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. Last Updated: 07/27/2016

Putin Stands Tough on Oil Dispute

ReutersA tap and meter showing zero-level pressure on Tuesday on the Druzhba oil pipeline at Hungarian oil and gas group Mol's refinery in Szazhalombatta.
President Vladimir Putin sent strong signals to Belarus on Tuesday that he would not back down in a heated dispute over oil tariffs that has disrupted the flow of crude to Europe.

The Druzhba pipeline, which carries Russian oil to Europe through Belarus, remained shut for the second day straight Tuesday.

In preparation for a long-term dispute, Putin on Tuesday ordered his Cabinet to explore cutting oil production. A cut would protect local refiners and the federal budget from the sharp drop in the price of oil that would occur if the domestic market were flooded with crude that would normally flow through Druzhba.

Moscow switched off the taps Monday as a dispute over the price that Belarus pays for Russian gas escalated into a full-blown energy trade dispute that has plunged relations between the erstwhile allies to an unprecedented low.

A meeting between Belarussian officials, led by Deputy Prime Minister Andrei Kobyakov, and Economic Development and Trade Minister German Gref late Tuesday failed to resolve the crisis.

"This looks like a trade war," Gref's deputy Andrei Sharonov said Monday on Ekho Moskvy radio. "One should not forget that Russia is Belarus' biggest market and its No. 1 economic partner. Therefore we have the possibility to apply measures to Belarus and get the duty canceled."

One year after a price dispute with Ukraine cut gas supplies to Europe, another crisis appeared to have been diverted Dec. 31 when Russia and Belarus reached a last-minute agreement on gas prices after months of diplomatic wrangling. Yet even then, Belarus said it was reluctantly accepting a price tag of $100 per thousand cubic meters of Gazprom gas -- more than double the $47 it paid last year.

Alexander Lukashenko's government had hoped to pay $75 and agreed to cede control of 50 percent of the national pipeline network to Gazprom in a bid to keep the price low. Russia's state-run gas giant agreed to pay $2.5 billion for half of Beltransgaz, while analysts said an independent valuation by Dutch bank ABN-Amro had valued the stake at $1.6 billion.

Branded "Europe's last dictator" by the United States, Lukashenko has relied heavily on low energy prices to keep up support among his population. But Russia has said it plans to cut subsidies to all its former Soviet neighbors, raising to market levels the energy prices that even its closest allies paid.

While Belarus agreed to the higher gas price, it refused to accept Russia's decision to slap an export duty of $180 per ton on all Russian oil shipped to the country. Belarus relied on the crude - which it would import duty-free, refine and then sell for a higher price on European markets -- for an estimated $4 billion of revenue per year.

Alexander Zemlianichenko / AP
Belarussian officials at their embassy in Moscow on Tuesday. European leaders called the cutoff "unacceptable."
The Foreign Ministry in Minsk said the duty violated a customs union between Belarus and Russia, which was due to pave the way for a merger between the two countries that now seems all but dead.

Belarus retaliated by levying a transport fee of $45 per ton on Russian oil passing through its territory. Russia refused to pay the tax and Belarus this weekend began siphoning oil from the Druzhba pipeline as payment. Russia called the move illegal and shut down the pipeline, effectively cutting oil shipments to Germany, Poland, Hungary, Slovakia and the Czech Republic.

Gref said after meeting Kobyakov that he would hold no more talks until the transit fee was revoked.

"These are our unconditional demands and we will not enter into talks until these conditions are satisfied," Gref was quoted by news agencies as saying.

He added that Russia could withdraw the $180 export duty in return. "My answer should not be read as a 'No,'" he said when asked if he would be willing to re-examine the tax in response to a move from Belarus.

The Belarus delegation was due to remain in Moscow even though no new talks were scheduled, he added.

Putin told the Cabinet meeting that, at $100 per thousand cubic meters of gas, Belarus had won the lowest price tag of all former Soviet states. "Even a country like Armenia, where there really are few problems, pays $110 per thousand cubic meters," Putin said.

Critics have accused Putin of wielding his country's growing oil and gas might as a weapon to win influence among Russia's neighbors, which are steadily looking West. Disputes with Georgia and Ukraine provoked harsh criticism in Europe.

EU leaders lashed out at Russia on Tuesday, calling the shutting of the Druzhba pipeline "unacceptable" and again questioning the country's ability to act as a reliable energy supplier.

State Duma Deputy Valery Yazov, who chairs the Energy Committee, said that while he had long called for Belarus to pay market prices for gas, it was Russia that would suffer most.

"This is a serious blow to Russia, because in the end it is we who are responsible for supplying energy resources to Europe," he said in an e-mailed statement.

Stanislav Bogdankevich, a former president of the Belarussian Central Bank, predicted the dispute would not last long.

"Moscow knows its relations with the West will be harmed," he said by telephone from Minsk. "A compromise will therefore be found soon. It will come with a big loss to Belarus, but it will be found."

Alexander Kliment of Eurasia Group, a New York-based risk consultancy, said Russia had more to lose, since Lukashenko already carries pariah status in the West. "The Russians send 40 percent of their non-CIS exports through Druzhba, so they've got to come to terms at some point. Lukashenko, though, is a pariah already, so what's he got to lose?" he said.

"Even though this is really a case of the Belarussians behaving badly, the Russians are the ones who will suffer most, economically and in terms of their already spotty reputation as energy suppliers," he said.