Russia halts oil supplies to Belarus after talks on a new supply contract fail

Russia halted oil supplies to Belarus on January 2 after Moscow and Minsk failed to agree on a new five-year supply contract, Tass reports.

Like with Ukraine, the previous supply contract expired on December 31, 2019 and the two sides had been trying to agree a new deal.

Russia’s Transneft oil transporting company has received no requests from Russian oil companies for supplies to oil refineries in Belarus starting on January 1, Tass reported on January 3.

"Transneft pumps oil in accordance with applications from oil companies. As of January 1, we have no applications from oil companies for deliveries to Belarusian refineries. At the same time, full-scale transit through Belarus goes on," he said, as cited by Tass.

Sources said large stocks of crude oil (about 0.5mn tonnes) had been created at the refineries. "That may be enough for about 20 days of work," a source told Tass.

Talks on a new deal have been fraught and going on for a year after Russia decided to change the way oil is taxed in the so-called tax manoeuvre and in effect end the energy subsidies to Belarus. Minsk has been demanding compensation for the change, which Moscow has refused.

Russian President Vladimir Putin and his Belarusian counterpart Alexander Lukashenko held two telephone conversations in the last two days of December to try and find a compromise, but the talks failed.

Lukashenko and Putin met earlier in December and half five hours of talks in the Russian resort town of Sochi, but those talks failed too. The Belarusian leader also raised these issues at his meetings with Russian Prime Minister Dmitry Medvedev and Energy Minister Alexander Novak on December 21, reports Tass.

Shortly after that, Lukashenko instructed the top officials of the petrochemical complex to sign oil supplies contracts and explore the possibility of supplies from the Baltic ports by rail and through the Druzhba oil pipeline. He earlier said that Belarus planned to purchase about 20bn cubic metres of gas and 24-25mn tonnes of oil from Russia in 2020.

Belarus has no oil of its own but the Soviet authorities built two modern oil refineries in the country that were completed shortly before the collapse of the Soviet Union and have been a major source of revenue for Minsk ever since. The refineries continue to operate, but their throughput has been reduced to the technical minimum, a source in the state oil company Belneftekhim told Tass on January 3.

"Russian oil is not delivered. The capacity of oil refineries has been reduced to the minimum technologically permissible level," the source said as cited by Tass.

The oil contract dispute is part of larger talks on bringing the two economies closer together into the Eurasia Economic Union (EEU) single market modelled on the EU. A preliminary deal was worked out in December, but the details have not been finalised. Compensation for the ending of energy supplies are a key point in the new deal, but Moscow has been playing hardball. Russia was due to lend Minsk $600mn in 2019 and the money was in the Russian budget and approved, but never released as talks dragged on.

In December an outline of a compensation deal was agreed but clearly the details are not. Once the two countries’ tax codes are unified under economic integration plans, expected to happen in 2022, Belarusian refineries will be extended a reverse excise tax to subsidise losses. This is the same scheme the Russian government has used to compensate domestic refineries for losses due to the tax manoeuvre, BMB reports.

Belarus says it will lose $10.5bn–11bn from the Russian tax change, and Minsk has been adamant that it receives some form of compensation before agreeing to deeper economic integration with Moscow. Ukraine was also due to lose some $3bn a year Russia pays as gas transit tariffs. In that case a deal was agreed at the last minute.