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. Last Updated: 07/27/2016

Belarus Steps Back in Oil Dispute

ReutersA view on Wednesday of a line production station of the Druzhba pipeline in Brody, 460 kilometers west of Kiev. The pipes take oil through Belarus to Europe.
Belarus pulled back Wednesday in its simmering dispute with Russia, lifting a transit tax on Russian oil to pave the way for a resumption of oil deliveries to Europe.

The head of national pipeline operator Transneft, Semyon Vainshtok, said late Wednesday that by Thursday he expected to switch on the taps to the Druzhba pipeline, which carries Russian crude to Europe through Belarussian territory.

The Druzhba pipeline has been shut since Monday, depriving Germany, Poland, Hungary, Slovakia and the Czech Republic of a major source of oil as Belarus and Russia have sparred over newly imposed tariffs.

The Belarussian government voted to cancel the transit tax that was levied on Russian oil last week, Belarussian Prime Minister Sergei Sidorsky said Wednesday after a Cabinet meeting. Economic Development and Trade Minister German Gref had said late Tuesday that Russia would hold no talks on resolving the crisis until Belarus lifted the transit tax.

European Union leaders have harshly criticized both sides. The Druzhba pipeline supplies about 1.2 million barrels of crude per day to the five EU countries -- some 12.5 percent of European demand.

EU energy chief Andris Piebalgs said late Wednesday that a deal between Russia and Belarus was "very close," after meeting Russia's ambassador to the EU, Vladimir Chizhov.

But Andrei Sharonov, deputy minister of economic development and trade, told journalists earlier Wednesday that the pipeline would remain shut until Belarus returned 80,000 tons of oil that Russia accuses it of illegally siphoning from Druzhba.

Belarus said it appropriated the oil as payment after Russia refused to acknowledge the new transit tax. Belarus last week slapped a $45 per ton tax on all Russian oil crossing its territory in a tit-for-tat move meant to offset losses it expected to incur from a newly imposed oil export tariff levied by Russia at the new year.

President Vladimir Putin told a Cabinet meeting Tuesday that the absence of an export tariff on crude oil to Belarus had cost the federal budget $3.5 billion to $4 billion annually over the past five years.

Russia's decision to impose the $180 per ton export tax enraged Belarus and came on the heels of tense negotiations over the price Minsk would pay for Gazprom gas.

Once close allies planning to merge into one state, Russia and Belarus have seen their relations plunge to unprecedented lows in the past few weeks. The two sides failed to present a united picture on Wednesday.

The office of Belarussian President Alexander Lukashenko said in a statement that a compromise had been reached during telephone talks with Putin. Sounding a more cautious note, Kremlin spokesman Alexander Smirnov said Lukashenko had phoned Putin to discuss the crisis, but declined to confirm that the talks had resulted in a deal.

Sidorsky, the Belarussian prime minister, was due to fly to Moscow on Thursday for two days of talks with his counterpart, Mikhail Fradkov. He said he expected Moscow to respond to his Cabinet's move by lifting the export tax.

"I hope that within two days we will be able to overcome all disagreements -- on oil, oil products and other sensitive groups of commodities on the Russian and Belarussian markets," Sidorsky said, The Associated Press reported.

Gref's ministry released a statement saying Belarus' decision "lifts the largest hindrance to the path of the negotiating process." A ministry spokeswoman declined to comment on whether the ministry would respond in kind.

Many analysts had believed that Belarus would not be subject to Russia's increasingly tough stance on neighborhood energy policy. Most correctly predicted that the two sides would conclude tough negotiations on gas prices before a New Year's Eve deadline, avoiding the type of cutoff that Ukraine suffered last winter.

Belarus agreed at the last minute to pay $100 per thousand cubic meters of Russian gas starting Jan. 1. That sum is far above the $47 it paid last year, but is still the lowest price granted to any Gazprom customer. And Belarus is the only country to face a phased rise in prices. Gas prices are due to increase every year, reaching European levels by 2011.

The last-minute deal also saw Minsk agreeing to sell 50 percent of its national pipeline network to Gazprom for $2.5 billion, a price considered generous by analysts and Gazprom officials.

Yet at Tuesday's Cabinet meeting with Putin, Industry and Energy Minister Viktor Khristenko lamented that Gazprom "does not have a controlling stake or input into how the company is managed."

Chris Weafer, chief strategist at Alfa Bank, said he believed the quickly escalating crisis was provoked by Russia in a bid to gain more control over Belarus' export infrastructure.

"And Belarus is trying to keep as much of the financial umbilical cord that they've relied on for the last 15 years, which was essentially cut on the first of January," he said.

Lukashenko has relied on heavily subsidized Russian energy to run his country's centrally planned economy and keep the population content.

"Lukashenko will not survive politically" without cheap Russian gas, said Alexander Rahr, program director of the Korber Center for Russia and CIS Affairs, in Hamburg, Germany. He said he expected the authoritarian leader to hand over ever more oil production and transport assets to Russia in a bid to restore relations and remain in power.

One reason for the crisis -- coming after four years of increasingly cool relations between the two countries -- could be to pressure Lukashenko into following through on promises to form a formal union with Russia, Rahr said.

"Certain forces in Russia are playing with the idea of hammering out the common state deal before the presidential election [in March 2008]. This would allow for a new constitution that would give Putin the possibility to stay in power," he said.

Lukashenko and former President Boris Yeltsin first agreed to the merger in the mid-1990s. Lukashenko has lagged on adopting the ruble as the national currency and has refused to hold a referendum on the union, insisting that the terms of the union must ensure that he shares equal status with the Russian president.

Most observers had expected Belarus to cave in.

"Belarus does recognize that Russia is its main trading partner and its only political partner," said Weafer of Alfa Bank. Splitting with Moscow "would be suicide," he said.

Russia steadily ratcheted up the pressure on Belarus. Gref was considering levying duties on Belarussian imports of meat and dairy products, television and furniture, Vedomosti reported Wednesday, citing an unidentified government source. Russia is by far Belarus' largest trading partner, taking in 99.9 percent of its meat exports and more than 90 percent of its dairy exports. The duties would cost Belarus some $6 billion, Vedomosti said.

Russia introduced duties on Belarussian sugar in late December. Belarussian officials say sugar producers have already lost around $2 million as a result.