07MOSCOW57, RUSSIAN ENERGY: THE RUSSIA-BELARUS OIL STANDOFF

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Reference ID Created Released Classification Origin
07MOSCOW57 2007-01-10 15:49 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO4455
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0057/01 0101549
ZNY CCCCC ZZH
O 101549Z JAN 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6278
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000057 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS WARLICK, HOLMAN, AND GUHA 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF/PISCITELLI 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 01/10/2017 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIAN ENERGY: THE RUSSIA-BELARUS OIL STANDOFF 
 
REF: A. MOSCOW 13174 
     B. WARSAW 33 
     C. BERLIN 45 
 
Classified By: CDA Daniel A. Russell.  Reasons 1.4 (b/d). 
 
1. (C) SUMMARY: Russia and Belarus have not yet found a 
solution to their row over oil volumes through the Druzhba 
pipeline.  Over the last three days each party has cast blame 
on the other for initiating the confrontation, with the 
Russians claiming that the Belarusian transit duty was 
illegal under existing agreements and Belarus blasting 
Russia's recently imposed export duty.  Before negotiations 
can begin (the Russians are characterizing the talks so far 
as "contact"), Russia is insisting that Belarus drop the 
transit duty and begin sending oil through the pipeline.  The 
GOR says that oil relations should be governed by a 1995 
intergovernmental agreement (IGA) under which the only 
authorized duty is the Russian crude oil export tariff. 
Energy Minister Khristenko has asked Russian oil companies to 
start making plans to cut back production -- an eventuality 
that Gref told the German Embassy may come as early as this 
weekend.  However, both the MFA and a representative from 
Rosneft have told us that the issue may be resolved before 
that.  In the end, a resolution to this problem revolves 
around finding the right "price," something which will likely 
involve a compromise on sharing tax revenues from the 
Belarusian refined products exports produced using Russian 
crude. 
 
2. (SBU) Late on January 8, MEDT's Deputy Minister Andrey 
Sharonov and Transneft officials confirmed that Russia had 
stopped shipping oil via the Druzhba through Belarus to 
Europe.  This decision followed a claim by Transneft 
President Semyon Vainshtok that Belarus had begun diverting 
Europe-bound oil for domestic use.  (Note: some 1/3 of 
Russian crude exports, or 1.35 million b/d, flow through 
Belarus to world markets.)  Responses from GOB and Belarusian 
oil industry officials ranged from denial to admitting that 
it happened but explaining the seizure as "payment" -- in 
lieu of cash -- of the recently-imposed $6.50/barrel transit 
fee Belarus imposed on oil through the Druzhba.  EU Energy 
Commissioner Piebalgs said that the situation posed "no 
immediate risk" to energy supplies in the EU.  According to 
Moscow sources, Poland has 80 days of oil reserves and 
Germany has 130 (Refs A and B). 
 
3. (SBU) As of the evening of January 9, The GOR and GOB had 
not found a solution to end the oil cutoff.  According to 
press reports, Economic Development and Trade (MEDT) Minister 
German Gref met with Belarusian Deputy Prime Minister Andrey 
Kobyakov for what Gref described as "preparation for talks." 
Repeating the mantra employed by other Russian officials, 
Gref insisted that for negotiations to begin in earnest the 
GOB must start transiting Russian oil again and repeal the 
transit duty Belarus imposed on Russian exports to Europe. 
Further, Russian President Vladimir Putin hinted at the 
possibility of reducing oil production if this dispute drags 
on. (Note: Russia is very short on excess refining capacity, 
so this sector can do little to mop up the excess oil) 
 
4. (C) Shawn McCormick (please protect), head of government 
affairs at TNK-BP, told us that during an emergency meeting 
the evening of January 9, Minister Khristenko told Transneft 
and seven Russian oil producers that Russia will not accept 
Belarus's imposed $6.50/barrel transit duty and that both 
sides must return to the 1995 intergovernmental agreement 
(IGA) under which the only authorized tax is the Russian 
export duty on crude oil.  Furthermore, Russia is insisting 
that Belarus agree to the longstanding practice of splitting 
the export tax revenue Belarus earns from refined products 
produced from Russian crude.  The traditional split is 85/15 
in Russia's favor as opposed to Belarus's desired 60/40 
split. 
 
