Long Pipelines Make Bad Neighbors
Why Russia is feuding with Belarus and what it means for Europe's security.
Almost exactly a year after a payment dispute with Ukraine led Russia to cut off gas deliveries to its European customers in a misguided attempt to force Kiev to pay up, a similar dispute between Russia and Belarus threatens to disrupt deliveries of Russian oil to Europe. As with the Moscow-Kiev "gas war" in January 2009, which left vast swaths of central and southern Europe without gas, the dispute with Belarus is only in part about money. It is also a reflection of the changing relationship between Russia and its one-time partners in the former Soviet Union, many of which are seeking to escape their political and economic dependence on Russia. And the implications could be serious — not just for Russia, Belarus, and its neighbors, but also for the balance of power in Europe generally.
The Russia-Belarus dispute became public just after the new year, with the Dec. 31 expiration of an existing contract for deliveries of Russian oil to Belarus through the so-called Druzhba (Friendship) pipeline.
Under the terms of the contract, Belarus did not pay customs duty on oil imported from Russia. Minsk did not use all of these oil imports domestically, however, sending much of it on to Europe and keeping the customs receipts, despite participating in a customs union with Russia. The profits from reselling Russian oil have long been an important source of hard currency for the authoritarian government of President Aleksandr Lukashenko, making up around a third of Belarus’s export revenue.
In 2001, Belarus unilaterally canceled a contract that mandated the sharing of these revenues, leading to substantial losses for Russian pipeline monopoly Transneft and the Russian state budget. Now, Transneft is demanding that Belarus pay full import duties for the portion of Russian oil that it resells on the European market, a demand that could cost Belarus as much as $5 billion per year. The Belarusian government argues that the Russia-Belarus customs union obviates the need for Minsk to pay duty on imports from Russia. Although deliveries through the Druzhba pipeline have not, as of mid-January, been cut off, the prospect that Transneft (whose chairman is Russian Deputy Prime Minister Igor Sechin, a close confidant of Prime Minister Vladimir Putin) will turn off the taps to force compliance from Minsk is clearly one that has European leaders worried because the European Union imports about a third of its oil from Russia, mostly via Belarus. Already, the prospect of supply disruptions has driven U.S. crude oil prices to a 15-month high, presumably to Moscow’s delight.
Long Moscow’s closest ally among the post-Soviet states, Belarus in recent years has increasingly become a headache for the Kremlin. Along with the Russia-Kazakhstan-Belarus customs union, Minsk and Moscow are joined in the so-called Russia-Belarus "union state," a kind of halfway house on the way to political integration. Yet like Ukraine before it, Belarus has become wary of being overly dependent on Russia and has sought more room to maneuver internationally, particularly after the August 2008 war in Georgia. Like other post-Soviet leaders, Lukashenko is worried about the precedent of Russian troops intervening in a region that Russian President Dmitry Medvedev referred to as Russia’s "zone of privileged interests."
Lukashenko’s sudden yen for independence is largely due to Moscow’s clumsy attempts to pull Belarus closer. Following the Russia-Georgia war, Moscow put enormous pressure on Belarus to recognize the breakaway republics of South Ossetia and Abkhazia. But, like his counterparts elsewhere in the former Soviet Union, Lukashenko held out. Offering a carrot, Russian Finance Minister Aleksei Kudrin announced last February that Moscow would lend Minsk $2 billion to help prop up the tottering Belarusian economy. Then, Russia instituted a boycott of Belarusian milk products in June in an attempt to pressure Minsk to fall into line. In response to the mounting financial crisis, Russia first delayed and then canceled altogether the final $500 million tranche of this loan. In response to the milk boycott and Russia’s vacillation with the promised loan, Lukashenko boycotted a June summit of the Collective Security Treaty Organization — a Russian-led NATO alternative for post-Soviet states — and openly expressed reservations over Russia’s plans to establish a joint rapid reaction force under the organization’s auspices.
