Interview of A.V. Sharonov, Secretary of State - Deputy Minister for Economic Development and Trade of the Russian Federation,

"It was friendship that suffered", Rossiyskaya Gazeta Daily, January 10, 2007

First of all, the hottest news. Why has the Druzhba oil pipeline got empty? Who closed the valve?

Andrei Sharonov

Early in the morning of January 8, the Russian oil flowing via the Druzhba oil pipeline to European Union countries stopped coming to Europe from Byelorussia. It occurred in spite of the fact that oil was delivered to Byelorussia as usual. The Transneft Company's representatives in Eastern Europe, who kept being on duty round the clock, immediately informed Moscow. Two minutes later the command to stop oil supplies for the Byelorussian direction was given.

It turned out that the Byelorussian side commenced illegal withdrawal of oil flowing towards Western Europe. The oil was withdrawn and pumped into Byelorussian oil storage facilities. To characterize the situation, the Byelorussian side used the term "sequestration" of commodities "illegally" crossing the customs frontier of the country. The "illegality" consisted in that the Byelorussian side demanded to pay the so-called "customs duty" of $45 for every ton of oil transported via the pipeline. Since we do not recognize this duty as legitimate or rightful under applicable international law or WTO regulations, or our bilateral agreements, we are not going to pay anything. The risk of loss of oil belonging to Russian companies and intended for European countries forced us to stop the pumping.

RG

In other words, Europe was left without our oil. How fast can we find any bypass routes?

Mr. Sharonov

This issue is currently scrutinized by specialists. As to me, I can say that we are not going to succumb to the racketeering used to deprive us of our goods, moreover, with unrestricted possibilities for resale of these goods to whomsoever at whatever prices.

RG

Let us consider the conflict from the very beginning. What is it, the above-mentioned $45? Is it payment for pumping or something else?

Mr. Sharonov

It is not the payment for pumping. Payments for transportation are regulated by the respective agreement between the Russian Transneft company and its Byelorussian partner. Moreover, this payment is normally made in advance. For instance, Transneft paid as early as in December for oil transportation in January.

RG

Then, where did the Byelorussians take this figure, $45 per ton of oil?

Mr. Sharonov

We suspect they "calculated" it as follows. On December 8, Russia imposed the export duty on oil deliveries to Byelorussia in the amount of $180 per ton. After that, the Byelorussian side estimated its ?losses? and to make them up, they introduced the duty equal to $45 per ton.

RG

For an onlooker, it may seem that Minsk just responded symmetrically by imposing their duty against our one.

Mr. Sharonov

It would be wrong to consider it a symmetric response. Deliveries of Russian oil to all countries without exception were and still are levied an export duty. This money is paid by Russian oil companies in the territory of Russia. The only exception was Byelorussia, for such a duty was not levied on oil deliveries to this country. However, getting oil at Russian domestic prices, the Byelorussian side enjoyed the right of reselling it to third countries, now at world market prices. It was one of the preferences granted at the Russia and ByelorussiaUnionState level.

Thus, on December 8, Russia put an end to Byelorussia's possibility to resale goods with such a high profit. Yet, it is neither sanctions nor discrimination. It is just bringing Byelorussia to equal terms with all other countries of the world.

And the Byelorussian side's response is real sanctions. Moreover, we faced unprecedented response measures. Nothing of the kind was ever introduced by any country. An analysis of WTO practice over the last 13 years has confirmed that no other country worldwide had taken the liberty of doing anything similar. As a matter of fact, the Republic of Belarus just imposed an illegal extortionate duty to raise its income, or, according to the Byelorussian side, "make up its costs".

RG

Interestingly enough, we had provided Byelorussia with the right to "profiteer" from Russian oil, implying that they would be dividing excess profits with Russia. At first, Byelorussia did it, then stopped and has not been sharing for many years. Why did we open our eyes as late as on December 8?

Mr. Sharonov

To be precise, Byelorussia stopped sharing the above excess profits with Russia in 1998 and later, in 2001, abandoned unilaterally the agreement on export duty sharing.

Why were we so slow with our response? The first reason consisted in that we did not apply to Byelorussia the regime of VAT collection by country of destination (the procedure under which the value added tax on goods delivered to Byelorussia would be paid in the latter, instead of Russia, thereby replenishing the Byelorussian budget; Russia reckoned that in the absence of such a regime, rights of our "Byelorussian brothers" are prejudiced and tricks with excess profits from oil resale is sort of compensation. - E.A.). In 2005, we switched over to this regime.

Secondly, Russia expected a faster progression of integration processes, first and foremost, transition to a common currency, which would soften the situation with export duty sharing. However, it did not occur and, having no comprehensible response from Byelorussia as to when it could be expected, Russia decided to equate Byelorussia with all other countries.

I would like to emphasize once again: it was neither penalty nor sanctions. Simply, the Republic of Belarus was deprived of privileges once granted with a view to a quick integration into a union state.

RG

Well, Byelorussia refused to integrate and lost its privileges. Yet, according to the Byelorussian side, the raising of gas prices by a factor of 2 is also a breach of the agreement on the UnionState, which stipulates that the gas price for Byelorussia will be equal to that for the Smolensk Region.

Mr. Sharonov

We should not forget that the whole package of documents on establishment of the UnionState has not been ratified. And not through Russia?s fault. I do not share the opinion that it would be a right thing to pick out of this non-ratified package solely the provisions pleasurable to Byelorussia, ignoring at the same time those containing obligations, and to insist on adhering to "good" provisions only.

