Belarus, Russia oil impasse continues

After days of talks on a new oil transit deal, Belarus still insists it should get crude from Russia duty free, even though it sells most of it to Europe for a large profit.

Russia wants to shift to market prices with its neighbors but it’s reportedly ready to provide duty-free oil for the country's domestic use, in an effort to solve the crisis.

Though 2009 ended without a deal oil is flowing. That's because of what Russia describes as its "exclusive attitude" towards its neighbor and the desire of both sides to ensure profits don’t dry up says Viktor Markov, Senior Analyst at Zerich Capital Management.

“The main problem is that Belarus re-exports Russian crude to Europe and makes good profit from it. But Russia is losing money and wants Belarus to pay duties. However neither side wants to lose its profits and it is here that the conflict arises.”

Last year Minsk enjoyed discounts on Russian oil worth $2 billion.

In 2009 Belarus bought 21 million tonnes of Russian crude at a cheaper price than is made available to other nations and produced petrochemicals for export. Minsk was looking for a similar deal for 2010.

But Moscow says these terms are possible only for oil used domestically.

But some experts like Dmitry Aleksandrov, head of the research department at Univer Captial say the source of the spat could be something else.

“The price and the terms of Russian energy supplies to Belarus have always been connected with access for Russian companies to Belarusian industrial assets and major refineries. Here we are talking big money. The issue is about full or partial privatization of these assets.”

Belarusian oil demand in 2010 is expected to be about 8 million tonnes. Moscow has offered to sell 6 million tonnes duty-free – asking for full payment for exports to Europe.

Minsk rejected the deal and even threatened to cut electricity supplies going through its power grids to Russian exclave Kaliningrad which could force Russia to take a harsher position on crude duties believes Veles Capital chief analyst, Dmitry Lyutyagin.

“If Belarus decides to increase electricity transit fees, Russia will take a stiff position on crude duties without any compromise and that may cast a shadow on political relations as well as on the newly-formed Customs Union.”

Failing to reach an oil agreement with Russia, Belarus said it could back out of the union. But analysts say the entity is more beneficial for Belarus than for Russia, as Minsk can use benefits from oil supplies and sell refinery products to the West for more competitive prices.