Lukashenko steps up anti-Russian rhetoric as energy dispute snowballs

Lukashenko steps up anti-Russian rhetoric as energy dispute snowballs
Russian President Vladimir Putin has often used Gazprom to apply political pressure on Russia's post-Soviet neighbours such as Belarus' Alexander Lukashenko.
By Sergei Kuznetsov in Minsk September 23, 2016

Belarusian President Alexander Lukashenko has warned the Russian leadership against applying further pressure on his country over natural gas and oil supplies - despite the fact that Moscow's political and financial support remains crucial for Minsk.

"We have been making little to no progress in talks on gas prices for several months. In this context, Russia has reduced exports of oil to Belarus. We perceive it as pressure on Belarus. But I will not tolerate any pressure," Lukashenko said on September 20. Since the start of July, Russian oil pipeline monopoly Transneft has pumped 40% less oil to Belarus than in the second quarter of 2016 because of Minsk's alleged $270mn debt to Russian natural gas producer Gazprom for past supplies.

Belarus and Russia have a track record of energy conflicts. One of the most bitter disputes over gas payments dates back to 2004, when Minsk refused to pay the higher gas price demanded by Gazprom, which added $200mn to Belarus's gas bill that year. As a result, Gazprom cut off gas shipments to Belarus, which affected supplies to Poland, Germany and Russia's westernmost region of Kaliningrad.

"I think this was an act of terrorism of the grandest scale, when in minus-20-degree cold, a country [...] is deprived of natural gas," Lukashenko said at the time. "We must sign an agreement on Putin's terms. If Putin wants us to pay this much, let's collect it. Let's take it from medications, from Chernobyl veterans, from those who rotted in the trenches [during World War II]."

Today, Minsk buys Russian natural gas at a price of $132 per 1,000 cubic metres, but says it regards $73 as a fair price. In May, the Russian energy giant's subsidiary Gazprom Transgaz Belarus said it was forced to file a lawsuit to the Court of Arbitration at the Belarusian Chamber of Commerce and Industry against government-controlled regional gas distribution companies, which it says did not pay for gas volumes supplied.

According to the subsidiary, it is protecting its interests in court under the terms of contracts signed with the Belarusian side. Minsk previously rejected the existence of any debt, citing several bilateral agreements reached in 2011 and the Treaty on the Establishment of the Eurasian Economic Union (EEU) signed in May 2014.

The Kremlin has often used Gazprom to apply political pressure on Russia's post-Soviet neighbours, especially on Belarus and Ukraine. However, there are some indications that the current energy dispute between Minsk and Moscow was triggered more by economic reasons rather than political.

According to Belarusian media reports, Gazprom's financial problems led to a situation where the energy giant was forced to suspend its flagship project in the country - the construction of a new $500mn office complex for the Gazprom Transgaz Belarus subsidiary. A 182-metre-high office building will be part of a multifunctional complex, which is planned to include sports and healthcare centres, as well as other public premises. Gazprom didn't comment on these reports.

Limited leverage

Meanwhile, the International Monetary Fund (IMF) warns of disruptions to external and domestic stability in Belarus if the energy price dispute with Russia is not resolved. "On the external side, key risks include persistently lower international energy prices or disruptions in energy price arrangements with Russia," the IMF says in a staff report published on September 21.

According to previous reports published by the Fund, Belarus is heavily dependent on Russian energy subsidies in the form of discounted natural gas prices and cheap oil, which is refined in Belarus. Specifically, energy support from Russia stood at 12.7% of Belarus’s GDP in 2013, and up to 14.9% of the country’s GDP in 2012.

Minsk already admits that the state coffers have been badly hit by continued oil and gas dispute with Russia. "Belarus' GDP dropped by 0.2% in July [GDP was down 2.7% y/y in January-July after a 2.5% y/y decline in the first half of the year]. It happened due to [...] circumstances relating to limited oil supplies to the oil refineries - about 700,000 tonnes," Prime Minister Andrei Kobyakov said in late August. "As a result, [Belarusian state petrochemical conglomerate] Belneftekhim decreased industrial output and wholesale trade in the relevant oil products decreased."

However, despite stepping up its anti-Russian rhetoric, the Belarusian leadership has only limited leverage in the current dispute with Moscow compared with previous conflicts. In 2007-2011, Minsk was forced to sell its gas pipeline system under Russian political pressure to Gazprom for $5bn.

Even more importantly, Belarus remains heavily dependent on Russian financial support, having so far only received $800mn from a $2bn stand-by loan agreed earlier this year with the Russia-led Eurasian Fund for Stabilisation and Development (EFSD).

At the same time, Western significant donor support remains unavailable for Minsk, despite some thaw in relations with the West after Lukashenko's re-election in October 2015. Specifically, the IMF is not ready to provide a new support package to Belarus.

According to the lender's report published on September 21, the IMF's executive board "has noted" the Belarusian authorities' interest in a lender-supported programme and "underscored the importance of strong commitment at the highest level to consistent macroeconomic policies and deep, market-oriented reforms".

Meanwhile, the Belarusian Institute for Strategic Studies, a Vilnius-based think-tank, underlines that Moscow's plans to promote the Ust-Luga port on the Baltic Sea, boost crude and refined oil transit via other Russian ports in the region, and ensure growth in oil processing in Russia pose a long-term threat to Belarusian oil processing and transit. "The Baltic states have lost most of Russia’s transit, and as their experience shows, neither dumping and infrastructure development, nor disputes helped them restore it," the think tank wrote in its policy paper published on September 19.