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Transneft is being bullied away from the pipeline

Date of publication: 11 February 2021

The Company may lose its petroleum products pipeline in Belarus.

Transneft risks losing the Zapad-Transnefteproduct Unitary Enterprise transit petroleum products pipeline running through Belarus, which is worth nearly RUB 7 billion, due to rising taxes in this Republic and falling loads. Minsk might initiate bankruptcy proceedings, followed by its nationalisation, Transneft’s management apprehend. Belarus needs this pipe to transport resources for its national refineries from Europe and to pump petroleum products in the direction of Ukraine. According to the lawyers, Transneft could have disputed a higher fiscal burden at courts, but its argumentation will hardly be heard there.

The operator of the Zapad-Transnefteproduct petroleum products pipeline on the territory of Belarus may go bust because of rising taxes and administrative pressure, stated First Vice President of the Russian Pipeline Monopoly Maksim Grishanin in his interview for Kommersant. Russian and Belarusian diesel fuel is supplied to Hungary and Latvia over this pipe. Starting in January 2020, in addition to imposing the environmental tax amounting to RUB 0.35 per 1 tonne of petroleum products pumped per 100 km, Minsk has thrice increased the profit tax rate from 18% to 50%. Only national Gomeltransneft Druzhba which transfers its profit to the national treasury anyway and Zapad-Transnefteproduct come within the purview of the decree.

“We’ve long been working with the Energy Ministry and a high-ranked commission to cancel this discriminatory tax. And while the environmental levy significantly slashed the profit of our enterprise, the profit tax growth actually generates losses in the backdrop of sinking transportation volumes,” Mr. Grishanin noted.

As reported by Transneft, the volumes transported via Zapad-Transnefteproduct will go down from 6 million tonnes in 2019 to 3.4 million tonnes annually in 2021-2024. The losses might amount up to RUB 800 million per year.

What’s more, according to Mr. Grishanin, the company experiences an unprecedented administrative pressure. According to Transneft, since the turn of 2020, the company has received more than 150 queries from the Belarusian authorities (against 27 in 2019). The number of field inspections has also increased five times to 20. “Zapad-Transnefteproduct cannot normally function in this situation and we do not exclude a scenario wherein the Belarusian authorities may demand the company’s bankruptcy because of the negative value of the company’s net assets,” noted Mr. Grishanin. As reported by the company, the current value of its assets amounts to RUB 6.7 billion.

Transneft has figured that the company can keep afloat either by increasing the volumes transported to 5 million tonnes, or by an 80% rise of the current tariff of USD 2.36 per tonne per 100 km to USD 4.24. Such a radical surge of the transportation tariff, however, might result in the outflow of volumes from this route, Advisor to Transneft President Igor Demin points out.

In the words of Mr. Grishanin, “the current posture of the Belarusian side is that “wealthy Transneft should somehow help its subsidiary and find a way out of this predicament.”

He mentioned that Transneft would resist bankruptcy proceedings followed by the operator’s nationalisation, including through courts of justice.

By gaining control over the petroleum products pipelines Belarus will get an alternative to Russia channel of crude oil supplies to its oil refineries, says Igor Yushkov, an expert at the University of Finance under the Russian Government. In his opinion, Minsk will be able to convert the northern pipe from the Latvian port of Ventspils to crude oil supplies to the Novopolotsk Refinery and even to the Mozyr Refinery via a crossover line on the Druzhba oil pipeline currently under construction. Belarus will be able to supply diesel fuel to Ukraine over the southern section of this pipeline without getting a license from Russia (now supplies are limited out of fear that Kiev might use this fuel for military needs). The expert reminds that even now Ukraine is one of the largest consumers of Belarusian petroleum products (ca. 3 million tonnes in 2019). Mr. Yushkov assumes that Belarus could make concessions in relation to Zapad-Transnefteproduct if Russia agrees to its terms and conditions on other oil and gas issues.

Managing Partner of Zharov Group Yevgeny Zharov believes that the Russian side could dispute the environmental levy, as well as the profit tax increase in superior judicial authorities and international courts. The company will just have to prove that the tax rate is economically unjustified and that it has been raised too drastically, thus creating unjustifiable competitive advantages for other companies. Yet Mr. Zharov admits that Belarusian courts may not pay heed to these arguments.

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