Political Overview of 2012: Diplomatic Wars, Sanctions and Elections
Belarus started the year 2012 in a rather bad shape.
Alexander Lukashenka has been occupying his post for almost 18 years. A dozen political prisoners remained behind the bars. Relations with the West were worse than ever before. The opposition was suppressed and the economy went through a painful recovery from the economic crisis of 2011. That year the inflation reached 108% and the national currency went through a threefold devaluation.
The 2012 in Belarusian politics promised to be tough. And tough it was for everybody.
Winter Froze the Foreign Policy
The events shaping the political landscape of the winter took place at the very end of the season. On 27 February the Council of the EU decided to extend its "black list" of Belarusian citizens prohibited to travel to the countries of the Union.
21 new persons were included into the list. The Belarusian response did not take long. On the next morning two diplomats: the Head of EU Delegation to Belarus Maira Mora and the Polish ambassador Leszek Szarepka were asked "to leave for their capitals for consultations". Simultaneously, two Belarusian ambassadors were recalled from Brussels and Warsaw.
Benjamin Franklin once sharply noted: "Whatever is begun in anger, ends in shame". On 28 February the European Union has decided to withdraw all its member-states’ ambassadors from Minsk.
The decisive, swift and surprisingly coherent actions of the EU took Belarusian authorities aback. Later they begged Russia for diplomatic and moral support, did their best to explain that the EU ambassadors can return to their workplaces, but nothing really helped. The time has come to perform some due and proper political steps towards Europe.
Slight Changes Came with the Spring
Notwithstanding the subtitle, the spring began with another governmental action isolating Belarus from the West. On 15 March 2012 two young men: Vladislav Kovalev and Dmitry Konovalov were executed for the terrorist act in Minsk subway that had taken place in April a year before.
Death penalty has always been a sticking point in Belarusian-European relations. Moreover, some experts and observers asserted that the investigation had been done improperly, with many procedural violations while others regarded it as normal.
European officials and domestic civil activists criticised the Belarusian authorities for the undertaken act. Some raised their voices in support of new portion of sanctions against the regime. Others doubted their effectiveness.
On 23 March these sanctions were adopted. Not only Belarusian officials were included into the new "black list", but also businessmen who were considered to be the regime’s sponsors. The message was pretty plain. The EU switched to hard line towards Belarus.
After the presidential elections of 2010 several tens of political activists got in prison. During the 2011 many of them were released with or without signing the plea for presidential pardon. Experts believe that was done in order to get some concessions from the EU. Spring of 2012 became the new "time to bargain".
On 14 and 15 April two political prisoners were released: Andrey Sannikov, ex-candidate for presidency, runner-up on the elections of 2010 and Dmitry Bondarenko, coordinator of the "European Belarus" campaign.
Soon after this event European ambassadors returned to Minsk. There was no doubt: their freedom was beholden to the European firmness and solidarity. Spring didn’t resolve all the problems in Minsk-Brussels relations, but the degree of tension was surely mitigated.
In May the news came from the East. Vladimir Putin, aspiring to reunite former satellites within the new integration project – Eurasian Union, came back to full power in Russia. He chose Belarus as a first country to visit, which seemed more like a landlord travelling across his provinces and reminding who was still in charge there.
Swedes Warmed the Summer Up
Usually, summer is a time of low political activity. So was it in Belarus until 4 July. On that day an airplane, chartered by the Swedish advertising agency "Studio Total", illegally entered the Belarusian airspace and parachuted several hundred teddy bears with notes carrying pro-democracy messages. The event was immediately called "the teddy bear airdrop".
In the best soviet traditions the first official reaction was the denial. Only by the end of July Belarusian government had officially recognised the fact of illegal intrusion in sovereign air-space.
Soon after that Lukashenka sacked two top generals, the heads of Belarus’ border guards and of air defence, for failing to intercept the plane. Belarusian-speaking Swedish ambassador Stefan Eriksson was expelled from the country.
Then the cannons of state propaganda fired their volley. Eriksson was convicted of supporting the Belarusian opposition and assisting the trespassers. That time Europeans decided not to escalate the tensions and other ambassadors remained in Minsk.
Inside the country the summer passed in preparations for the September parliamentary elections. The opposition divided into three camps: those who fully partake in the elections, those who utterly boycott them and those who register their candidates with further exit from the race.
Gloomy End of the Year: No Gleams of Democracy
Parliamentary campaign was, by all estimates, very passive. Political apathy and people’s distrust to both governmental and oppositional candidates were the prevailing trends before and during the elections.
Besides, the government resorted to its traditional tools. Some oppositional candidates were not registered. Their representatives had almost no chance to get into electoral committees. Even their legally guaranteed TV-speeches were censored.
In such an atmosphere nobody really hoped for the elections to be fair or democratic. On 23 September 109 pro-governmental candidates were "elected" into the House of Representatives – the lower chamber of Belarusian parliament.
No mass oppositional rallies followed the elections. OSCE observers traditionally didn’t recognize the elections as free and democratic, while observers from post-soviet states did. European leaders refused to deal with newly formed Belarusian parliament.
On 15 October European Union prolonged sanctions against Belarusian regime for one year, which caused relatively moderate verbal response of Belarusian Ministry of Foreign Affairs.
Meanwhile, Andrey Sannikov, ex-candidate for presidency that had been released from prison half a year before got political asylum in the United Kingdom and moved there with his supporters’ team.
