How and why does Russia support Belarus? Part 2: oil tax

Last year, the leadership of Belarus drew up the budget for 2016 with surplus due to exports customs duties for oil, the amount of which should have totaled $1.1-$1.5 billion by the Finance Ministry's estimates, in case the oil price in the global market averaged $50 per barrel. However, the developments earlier this year made Minsk reduce its appetites. Now, specialists say, Belarus will get $900 million at best (on condition that the oil price averages $40 per barrel). This is a serious problem for the Belarus government, as the budget revenues from the sale of oil products are as never essential.

The economic model of Belarus fully depends on the supplies of cheap energy resources from the Russian Federation, including crude oil that is of fundamental importance to the oil refining industry of Belarus.  Two oil refineries of Belarus - Novopolotsk-based OJSC Naftan Oil Refinery (Vitebsk region) and OJSC Mozyr Oil Refinery (Gomel region)  - jointly with JSC Belaruskali are the flagships of the country. These are among those few companies that still bring benefit to Belarus.

In the period of “duty-free” supplies that actually continued until 2006, Minsk received about $3 billion profits in average annually, though theoretically it was to return the export duties for the exported oil products to Russia. In 1995, Russia and Belarus signed the agreement to share the customs payments for exports of oil products made from the Russian oil from the territory of Belarus, but the president of Belarus fully ignored the agreement taking advantage of Boris Yeltsin's friendly attitude. In 2001, the Belarusian leader terminated the agreement after notifying Russia about it.

Up to the so-called “third oil war” of 2010, the oil refineries of Belarus processed nearly 20-21 million tons of crude oil annually (in 2015, 24.64 million tons of oil and oil products were imported in the country), amid growing exports of Belarusian oil products.  For instance, in 2001, it totaled 7.7 million tons, and in 2015 – 18.64 million tons.  Yet, the profitability of oil refining started falling during the recent years, as the prices fell, while the import tax on the Russian oil was left unchanged. Eventually, the local budget had to subsidize the oil refineries and the Russian processors. However, even despite this Belarus managed to gain benefits even after Russia made Minsk to pay import taxes for crude oil and oil products since 2006. For instance, the known fraud of 2011-2012 made Belarus the world’s leading supplier of thinning agents, lighter lacquer diluents and lubricants that were not taxed by Russia. Then the supplies amounted to $2-$2.5 billion, which was a real gift to Belarus in conditions of the crisis. It is noteworthy that after the fraud with diluents and lubricants was exposed, Moscow did not press Minsk over de-facto smuggling. The issue remained hanging in the air. However, in exchange, Belarus had to agree on deeper integration, but eventually, Minsk even received additional bonuses from Russia. In 2014, Moscow let Belarus keep $1.5 billion from the export duties in its budget. However, that tax tricks in the oil sector did not last long due to sliding oil prices in the world.  Anyway, thanks to the unpaid oil taxes, Minsk saved additional 20.025 trillion Belarusian rubles or more than $1 billion by the National Bank’s exchange rate.  It is rather a high amount for Belarus.  For instance, that country earned 2.9633 trillion Belarusian rubles from exports of its own oil and another 6.8895 trillion Belarusian rubles from the supply of potassium fertilizers.  The oil taxes accounted for 7.5% of the country’s consolidated budget versus the 0.4% in 2014.

How does Belarus receive extra profits due to Russia’s loyalty? In fact, the scheme is obvious.  For instance, last year Belarus imported 24.64 million tons of oil and oil products and exported 18.64 million tons after distillation. This figure is exclusive of the oil recovered in the country (about 1.6 million tons), as it is fully exported (mostly to Germany). Considering that the losses after distillation are insignificant, Belarus not only received proceeds from export of oil products, but also saved about 6 million tons of the Russian oil tax-free. It should seem that the given amount was to be charged from the local budget, but in fact, it’s not all that simple.  

According to official data, export of oil and oil products inclusive of the own oil in terms of money exceeded import by $1.828 billion in 2015 i.e. $6.200 billion were spent on procurement in 2015, while the proceeds from exports of oil products  totaled $8.028 billion inclusive of the export of the own oil.  Yet, comparing with 2014, the total proceeds fell 34.8% due to the sliding oil prices. Nevertheless, Belarus still gained profits, first, because it buys crude oil for the Russian domestic prices – about $252per ton last year – which is much lower than the world prices.  Meantime, Belarus sells oil products for the price close to the average global prices: in 2015, the average price of oil products was about $400 per ton or $396 per ton considering the sale of the own oil.  It turns out that besides the saved import taxes, Belarus gained profits from the difference of prices: about $145 per ton in 2015. Yet through it all, in Minsk they think it is insufficient.

As known, the Belarus authorities have been demanding revision of the oil pricing formula for several months already. The formula was agreed upon in December 2011 – the global price (Rotterdam netback price) minus export tax and transport costs, and a discount of $3.7 per ton. Belarus would like to get at least $5 discount.  The key argument of Minsk is that the oil price for the Russian oil refineries is lower than the one for the Belarusian ones. Besides, they say the tax maneuver in Russia has affected the economic effectiveness of refining.

In addition, Belarus does claim that the quality of the Russian Urals oil has deteriorated and the barrel-to-ton conversion ratio envisaged in the formula proves higher than the actual one.  Although Belarus is trying to press Moscow through the Eurasian Economic Union, the bilateral talks have not brought any result yet.  For instance, yet last autumn, Minsk and Astana opposed the Eurasian Economic Commission's project that looked to establish a common oil and oil product markets in the Eurasian Economic Union that implied preservation of the exisitng mechanisim of oil pricing i.e. based on the situation in the markets of the member-states. Belarus says the key principle of a mutually advantegous cooperation in the field of energy is the “principle of market pricing for energy resources” and “fair competition.”

After the meeting of the Eurasian Intergovernmental Council in Yerevan on May 20, 2016, Prime Minister of Belarus Andrey Kobyakov said the sides have found common approaches to pricing of oil and oil products, but it is hard to believe in that. It is unlikely that the Kremlin plans to distribute oil actually free of charge in such situation. Besides, Belarus has several billion dollars of profits from the preferential prices of oil and the export taxes that are not shared with Russia.

It is simply improperly to demand more, though in Minsk they seem to think differently. Perhaps, that is why the leadership of that country links the oil pricing with another important issue – the supply and the price of the Russian natural gas.

Pavel Yurintsev