsk in June and Belarus stopped solvent exports in August, Prime Minister Mikhail Myasnikovich said this month, citing an instruction from President Alexander Lukashenko.
"The last trainload left on August 4," Myasnikovich said, adding that the step was taken to alleviate Russia's concerns.
Minsk, however, insisted its activities were in line with the protocol of its trade treaty with Moscow.
"We have not broken any article of the customs union's customs code," Myasnikovich said.
Myasnikovich said he would discuss the issue further with Medvedev at a summit of Commonwealth of Independent States prime ministers in Ukraine on Friday.
A source in the Russian government contradicted this assertion by Minsk and said Belarus was still exporting solvents.
"They have said they understood (our concerns) but they have not understood anything. They keep pumping solvents (abroad). We are talking about millions of tonnes," the source, who did not wish to be identified, said.
This official said Russia estimated damages in lost revenue at about $1 billion and hinted at possible punitive action if the affair was not settled amicably.
"We have levers, including (gas and oil) taps," the source said.
Belarus' government and Russia's Energy Ministry had no comments on the issue.
The Russian government said this month it was considering introducing an export duty on solvents, equal to that for fuels.
The affair highlights the unusual and often testy relationship between Belarus - a country of 9.5 million whose leadership is politically at variance with the West - and Russia.
The matter is certain to be raised in bilateral talks at Friday's CIS prime ministers meeting. But despite the heavy hint of retribution, Russia might - given the symbiosis of the relationship - prefer not to create a fuss now.
Run by Lukashenko since 1994, Belarus has positioned itself as Russia's closest ally in the territories of the former Soviet Union. The two nations signed an agreement in 1999 which was supposed to create a unified state and their joint border is an open one under the customs union arrangement.
However, the unification project has never taken off and, according to Western diplomats, Minsk has for years tried to play Russia and the West against each other in order to secure political and economic concessions from both sides.
Just this week Lukashenko came under fire from international monitors over a September 23 parliamentary election which they said was not free or fair.
A Moscow-led CIS observer team, on the contrary, supported Lukashenko, saying the election was fair and it condemned the judgment of the Organization for Security and Cooperation in Europe as "politicized".
But Lukashenko's often eccentric style of rule and his bouts of flirtation with the West have often irked Moscow over the years.
Last year, a severe balance-of-payments crisis caused by excessive government spending in the run-up to the 2010 presidential election forced Belarus to accept tough terms of a Russian bailout package.
In return for about $5 billion in loans and investments, Minsk pledged to sell off its key assets such as gas pipelines, which were snapped up by Russia's Gazprom.
This year, Lukashenko warned his government against rushing privatizations, indicating he was unhappy with terms offered by Moscow.
(Additional reporting by Vladimir Soldatkin in Moscow and Olzhas Auyezov in Kiev; Writing by Olzhas Auyezov; Editing by Giles Elgood)