Excerpts from the Transcript of the Meeting with Cabinet Members 2007-01-09 10:12:32 The Kremlin, Moscow President Vladimir Putin: I suggest that we talk about energy issues and, of course, first and foremost the ones that affect our relations with our closest neighbours, with our partners. I am also referring to the unresolved issues in our negotiations with Belarus. How is the agreement we signed on the deliveries and transport of Russian gas functioning in practice? Could Viktor Borisovich [Khristenko] comment? Please go ahead. Industry and Energy Ministry Viktor Khristenko: Concerning the gas agreements, the package that was signed has come into force and is being executed in its entirety. This concerns both the deliveries of gas for the Belarusian economy as well as transporting Russian gas through Belarusian territory to European consumers. In this respect, the agreements that were signed regarding deliveries to the Republic of Belarus provide for a four-year transition period while the Belarusian economy and population gradually adapt to the new energy prices, to the new price regime, to the gradual transition to market prices and to the transfer of part of the Beltransgaz property rights which represents a partial compensation of the increase in gas prices. In connection with this I would like to once again emphasise that to a large degree the decisions made concerning Belarus reflect the internal decisions that Russia made 30 November 2006 on the formation of a gas market. We already reported on this to you. First and foremost these decisions are based on the necessity of ensuring energy security in Russia in the medium- to long-term, on avoiding the excessive monopolisation of the energy market, on reaching new levels of extraction, on exploiting new deposits (undoubtedly, the cost and expenses of extraction are higher in these new deposits than in old ones), and on launching mechanisms to ensure efficient energy use. The cabinet made decisions calculated on this four-year term, during which prices on the Russian gas market will gradually become equal to those on the European market. However, it is certainly true that regardless of all this even by 2011 internal Russian prices, those within the Russian Federation, will remain substantially lower than the prices of gas delivered to any other consumers. I would like to emphasise that this four-year transition period is also linked with the process of gradually adapting Russia’s economy to the new prices and is taking into account the growth of population incomes while delivering gas to the population. Coming back to Belarus, it is necessary to say that from the beginning, the original position was connected with a three-year transition period to new gas prices. However, the Russian party eventually acknowledged that the Belarusian economy’s period of adaptation should be equal, identical to that of Russia itself and also be four years long. Vladimir Putin: Let us recall the price. The price is 100 dollars per 1000 cubic metres, as far as I know? Viktor Khristenko: Yes. Vladimir Putin: Poland buys from us for 270 dollars per 1000 cubic metres. This means that this year the market price for Belarus would be about 260 dollars per 1000 cubic metres. The Russian Federation agreed that this year it would sell Belarus gas for 100 dollars, therefore below market price. This is the lowest price in the CIS. Even a country such as Armenia, a country that also has quite a few problems, pays 110 dollars per 1000 cubic metres of gas. And let us not forget that Russia is not collecting export duties while exporting our gas to Belarus. As a whole, if we look at the difference between market price and the price that we agreed on today with the Belarusian party then the difference for Russia amounts to approximately 3,300 million USD. Out of this Russian budget loses about 1,300 million USD due to the export duties it does not collect, and Gazprom loses about two billion. And these losses of billions of dollars — even taking into account the downward trend — will be conserved during the whole transition period, during four years. This is the price Russia must pay to change to market relations. And this represents direct support for our Belarusian colleagues and a cost for Russia and Russian taxpayers measured in many billions of dollars. With regards to Beltransgaz, Gazprom really does have 50 percent holding in that company but it remains only a minority shareholder because it does not have a controlling stake nor input into how the company is managed. Along with this we agreed that we will accept the highest evaluation made by an independent evaluator – five billion dollars. And we are paying the Belarusian party 2,5 billion dollars. As a matter of fact, that 2,5 billion represents one more form of support for our Belarusian colleagues. I very much expect that all these agreements will be executed both by Russian and Belarusian parties with the awareness of what Russia is doing to support the Belarusian economy. And now, Viktor Borisovich, could you explain the recent problems connected with the