RG

Anyway, Russia is not going to pay $45 per ton, while Semyon Vainshtok, Transneft President, is awaited for at a Minsk court. What is your attitude to this move?

Mr. Sharonov

It seems to me the Byelorussian side decided to throw the cap over the mill. And their actions are not limited to such high-profile persons. According to the Federal Customs Service, since January 8 Russian motor vehicles, irrespective of whether they are commercial or private, are stopped at the Russian-Byelorussian border and forced to pay a collateral and make a provisional permit for entry, which has never occurred hitherto.

RG

What are your comments regarding threats from Minsk to sequestrate Russian property on account of "unpaid customs duty"?

Mr. Sharonov

As far as I can see, for the Byelorussian side such property is oil, which, as a matter of fact, they are trying to sequestrate.

RG

It is very similar to situations engineered by the Noga company?

Mr. Sharonov

Thankfully, not yet.

RG

Let us scrutinize the problem in a broader fashion. Using cheap gas from Russia, Byelorussia makes cheap goods that are sold in Russia without any duties to pay. The situation contributes to the collapse of our agrarians, machine building plants, furniture makers. Has anybody estimated this damage?

Mr. Sharonov

No formal estimates are available. However, I can say that the refusal to share the oil duty, taken alone, results for the Russian budget in a loss of about $3.5 billion per year. And there exist also other stories, for instance, supplies of sugar, agricultural machines, potatoes, pork, and so long and so forth. I would like to note that Russia is trading partner No.1 for Belarus, accounting for around 50 percent of exports from this country. Therefore, our interdependence is extremely strong.

RG

What are your comments to the expert judgment according to which such losses may amount to $7 billion per year?

Mr. Sharonov

It is one of unofficial expert opinions.

RG

Would, at last, the following question be appropriate: what does the bulky bureaucratic structure of the UnionState serve? With salaries of functionaries, overhead costs, and budget? The budget formed from the taxes paid by our taxpayers, who, as a matter of fact, expect new roads and hospitals from the Government, rather than "integration", in return to their taxes. What is it all for if the "bureaucrats" are incapable of precluding such losses?

Mr. Sharonov

I would not blame functionaries of the Union State. They pursue the tasks posed by politicians. I think the problem lies in another plane, namely, the Byelorussian side is constantly postponing the adoption of critical decisions capable of advancing the real formation of the UnionState. And there is an impression that the idea of the UnionState is converted into sort of a political slogan resorted to by our Byelorussian partners when it is advantageous to them, or ignored when it is unfavorable.

Listening to promises of "upcoming integration", Russia pays no attention to numerous facts of asymmetry in our economic relations, facts of direct discrimination of Russian companies on the Byelorussian market. I would like to provide just one example, namely, tenders for public procurement in Belarus. The President of this country signed the decree stating, in black and white, that Byelorussian companies are granted preferences over Russian ones.  At the same time, our law provides for equal rights for Byelorussian and Russian companies.

In other words, all this rhetoric looks like temporization to keep unreasonable preferences enjoyed by Byelorussian companies on the Russian market. With the objective in view, I mean creation of the UnionState, such a policy is justifiable, at least from the moral standpoint. However, in the situation when nobody embarks on any practical efforts, preferences grow purposeless and we have the right to bring the relations to a purely economic plane.

RG

The opinion was voiced that in case Russia puts Byelorussia under pressure, the latter's economy will collapse. The reason for this scenario is as follows: owing to "integration fruits", Byelorussian authorities have not cared about restructuring the country's industry and agricultural sector. Do you agree with this opinion?

Mr. Sharonov

There exist different judgments as to the condition of the Byelorussian economy. I am no expert in this matter. Still, I can affirm that in its nature the economy of this country is of administrative and command type in many aspects and the greater part of Byelorussian companies are incapable of operating in a free market environment. Therefore, if Byelorussian companies have to compete on foreign and especially local markets against other companies on equal terms, undoubtedly, a significant share will be found non-competitive.

RG

Is it true that for Byelorussian enterprises the break-even point is around $70 per thousand cubic meters of gas? Does the new price mean inevitable bankruptcy for the Byelorussian economy?

Mr. Sharonov

I can say only that the Byelorussian side considers the new price as discriminatory, whereas in our opinion, it is the most favorable price for importers not only in the post-Soviet space, but even worldwide. I think the conditions we have offered to Byelorussian gas consumers are more advantageous than those for all others.

RG

It is difficult so far to voice any predictions and nonetheless, what outcome can be expected?

Mr. Sharonov

We do not want to get involved in a serious trade war, but the latest actions on Byelorussia's part evidence they will stick at nothing. In our turn, we will have to undertake adequate measures and they will be painful for both sides.

RG

Can you admit that in the final analysis it is Russia to blame? For its sufferance, indulgence, and bringing the situation to that heat of conflict?

Mr. Sharonov

I would not like to voice judgments and yet I have to confess the correctness of the rule: in case you do not show in timely fashion that you keep watching decencies to be observed, it allows your partner to think that you will always forgive ?small tricks?. And the scale of such tricks invariably tends to grow.

Apparently, our failure to declare in due time our readiness to defend interests of Russian companies provoked our partners to think that they can play foul in the noise of rhetoric about the Union State and burst into crying about "discrimination" in the case of a slightest attempt to bring our relations to within a normal civilized framework.