Belarus and Russia: Stagnating Together?
Earlier this year, Belarusian media published an interview with Belarusian oligarch Iuryi Chyzh. The businessman predicts problems with the Russian economy, supports the diversification of Belarusian enterprises and states that Russia is grabbing the biggest piece of the pie in the Customs Union.
Chyzh is right. Belarus remains too dependent on Russia economically: half of Belarus' trade is with Russia. The Kremlin controls the competitiveness of the Belarusian economy through its energy shipments, since without Russia`s energy subsidies Belarusian goods will quickly become too expensive.
The Kremlin further binds Belarus with its integration projects and imposes its own interests, keeping the Belarusian authorities on the energy needle. If Lukashenka`s regime fails to modernise its economy and diversify its markets, Belarus will stagnate together with Russia.
Iuryi Chyzh is one of the most influential businessmen in Belarus and has a close relationship with Lukashenka`s team. The European Union sees him as the regime`s purse and imposed economic sanctions against his companies back in 2011. That is why his statement favouring diversification from Russia is important, since it broke with the regime's typical pattern.
The under utilisation of Belarusian enterprises’ functional capacities happens mostly due to Belarus’ huge economic dependence on Russia. A worsening economic conditions in Russia significantly affects the Belarusian economy. The International Monetary Fund forecasts 2 per cent growth for the Russian economy in 2014.
Belarus` trade addiction with Russia may become a great threat to the financial stability of Belarus as the economic situation in Russia worsens. In 2012, Belarus sold to Russia tractors and tires, trucks and cars for more than $ 3bn. There have been no precise results for 2013 disclosed so far, but for sure they will be worse than in 2012. This year, Russia introduced a recycling tax on cars. The losses for Belarusian truck producers may allegedly have reached as much as $ 350m.
The Belarusian Ministry of Economy predicts the demand for industrial products will continue to decline. This is in large part due to the fact that half of the Belarusian trade remains a trade with Russia.
Oil products produced from the raw materials that Belarus receives from Russia remain a half of all Belarus' exports to the EU. The competitiveness of the rest of Belarus' exports is still in Russia’s hands, as Russia`s energy subsidies make Belarusian goods cheaper through lowered production costs. The Kremlin may potentially raise the price of natural gas for Belarus, which will automatically lead to a significant price increase of Belarusian goods. This would essentially signal the possible collapse of Belarusian exports to Russia and other countries.
How Russia Grabs the Biggest Piece of the Pie in the Customs Union
The project of the Union State launched almost 15 years ago laid tight economic integration but brought little convergence results. Kremlin`s institutional control over Belarusian economy has increased significantly in the recent years, with the accession of Belarus to the Customs Union. Two cases became good illustrations of how Russia forces its partners to adopt the Russian rules of the game.
Since 1 July 2011, the Kremlin forced Belarus to protect the Russian car industry and to raise import duties on cars, on average, by four times - to the level of Russia. Moreover, the vast majority of customs rates are de facto Russian and reflect Russia's national interest, not Belarus' or Kazakhstan's.
This year, 1 July 2014, Belarus will oblige local businesses to pass a complicated procedure of certification of goods that can lead to the bankruptcy of some enterprises. In practise this means that the businesses will be forced to give some of their goods for examination, after which the goods may not be suitable for sale.
Belarus does not get what it wants most - abolition of the 36% duty for oil products, made in Belarus and sold to third-party countries. In 2012 Belarus paid $ 3.8bn to Russia for these duties. Though both countries are in the Customs Union, the Kremlin does not cancel this duty for its struggling ally. Repealing this payment could solve a significant part of the economic problems in Belarus.
Though the Customs Union does not look very profitable for Belarus, Russia lifted a great number of the barriers facing Belarusian companies. The absence of economic wars, previously so frequent between the countries, proved precisely this point. Moreover, Belarus receives energy resources at low prices from Russia, and therefore has to put up with Kremlin`s grabbing of the biggest piece of the pie.
Economic Drift from Russia Remains Unlikely
If the state of the Russian resource based economy gets worse in 2014, Belarus will look attached to the sinking stone. Russia's position as a major investor in Belarus and an important player in the banking sector strengthens dependence of Belarus.
According to the National Statistical Committee Russia remains the main investor in Belarus, putting in about 50% of the investments. United Kingdom sits at the second place and Cyprus holds third – for countries that Russian businessmen like to register companies in.
According to Agata Wierzbowska-Miazga of the Centre for Eastern Studies from Poland, Russian banks have become the largest source of foreign currency loans for Belarusian companies. BPS-Sberbank, BelVEB, Belgazprombank belong to the largest commercial banks in Belarus. Russian businessmen control seven of the 31 banks in Belarus. All these banks bring in profits.
Thus, Belarusian dependence on Russia in the economic sphere remains so strong that it seems unlikely Lukashenka will start a real conflict with the Kremlin. However, the idea to diversify Belarusian exports is becoming rather popular among Belarusian officials as well. Belarusian diplomats had an active year improving ties developing countries in 2013 and will open new diplomatic missions in nine countries such as Qatar and Mexico.
However, the problem of Belarus is not just one of a desire to diversify its markets, but also about possibilities to do so. Many Belarusian enterprises look too obsolete. If the authorities fail to carry out the modernisation of enterprises and economic regulations, they will convict a great part of the enterprises to stagnate together with Russia.
However, Russia is in the World Trade Organisation and many Western businessmen continue to transfer technology and invest in Russia. The Belarusian economic situation remains much worse.