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Belarus warns of suspending Russian oil transit to Europe over economic dispute

Highlights

Druzhba pumps over 1 milllion b/d of oil to Europe

Threat seen as part of multi-factor negotiation process

Moscow — Belarus threatened Thursday to suspend transit of Russian crude to Europe via the Druzhba Pipeline in an attempt to pressure Moscow amid deepening economic disagreements between the neighbors.

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Russia exports more than 1 million b/d of crude to Europe through Druzhba, including to Germany, Poland, the Czech Republic, Slovakia and Hungary.

"If you need to repair the oil pipelines and oil pipelines that go through Belarus, suspend [the flows] and repair it," Belarus President Alexander Lukashenko said during a government meeting, as reported by Belarus' BelTa new service. "They have become arrogant to such an extent that they begin to twist our arms," Lukashenko said, referring to Russia.

His comments came after Russia earlier this week banned the import of some fruits and agricultural goods from Belarus, citing violations of its sanctions-related regulation and veterinary and sanitary standards.

Belarusian specialists are currently studying what parts of the old oil pipeline, which has been operating for 50 years, should be closed for maintenance, said Igor Petrishenko, Belarus' deputy prime minister, BelTa reported. It is too early to speak how long, or when, the maintenance can take as the engineers have yet to finalize the work, he said.

If the pipeline is closed, Russia would be able to redirect some of the crude volumes through its ports on the Black and Baltic seas, but would not be able to compensate for the full halt.

Russian oil pipeline operator Transneft declined to comment on potential solutions if the situation will be developing.

The Kremlin, meanwhile, admitted that there are a number of commercial issues in the bilateral cooperation that have yet to be resolved, said presidential spokesman Dmitry Peskov.

Russia understands Lukashenko's concerns, but favors a calmer conversation between the two countries, he said, as reported by local media.

Lukashenko's comments came as Belarus was considering a whole range of issues related to the planned integration of the economics of it and Russia within the single economic zone of Eurasia Economic Union, which also unites Kazakhstan and a number of other former Soviet republics.

OUTSTANDING ISSUES

In anticipation of the integration, Russia has reconsidered its oil taxation system to reduce subsidies it currently provides to Minsk, in particular via deliveries of tax-free crude to Belarus' three refineries. Russia supplies over 360,000 b/d of crude to Belarus, with Minsk nearly fully depending on those supplies.

Under an intergovernmental agreement, those deliveries are export duty-free, making them lucrative for Belarus but economically unattractive for Russia. Russian officials earlier estimated the deliveries cost around $5 billion/year to the Russian budget.

To reduce the burden, Russia has decided to gradually cancel its export duty for crude and oil products by 2025, when the Eurasian single energy market would ensure their boundary-free movement. The move would increase the cost of crude for both Russian and Belarus refineries as domestic oil prices are linked to export netbacks - international oil prices minus export-related taxes and transportation cost. Russia plans to partially compensate the losses for its refineries via excise refunds and other mechanisms it started introducing since January.

But questions remain over what tools Belarus can use to mitigate the negative impact of the move for its own refineries.

Among other unresolved issues are natural gas prices, as Minsk wants to obtain supplies at Russian domestic prices, and agricultural and food supplies from Belarus to Russia.

-- Nadia Rodova, nadia.rodova@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com