The reduction of oil dotations from Russia: a catastrophe for Belarus?
On 12 April, tut.by reported that Belarus has pushed for an urgent modernization of it chief refineries in Navapolatsk and Mazyr to minimize the losses from the reduction of Russian oil dotations via the ‘tax manoeuvre’. However, if Russia reduces oil dotations in 2019, catastrophic consequences should not follow for Belarus. Belarus will disagree to concede to Russia in the questions of real integration, as Moscow means it: creating common customs, unification of currencies, creating a common visa space, and deployment of Russian military bases.
Alexander Lukashenka and Vladimir Putin still negotiate about compensating Belarus for Russia’s latest oil tax reform. The Russian “tax manoeuvre” foresees a decrease in export duties on oil and an increase in tax on the extraction of natural resources. So far, Belarus possesses several options to compensate over the ‘tax manoeuvre’, including borrowing from international organisations and curtailing the work of EAEU (Eurasian Economic Union) – an intergovernmental organization particularly important for the Russia leadership. Hence, Russia’s options to force Belarus into closer integration remain rather limited.
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How much oil dotation’s did Belarus receive from Russia in the past?
According to the data of the Russian side (Putin and Medvedev mention these figures when they talk of supporting Belarus), since 2005, through cheap supplies of oil and gas, Belarus received from Russia dotations amounting approximately 100 billion USD. According to the data of Russian experts (for example, of S.Agibalov, the chief expert of the Russian Institute of Energetics and Finances) after 2014 Russia reduced oil and gas dotations to 4 billion USD a year: around 2 billion USD from the supplies of cheap oil, and around 2 billion USD from cheap gas supplies.
Deliveries of oil products comprised up to 40 per cent of the Belarusian export (in USD), in recent years – over 30 per cent. Belarus refined the Russian oil at its factories (Navapolatsk and Mazyr oil refineries) and sold oil products at the international market at market price.
Currently, the sides are negotiating compensations for the losses to the Belarusian budget, resulting from this “tax manoeuvre” in Russia (which led to the reduction of duty-free supplies of oil).
The Russian side suggests that Russia will pay the oil dotations at the end of each year if common customs is created, and if currencies are unified (the Russian ruble serving as a currency in the territory of Belarus). Namely, if Belarus takes the first steps to lose sovereignty.
Arguments over the ‘tax manoeuvre’, a break-through in 2019?
It is likely that in 2019 the sides will not come to an agreement concerning the full resumption of oil dotations. According to Belarusian estimates, in case of curtailment of oil dotations, in 2019 the Belarusian budget will lose around 400 million USD (with the price 70 USD per barrel).
In 2017, Belarus got from Russia around 24 million tons of oil. However, the balance surplus in the foreign trade of Belarus comprised only 63.2 million USD. Reduction of oil dotations in 2019 will affect negatively the GDP of Belarus (in 2017, it grew by 2.4 per cent, in 2018 it grew by 3 per cent).
In November 2018, the Belarusian Minister of Finances Maksim Yermalovich claimed that the curtailment of oil dotations would not bring significant negative consequences. Belarus could compensate the losses by drawing a loan from international financial organizations (in particular, in September 2018 Belarus resumed talks with the IMF on obtaining a credit).
Will Belarus obtain loans from international organisations?
As it follows from statements of top Belarusian officials, since the annexation of the Crimea by Russia and the start of the war in the east of Ukraine, Belarus has good opportunities to draw loans from international financial organizations at profitable terms. Unless the credits are obtained, Belarus has three variants of compensation for the losses from the reduction of oil dotations from Russia.
The first one is by decreasing gold and foreign currency reserves (as of January 1, 2019, the gold and foreign currency reserves of Belarus comprised 7 billion 157 million). The second one is decreasing imports or, which is harder to implement without structural reforms, increasing exports.
The third variant is cutting down on social expenses from the budget and reducing (or halting) support to unprofitable state enterprises. For example, in December 2018 allowances for free medical substances were cut. A combination of these variants can be implemented.
Few options for Russia?
In case Belarus declines to make concessions regarding real integration, as Moscow sees it, it is highly unlikely that Russia will increase the price for gas and, by doing so, will also stop gas dotations. The preferential price for gas for Belarus was envisaged by the agreement on selling the Belarusian gas transportation enterprise Beltrasgaz to the Russian company Gasprom at the end of 2011. In 2019, Belarus pays 129 USD for one thousand cubic meters of gas.
Representatives of the Belarusian government had claimed that receiving cheap gas was a condition for Belarus’s participation in the Eurasian Economic Union. For Russia, the existence of this intergovernmental organization and participation of Belarus in it is important.
Besides, Lukashenko uses Belarusian participation in the EAEU as an argument for receiving also oil dotations from Russia. There is some probability that negotiations in 2019 will come to reaching an agreement on continuing duty-free supplies of Russian oil without any concessions from the Belarusian side.
In conclusion, despite the fruitless talks and mutual threats between Minsk and Moscow, Belarus’s bargaining position remains rather strong. To compensate the losses from the ‘tax manoevre’, Belarus might borrow from international organisation, reduce social expenses, and threaten to quit the Eurasian Economic Union – an organization of a strategic importance for Russia.
