Russia-Belarus energy dispute Totally Explained

The Russia-Belarus energy dispute began when Russian state-owned gas supplier Gazprom demanded an increase in gas prices paid by Belarus, a country which has been closely allied with Moscow and forms a loose union state with Russia. It escalated on January 8, 2007, when the Russian state-owned pipeline company Transneft stopped pumping oil into the Druzhba pipeline which runs through Belarus because Belarus was siphoning the oil off the pipe without mutual agreement.
On January 10, Transneft resumed oil exports through the pipeline after Belarus ended the tariff that sparked the shutdown, despite differing messages from the parties on the state of negotiations.
The Druzhba pipeline, the world's longest, supplies around 20% of Germany's oil. It also supplies oil to Poland, Ukraine, Slovakia, the Czech Republic, and Hungary.

Background

For the long period, the gas price for the most of former USSR republics was significantly lower than for the Western European countries. In 2006 Belarus paid only $46 per 1000 m³, a fraction compared to $290 per 1000 m³ paid by Germany. The annual Russian subsidies to the Belarusian economy were around $4 billion, as Russian president Vladimir Putin said on January 9, 2007. In 2006 Russia announced a higher price for 2007. After Alexander Lukashenko, President of Belarus, rejected this price change, and without a new treaty, Gazprom threatened to cut gas supplies to Belarus from 10:00 MSK on January 1, 2007. Both sides finally agreed on the following terms:

Russian gas to be sold to Belarus for $100 per 1000 m³ (compared to Gazprom's original request of $200 per 1000 m³)
Belarus to sell Gazprom 50% of its national gas supplier Beltransgaz for the maximal price of $2.5 billion
Gas prices for Belarus to gradually rise to the European market price by 2011
Belarus's transit fees for Russian gas to increase by around 70%

Another part of the energy dispute is the dispute for oil. In 1995, Russia and Belarus agreed that Russia wouldn't impose any customs on oil exported to Belarus. In exchange, the revenues from this oil processed in Belarus would be shared by 15% for Belarus and 85% for Russia. In 2001, Belarus unilaterally canceled this agreement while Russia continued its duty-free exports. Lukashenko's state kept all the revenues, and many Russian oil companies moved their processing capacities to Belarus. On this arrangement, Russia also lost billions of dollars annually. On December 18, 2006, Russia put an end to this practice, announcing a standard $180 per ton toll on Russian export oil to Belarus. In response, Belarus imposed a tariff of US$45 per ton of oil flowing through the Druzhba pipeline, prompting Russia to claim that the move was illegal and to threaten retaliation, since it contradicts bilateral trade agreements and worldwide practice. Only imported or exported goods are being tariffed while transit goods are not objects of tariffing. Russia rejected paying the newly imposed Belarusian tariffs.
   In compensation, Belarus began siphoning off oil from the pipeline. In response, Russia stopped oil transport on January 8.
   A Belarusian team led by Vice-Premier Andrei Kobyakov flew to Moscow on 9 January to pursue a solution but initially reported that they hadn't been able to start negotiations.
   On January 10, the Belarusian government lifted the tariff, and Russia agreed to start negotiations. The oil flow was resumed at 05:30 GMT on January 11. In the wake of the dispute, Gazprom acquired 50% stake in the Belarusian gas pipeline operator Beltransgaz for 2.5 Billion USD.

August 2007 developments

Following the alleged violation of previous agreements and the failure of negotiations, on August 1, 2007 Gazprom announced that it would cut gas supplies to Belarus by 45% from August 3 over a $456 million debt. Talks are continuing and Belarus has asked for more time to pay. Although the revived dispute isn't expected to hit supplies to Europe, the European Commission is said to view the situation 'very seriously'.
As of August 8th Belarus has fully paid its $460 million debt for Russian natural gas supplies, ending a dispute between the country and Gazprom [RTS:GAZP].

Related disputes

The situation is reminiscent of other recent price tensions between Russia, one of the world's energy superpowers, and other states since the start of 2005. These have resulted in increases in the prices paid for gas by Moldova (now paying US$170 per 1,000 cubic meter), Georgia (US$235 per 1,000 cubic meter) and Ukraine (following the 2006 Russia-Ukraine gas dispute, which also resulted in a 4 day cut to European gas supplies).

Impact

All IEA member countries, who are net oil importers, have legal obligation to hold emergency oil reserves, which is equivalent to at least 90 days of net oil imports of the previous year. Furthermore, under the EU regulations there's obligation to hold reserves equivalent to 90 days of consumption, so unlike the gas dispute with Ukraine in 2006, consumers were not affected. Poland had an 80-day oil reserve. Had the dispute prolonged, it's likely that alternative supplies would have been secured. International oil prices were not significantly affected.
The involved countries have, however, expressed concerns about the reliability of the Russia-Belarus oil pipeline and Belarus as an oil middleman supplier.
The events have also provoked renewed discussion on the government policy of phasing out nuclear power in Germany.

Reaction

The European Union has demanded an "urgent and detailed" explanation, according to a spokesman for Energy Commissioner Andris Piebalgs.
Following a meeting with European Commission President José Manuel Barroso in Berlin, German Chancellor Angela Merkel condemned the action, stating "It isn't acceptable when there are no consultations about such actions". Commenting on the importance of trust in energy security, she said "That always destroys trust and no trusting, undisturbed cooperation can be built on that." Merkel continued by saying "We will certainly say to our Russian partners but also to Belarus that such consultations are the minimum when there are problems, and I think that that must become normality, as it would be within the European Union." Barroso said that "while there's no immediate risk to supplies, it isn't acceptable" for such actions to be undertaken without prior consultation.

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