How Belarus cutting fuel exports to Ukraine would impact Ukrainian markets

9 February 2022, 11:55 PM

Belarusian dictator Alexander Lukashenko has threatened to cut off both gasoline and diesel exports to Ukraine. What do these threats entail, and how would both the Ukrainian and the Belarusian fuel markets be affected?

Retail prices of light oil products in Ukraine have risen by 10% since the beginning of this year. Beyond global oil prices and fluctuating currency exchange rates, a third factor has begun to play its role in these price increases.

In an interview aired on Russian state TV, Lukashenko said he’s ready to cut Ukraine off from Belarusian fuel and electricity.

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“Together with Russia, we’ll cut off all shipments of not just fuel, but electricity, too,” said Lukashenko.

This is the second signal from Ukraine’s northern neighbor that could significantly impact Ukrainian gasoline and diesel markets: The first was Belarus cutting off rail shipments of fuel from Lithuania to Ukraine on Feb. 7.

Forecasters are struggling to predict what would happen to gasoline prices if Lukashenko acts on his threat. But it remains an “if”, for now.

NV Business looked into who stands to lose more from the dictator’s tantrum – Ukraine or Belarus.

Shooting yourself in the foot with a gas pistol

Ukrainian President Volodymyr Zelensky has already responded to Lukashenko’s threat:

“Our trade volume is at $6 billion, Ukraine exports to Belarus $1.5 billion, and imports $4.5 billion,” Zelensky said after his meeting with French President Emmanuel Macron.

“If (our) countries start to limit trade, who will be hurt?”

Domestic light oil production satisfies less than half of Ukraine’s demand, so Ukraine is definitely dependent on imports in this case.

Ukrainian fuel imports are dominated by two suppliers. The country is most reliant on diesel imports. According to the A-95 consulting firm, 62% of diesel fuel sold in Ukraine in 2021 (around 5 million tons), was imported from Belarus and Russia. Meanwhile, 44% of Ukrainian gasoline (998,000 tons) was imported from Belarus in the same year. Minsk also accounts for sizeable shares of the jet fuel and liquid natural gas (LNG) sold in Ukraine.

This makes Ukraine the largest market for Belarusian petroleum products. It’s on this basis that all experts we’ve approached agree that fuel will keep flowing across the border.

“It would a crushing blow to the Belarusian economy, their oil refineries will come to a halt,” said Sergey Kuyun, A-95’s director. According to him, without petroleum exports, the Belarusian economy could crash entirely, given that Minsk has recently ceased exporting potassium fertilizers due to Western sanctions.

EU sanctions make Ukraine the key market for Belarusian fuel, said Leonid Kosianchuk, president of Ukraine’s Oil Traders Association.

“By making this decision (to stop fuel exports to Ukraine), Lukashenko would be intentionally grinding his country’s economy to a screeching halt; unless Russia promised to compensate for his losses, but that is rather dubious,” he said.

Ukraine is a premium market for Belarus, Ukrainian Oil & Gas Association told us:

“So, we hope fuel shipments (to Ukraine) will continue.”

Worst-case scenario

If Lukashenko decides to follow through on his threats after all, Ukrainian gas stations will suffer from a huge fuel deficit, according to the experts NV Business spoke with.

“Today, Belarusian fuel (is responsible) for a third of our diesel and half of the gasoline sold in Ukraine,” Kuyun told us.

“Commercial stockpiles would last at best for 3 to 4 days.”

According to him, all transportation in Ukraine would freeze if Russia and Belarus simultaneously cut off fuel exports to Ukraine.

Kosianchuk adds that such a crisis would be exacerbated by the coming seasonal spike in diesel demand due to the agriculture industry. Given the absence of strategic fuel reserves, large deficits would create huge problems for the entire Ukrainian economy.

How can Ukraine hedge the risks associated with its hostile neighbors? The association recommends urgently diversifying our petroleum supply: by stimulating domestic output and maritime imports, and purchasing more Polish fuel.

“It’s possible to reduce Russia’s and Belarus’ share (of our fuel imports) from 70% to 30%,” said Kuyun.

Ukraine needs to manage the risks by creating state-funded crude oil and petroleum reserves.

“Many European countries already have oil and petroleum reserves, sufficient to cover 90 days of demand,” the Ukrainian Oil & Gas Association noted.

However, it would take several years to develop a properly diversified fuel market in Ukraine.

“Replacing basically half of our demand would be both lengthy and costly, even if we discount the effects of a prolonged fuel deficit,” said Kosianchuk.

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Kuyun is more optimistic on this: “It would take one to one-and-a-half months, but prices could spike unpredictably,” he said.

Price fluctuations

The median retail price of A-95 octane gasoline in 2022 rose from UAH 30.21 to UAH 33.7 ($1.2) per liter (approximately a quarter gallon), according to A-95’s data. Diesel prices increased from UAH 29.4 to UAH 32.99 ($1.19) per liter during the same period.

But that’s caused by rising global oil prices and currency exchange rates fluctuation.

“Fuel duties are denominated in euros, and purchases are made in U.S. dollars,” the Ukrainian Oil & Gas Association explained.

Freezing weather in the United States spurred global oil prices to reach $94 per barrel on Feb. 7 – a record high of seven years. This year, the Ukrainian hryvnia, despite some encouraging rises last week, declined from UAH 27.4 to UAH 28.08 against the dollar.

According to Kosianchuk, without fuel imports coming from Belarus, the gulf between supply and demand would cause Ukrainian petrol prices to skyrocket unpredictably.

“To try and speculate about price levels (in that case) is pure guesswork,” he said.

In accordance with the government’s fuel prices regulations, introduced in May 2021, retail A-95 gasoline and diesel prices are tied to international price levels and customs dues. Gas stations have their markups for gasoline and diesels limited to UAH 5 and UAH 7 per liter, respectively.

But these efforts are effective under nominal conditions, without key suppliers simply vanishing from the market.

“No amount of state regulation could keep things under control,” Kosianchuk warned.

“We could face a repeat of the 2004 crisis, when the government introduced price caps, but fuel was physically absent (from gas stations).”

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