Friends Disunited - Belarus and Russia Scrap over Oil

Guy Norton in London

After 2009's gas war with Ukraine, Russia began 2010 with the opening of a new front in its energy disputes with ex-Soviet states.

At the start of the year, the Kremlin cut off oil supplies to Belarus via the ironically named Druzhba (Friendship) pipeline in a spat over prices and transit fees. In retaliation, Belarusian President Alyaksandr Lukashenka threatened to order Belarusian power company Belenerha to cut off electricity to the Russian enclave of Kaliningrad. The Druzhba pipeline not only supplies Belarus, but also accounts for 75% of Poland's oil needs and 15% of Germany's. So far, deliveries to both those countries have not been affected as Belarus has had enough oil stockpiled at its two main refineries, Naftan und Mosyr. The dispute, which was still rumbling on by mid-January helped to push oil prices to a two-month high of $81. A similar conflict at the start of 2007 caused a sharp fall in deliveries to Poland and Germany via the Druszba Pipeline.

The dispute has also cast a shadow over the planned expansion of a southern spur of the Druzhba pipeline by Austrian oil and gas company OMV and Slovak pipeline operator Transpetrol. At present, the spur ends at the Slovakian capital Bratislava, but two months ago OMV and Transpetrol announced plans to build an extension by 2012 that will link up with the Schwechat refinery in Austria. At present, Austria receives all its oil via the TransAlpine pipeline that runs from the Italian port of Trieste.

To tax or not to tax

While Ukraine is the main conduit for Russian gas exports to Western Europe, Belarus plays the same role for oil deliveries, importing around 400,000 barrels of oil a day (b/d), the vast majority of which it then exports on to Central and Western Europe in either crude or refined form. In 2009, Russian oil production reached a new record high of 9.925m b/d, overtaking Saudi Arabia as the world's biggest oil producer.

At the heart of the dispute is the fact that Russia wants Belarus to pay a market price for the oil it receives, the vast bulk of which it exports further west at a profit. For its part, Belarus is demanding a 10-fold increase in transit fees to $45 per tonne. Coincidently - or maybe not - Russian companies such as Rosneft are seen as the likeliest buyers of Naftan, Belarus' main refinery. As part of the privatization of Naftan, Belarus is seeking at least $1.6bn to connect Naftan with one of the Baltic states.

In mid-December, relations between Russia and Belarus looked far warmer when the two governments signed a treaty on further political and economic integration. At the same time, Russia's biggest lender Sberbank bought the number four banking player in Belarus, Belpromstroibank (BPS-Bank), for around $295m. Furthermore in the period 2010-2014 Sberbank committed to increasing BPS-Bank's equity base by $300m-350m as well as agreeing to arrange a further $2bn in supplementary financing. "We're investing a huge amount in the Belarusian economy and see the potential for it to develop and our business to grow," said German Gref, Sberbank's chief executive.

Sberbank has also said it will help Belarus access the international bond markets. Finance Minister Andrey Kharkavets says that Belarus is planning to launch a debut Eurobond in the second quarter, market conditions permitting. "There would certainly be investor demand for a sovereign bond from Belarus," says Jan Mutsaers, managing director, debt capital markets at ING in London.

Meanwhile, in the latest sign that the Belarusian government's economic reforms are attracting growing attention, investment bank Renaissance Capital (RenCap) has opened a representative office in Minsk. The office is headed by Sergey Levin, who joins RenCap from Belarusian private equity firm Lebortovo Capital Partners. RenCap intends to offer a full range investment banking services in Belarus and is looking to promote Belarus as an up-and-coming destination to foreign portfolio and strategic investors. "Belarus is a promising market and it is a natural fit with the other regional markets in which Renaissance Capital operates," says Peter Vanhecke, chief executive of RenCap's Central and Eastern European operations, adding that RenCap is looking to further expand its network in the region in the near future. RenCap joins BG Capital, the investment banking arm of Bank of Georgia, which set up shop in November 2008 and now claims to have secured around a 33% share of secondary market trading on the Belarusian Currency and Stock Exchange.

Commenting on RenCap's entry to Belarus, Aleh Gud, regional director for BG Capital in Minsk says: "Given the utter lack of international competition on the local Belarusian market, there is no reason for us to think there is no room for two or more players. I think it is only inevitable that more investment banks will enter the market as it grows and economic reforms continue."