Global Insight Perspective

Significance

On the footsteps of the four-fold rise in gas prices, Russia has introduced a US$180 per ton tax for oil exports to Belarus.

Implications

The new oil tax renders void the "oil offshore", which Belarus has been for the last decade. It will consume all profit of the state budget for 2007, leaving no assets to cover the gas price rise.

Outlook

The Belarussian president will urgently seek new alliances, but may be forced to sell a stake in state gas transit company Beltransgaz to Gazprom as a last resort. Russia is likely to further deploy its energy diplomacy to put pressure on the EU countries.

The Belarussian President Alexander Lukashenka has to do some hard thinking. He needs to find the ways to keep his country's economy afloat in the face of steep rise of the budget expenditure following price rises for energy resources—or to find the ways to avoid them. This is against the backdrop of mounting pressure from the West to democratise, and a high-profile hunger strike action by one of his former competitors at the last year's presidential election.

Oil "Offshore" Sealed

The most recent economic blow to the Belarussian regime is the Russian government's decision to impose export taxes on oil, at a steep US$180 per ton, which translates into the loss of US$1.7-2 billion for the Belarussian budget. Belarus has hitherto enjoyed "offshore" status for the oil industry. In 1995, Belarus and Russia concluded a Customs union, according to which they were supposed to share export duties on oil products exported from Belarus. The rules and procedures for tax sharing were not agreed, however, and Belarus never repaid any export duties to Russia over the last 11 years. The Belarussian side justified itself by noting that Russian oil was not merely transported in crude form from through the country, but was refined at two Belarussian factories. Given that the Russian and Belarussian export duties on oil differed by as much as nearly 60% (US$134 and US$75.8) respectively, Belarus became an oil ''offshore", and most Russian oil producers rushed to avail themselves of its benefits. Now that the oil exports to Belarus are taxed, the Russian oil producers look to spend some US$1.8-2 billion more annually, while the Russian budget will see an income increase of US$3.5-3.7 billion, Russian newspaper Kommersant estimates. The decision is said to have been taken by President Putin personally, and the Belarussian government has no counter-arguments or alternatives to offer in exchange to persuade the Russian government to back down.

Gas for Pipes

An earlier but even more significant blow to the Belarussian economy came from the decision of the Russian gas exporting behemoth, Gazprom, to raise prices from US$47 per thousand cubic metres (tcm) to the "European level" of US$235 per tcm. The decision was announced last March, and in May the Belarussian government talked the price down to US$200 per tcm. Unlike with oil taxes, where bargaining is practically ruled out, the Russian side used the price rise to gain control over Belarussian gas transport infrastructure, and in particular over the Beltransgaz company. Russia has been pushing for control of Beltransgaz since 1994, but the Belarussian government proved very deft and skilful at keeping the company, its main trump card against Russia. The Belarussian president has resorted to promises of integration with Russia, rendering it an unwavering foreign policy support, protracting talks and making unfulfilled promises. Evidently, Gazprom's patience has run out. It is demanding that the Belarussian side sells 50% stake in Beltransgaz or pays US$200 per tcm for gas from next year. President Lukashenka is now playing for time bargaining over Beltransgaz's price: the Russian side estimates it at US$1.5-2 billion, while the Belarussian government names US$4-5 billion. The Belarussian government will only sell Beltransgaz as a last resort, and over the last year it has urgently sought new energy sources, including reopening the discussion about the construction of a nuclear power plant.

Pressure Rises Over the Belarussian Regime

Alexander Lukashenka had no difficulty in securing his presidential position during the elections this March. He currently faces bigger challenges to maintain his power under the economic pressure from Russia and political pressure from the West. The oil tax alone will swipe the profit of the next year's budget, leaving few funds to cover the prospective four-fold increase in gas import prices. Belarus is set to lose some further US$150-250 million a year from Russia's ban on state purchases of Belarussian manufacturing products, introduced in October this year. This will make it hardly possible to sustain the current 6% GDP growth rates, and will spur inflation or cut social expenditure, set as high as 60% in the 2007 budget. To compensate for the worsening economic situation, President Lukashenka is likely to step up his ideological work. Even on this front, however, he faces increased tension. The United States has approved the renewal of the Belarus Democracy Act allocating US$27.5 million for democracy promotion in the country, and the U.S. President mentioned the Belarussian regime on a par with Afghanistan and Iraq during NATO summit in Riga (Latvia) last month. The ex-candidate in the presidential elections Alexander Kazulin, in the meantime, succeeded to raise the Belarussian issue at the UN Security Council after seven weeks of hunger strike in prison. The European Union (EU), however, is still very much undecided on its policy to Belarus, and Lukashenka tentatively explored a possibility of aligning with Europe against Russia. On the eve of the CIS summit several weeks ago he even voiced the suggestion of making a union with Ukraine, which the Ukrainian President duly ignored.

Outlook and Implications

While the Belarussian president is running out of means to sustain his power, Russia's aggressive policies to its CIS neighbours and the further intentions of the Russian government merit scrutiny. Over the last two years, Russia has already radically stepped up its energy prices for Ukraine, Georgia, Moldova and Belarus, which only Georgia and Belarus have so far defied. While Belarus is likely to eventually accept the new prices, Georgia has secured energy deliveries from Azerbaijan. Russia does not have an urgent economic need to increase the energy prices, and certainly much less then it needed in the 1990s. The aggression on pricing certainly has a political rationale, which is most likely to practice in exerting economic pressure over weak neighbours in order to apply the same methods to the EU countries to get stakes in their energy companies in future.

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