5. (C) Khristenko verified that the northern Druzhba line 
remained shut down and warned that the dispute could go on 
for a prolonged period.  Russia believes that western 
customers have a comfortable three weeks of oil storage. 
Transneft said that its 3-day storage capacity would be full 
by COB January 10.  After this, production itself may need to 
be shut-in and Khristenko requested the producers to restrict 
output accordingly.  For example, McCormick told us, TNK-BP's 
 
MOSCOW 00000057  002 OF 003 
 
 
production cut could amount to 375,000 b/d -- about 
one-quarter of the company's daily production. 
. 
DUELING TAXES 
------------- 
. 
6. (SBU) While undoubtedly influenced by the acrimonious ga
s 
row (Ref A) the proximate cause of the situation is the 
recent oil-related taxes the two countries have imposed on 
each other.  Russia announced in December that it would begin 
levying a $180/ton export duty on oil sold to Belarus. 
Russian officials justified this export duty saying that the 
GOB had not lived up to the terms of the 1995 IGA regarding 
the splitting of export tariff revenues that Belarus receives 
from the sale of refined products produced from Russian 
crude.  Belarus responded by slapping the transit fee on 
Russian oil transiting through the Druzhba.  Transneft has 
not paid this fee, claiming it is illegal under existing 
agreements, prompting Belarus to begin legal proceedings 
against Transneft and its President, Semyon Vainshtok. 
 
7. (C) McCormick confirmed the lack of progress in the talks 
but indicated that the Russian side wants to end the 
stand-off "in days, not weeks."  He also said that the 
$45/ton transit fee would cost Russian shippers, at current 
volumes, $3.7 billion per year -- $700 million from TNK-BP 
itself.  In addition, TNK-BP oil traders said that they were 
looking at other ways to get the oil to Europe (via the 
shipping terminal at Primorsk and through Ukraine) but their 
options are limited due to capacity constraints on these 
routes.  Oleg Butsenko, Rosneft's export division chief told 
us that, for commercial reasons, his company's exports to 
Belarus fell after the imposition of the Russian export duty 
but that they don't plan to abandon the route.  He said not 
to "over-dramatize" the situation, though, hinting that he 
thought the matter could be settled quickly. 
. 
THE RUSSIAN MFA TAKE 
-------------------- 
. 
8. (C) Victor Sorokin, Director of the MFA,s Second CIS 
Department (Belarus, Moldova and Ukraine), emphasized the 
positive in recent developments, noting that the GOR was 
satisfied with the finalization of its &gas relationships8 
with all former Soviet republics by adding the final piece -- 
Belarus -- to the puzzle.  Sorokin defended the rise in gas 
prices and imposition of oil duties as overdue measures to 
move Russian-Belarusian relations to market terms.  There was 
no near-term prospect of a union state that would justify 
preferential treatment for Belarus, and Sorokin repeated that 
the GOR had no interest in forcing such an arrangement and no 
intent of moving along the constitutional path that would be 
required to realize it.  Russia and Belarus remain two 
separate sovereign states, where market-driven pricing and 
conditions should apply -- to both oil and gas. 
 
9. (C) Sorokin predicted a resolution in the "nearest 
future,' and noted contacts that there have been continuous 
contacts between the two countries at all levels to resolve 
the latest oil impasse -- between Lukashenko and Putin; 
between the Prime Ministers Sidorskiy and Fradkov; between 
Foreign Ministers Martynov and Lavrov; and (currently in 
Moscow) between Deputy Prime Minister Kobyakov and Economic 
Development and Trade Minister Gref.  Sorokin underlined that 
the meetings in Moscow are not &negotiations8 but 
&contacts,8 since Russia was not prepared to compromise on 
the imposition of the oil tariff.  He reminded us of the 1995 
IGA which Belarus willfully started ignoring several years 
ago.  Gref, who is heading the Russian side, Sorokin 
stressed, was one of the most liberal members of the Putin 
cabinet and did not subscribe to an energy "stick." 
Belarus's behavior was unacceptable, according to any market 
norms. 
 
10. (C) Sorokin refrained from criticizing Lukashenko 
personally, other than to note relations remained 
"complicated."  He repeatedly said that the Belarusian leader 
has no choice but to initiate economic reform in the country 
and break out of the counter-productive isolation. Russia 
could no longer subsidize Belarus, but Belarus remained a 
"special friend," and still received the lowest gas price 
among all Gazprom's customers.  He emphasized that once this 
new paradigm is understood, the talks can move fast to a 
 
MOSCOW 00000057  003 OF 003 
 
 
resolution. 
. 
COMMENT 
------- 
. 
11. (C) Cutting through the tit-for-tat in the press, it 
becomes apparent that this boils down to finding the right 
"price."  It is virtually impossible to predict with any 
certainty what this price may be, but any deal will likely 
involve a compromise on the split of export tax revenue 
Belarus makes from sales of refined products.  Furthermore, 
the longer this drags on the more skittish Russian shippers 
are likely to become.  This combined with the mounting damage 
to Russia's reputation argues for a relatively swift 
conclusion to this impasse.  Putin's resolve on such issues, 
however, is notoriously strong regardless of reputational 
damage.  Another wildcard is Lukashenko and whether he is 
willing to go to the mat to show he can stand up to Russia. 
In the long run, Russia will find alternatives to the 
Druzhba, an aging route with bothersome middlemen standing 
between Russian oil and the cash it generates when sold in 
the West.  In the short run, however, the potential oil 
production cuts and relocation of exports could be disruptive 
to oil markets. 
RUSSELL

Wikileaks

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