deliveries and transport of Russian oil through Belarusian territory. What exactly do these problems consist in? Viktor Khristenko: If we talk about the essence of the dispute, then the crux of the matter or the problem is the regime for collecting export duties on crude oil. I will perhaps briefly touch on the history of this issue. As part of the integration process, in 1995 the Russian Federation waived export duties on crude oil being delivered to Belarus and we signed an agreement with our Belarusian colleagues which stipulates that while the crude oil export duties amount to zero we will both establish a regime whereby the export duties collected on oil products will be syncronized. Therefore, as of 1995 the Russian export duties on oil products were automatically calculated at the western border of Belarus. Along with this, in these same agreements, in the agreements that were signed, the financial means received from export duties on oil products were divided in the following way: 15 percent was put into the budget of the Republic of Belarus and 85 percent into the budget of the Russian Federation. Such as regime has been signed and has been in effect as of 1995. In 2001 the Belarusian party unilaterally left this agreement. Vladimir Putin: In which year? Viktor Khristenko: In 2001, and as of then the Belarusian party established a regime for export duties on oil products independently. In practice, for example last year, 2006, this rate was two to three times lower than the Russian duties on oil products. Vladimir Putin: And this resulted in the situation whereby our oil companies began to export crude oil for processing on Belarusian territory. Is that right? Viktor Khristenko: As a matter of fact, this resulted in a situation, in a certain offshore, a vacuum if you want, which created advantages exclusively for Belarusian oil refineries in an absolutely unfounded way and significantly distorted the whole system for the economic regulation of streams of oil and oil products in general for the Russian Federation and for the Union State as well. Vladimir Putin: In 2001 the Belarusian partners unilaterally left the agreement, is that right? Viktor Khristenko: Yes. Vladimir Putin: Why did you not introduce an export duty on crude oil at once? Viktor Khristenko: First of all, I must say that we certainly expected that our Belarusian colleagues would return within the framework of the 1995 agreement and we therefore undertook the corresponding steps with our Belarusian colleagues. Secondly, it is certainly true that all this was considered in the context of forming the entire Customs Union. And finally, probably as a third point one must point out that such long negotiations actually amount to additional support for the Belarusian economy as a whole and, truth to tell, support during the election campaign that touched on many political issues in Belarus. To a certain degree this process is also a tribute to these circumstances. Vladimir Putin: And these negotiations lasted five years? Viktor Khristenko: Yes, the negotiations had varying degrees of success or, more precisely, lasted five years without any tangible success. Vladimir Putin (addressing German Gref): And how did negotiations proceed this year, German Oskarovich? Economic Development and Trade Minister German Gref: Already as of the first quarter of 2006 we started to negotiate on how to return to all previous regulations – not only with respect to levying export duties on oil products but a whole range of settlements, including Russian companies’ access to the Belarusian market as provided for in the 1995 agreement. Intensive negotiations have been underway since April. We reached no consensus on the project of the draft agreement. Later on, in September 2006, after all Russian departments had agreed on a document we sent a draft agreement to the Belarusian party for them to sign. After our partners in the Belarusian government refused to sign this document, in November we notified the Belarusian government that we intended to introduce a normal regime which does not include any preferences and introduce export duties on crude oil. Vladimir Putin: The same regime that applies to our partners from other countries? German Gref: Exactly. This was done on 8 December 2006. In light of the withdrawal, the unilateral withdrawal of the Republic of Belarus from the agreement, the cabinet made the decision to introduce response mechanisms consisting in duties on crude oil, and thereby created absolutely identical conditions for all our partners to which we deliver crude oil. Vladimir Putin: Are the conditions that apply to the Republic of Belarus worse than those that apply to our other partners? German Gref: They are standard. We simply applied absolutely normal conditions concerning the export of Russian oil to Belarus. Vladimir Putin: In other words, the Republic of Belarus is affected by exactly the same conditions as any other partners that receive our oil? German Gref: That is absolutely right, Vladimir Vladimirovich. The one exception is the member countries of the Eurasian