NY Dispatches: Pompeo in Belarus

Last week US Secretary of State Mike Pompeo visited Minsk amidst an ongoing dispute between Belarus and Russia over the price of oil following the “tax maneuver”, a revamp of Russia’s system of taxing oil extraction and exports, which Belarusian president Alexander Lukashenko says will leave his country significantly worse off. Pompeo’s visit, while significant, was more a carefully choreographed political spectacle than anything else. Belarus’s way out of dependence on Russian oil will require take more time and determination.  Nevertheless, the Belarusian president certainly has plans and may have discovered something important about the conditions, in which he has to implement them.

Pompeo’s visit brought some colorful moments. “It’s a dictatorship, in which everyone rests on a Saturday but I work,” said Lukashenko, delivering one of his trademark zingers. The two politicians were also overheard making jokes about journalists. The promises made at the meeting were no less colorful: Pompeo, in an apparent jab at Russia, proposed supplying oil to Belarus to fulfil 100% of the country’s needs. There were talks about increased American investment into Belarus’s high-tech industry. The United States, whose ambassador Lukashenko forced out ten years ago amidst US sanctions on Belarus, appointed a new ambassador, Julie Fisher. Pompeo did not meet opposition leaders, choosing instead to visit Belarus’s High-Tech Park.

Even before Pompeo’s visit emotions were running high. Following a month of heated disputes about the price of oil that ended with Russia restricting the volume it ships to Belarus, Lukashenko claimed that Russia’s hydrocarbon shipments “brought cancer to Belarus”. According to Belsat, a TV channel, support for an alliance with Russia dropped from 60 to 40% in 2019. Almost 75% of Belarusians would choose to live in an independent country as opposed to 15% who would rather form a union with Russia, be it a Union State or an expanded Russian Federation. This is a development that Lukashenko has consciously and methodically supported over recent years.

Most likely both Lukashenko’s grandstanding and Pompeo’s gestures are more optics than substance – but optics matter.

Many have argued that annexing or otherwise integrating Belarus could offer a solution to Putin’s “2024 problem”: he could, so the argument goes, stay in power as the president of a new state even as the term limit enshrined in the Russian constitution denies him a fifth term as Russian president after 2024. I have long argued that this would be both significantly more complicated and costlier than any other alternative that Putin has at his disposal. The constitutional amendments announced by Putin in January, while they did not answer every question about 2024 (if possible, they created a range of new ones), probably put these speculations to rest.

But this does not mean that a tighter Russia-Belarus union is – or ever has been – off the table. Moscow’s strategic goal of integrating as many layers of the Belarusian state as possible into Russia’s political, economic and security structures is independent of Putin’s 2024 plans. Attempts to force the Belarusian head of state into obedience are unlikely to cease. This is why it is important for Lukashenko to stress, at every opportunity, that he has options.

Belarus has two major oil refineries: the Naftan refinery in the town of Novopolatsk in northern Belarus and the southern Mozyr refinery. Together these plants are responsible for about 25% of Belarus’s total export income. Up until 2014-15 their business model was simple: they received cheap oil from Russia, with which Belarus shares a customs union, via the Druzhba pipeline, refined it and exported most of the oil products for a hefty profit. Once oil prices fell, however, this arrangement became unsustainable. Wages in Belarus’s refineries fell. Energy feuds between the two countries became commonplace. In 2017 the Belarusian government announced a costly upgrade of the two refineries, apparently in a bid to enable them to process oil other than Russia’s Urals blend – but the upgrades are progressing slowly, especially as Belarus’s economic growth is grinding to a halt.

The refineries planned to receive about 50,000 tonnes of oil per day this year. Presently, they receive only a fraction of this: the business group of Mikhail Gutseriev, a Russian businessman who has interests in Belarus’s lucrative potash sector, ships them a mere 13,000 to 21,000 per day. Moreover, there is no guarantee that these shipments can continue in the longer term if Moscow reins in on Gutseriev. For the same reason shipping oil from Kazakhstan, while it is being discussed, is probably not a viable option.

