Belarus Threatens to Spoil the Inauguration of the Eurasian Economic Union

According to a leaked document published by TUT.BY this week, the Belarusian parliament will insert its own special clause when it ratifies the Treaty of the Eurasian Economic Union.

The clause will reserve the country’s right to ignore its treaty obligations if Russia does not agree to lift all barriers of the free trade regime that are harmful to Belarus.

This most recent scandalous development is unfolding only three months before the planned inception of the next stage of the Eurasian integration project – the Eurasian Economic Union.

This is a result of Belarus’s harsh reaction to Russia's plans to reform its taxation system in the oil sector, something more commonly known as a “tax manoeuvre". Belarus will suffer considerable financial losses if this move pushes forward.

The presidents of Belarus and Russia will meet in Minsk on 10 October. Given the current geopolitical climate, Vladimir Putin will surely have to make concessions. The Russian Prime Minister Dmitry Medvedev has already promised to cushion the effect of the tax manoeuvre for the Belarusian economy.

Oil Tax Manoeuvre

The House of Representatives, the parliament’s lower chamber, plans to discuss the Treaty of the Eurasian Economic Union (EAEC) on 9 October. Rather uncharacteristically, a leaked document appeared on the TUT.BY portal before the parliament's planned discussion. According to it, MPs will amend the ratification instrument with an important reservation.

Belarus wants to sign a bilateral (with Russia) or trilateral (with Russia and Kazakhstan) agreement that will lift “barriers, limitations and exemptions” in trade for certain goods and services. The leaked document specifies those goods and services: energy resources, industrial assembly-line products, automobile shipping and others. Without such binding agreements, Belarus will not guarantee that it will strictly adhere to its Eurasian integration obligations.

This is how the Belarusian authorities are reacting to Russia’s previously announced oil tax manoeuvre, a plan to tweak oil taxes by increasing the mineral extraction tax and cutting export duties. The move is part of Moscow’s attempts to improve the competitiveness of Russia’s economy by reforming its tax system.

In particular, it wants to stimulate more efficient consumption of energy resources inside Russia and limit the energy rents that it doles out to its Eurasian partners.

For example, Belarus gets, according to some estimates, about 16% of its overall GDP from Russian subsidies. The manoeuvre will mean a surge in crude oil prices and losses for oil refineries as well as for the country’s economy at large. In other words, it will significantly impact Belarus’s export potential. According to official statistics, mineral resources made up 33% of Belarusian exports in 2013. Agricultural and industrial exports will also suffer.

Belarus Wants Compensation

On 29 September Alexandr Lukashenka met with members of the lower chamber of the Belarusian parliament. He stated that his government would not put up with the Kremlin’s tax manoeuvre.

According to Lukashenka, the tax manoeuvre might cost Belarus more than $1 billion. He underlined that if Russia made such a move it would become a serious problem for the prospective Eurasian Economic Union's (EAEU) ability to function:

First of all, because we had a different agreement. Secondly, if certain actions are taken in one direction then there should be compensation in another direction. This is a significant amount of money and we should, by no means, suffer to lose out on it.

Lukashenka also stressed his position that the country’s accession to any organisation has to bring clear benefits to the state and its citizens:

We need to get more than we currently have. […] We have to take steps that do us good. Otherwise, what is the point if we do not benefit from it?

He called on the MPs to cautiously defend the interests of Belarus when considering the EAEU Treaty and hinted that the tax manoeuvre issue will impact the country’s decision on whether or not to ratify it.

Not the First Time

The Eurasian integration project is currently experiencing new tension between its members. Apart from the tax manoeuvre, other issues are also fouling up the integration project.

Ever since the Russian government introduced an embargo against certain categories of Western goods there have been growing rumours that Belarus has been re-exporting some of those goods and, subsequently, cashing in on the Russian sanctions. During the Customs Union-Ukraine-EU summit in Minsk on 26 August, Vladimir Putin even made a public accusation to that effect.

For its part, Belarus claims that it is suffering financial losses due to the Russian ruble's devaluation. According to the Belarusian Ministry of Agriculture, the country has already seen losses totaling around $160 million.

This is not the first time that similar scandals have arisen since the inception of the Eurasian integration project. Perhaps the incident with the most resonance took place in 2012 and had to do with solvent exports.

At that time the authorities in Minsk and their partners among Russian businessmen actively exploited a loophole in the Customs Union’s legislation. They disguised oil products as solvents and exported them to the EU. The trick helped Belarus to avoid making any payments export duties on oil products into the Russian state budget as the Customs Union’s laws did not classify solvents as oil products. As a result, Belarus saved about $2 billion in 2012.

What is Next for Eurasian Integration?

As with the solvents scandal, the current row will likely end with a compromise. On 2 October, during a meeting with Lukashenka, PM Mikhail Myasnikovich stated that his cabinet had suggested a way to resolve the tax manoeuvre issue.

Today Belarus has to transfer to Russia’s state budget all export duties on oil products made from Russian crude oil and sold to a third party. In 2013, for example, the government handed over $3.3 billion worth of export duties to Russian state accounts. Belarus has long expressed disagreement with this arrangement and even threatened not to sigh the EAEU Treaty was it not changed.

As a result, on 8 May 2014, Alexandr Lukashenka and Vladimir Putin agreed on a compromise formula: in 2015 half of the export duties on oil will go to the Belarusian budget and the other half will go to Russia.

Myasnikovich’s solution to the ongoing row foresees the whole sum going to the Belarusian budget.

Given Russia's difficult geopolitical position at the moment, the Kremlin is particularly interested in demonstrating progress with its Eurasian project. Therefore, it does not want to see any visible prolonged tension with Minsk and will be forced to offer some kind of compensation to its Belarusian partner.

On 7 October, the Russian PM Dmitri Medvedev met with his Belarusian counterpart and promised to cushion the negative effects of the tax manoeuvre. Precise details of what this entails remain unknown. Belarus will hardly get everything it wants but the concessions will likely be lucrative enough for Minsk to ratify the EAEU Treaty and host a peaceful summit of the Supreme Eurasian Economic Council on 10 October.

This will not, however, put an end to similar tensions in the future.

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

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