Russia beckons Belarus to heel in oil supply row

MOSCOW/MINSK (Reuters) - Russia is trying to bring Belarus to heel by threatening to cut at least $2.5 billion in energy subsidies that prop up the economy of its ex-Soviet neighbor, analysts said.

Russia briefly cut oil supplies to Belarussian refineries this month in the dispute over Belarus’s lucrative business in exports of oil products refined from Russian crude, again raising the specter of supply disruptions for EU customers.

But the rift, which helped push U.S. crude above $81 a barrel on Monday, is about much more than energy subsidies.

At stake is the political future of Belarus, which is wedged between Russia and the European Union, and key Belarussian refineries that the Kremlin would like to see in the hands of Russian companies.

Analysts said Russia is using its energy might to bring Belarussian President Alexander Lukashenko to heel after attempts by the former Soviet farm director to leverage dependency on Moscow with overtures toward European powers.

“Russia is playing hardball and bringing Belarus into line,” said Chris Weafer, chief strategist at Uralsib Capital, a Moscow investment bank. “Lukashenko doesn’t really have any options -- he has nowhere to go except Russia, and the Kremlin knows it.”

Lukashenko, in power since 1994, admitted last month that he would face “political death” if he moved out of Moscow’s orbit, though he has tried to build ties with the West since falling out with Moscow in 2007 over a hike in energy prices.

He has openly strained relations with Russian Prime Minister Vladimir Putin. The Kremlin was furious in June when Lukashenko snubbed a security summit in Moscow.

Belarus has long been isolated because the West said Lukashenko ran Belarus like a post-Soviet dictatorship, though the EU has now said it is willing to improve ties with Minsk.


The row with Russia centres on oil duties paid for millions of tons of oil that Belarus has imported from Russia with steep discounts.

Russia allowed Belarus to import oil for domestic use duty-free, while paying just 35.6 percent of Russia’s crude export tariff for oil that is then refined and sold onwards.

Putin said Belarus can buy 6 million tons this year for domestic needs without paying duties, leaving 14.5 million tons of crude that Moscow says Minsk should pay at least the full $267 a ton duty on.

That would amount to a hike of about $2.5 billion in 2010, or about 5 percent of Belarus’s $50 billion economy, which is deeply dependent on the export of subsidised oil products.

“Oil products are one of the main sources of export income for Belarus,” said Yaroslav Romanchuk, the director of the Mizes think tank in Minsk. “Last year, oil products made up 37 percent of exports.”

Russian Deputy Prime Minister Igor Sechin, who holds sway over the oil and gas sector of the world’s biggest energy producer, warned on Monday that there was still no agreement on oil pricing with Belarus.


By demanding such a painful hike in customs duties, Moscow could force Belarus to the negotiating table on a host of issues including the sale Belarussian assets to Russian companies.

Belarus has yet to decide whether it will sell a stake in the Naftan oil refinery to Rosneft ROSN.MM, a state controlled Russian oil company whose board is chaired by Sechin, or LUKOIL LKOH.MM, Russia's second largest oil producer.

“Russian capital wants to get into the oil sector,” said Alexander Klaskovsky, an independent political analyst in Minsk.

Russia has repeatedly clashed with its neighbors over energy pricing in recent years. A dispute with Ukraine last winter left EU customers without gas for almost two weeks in the dead of winter, severely straining ties with the European Union.

But Moscow views the disputes as a way to increase European Union interest in projects -- such as the expanded terminal in the Baltic Sea port of Primorsk and the North Stream gas pipeline -- which bypass transit states such as Belarus.

Additional reporting by Dmitry Zdhannikov and Lidya Kelly in Moscow and Chris Baldwin in London; editing by William Hardy