Belarusian Solvents: A Tricky Way To Economic Growth

Despite the proclaimed common Russia-Belarus way to prosperity within the Customs Union, neither country is ready to sacrifice individual economic interests to this cooperation.

On 24 July Russia stopped railway deliveries of straight-run gasoline – the main raw material for solvents’ production – to Belarus. That became the culmination of this summer’s solvents conflict. The measure is timely, but is likely to result in considerable deterioration of Belarusian economy’s performance.

During the first five months of 2012 Belarusian trade and services surplus amounted to USD 3 bln, compared to the yearly forecast of USD 1-1.5 bln. For Belarus, which suffered greatly from insufficiency of foreign trade last year, these results were a real success. The joy has, however, had to fade away because of quite unexpected revelations.

The pleasant figures resulted from Belarus evasion of its obligations under Russia-Belarus oil agreements. Belarus started to export oil products under the label of solvents ‒ liquids used for dissolving other substances, manufactured with use of straight-right gasoline, but not classified as oil products. That meant Belarus’ economic growth is achieved at Russia’s expense.

Solvents were among most widely exported Belarusian products for a long time, but this year the growth rate of their export became almost unbelievable. The increase in export of solvents during January – April, 2012 compared to January – April, 2011 made USD 1,472 mln. The cost of their export to the countries outside the Customs Union during January – May, 2012 amounted to USD 2,180 mln. In the Belarusian export structure their export’s share amounted up to 10,4%.

Rise of the Conflict

The rise of solvents’ export attracted attention of Russian authorities already in spring of 2012, and the suspicions that Belarus exports oil products under the solvents’ label started to extend. On the official level there was no place for such concerns until June 6, when Russia’s ambassador to Belarus Aleksandr Surikov noted that “Belarusian import of Russian oil products increased several times, including in four times during 2012”. He also added that “Belarus imports more than it needs for internal consumption” and that “in the Customs Union reporting solvents and thinners, being not subject to duties, have appeared”.

The Head of the State Customs Committee of Belarus shortly assured that all oil products’ deliveries are legal, but this did not satisfy Russia. On 15 June, Dmitry Medvedev instructed the authorised Russian state bodies to analyse the situation with the solvents. The investigation resulted in declaration of the Russian Deputy Minister of Finance that Belarusian solvents may serve as “a cloak for export of oil products”.

However, there has been no single direct evidence of such violations yet.

Oil Agreements

During the period of the Customs Union’s creation, the two countries agreed that Belarus would be entitled to import Russian oil on a duty-free basis, but also undertook to transfer to the Russian budget the whole amount of export duties on “crude oil and certain categories of products produced from oil (“oil products”)” exported from its territory to third countries.  Export duties from extraction of its own oil (estimated 1.7 mln tones a year) pass to the Belarusian budget.

The agreement aimed at settlement of the long-lasting oil wars of 2010 between the two countries. And until now, it coped with this role. Russia delivered oil to Belarus without any duties’ requirement. Belarus, in compliance with its international obligations, transferred to the Russian budget USD 3.07 bln of export duties on oil products exported to third countries in 2011. In January-April 2012 the amount was USD 1472.6 mln. The business seemed to be mutually beneficial.

The solvents never were within the scope of the agreement’s scope before, since they do not classify as oil products. Accordingly, Belarus has not transferred to Russia export duties on solvents. At the same time, if Belarus actually exports oil products under the solvents’ label, it turns out to be guilty of evading its obligation to pay the export duty on them to Russia and threatening the fragile oil truce.

Economic and Political Interests

GDP growth of Belarus may decrease by 50%

Amounts of money at stake aggravate the situation. The alleged losses of Russian budget from the illegal export of solvents amount up to USD 1 bln. According to Belarusian economic analyst Yaraslau Ramanchuk, if the same rules as those established for oil products apply to export of solvents, GDP growth of Belarus may decrease by 50%. But for these figures, the countries would probably avoid revelation of this type of troubles to preserve the image of successful Belarus-Russia cooperation.

The political factors, however, can also play a negative role: the truth about this whole situation may never come to the surface. However widely announced were the discussions of the solvents’ problem prime ministers of the two countries, all we know is that the two states agreed to examine the case and to right a wrong. Though the top-level meetings took place more than two weeks ago, their findings have not been published.

There, of course, may be one more reason for this silence. If Russia’s allegations are justified, the question of who is guilty is going to arise. And the answers may be unpleasant. Belarus has two major solvents’ exporters, one of which is Triple, famous for its owner's very close relations with Alexander Lukashenka.

Could the solvents be illegally exported in such great amounts without participation of Triple and could the head of Triple act without authorization from higher-ups? Belarus analysts also claim it is a rhetorical question whether Belarus could implement the alleged scheme without Russian oil oligarchs’ participation.

Belarusian Digest