Money Or Sovereignty? What An Oil Dispute Portends For Russian-Belarusian Relations
A new confrontation between Belarus and Russia over oil revenues and political integration has delivered a serious blow to the two countries’ long-standing alliance. There are talks that even the Belarusian independence is under threat. Faced with a choice between more money and more sovereignty, Minsk will inevitably choose sovereignty. In the long run, this conflict demonstrates the gradual breakdown of Russian-Belarusian “brotherhood.”
In just over a month, Russia and Belarus have found themselves embroiled in a conflict that strikes to the very heart of their supposedly brotherly ties.
It didn’t come out of the blue. In fact, every aspect of it could have been predicted, except for how quickly it escalated: in just a few weeks, both countries have shifted from their regular rhetoric of an alliance to accusations of undermining state sovereignty.
After a series of meetings this summer and fall, it appeared that Russian President Vladimir Putin and Belarusian President Alexander Lukashenko had settled all their major differences. The two countries then signed documents resolving a slew of economic disputes - on food shipments, loans, and the sale of oil and oil products.
But the oil issue - which was most sensitive for Minsk - remained unsolved. And it has driven a potentially irreparable wedge between the two allies.
Starting in 2019, Russia will gradually reduce its oil export duty, while also increasing its mineral extraction tax and introducing a negative excise tax to prop up its oil refinery industry. That “tax maneuver” - as the reform has been called - deprives Minsk of oil revenues, the key benefit from its integration with Moscow.
Duty-free Russian oil was relatively inexpensive for Belarus, and petrochemical product export duties were credited to the Belarusian budget. But now, between 2019 and 2024, Minsk is set to gradually lose both the duties and cheap oil.
According to Belarusian estimates, the country has already lost $3.6 billion in the last few years and is bound to lose another $8-12 billion in the next five, depending on the global oil prices.
Belarus operates under the assumption that it joined the Russia-led Eurasian Economic Union (EAEU) to maintain favorable trade conditions, especially as it relates to oil. Minsk and Moscow have been discussing compensating Belarusian losses since this summer.
Belarus wanted to keep the discount on the price of oil, while Russia proposed compensating Belarus through budget transfers. Moscow finds this option more politically expedient, since it can always withhold another transfer if Minsk misbehaves.
The negotiations proceeded at a normal pace until the end of November, when Russian negotiators allegedly refused to discuss compensation further. Around the same time, Belarusian Deputy Foreign Minister Andrey Belkovets admitted that the negotiations were difficult. He also stated that, without compensation, Minsk would consider leaving the EAEU altogether-an unusually bold statement for a politician of his rank.
Lukashenko echoed that “no equal conditions, no union” refrain at the EAEU summit in St. Petersburg on December 6. The Belarusian president dispensed with regular protocol speeches and leveled several demands at Putin, the most central of which was lower gas prices. It was an unexpected move, since everyone thought the issue had been resolved until at least 2020.
The presidents then started arguing and interrupting each other, and Putin ultimately voiced what would soon become Moscow’s new official position: different gas prices require a different level of integration between the two countries.
Putin’s phrase went largely unnoticed at the time-after all, the Russian president might have simply lost his temper. But just a week later in Brest, Dmitry Medvedev reiterated the same position in greater detail. He said that, if Belarus wants Russia’s support, it must make progress on the 1999 Union State Treaty: introduce a single currency, customs service, court, and Accounts Chamber. The Belarusian media described this speech as “Medvedev’s ultimatum.”
Other parties to the dispute have escalated their rhetoric as well. Lukashenko accused Russia of trying to take over and destroy Belarus “by hook or by crook.” Russian Finance Minister Anton Siluanov stated that Russia had made no promises to compensate Belarus for the tax maneuver because it is part of Russian domestic policy.
In an interview, Russia’s new ambassador to Belarus, Mikhail Babich, took detailed stock of all Belarusian grievances. The parties got carried away with the concept of “equal business practices,” while raw-material subsidies for Belarus have run their course, he said.
