Russia in Review: Belarus Update: Lukashenko Uses Oil Tariffs to Delay Integration with Russia

Russia in Review is a weekly intelligence summary (INTSUM) produced by the Institute for the Study of War (ISW). This ISW INTSUM series sheds light on key trends and developments related to the Russian government’s objectives and its efforts to secure them. Receive future Russia in Review INTSUM products via-email by signing up for the ISW mailing list.

Key Takeaway: Belarusian President Alexander Lukashenko is using energy policy in his latest efforts to resist growing Russian pressure to integrate into Russia-dominated structures. Lukashenko’s efforts to diversify Belarusian oil imports will likely provide him with sufficient leverage to secure higher payments from Russia on Russian oil transiting Belarus. However, Lukashenko lacks leverage on the issue of Russian gas subsidies to Belarus. Lukashenko will not, in the long run, be able to prevent further integration with Russia. However, through selective resistance with Western support, Lukashenko may be able to shape the nature of the Union State relationship to limit Russian President Vladimir Putin’s growing control over Belarus.

The Kremlin’s campaign achieve greater control over Belarus slowed in 2019 but has not stopped. In 1999, Belarus and Russia formed the Union State – a supranational agreement with the stated goal of the federal integration of the two states under a joint structure. The Kremlin intensified its political and economic pressure campaign to integrate Belarus through the Union State structure throughout 2019. [1] Lukashenko stepped up his balancing act in response – resisting Russian pressure while maintaining a strategic relationship with the Kremlin. Lukashenko successfully slowed the Russian campaign by the end of 2019. Putin left December 7 negotiations with Lukashenko without a joint press conference and without a Union State roadmap – a key Kremlin objective for 2019. [2] The Kremlin still intends to integrate Belarus.

Lukashenko’s leverage is limited, but he is attempting to use energy policy to counter the Kremlin’s pressure for greater integration. Lukashenko stated that unequal energy relations are his main problem with Russian demands prior to the December 7 meeting.[3] Lukashenko is currently countering Russia’s pressure on two major energy issues – Russian oil transit and Russian gas supply to Belarus. Lukashenko is likely using his limited advantage in the oil trade to resist Russian pressure on gas. Belarus derives income from tariffs on Russian crude oil transit through two Belarusian oil refineries, purchasing crude oil from Russia before selling the refined product to European consumers. Lukashenko holds slight leverage in oil politics through the threat of increasing tariffs and pursuing alternative suppliers of oil. In contrast to oil, which is a source of income for Belarus, Belarus is reliant on cheap Russian gas for its domestic use. Lukashenko has little leverage in his ongoing effort to retain low prices for Russian gas.

Lukashenko is attempting to make Russia pay a higher tariff rate on oil transit but is weakened by a reliance on Russian shipments. In 2019, Belarus demanded Russia pay a tariff increase of 16.6 percent starting in 2020.[4] Belarus argued even such increase would be a concession, as a 21-percent increase would be necessary to cover damage to Belarusian oil refineries caused by contaminated oil Russia shipped to Belarus earlier in 2019.[5] Russian state-owned oil company Transneft refused the increased tariff on December 17.[6] Russia’s Federal Antimonopoly Service stated Russia only forecasted a 3-6.8-percent increase in Belarusian tariffs for 2020. Negotiations stalled, and Russia halted all oil supplies to Belarus on January 1.[7] Belarus agreed January 4 to a reduced amount of Russian oil imports – 133,000 tons, roughly 9 percent of the average monthly shipment in 2019 – at current tariff rates for the month of January while negotiations continue.[8]

Lukashenko is using alternative oil sources to resist the Kremlin’s pressure. Lukashenko quickly adapted to the Russian shutoff by pursuing diversified oil imports. Belarusian state oil company Belneftkim reportedly began holding near-daily talks with potential oil suppliers, including Ukraine, Poland, the Baltic States, Kazakhstan, and Azerbaijan, on January 14.[9] Lukashenko said January 24 that Belarus will attempt to import American, Saudi, and Emirati oil to keep its refineries running.[10] Belneftkim stated Belarusian refineries have run on minimum loads in 2020 due to Russian cutoffs and required substitutions to remain functional. 