Belarus faces its first investment claims
Since gaining independence, Belarus has never participated in proper investor-state disputes. Nevertheless, in late 2017 and 2018, Belarus faced a record-breaking three investment arbitration claims. A Dutch investor in a Belarusian financial institution and two Russian investors in the Belarusian manufacturing registered their claims against the state. All three investors accused the Belarusian government of stripping them of their Belarusian assets and breaking mutual investment treaties.
Such claims potentially harm the image of Belarus for investors, despite the success of such large investment projects as the High-Tech Park and Great Stone Industrial Park. Although Belarus occupies a remarkable 37th place in the Doing Business ratings, the state’s attitude towards foreign investors remains far from perfect.
A scandalous banker claims assets back: JSC Delta Bank versus Belarus
On 22 March 2018, a Dutchman who had invested in a Belarusian financial institution, JSC Delta Bank, registered a claim at the International Centre for Settlement of Investment Disputes (ICSID) in Washington. According to the Dutch claimant, Belarus breached a bilateral Dutch-Belarusian investment treaty.
Prior to 2015, the Dutch claimant had held 75% of JSC Delta Bank, with the remaining 25 % belonging to a Ukrainian businessman, Mykola Lagun. In 2015 Belarus’s Central Bank stripped JSC Delta Bank of its licence. The Belarusian authorities maintained that JSC Delta Bank illegally withdrew money from the country and failed to meet its obligations to creditors. The authorities initiated several criminal cases against the bank’s top management on charges relating to the withdrawal of funds. JSC Delta Bank was later declared bankrupt, yet the bank’s liquidation procedures still continue.
By 2016 JSC Delta Bank’s part-owner, Mykola Lagun, had threatened the Belarusian authorities with the international courts. Interestingly, Lagun, also retained partial ownership of Ukraine’s Delta Bank until 2015. With the bankruptcy of Delta Bank the same year, the country’s deposit guarantee agency reportedly paid out more than $600m to depositors. Lagun has been cooperating with Ukraine’s investigative authorities on charges of failure to meet the Delta Bank’s obligations to Ukrainian creditors. The JSC Delta Bank’s case became the third investment arbitration case against Belarus since late 2017.
A failed manufacture giant in Asipovichy: Grand Express versus Belarus
On 31 January 2018, Russian company Grand Express also registered the largest arbitration case against Belarus with the ICSID in Washington. The Russian company claimed that Belarus breached two treaties protecting foreign investment in the Eurasian Economic Union.
Prior to 2015, Grand Express owned a 74% stake in the Asipovichsky Carriage Works (AVZ). The remaining stake belonged to the Belarusian Railways (BelZhD). The partners intended to build a plant with a production capacity of 2,500 freight cars and 2,000 tank containers per year.
Grand Express participated in the plant’s infrastructure building and acquired modern equipment. Nevertheless, in 2015, the parties quarrelled regarding the purchase of rail wagons. Grand Express maintained that the Belarusian government and BelZhD failed to meet their obligations; the Belarusian authorities, on the contrary, blamed the Russian stakeholder.
Grand Express failed to acquire compensation for the built assets from the Belarusian authorities and, in March 2017, AVZ filed for bankruptcy.
$200m for a trolleybus depot? Manolium Processing versus Belarus
On 15 November 2017, the Russian company Manolium Processing informed the authorities of their arbitration claim against the Republic of Belarus. Similarly to Grand Express, Manolium Processing accused the Belarusian authorities of breaching the 2014 Treaty on the Eurasian Economic Union. The amount of the claim reached $200m.
The cooperation between Manolium Processing and the Belarusian government began in 2003, when Manolium’s owners, Russian citizens Aram Yekavian and his partner Andrei Dolgov, won a land plot tender in the centre of Minsk. The Russian investors planned to build a business centre and a five-star hotel at a total cost $200m. In return, the investors agreed to invest $15m in a trolleybus depot nearby and $1m into the National Library construction fund.
As a result, Manolium Processing had built a trolleybus depot, however, the Belarusian authorities failed to transfer the land plot. The Russian company asked for the compensation over the built depot, yet the Belarusian authorities maintained that Manolium Processing breached its obligations to the investment contract.
The Russian company further tried to restore its rights in Belarusian courts, however, the courts also failed to secure the compensation for the depot and obliged Manolium Processing to pay damages to Belarus.
In early May 2017, the Russian company submitted a pre-arbitration request, thus allowing Belarus six months to resolve the dispute amicably. Nevertheless, the sides failed to reach a pre-arbitration settlement. Currently, Manolium Processing requests compensation of $171m in lost profits and $37m over the expropriated property. The hearings will take place in summer 2019 at the Permanent Court of Arbitration in Hague. The Ministry of the Economy will represent Belarus.
The winner takes all
The largest investors to Belarus come from Austria, China, Russia, Ukraine, and the United Kingdom. On the verge of the growing conflict with Russia, Belarus will have to increase and diversify its foreign investment flows. This will allow to modernise the national economy and decrease the economic dependence on Russia. At the same time, according to Jason Pellmar from the International Finance Corporation, Belarusian legislation still lacks proper legal protections for foreign investors. As a result, Belarus inevitably makes mistakes in dealing with foreign investors.
Should the Dutch and the Russian claimants win their investment cases, other investors might consider applying to international courts rather than conduct difficult talks with the Belarusian authorities. Belarus might also reconsider its rough attitude towards foreign investors. The Belarusian government might finally realize that unwise stripping foreign investors of assets not only results in high compensations but also in the country’s reputation damage.