According to Babich’s estimates, Minsk’s new demands would cost Moscow $3 to $4 billion a year, and are “questionable under the existing legal framework.” Echoing his country’s leaders, Babich offered Minsk a choice: revive and complete the Union State or play by EAEU rules.
Minsk and Moscow butt heads on the oil and gas issues every year, trading accusations and raising their voices to get a better deal. Yet they always end up settling their disagreements.
The current dispute is different. Moscow last took such a categorical stand in 2002, when Putin proposed that Belarus’s six provinces become regions of the Russian Federation. Back then, the argument revolved around legal minutiae in the Union Treaty, which had already started showing some troubling signs. But sixteen years ago, Putin’s proposal could just drown in the sea of talk and be postponed through endless summits, while Belarus would continue receiving payouts from its senior ally.
Now Minsk has been saddled with a choice tied to an extremely important financial matter. Having refused to make that choice in the past, Lukashenko maintained a comfortable status quo. But another refusal now would mean agreeing to slowly but steadily lose its petrochemical export revenues, the country’s main foreign currency revenue stream.
This would impact fuel prices, the state budget, and the public sector, which is partially subsidized by money-making oil refineries. In addition, the country already faces a serious national debt problem, and the 2020 parliamentary and presidential elections are looming on the horizon. These factors guarantee that the Belarusian regime will feel nervous and vulnerable in the coming years.
After repeating its “money after integration” mantra so many times, Моscow will find it very difficult to offer money if Minsk doesn’t accept its conditions. Room for compromise virtually disappeared after the question was publicly and persistently raised.
Minsk finds itself in a very difficult position. It has exhausted its geopolitical blackmail arsenal. Everyone realizes that Minsk’s threats to turn to the West are unrealistic because no one there will embrace the Belarusian regime in the foreseeable future. Nor can Belarus threaten a withdrawal from the EAEU: with its current dependence on Russian oil, gas, and the domestic market, this would be akin to shooting oneself in the foot. It would be simply impossible to recover the resulting losses.
However, a compromise with Moscow that would require Belarus to cede some of its sovereignty is also doubtful. Aside from the fact that both the country’s elites and its people firmly support Belarusian independence, loss of sovereignty would run counter to Lukashenko’s core. That’s actually the reason why the Union Treaty’s implementation stalled in the early 2000s: an autocrat cannot hand over his real power mechanism to a supranational body or another autocrat. Lukashenko believes that if that happens, he will instantly lose his total power.
But economic shocks, however serious, don’t trigger such immediate consequences. Full control of the political field and loyal security forces will allow the Belarusian president to stay in power for many years to come-even if that necessitates economic privations. The regime has yet to test the limits of the people’s patience and the boundaries of police brutality. Therefore, unless Russia softens its position and offers Minsk some sort of a compromise, the Belarusian regime is almost certain to choose more sovereignty over more money.
Historically, changes in Belarus stem from external upheavals. Russia’s war in Georgia set off Minsk’s first attempt at closer ties with the European Union. Events in Crimea and Donbas prompted the second attempt, which is still ongoing. Belarus introduced visa-free travel for Western states, and large EU banks extended hundred-million-dollar loans to the country.
Declining oil prices, the Russian recession in 2015, and a related economic crisis in Belarus steered Lukashenko toward limited economic liberalization, accelerated development of the IT sector, and the appointment of market reformers to government offices.
Thus, if the current dispute between Minsk and Moscow proceeds as predicted, diminishing Russian subsidies will prompt the Belarusian regime to undertake new reforms and continue diversifying its foreign policy and trade.
Still, a drastic break with Russia will be impossible for many years to come, regardless of who’s in power in Minsk. No reasonable Belarusian politician will reject the remaining economic advantages of ties with Russia.
But the current confrontation is a significant step in a much deeper historical process: the two states’ emancipation from one another. After regular disputes, Belarus and Russia are gradually abandoning the brotherhood rhetoric. Instead, the two ruling classes are starting to think pragmatically in terms of real interests, not imagined ones.
This article was originally published on www.carnegie.ru.