Belarus' Magic Oil Economy

The Belarusian Statistics Agency reported about a fantastic growth of exports in January-February 2012. Compared to the same period last year, the country’s exports grew by impressive 62,5%.

The official propaganda trumpeted that Belarus has successfully overcome all the economic troubles that hit the country in 2011.

However, the reality looks less euphoric. The breakthrough in foreign trade is not a result of a particularly wise economic policy or an overarching reform strategy. Securing cheap Russian oil supplies and selling oil products to the West remains the backbone of the Belarusian economy. Exports of other goods remain unimpressive.

The Origins of the Belarusian Oil Offshore

Belarus inherited two large oil refineries from the the Soviet Union. Naftan refinery in the north of the country was established in 1963 and Mozyr Oil Refinary in the south started to work in 1975.

Both companies were intended primarily for exports to the West. They processed crude oil from Soviet Russia and then exported processed products such as fuels, gasoline and bitumen.

After the collapse of the USSR these two oil refineries were among the most advanced enterprises that the newly-established Republic of Belarus had. And at the beginning of the 2000s the Belarusian government discovered a way to maximise the use of these assets.

It literally created an offshore oil zone for Russian companies that wanted to provide crude oil for processing at Naftan and Mozyr Oil Refinery. Thanks to the Union State of Russia and Belarus established in 1996 Russian companies did not have to pay export duties on crude oil on the border between the two countries.

It became more economically sensible for Russian oil companies to process their crude in Belarus rather than in Russia

To make Belarusian refineries more attractive than their Russian competitors Belarus set export duties on oil products to other countries at a level lower than in Russia. Thus, it became more economically sensible for Russian oil companies to process their crude in Belarus rather than in Russia.

It became highly profitable for the Belarusian government and firms to buy oil in Russia, process it at home and then export to foreign countries - primarily the EU member states and Ukraine. That made up up to 40% of all exports in some periods of time. It also generated the lion’s share of hard currency revenues for Belarus.

This foreign trade scheme established a strong correlation between Belarusian imports of crude oil from Russia and the overall exports of the country. 

Politics of the Belarusian Offshore Oil Zone

The oil offshore satisfied the interests not only of the Belarusian authorities, refineries and certain businessmen but also of an influential group of Russian businessmen. Russian oligarchs earned fortunes thanks to the Belarusian scheme. As a result, they became leading lobbyists of the Union State and opponents of export duties on oil on the border between Russia and Belarus.

Russian oligarchs earned fortunes thanks to the Belarusian scheme

However, even these powerful lobbyists were unable to prevent politics from interfering with the oil scheme. Already in the mid-2000s Russian President Vladimir Putin publicly raised the issue of this offshore oil zone. But he hoped that the privileged treatment of the Belarusian oil processing sector would accelerate economic and political integration between the two states.

In 2009 it became obvious that Putin's hopes failed. The Union State’s ambitious goals (for example, a common currency) were not achieved. Moreover, Belarus failed to support its ally in the aftermath of the Russian-Georgian war and refused to recognise the breakaway republics of Abkhazia and South Ossetia. Lukashenka even started to improve relations with the European Union and the United States.

In response, the Kremlin decided to do away with the offshore oil scheme in Belarus. After a series of public rows, it introduced export duties on crude oil on the border with Belarus. It became no longer profitable for both Russian oligarchs and Belarusian authorities to process oil at Naftan and Mozyr Oil Refinery and then export to third countries.

In 2010 Belarusian refineries did not have enough crude oil to process. Belarusian exports dropped and the country lost its main source of export revenues. It became one of the triggers of the economic crisis in 2011.

The Belarusian authorities decided to look for alternative sources of crude oil to substitute the Russian providers. They signed contracts with Venezuela and later with Azerbaijan. But oil transportation costs in those contracts were very high. Economically, it did not make much sense. But politically, it became an additional irritant for the Kremlin.

The Belarusian Oil Offshore 2.0

The Russian authorities reintroduced the oil offshore in Belarus only after the latter signed a package of documents on the Customs Union at the end of 2010. The Kremlin agreed to withdraw export duties on crude oil on the Russian-Belarusian border. However, it demanded that Belarus returned all export duties on oil products produced from Russian crude to the Russian budget.

The Russian authorities reintroduced the oil offshore zone in Belarus only after the latter signed a package of documents on the Customs Union at the end of 2010

This is, of course, a less profitable scheme than the one before. But it is still highly attractive for both Belarus and Russian oligarchs. They profit from the difference between export duties on crude oil and oil products. The latter are only 66% of the former. Thus, the Belarusian refineries can now earn roughly 30% more than in 2010.

The resulting Belarusian foreign trade in 2011 and the beginning of 2012 demonstrate that the offshore oil again worked its magic. Belarus spent more than USD 9 billion on crude oil but earned more than USD 12 billion from its exports of oil products. The European Union (primarily, the Netherlands and Latvia) and Ukraine were the main consumers.

Additionally, Germany and Poland started to buy Belarusian-owned crude oil. Belarusian exports to the EU in 2011 grew nearly two times - even despite the deepening political conflict with the West.

However, the current situation may not last forever. Following an oil transit dispute between Russia and Belarus in January 2007, the Russian government constructed a new pipeline bypassing Belarus and other former Soviet States (Baltic Pipeline System-II).

Vladimir Putin launched the new pipeline on 23 March 2012. As a result, the volume of oil transportation through Belarus might be significantly reduced. This can also impact the Belarusian oil processing sector. 

But for the time being oil and oil products make up two thirds of all exports to the EU. Cheap Russian crude oil and consumers of Belarusian oil products among the EU member states are the real saviours of the Belarusian economy.

Yauheni Preiherman is Policy Director of the Discussion and Analytical Society Liberal Club in Minsk.

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