Tensions Flare in Russia-Belarus Pipeline Talks

Seeking Leverage to Stave Off New Tax, Minsk Threatens to Cut Kaliningrad's Power; Moscow Reassures Europe Over Deliveries

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By WILLIAM MAULDIN and RICHARD BOUDREAUX

MOSCOW -- Belarus escalated an energy price dispute with Russia on Monday, raising concerns about midwinter disruptions in the flow through a pipeline system that supplies about 10% of the European Union's oil.

The dispute focuses on the Soviet-era Druzhba system, the main route for Siberian petroleum to Europe. Russia began curbing supplies through the pipeline to Belarus's domestic market after a pricing deal between the two countries expired Dec. 31.

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Associated Press

Premier Vladimir Putin, second from the right, visits the central control unit of Russia's power system in Moscow on Monday as an energy-price dispute between Russia and Belarus escalated.

On Monday, Russian officials said those deliveries had been resumed, but not before Belarus threatened to cut off electricity to Russia's westernmost region if the Russians insisted on imposing a new tax on the oil Belarus processes for export.

Russia's top energy official, Igor Sechin, said European customers were unaffected by the dispute and that Russian crude was flowing normally through the pipeline. But he emphasized that Russia and Belarus had yet to clinch an agreement.

Three years ago, Russia briefly cut oil exports to Europe through a Belarussian pipeline as the two countries quarreled over price. That, along with a January 2009 natural-gas cutoff to Europe caused by disputes with Ukraine, raised doubts in Europe about Russia's dependability as a top energy supplier.

The oil dispute poses less of a threat to European countries, which have stockpiles in place and options, such as sea shipments, for receiving new crude.

But Russia's new position could prove costly for Belarus, a former Soviet republic that has counted Moscow as its top ally.

The majority of the Druzhba pipeline's crude -- about 37 million tons annually -- goes through Belarus to refineries in Poland and eastern Germany, which depend on the pipeline for nearly all of their crude. Belarus keeps and refines an additional 21.5 million tons of crude for itself and European customers, according to Cambridge Energy Research Associates.

Until now, Moscow has taxed Belarus at about one-third its rate for international customers for the crude Belarus refines domestically. Belarus has used about eight million tons of the refined oil domestically each year and exported the rest at a hefty profit.

Now Russia is demanding that Belarus pay full customs duties on the refined oil it doesn't consume domestically, in line with a broader policy of bringing market pricing for its energy supplies. The new tax could cost Belarus an estimated $5 billion this year, more than 10% of its gross domestic product, Belarussian experts told the Associated Press.

On Monday, Belarus upped the ante by threatening to interrupt electricity transfers to Russia's Kaliningrad region, a Baltic Sea enclave sandwiched between Poland and Lithuania. A statement issued by Belarus's Belenergo energy company said the two countries lacked an agreement governing those transfers in 2010.

A spokesman for Inter RAO UES, the Russian operator of power exports and imports, said Belarus was trying to "blackmail Russia through the media."

Relations between the former Soviet neighbors have been increasingly strained by financial disputes. Belarussian President Alexander Lukashenko has accused Russia of bullying his country of 10 million people and trying to acquire some key industrial assets.

Belarus has limited leverage to confront Moscow over Druzhba, which means friendship. Russia is building a second phase of the Baltic Pipeline System, scheduled to be completed in 2012, which would route oil around Belarus to Europe via the Baltic Sea.

"This is Belarus's last opportunity to strike a bargain before that pipeline gets completed," says Matthew Sagers, a Eurasia specialist at Cambridge Energy. "But Russia holds all the cards."

Oil prices rose Monday to $81 a barrel, the highest in more than two months, partly because of the Russia-Belarus dispute.

Write to William Mauldin at william.mauldin@dowjones.com