Economic Community where export and import duties do not apply, and this holds only in the event that all the agreements within the Customs Union are being implemented. And the legal base of the Eurasian Economic Community provides that states can introduce such measures if one of the parties violates these bilateral agreements. Vladimir Putin: Like in this case of a unilateral withdrawal from the agreement… German Gref: In 95. Vladimir Putin: In 1995. German Gref: That is absolutely right. Vladimir Putin: (addressing Viktor Khristenko): Viktor Borisovich, is there an agreement between Russian and Belarusian partners on pumping our oil to western consumers? Vladimir Khristenko: Yes, certainly, such relations always are based on agreements. These agreements are applicable in the long-term, in twenty years time, and there are also annual agreements that are more precise. In this sense the contractual base underlying all our mutual relations has existed for more than just one year and there are no bases to question it. Vladimir Putin: And the Russian party fulfills the obligations it has taken on within these transport agreements? Viktor Khristenko: Always has executed, continues to execute, and intends to continue to do so. We always execute any responsibilities that the Russian party incurs from any treaty or legal contract. Vladimir Putin (addressing Aleksei Kudrin): Aleksei Leonidovich, the government cabinet has introduced an export duty on crude oil to Belarus. How much income will this represent for the Russian budget and, similarly, how much did the Russian budget lose from not introducing this duty? Finance Minister Aleksei Kudrin: As a result of introducing the export duty on crude oil this year the Russian budget will receive about four billion dollars. As a matter of fact, prior to this we had no opportunity to receive this revenue since we supported the integration processes that Viktor Borisovich mentioned. Vladimir Putin: The losses incurred by the Russian budget in connection with the absence of export duties on crude oil over the past five years represent approximately 4 to 3,5 billion dollars? Aleksei Kudrin: From 3,5 to 4 because the export duty varies in relation to the oil price. Vladimir Putin: Of course. And what is the economic and legal basis for the decision our Belarusian partners made to impose an oil transit tax? German Gref: The transit tax the Republic of Belarus introduced violates three key international agreements. In the first instance, it contradicts international legal practice. According to the provisions of the World Trade Organisation, duties imposed by non-member countries consist in either taxes on imports, that is on products intended for the state’s own territory, or exports, that is on goods produced on the territory of a state and delivered to third countries. In this case the tax cannot be considered to be either an export or import customs duty. Such a payment is unprecedented in international practice and no country has ever imposed such a payment before. It violates a bilateral agreement between the governments of the Republic of Belarus and the Russian Federation, two bilateral agreements, and it violates the agreement between Transneft and the corresponding companies in the Republic of Belarus that Viktor Borisovich mentioned on transporting oil. As such, we can at once see that it infringes three different levels of legislation and international legal practices in this sphere. Plus one more nonsense: point one of the Republic of Belarus’ decision stipulates that the transit tax is taken for transporting oil through the Republic of Belarus and point two says that it is Transneft that must oversee the transport of oil through the Republic of Belarus. In other words, it is also a duty targeted at one company, something that also contradicts all available norms and international legal practices. It is difficult to determine the legal nature of this tax because it is without precedent and no country has ever been faced with this before. Vladimir Putin (addressing Prime Minister Mikhail Fradkov): Mikhail Efimovich, it is necessary to continue negotiations with Belarusian partners on finding a settlement for the deliveries of Russian oil to Belarus and for transporting our oil to western consumers. It is necessary to protect the interests of Russian companies who will obviously be forced to incur certain losses. We must ensure an equal approach while selling oil on foreign markets and develop a package of measures that minimizes their losses. In connection with the problems which have arisen while transporting our oil through Belarusian territory, we must discuss the possibilities for reducing oil extraction with the corresponding Russian companies. We need to do everything possible to protect the interests of western consumers of Russian energy. And finally, the last point. I charge the Government to develop a package of measures designed to protect the national economy. This package must address all aspects of our cooperation with our partners and, in this case, with our Belarusian partners.