Belarus purchased 80,000 tons of crude oil – roughly equivalent to 6 percent of the pre-2020 monthly shipments to Belarus from Russia – from Norway on January 21. Norway will deliver the oil over two weeks beginning January 26.[11] Belarus also agreed to purchase an additional shipment from Kazakhstan, which Russia blocked on January 21. [12] Lukashenko denounced Russia for blocking oil deliveries between two of its own allies in response. Lukashenko continues to take escalating actions aimed at squeezing concessions from Russia. Lukashenko raised tariffs to 6 percent on February 1 to “adjust for inflation” despite ongoing negotiations with Russia and the apparent stability of the Belarusian ruble.[13]

Lukashenko is trying to resist the Kremlin’s efforts to use gas prices as a tool to pressure Belarus into integration with Russia. Belarus is fully dependent on Russia for gas. Lukashenko is trying to keep prices at their 2019 levels, which Russia frames as a subsidized price but Belarus frames as a fair market price. Russia openly uses gas prices as leverage to influence Belarus. The Kremlin links continuing gas subsidies to Belarusian concessions on integration, claiming it would be a “mistake” to retain low gas prices to Belarus for 2020 prior to a concrete Union State roadmap.[14] Lukashenko and Putin negotiated the prices of Russian gas subsidies to Belarus throughout December 2019. Belarus and Russia reached a last-minute deal on December 31 to freeze gas prices at 2019 levels for January and February 2020 pending further negotiations.[15] Lukashenko took an opposing stance on January 9, accusing Russia of price gouging and stating Belarus will not sign a deal to purchase gas without continued lower pricing.[16] Belarusian officials stated on January 16 that Belarus and Russia would resume talks on gas pricing by the end of January; it is unclear if these talks have occurred.[17]

Despite the conflict over energy, Lukashenko continues cooperate with Russian integration in other sectors and prioritize friendly ties with Russia. Lukashenko explicitly expressed his dissatisfaction with Russian policies on oil and gas on January 9 but emphasized that he seeks fair energy relations, not ending ties.[18] Lukashenko continued to describe Russia as “brotherly Russia” in January 2020 despite his strong criticism of Russian energy pressure. Lukashenko has focused his resistance on the energy sector while assenting to other Russian integration demands.[19] It is unclear if Lukashenko intends to broaden his resistance to Russian integration efforts to include other sectors.

The Kremlin will likely successfully pressure Belarus into accepting increased gas prices or further Union State integration in ongoing negotiations, but Lukashenko might be able to slow and shape the process. Lukashenko has conducted a delicate balancing act between Russia and the West for decades. His ability to resist Russian pressure will rely on his ability to bundle various issues to dilute Russia’s leverage, keep Putin on the defensive in the information space, and get Western support on key issues, such as diversifying Belarus’s oil supplies. US Secretary of State Mike Pompeo met with Lukashenko on February 1 and stated that American energy producers are ready to sell oil to Belarus. Pompeo also dispelled rumors that Belarus might be added to the administration’s travel ban. This meeting, and Pompeo’s statements, will likely empower Lukashenko to resist Russian pressure.[20] Belarus will be unable to fully replace Russian supplies, but will likely be able to replace the minimum requirements to keep Belarusian refineries open during continued negotiations with Russia, allowing for leverage in tariff negotiations. Greater American and European supplies to Belarus during the negotiation process will strengthen his hand against Putin. However, Lukashenko has little leverage on gas subsidies, particularly following Russian successes in opening new avenues of gas transit in Ukraine and the ongoing NordStream and TurkStream projects in the Baltic and Turkey, respectively.[21]

Lukashenko likely understands he cannot wholly resist Russian integration, and will attempt to use sectors in which he has leverage, such as oil, to shape the Union State roadmap by stalling negotiations to attain limited Russian concessions. A Kremlin victory by increasing control over the Belarusian economy would further empower Putin, freeing up economic resources currently going to Belarus for other malign actions, and further the Kremlin’s goal of dominating the post-Soviet space. The West should support Lukashenko diplomatically and by providing oil import substitutions to protect Belarusian sovereignty and reduce the likelihood of an empowered Kremlin dominating Belarus.