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. Last Updated: 07/27/2016

Russia, Belarus End Bruising Dispute

APPrime ministers Mikhail Fradkov and Sergei Sidorsky after their talks Friday.
Russia and Belarus appeared to put an end to their acrimonious energy dispute on Friday, as Russian officials acknowledged that Moscow's reputation as a dependable energy supplier had been damaged.

Moscow would cut its oil export duty from $180 to $53 per ton, after Belarus rescinded a transit fee that Russia had refused to pay, Prime Minister Mikhail Fradkov said after meeting his Belarussian counterpart, Sergei Sidorsky.

Russia would have the right to revise the export duty every two months starting next year, Interfax reported.

Russia will also start receiving most of the profits from the duty on Russian oil that Belarus re-exports to Europe, Fradkov said.

Belarussian President Alexander Lukashenko indicated Sunday that the deal might be temporary. "Specific contracts and prices for January and February have been negotiated. They are more than acceptable to us," Lukashenko said, Interfax reported.

"The dispute has definitely damaged our reputation as a reliable supplier," Economic Development and Trade Minister German Gref told reporters Saturday.

"We must create a system whereby supplies will depend only on us, not on the transit stage."

Russia has been seeking to extend control of oil and gas pipelines beyond its borders, and in late December, Gazprom pushed through a deal with Belarus that saw it double gas prices and gain control of 50 percent of the country's pipeline network.

Moscow and the European Union hope to sign a new bilateral cooperation treaty this year, and energy talks are due to top the agenda. The EU, which gets about one-quarter of its gas from Russia, harshly criticized Moscow as oil imports were disrupted for three days last week.

The dispute's outcome is also a blow to Lukashenko, whose government must now fork over double the price it paid last year for Russian gas and pay an oil import tariff for the first time.

Moscow's imposition of the export duty on New Year's Day prompted Belarus to slap a transit fee of $45 per ton on all Russian oil passing through its territory. Russia refused to pay the fee and Belarus tapped oil from the Druzhba pipeline as payment. Russia then shut down the pipeline for three days, cutting exports to Germany, Poland, Hungary, Slovakia and the Czech Republic.

The phasing out of subsidized Russian energy could put Lukashenko's authoritarian regime under greater strain as the two countries are increasingly at odds over the terms of a long-stalled political union.

"The Belarus economy will now struggle to survive," said Alexander Rahr, program director of the Korber Center for Russia and CIS Affairs in Hamburg, Germany. "We have seen a crucial break in the economic relationship between Moscow and Minsk."

Russia is by far Belarus' largest trading partner and one of its few political allies. U.S. President George W. Bush reinforced Lukashenko's pariah status in the West on Friday, signing into law an act that tightens sanctions against the country and provides money to independent media and opposition groups.

Yet the country could still find ways to pressure Russia into boosting support, Rahr said. Belarus provides a key transport link to Kaliningrad, he noted, with the only other means of reaching the Russian exclave passing through EU member Lithuania.

And the country remains Gazprom's second-largest customer in the former Soviet Union after Ukraine, importing around 20 billion cubic meters per year.

The decision to impose an export duty was designed to gain revenue from Minsk's practice of exporting oil to Europe at market prices after refining the cheap crude it takes in from Russia.

Russia lost out on an estimated $3 billion to $4 billion per year as a result of the scheme.

A customs union deal signed between the two countries in 1995 stipulated that Belarus would hand over 85 percent of the duty profits to Russia, but Minsk stopped paying in 2001.

Under Friday's deal, this year Russia will receive 70 percent of revenues from Belarussian exports of refined Russian oil, rising to 80 percent next year and 85 percent in 2009, Fradkov said.

Industry and Energy Minister Viktor Khristenko told President Vladimir Putin last week that Russia had held off until this year to react in part because it wanted to continue subsidizing the Belarussian economy until after presidential elections last March.

Lukashenko was overwhelmingly re-elected in the vote, which was validated by Russia but widely criticized in the West as neither free nor fair.

Analysts said Lukashenko, as well as the centrally planned Belarussian economy, had emerged as the biggest loser in the dispute.

"The crisis puts a question mark over his authority," Rahr said. "The Belarussian economy has been much too dependent on cheap Russian energy. Valuable time [to reform] has been lost."

Russia's reputation and its relations with Europe were the other casualties of the crisis, said Tanya Costello, a London-based analyst with Eurasia Group, a risk consultancy.

"While the crisis won't have any effect on specific projects, we will see greater calls over the next few months and years to look for non-Russian sources of oil and gas," she said. "In the end, Belarus is entirely dependent on Russia economically. This will put a great strain on [Lukashenko's] government."

German Chancellor Angela Merkel, which took over the rotating presidency of the European Union this month, said in the midst of the crisis that Germany should look into alternative fuels and reconsider its decision to shut down its nuclear power program.

Gazprom is the biggest commercial winner in the dispute, as it will now take in $100 per 1,000 cubic meters of gas to Belarus, up from $47 last year. That number is to hit European levels -- around $230 -- by 2011.

MDM Bank estimated that the $100 fee would add around 3.5 percent to Gazprom's net income next year.

"Gazprom is the clear winner from the hostilities," MDM said in a research note Wednesday.

"The Russian gas monopoly appears to have secured a favorable gas deal at the expense of the oil companies," it said.

Russian oil companies lost $1 million to $3 million per day during the dispute, it estimated.

The dispute had focused attention on plans to merge the two countries, but analysts said the proposed union now appeared to be dead.

On Sunday, Lukashenko said: "From all the consultations and talks, I have understood that we have different perspectives and understandings on the construction of a union government. The union must be built on the principle of equal rights."

"If Russia is ready for that, then let's do it this year," he said.

Lukashenko has dragged his feet on adopting the ruble as a common currency since he realized it was unlikely that he would head the union, analysts said.

The Russian press has speculated that Kremlin officials could push for a full political union and a new constitution that would allow President Vladimir Putin to stay in power beyond 2008.