Belarus in search of “alternative” oil

Alexander Lukashenko has once again charged the Belarusian government to find oil alternative to the Russian supplies. Earlier, he demanded geologists to intensify oil and gas exploration in Belarus, due to the protracted oil and gas conflict with Moscow. So why is oil so important for the economy of Belarus and are there any real alternatives to Russian raw materials? Within several decades after WWII, once an agrarian country with overwhelmingly rural population has developed into a highly-developed industrial region. The economy of Belarus is based on highly-concentrated export industry operating on imported raw-materials and semi-finished products. Since the Soviet period, the country has received 100% of gas and about 90% of oil from Russia. Commercial production of hydrocarbons in the territory of the country was launched in 1965 and is concentrated in the area of Gomel region and partly in Brest region. The annual recovery of oil (about 1.7 million tons) satisfies about 30% of domestic consumption.

The oil processing industry in Belarus emerged in 1963 with opening of an oil refinery in Novopolotsk (Vitebsk region). In 1975, another refinery was built in Mozyr (Gomel region). Both the enterprises supplied fuel to the western group of the Soviet troops. Modernization of refineries during the recent years have resulted in improvement of oil refining depth to 90% and the refining capacities to about 22.8 million tons. Belarus is supplied with Russian oil tax free and directs export taxes to its budget. Export of oil for refining and exporting to the EU countries is vital for the foreign trade of Belarus. Incomes from export of oil products account for about 35% of total export of commodities of Belarus and are the key source to replenish the budget. Oil subsidies have exceeded $40 billion since 2000. This helps maintain the operating social and economic model of the country’s development. Recently, Russia has been reducing oil supplies to the Belarusian refineries as Minsk fails to implement contract terms.

In 2017, they plan to complete the so-called tax maneuver in Russia: export tax on crude oil will be reduced and the mineral extraction tax will be raised. This will affect the supplies of tax-free oil to the Belarusian refineries, which cannot but affect the Belarusian budget. During the recent months, the dispute between Minsk and Moscow is about establishment of a single gas, oil, and oil products market within the Eurasian Economic Union (EAEU) in 2025. This drives a wedge into the integration union.

Energy cooperation between the countries resembles an evident conflict of interests of net-exporter and net-importer of energy resources that often impeded bilateral relations previously. The acutest contradictions in supplies of Russian oil to Belarus that emerged in 2006-2007 and 2009-2010 resulted in tension of political resources between the two countries and even blocked transit of the Russian oil to the EU.

In 2010, the Belarusian government tried to replace Russian oil with deliveries from Venezuela. A contract to supply 4 million tons of oil annually with gradually increase to 10 million tons was signed. To reduce the cost value of deliveries from Venezuela, the country made deals for import of oil from Azerbaijan on the so-called swap scheme, replacing Azerbaijani oil with Venezuelan one and saving on transit. The project was cancelled in 2012 because of economic unviability. The government of Belarus developed options to import oil from Azerbaijan, Venezuela and the Persian Gulf countries via Baltic and Black Sea ports. Surrounded with countries-net importers of energy resources and having no access to the sea, any attempts to diversify oil and gas supplies are economically unviable for the country.

Because of some objective reasons, it is not easy to make Belarus less dependent on the Russian market of energy resources in the short-term and mid-term outlook. However, there are opportunities to improve the energy efficiency of economy, including the use of local fuel types and development of renewable energy. The Belarusian economic model that operated at the expense of Russian energy subsidies and resale of oil products has exhausted its possibilities. During the last twenty years, no radical changes have been made in the production structure and sales markets of Belarusian products. Stiffening competition for producers in the Russian market poses threat to Belarusian exporters. The Belarusian government’s requests for cheap oil and loans from Russia will keep growing unless the country implements drastic economic reform.

Dmitry Bolkunets (High School of Economics, Russia) for EADaily