Even more alarmingly from Russia’s perspective, Lukashenko announced that Belarus was interested in participating in the European Union’s Eastern Partnership, designed to craft free trade deals, looser visa rules, and strategic partnership agreements with a number of post-Soviet countries in Eastern Europe and the South Caucasus. The European Union reciprocated Lukashenko’s interest in warmer relations in part to keep the Belarusians from recognizing the breakaway republics and in part because Lukashenko’s sudden interest in rapprochement appeared to offer an opportunity to press for domestic liberalization in a country sometimes called "Europe’s last dictatorship." Despite its concrete focus on visa and trade issues, the Eastern Partnership is officially described as an attempt to promote adherence to "shared values including democracy, the rule of law, and respect for human rights" among the post-Soviet states along Europe’s borders. For Russia, which increasingly sees the promotion of liberal values as a means of strengthening the West’s influence vis-à-vis Moscow, the Eastern Partnership appears to be a transparent attempt to intrude on the Russian "zone of privileged influence."
The whole problem comes back to the subsidized energy prices Russia allows its former dependents as a dual system of patronage and control. The subsidies have created perverse incentives in recipient countries, which, like Belarus, have been able to resell Russian energy on their domestic markets at depressed prices, discouraging efficiency and propping up uncompetitive Soviet-era industries. At the same time, subsidized energy supplies have been a major source of corruption because the resale of Russian oil and gas abroad at world prices provides a major source of income for political insiders in Ukraine, Belarus, and other recipient countries.
The threat of withdrawing the subsidies is also one of Russia’s largest bargaining chips in the region. During an earlier payment dispute with Minsk over gas, Moscow moved aggressively to seize a share in Belarus’s gas pipeline network in exchange for maintaining (reduced) price subsidies. As part of Russia’s strategy for exerting pressure on Belarus at the time, Transneft decided to cut oil deliveries through the Druzhba pipeline. Given Belarus’s sclerotic economy and pre-2008 estrangement from Europe, Moscow knew that Lukashenko had little choice but to agree to its demands. The Kremlin has similarly sought to take advantage of Ukraine’s energy debts to gain control over the Ukrainian distribution network, a move that Kiev has thus far resisted.
Since Putin became president of Russia in 2000, the Kremlin has applied these subsidies selectively. Particularly between 2005 and 2008, when global oil prices were rising rapidly, Moscow pressed its neighbors to pay market prices for their energy deliveries, especially neighbors that were becoming foreign-policy headaches. In part, this development was a positive one. It was in line with International Monetary Fund demands that energy transactions take place at market rates and, if fully implemented, would have created real incentives for purchasers to reduce their profligate energy consumption. It would also place relations between Russia and its neighbors on a more predictable, market-oriented basis.
But though moving to market rates for energy makes sense in theory, put in practice by the Putin regime it has only contributed to uncertainty among the European states that purchase most of Russia’s energy. Market rates have been introduced for different post-Soviet states at different times, depending in large part on the purchaser’s relationship with Moscow. For Belarus, loyalty has long translated into some of the lowest energy prices of any Russian neighbor, even as Russian gas monopoly Gazprom and Transneft have ratcheted up prices on Ukraine and other states that have sought to leave the Russian orbit. With Belarus increasingly aware that its dependence on Russia has left it isolated and vulnerable, it too is finding that foreign-policy flexibility comes with a price.
Moscow’s long-term goal is to take control of energy distribution infrastructure throughout the former Soviet Union. This aim is clearly stated in Russia’s energy policy, and the previous round in the dispute between Belarus and Transneft-which also sparked a brief cutoff of Russian oil supplies-was ended in part by an agreement for the Russian pipeline monopoly to take a 50 percent stake in Belarusian pipeline operator Beltransgaz. Gazprom has exerted similar pressure on Ukraine over Kiev’s outstanding debts. If Moscow were to succeed in completely taking over the Belarusian energy distribution network, it would not only be in a stronger position to influence Minsk’s foreign policy, but the move would also improve Moscow’s market power, and hence its political leverage, vis-à-vis Europe. Uncertainty about deliveries through Belarus could also lead to higher global oil prices, just as Western economies are beginning to emerge from the recession. That in and of itself should be reason enough for the Europeans — and their U.S. allies — to pay close attention to a seemingly obscure customs dispute.