The Belarusian government has tried to find further alternatives. It might seem that the cheapest and easiest of these would be purchasing oil from Poland via the same Druzhba pipeline that carries Russian oil to Europe. However, reversing the oil flow is currently impossible. Pompeo’s offer to meet 100% of Belarus’s needs would not only be an expensive business – shipping costs would probably result in a price difference of at least $4-5 per barrel, perhaps even more, which would put further squeeze on Belarus’s cash-starved refineries. Then there are technological issues: in order for the refineries to be able to process American oil, either further costly upgrades are necessary or Belarus would have to mix the American oil with Urals blend or similar. In short, the idea of buying oil exclusively from the US is an excellent way to annoy the Russian government, but costly and difficult to carry out in practice.

With Norwegian oil, Belarus went a little further: 80,000 tons (which Naftan gets through in about three days) were shipped to the refinery via the port of Klaipeda in Lithuania and a railway connection from Norway’s Johan Sverdrup field in a demonstrative purchase. This oil is similar to the Urals blend in quality, but – just like American oil – it is significantly more expensive, by about 20 dollars per ton (about $2.7 per barrel). This is another painful alternative.

Belarus cannot easily afford to buy oil at a more expensive price: it faces tough competition in the European and Ukrainian markets, to which it primarily exports. The Ukrainian market is especially fraught, with Russia frowning upon Belarus’s attempts to fill the voids on a market that is slipping away from Russia. In April last year Belarus had to curb its output and export of refined oil products to Ukraine for several weeks after it received contaminated oil from Russia, which damaged its standing on the Ukrainian market.

But the Russian government also knows that Belarus, if all else fails, can hold Russian oil deliveries to the EU to ransom: Europe receives about 10% of its oil via the Druzhba pipeline and while Russia may be able to export oil via rail and ports, it is highly questionable whether these hubs have the capacity to replace Druzhba. In any case, these alternative shipping methods would be significantly pricier, weakening Russia’s position on these markets. Of course, Belarus would also suffer reputational damage, just as Ukraine did in the gas wars of the 00s. But such a situation can be interpreted in multiple ways, and let me repeat, optics matter.

Belarus also has a dynamically growing IT industry, which was one of the unsung success stories of the past years. The country earned a whopping $15 bn from exporting high-tech products and services last year, especially software engineering and tailored IT services, which were worth $2 bn, after more than doubling their value in the past three years. This is not to say that the growth in the export of IT products and services will solve Belarus’s short-term problems. Nonetheless in recent years, by creating of a high-tech industrial park (which overwhelmingly exports to the EU and the US, and which Pompeo visited) and promoting the industry, Belarus has put down the foundations of a more diverse economic growth. In 2018 5.5% of Belarus’s GDP consisted of its IT sector. By 2022 some experts expect this ratio to be close to 10%. While Russia is aggressively taking steps towards a significantly tighter regulation of its internet infrastructure, Belarus, no less authoritarian, is becoming an attractive place for Russian-speaking IT professionals.

In the short term – definitely until this year’s presidential election in Belarus that Lukashenko expects to win – we are stuck with symbolic politics, demonstrative oil purchases, grandstanding and slowly modernizing oil refineries.

Even so, Pompeo’s visit proved Lukashenko right about something important: namely that values, principles and even appearances matter less and less in American (and to some extent, in European) foreign policy. It is likely that ten years ago the US and the EU would offered to help Belarus bridge a similar oil shortage – but Lukashenko would have faced a much tougher negotiation and would probably have had to make more unpleasant concessions in the form of political or structural reforms. The sort of Realpolitik that has prevailed since is of course not alien to the US or to European countries. However, the Russian government has done its utmost to facilitate it, which should now feel at least a little ironical.

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