Belarus has developed its own oil supply diversification strategy. However, the country might ultimately use this to secure better terms of cooperation with Russian companies, rather than to reduce its overall dependency on Moscow.
Belarus is in the news largely because of its forthcoming presidential elections in August, which President Alexander Lukashenko intends to win, thereby extending his two decades-long rule.
Yet behind the political tussle is a more obscure although equally important battle: critical Russian oil supplies to Belarus. It is often presented as a fight for Belarus’ independence, although it remains far from that.
The latest oil dispute began earlier this year when Belarus challenged the terms of supplies proposed by Russia and demanded additional discounts and compensations. Moscow opposed this, and as a result Russian deliveries to the Belarusian refineries were drastically limited for the whole quarter. That led to a severe crisis in Belarus’ oil industry, forcing refiners to cut utilisation rates, halt most petroleum product exports, process national oil inventories and import (much more expensive) crude from alternative sources.
The oil spat between Minsk and Moscow was resolved in April, but since then Belarus remains adamant that it will continue its effort to diversify away from its reliance on Russian energy supplies. Belarus has decided to build a new domestic oil pipeline and bring in more tankers with non-Russian cargoes, including the very first shipments of crude oil from Saudi Arabia and the US. Moreover, at the beginning of June, Belarusians stated that they were already in talks with their Saudi and Azeri counterparts regarding possible long-term crude oil supply contracts.
But is that enough to conclude that we are witnessing a fundamental Belarusian move away from total reliance on Russian crude oil supplies? Actually, it is not as simple as it might seem.
Between Economics and Security
Belarus’ diversification strategy should be viewed first and foremost in the context of the so-called ‘tax manoeuvre’ in Russia, initially started by the Kremlin in 2015 and revived in 2019. The main objective of the manoeuvre was to gradually replace the export duty on crude oil which the Russian state is levying on its oil producers with a higher mineral extraction tax, a process scheduled to be concluded by 2024. The ongoing fiscal change is of key importance for the Belarusian refineries, as they import Russian crude oil on a duty-free basis, which currently translates into a $5.7 discount per barrel, assuming global oil prices stay around $40 per barrel. Therefore, the correlation remains simple: lower export duty in Russia results in higher import costs for Belarus and a greater Belarusian interest in alternative sources of supply.
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Source: Esperis
As 2024 approaches, Belarus’ diversification efforts have indeed gained momentum. First of all, Belarusians are trying to secure more supply routes to their refineries. Currently the only two existing options for non-Russian crude imports to Belarus are to bring cargoes via the Lithuanian port of Klaipeda (with subsequent rail transit to Novopolotsk refinery) or via the Ukrainian port of Pivdennyi near Odessa (with further pipeline shipment to Mazyr refinery). However, the above mentioned routes are not fully attractive for Belarus as they are much more expensive and complicated in terms of logistics than the direct pipeline supplies from Russia.
To improve the competitiveness of non-Russian deliveries, officials in Minsk have developed a mid-term diversification strategy. Statements made by Lukashenko in the past several months indicate that he sees the possible reverse flow on the Druzhba pipeline from the direction of Poland as the most economically viable option. At the moment, the regular shipments to Belarus on this route are not possible due to technical constraints on the Polish side, but this should change in the short term with bidirectional flow on the Druzhba pipeline to be enabled in 2021, and a second branch of the Pomeranian Pipeline to be commissioned in 2023, which will increase the flexibility of supplies.
Moreover, Lukashenko has just taken a decision to build a brand-new oil pipeline, connecting Gomel and Gorki (to be built in 2023). The idea behind the investment is to enable possible oil supplies from the direction of Ukraine and Poland to reach not only the Mazyr refinery, but also the refinery in Novopolotsk. As for now, such shipments would require pumping the crude through the Russian section of the Druzhba system (as indicated on the map above).
Only a Bargaining Chip?
Despite all the efforts undertaken recently, diversification proponents should not exaggerate their significance. One should not take it for granted that the crude slate in the Belarusian refineries will actually be fully diversified and it is not at all a given that the non-Russian oil deliveries will make the country independent from Moscow’s political and economic pressure in other sectors.
Even after 2024 when Russia’s tax manoeuvre is completed, Russian crude oil supplies will probably remain competitive against deliveries from alternative sources due to better logistics. And Belarusians will not be eager to lose their margins on oil product exports (fuel exports accounted for 8% of the country’s GDP in 2019), which are possible mainly because of the cheap crude deliveries from Russia. This is, among others, because Belarus’ refiners already have another big burden as they have to supply the domestic market with low-price fuel. As of the mid-June, the cost of diesel in Belarus was €0.67 per litre, about half the price in the UK.
Moreover, Russia still has other areas of leverage over Belarus and it might push officials in Minsk to limit or even halt its crude oil diversification programme. The Russians may threaten their Belarusian neighbours with a natural gas price hike or even an embargo against food imports from Belarus, as well as coerce them with new discounts for crude imports and/or preferential treatment in sectoral cooperation.
All this suggests that ultimately Belarus may try to play the diversification card not so much to replace Russian crude oil with alternative supplies but to secure better terms of cooperation with Russian companies in the future. Lukashenko has been taking advantage of such ‘tug-of-war’ images in boosting his foreign policy for many years already, and there is no reason to think that this time it could be different.
Of course, there still might be more non-Russian supplies to Belarus in the future, as the tax manoeuvre is being rolled out and Russia’s oil subsidies (in the form of duty-free shipments) continue to decrease. Moreover, Belarusian interest in crude oil deliveries from the direction of Poland, Ukraine or the Baltic States will also rise temporarily in times of crises in Minsk’s relations with Moscow. But it is unlikely that this will translate into the breakthrough that many in the West are currently anticipating, namely a transformed Belarus ready to stride confidently as an independent state.
Mateusz Kubiak is a senior oil and gas analyst with Warsaw-based consultancy firm Esperis. He co-authored Esperis’ recent report on Belarus’ oil supply diversification strategy.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.