Belarusian Economic Research and Outreach Center

Russian Oil Blackout - Digest Of Belarus Economy

On 14 September 2016 First Deputy Prime Minister of Belarus Vladimir Semashka announced that negotiations on oil and gas relations between the Belarusian authorities and Russia's main economic players had failed.

Meanwhile, the oil crisis has cast further uncertainty on how long Belarus' economic recession will continue and whether the execution of the state budget for 2017 will be successful.

The only way left for the government to rectify the economic situation is to hope for help from the IMF, which started its mission on 19 September 2016.

Refinery industry: forget the oil

The Belarusian authorities had planned to resolve their problems with Russia in the energy sector on 13-14 September 2016, but negotiations between the governments failed to yield results.

According to the 2011 Belarusian-Russian intergovernmental agreement, the gas contract price for Belarus is pegged to the tariff payable by Russian consumers with the addition of transportation and storage costs, equivalent to $132 for 1,000 cubic meters.

The Belarusian authorities consider a fair charge for Russian gas to be $73, calculated as the cost of gas on the German market minus transportation costs and export duty of 30 per cent.

However, the Russians are insisting that the already signed energy contract is valid for the 2015-2016 period, which includes a predetermined price formula. Thus, there is no possibility that the contract price can be changed. The establishing of equal gas prices will only be possible by the end of 2025 after creating a common gas market within the Eurasian Economic Union.

Meanwhile, the total amount of Belarusian debt for gas supplies has already reached $300m. As a result, on 16 September 2016 Russian Deputy Prime Minister Arkady Dvorkovich announced that the supply of crude oil to Belarus would be reduced by 5m tonnes (or 25 per cent of total supplies) in the second half of the year (see Figure 1).

However, the intergovernmental agreement between Belarus and Russia in the energy sector signed on 29 May 2014 clearly states that Russia has no right to restrict the supply of oil. The document specifies that for each calendar year the parties will jointly develop and approve the volume of oil and petroleum products supplied.

There is provision to vary supply volumes, but not by more than 2 per cent. Therefore, the total variation in oil supply may not exceed about 480 tonnes for the whole year, far from the 5m tonnes threatened by Russia.

Economic growth: diminishing expectations

Initially, the Belarusian authorities forecasted 0.3 per cent economic growth in 2016, but later amended their predictions to a decline in GDP of 2 per cent. However, this year the refining of oil is set to be one of the core brakes on the economy. If the supply of the so-called "black gold" does not double, economic growth in the next year would seem miraculous.

The official forecast for 2017 assumes that Belarus will obtain 24m tonnes of oil. As a result, the recession would end and GDP growth would amount to not less than 0.2 per cent (assuming the average world oil price of $35 per barrel) or 1.5 per cent (assuming an oil price of $45).

However, the official economic plans for the next year do not account for a decline in the volume of Russian oil supplies to the country. On 23 September 2016 Prime Minister of Belarus Andrei Kobyakov announced that the total losses from oil shortages to Belarus's economy had already accounted for 0.3 per cent of GDP.

The latest Belstat data shows that the GDP of Belarus in January-August decreased by 3 per cent on the previous year and had outperformed the January-June GDP data by 0.5 per cent (see Figure 2).

There are other core factors which affect the government's macroeconomic predictions. One of these is investment activity. This year it has been highly unstable. Even agriculture is slowing down. Due to decreasing prices on the Russian market Belarus is unable to benefit from increasing volumes of trade (see Figure 2).

Budget policy: debt manoeuvres

However, another important factor in the oil drought is a decreasing level of income within the Belarusian budget.

In 2016 the government planned to use more than $1.1bn in revenues from export duties on petroleum products and oil to repay foreign debts. In the first half of the year because of lower oil prices and supply cuts from Russia, Belarus received only about $390m or just one-third of the money it had anticipated.

Meanwhile, the core project of the 2017 budget will involve making payments on external debt and arranging its refinancing. In particular, fees from the sale of petroleum products will go directly towards the repayment of foreign debts. The price of oil has fallen and the country does not have enough money to settle with its main creditors, namely Russia and the Eurasian Fund for Stabilisation and Development (EFSR).

Even if the price of oil does exceed $35 and Belarus receives a new tranche of the $700m loan from the EFSR, it will not help to repay the external debt of $3.2bn in 2017. The budget is still short of $1bn.

Therefore, taking into account all the possible social and economic risks, Belarus urgently needs new credit from the IMF. Belarus has been trying to test the waters during negotiations with the international organisation between 19-30 September 2016. Moreover, the decision from the IMF is being eagerly awaited by the end of the year by the authorities, who hope to receive several tranches as early as 2017.

In conclusion, the longer the Belarusian authorities wait for the introduction of painful structural reforms, the worse the economic situation in the country will become. The time will come when neither financial aid from the West, nor dwindling oil streams from the East will be sufficient to help to revive the crumbling economy.

Original article in BelarusDigest