At the end of the year Belarusian president astounded the whole country by the now infamous Decree No9. According to this decree, if you are an employee of a certain "modernizing" enterprise you can’t leave the job without special permission from your boss. His decision, in its turn, can be appealed to the head of the local administration. If you refuse to work you will be fined with a gross sum of money or subjected to forced labour at the same plant. The decree has already been characterised as introducing the new serfdom in Belarus.
All in all the year of 2012 in terms of political development has been just another wasted twelve months. There are still several political prisoners in jails. Parliamentary elections passed unnoticed. Relations with the West are cold and strained, while economic misunderstandings with Russia tend to transform into political tensions.
Paraphrasing one famous Israeli politician of the 20th century, Belarusian authorities never miss an opportunity to miss an opportunity. And the outgoing year is the best example.
Belarus Economy in 2012: Low Growth and Fragile Stability
The currency crisis of 2011 has revealed the limits of the Belarusian economic model. On the one hand, it became obvious even to the most conservative government officials that changes in economic policy are required.
On the other hand, the resurgence of oil exports in the first half of 2012 allowed the government to avoid necessary reforms. The economy finishes this year with a low output growth rate, but fragile macroeconomic stability is achieved.
The prospects for 2013, however, do not offer much optimism, at least in terms of growth performance.
Drivers of economic growth
In 2012, economic growth has slowed down despite rising real incomes of the households. In the second half of the year, this factor superseded net exports as a key driver of GDP growth during the first half. The political promise to increase monthly average wages to $500 lifted real wages – both in national and foreign currency – from spring 2012 on. Real wage growth surpassed the corresponding dynamics of labour productivity.
In order to stifle inflation, the National Bank increased real interest rates, while the government continued stringent fiscal policy.Although poverty dropped to 5.3 per cent (with regional rates about 6.3 per cent), households are hardly above the level of 2007. Yet, average household still spent more than forty per cent of their incomes on food, despite low food inflation in 2012.
Privatisation and investment
Facing a problem of weak growth, authorities announced plans to set up ‘highly productive’ enterprises, but no meaningful steps have been made. In similar fashion, privatisation has not been moved beyond discussions. Authorities seek to maximise privatisation revenues by looking for the most generous bidders, both at home and abroad.
However, re-nationalisation of two major confectionery factories made foreign investors very cautious in entering the Belarusian market.The Investment Forum held in November 2012 has resulted in twelve ‘intensions protocols’ only.
The inflow of foreign direct investment reached the planned figure of $ 1.2 billion before the end of the year. Industry attracted about eleven per cent of that modest amount. This is a low rate to contribute to modernization of the national industry.
China and Russia are two major foreign investors. As for China, it is more concerned with promoting its own exports rather than investing. Russia has helped Belarus to obtain a third instalment of a loan from the Eurasian Economic Community, while the provision of the fourth instalment was negotiated successfully.
Authorities have not abandoned its stringent fiscal policies, though wage increases in the public sector contributed to rising expenditures on healthcare and education. Restrained fiscal policies have been determined by the need to contain inflation, particularly against the background of high inflationary expectations.
It could realistically be expected that the 2012 budget would be at least balanced or turned into a small surplus (below one per cent of GDP). This is due to a relatively modest foreign public debt burden, which is to increase from 2013 onwards.
This increased burden could lead to a budget deficit, given that the structure of revenues and expenditures would remain unchanged, including financing of investment programs. Although the government has substantially cut subsidization of industry and agriculture in 2012, it is likely to remain at the level of 3.5–4 per cent of GDP.
Limits of monetary policy
To a large extent, economic growth has been suffocated by a policy of high interest rates. This policy is adopted to combat high and volatile inflationary expectations, resulting from the 2011 currency crisis. This policy was necessary to stabilise exchange rate, particularly in the first half of the year. However, inflationary expectations have not been reduced as people retain memories of devaluation and accelerated inflation.
Throughout 2012, the majority of banks have been recapitalised to cover the real losses of regulatory capital incurred after the devaluation-fuelled inflation of 2011. Given high interest rates policy, banks have been unwilling to expand credit supply, and to take additional credit risks.
In the environment of credit shortage, only banks with access to cheap capital – particularly subsidiaries of Russian banks – were able to expand their credit portfolios and to increase their shares at the domestic market. The mix of borrowers has also changed towards larger shares of export-oriented companies and households. Both categories of lenders can bear the burden of increased interest rates.
It appears that monetary policy is constrained. On the other hand, the National Bank has to stabilise exchange rate in order to make inflationary expectations less volatile. On the other hand, fluctuating exchange rate helps to balance the current account. In this situation, interest rates policy remains the only efficient tool available to the National Bank, but this policy does not address the problem of inflationary expectations.
Current account and exchange rates
Exchange rate fluctuations are welcome to balance the current account. Over January-July, it reached surplus due to the lasting effects of 2011 devaluation and sales of ‘solvents and thinners’ (oil products in disguise, exported without paying customs duties to the Russian budget).
But from August to October, current account turned to deficit. Apart from the effects of real exchange rate appreciation (as prices in Belarus rise faster than in major trading partners), exports of notorious ‘solvents and thinners’ were stopped, while one of the refineries began to operate at lower capacity due to the scheduled maintenance.
Moreover, deterioration of exports performance is related to slower economic growth.Situation at the foreign currency market mirrored the dynamics of net exports.While over the first half of the year, supply of foreign currency by households exceeded their demand, between June and October, demand exceeded supply.
However, by the end of the year, hoarding of foreign cash has become less attractive than national currency deposits. As for the enterprise segment of the currency market, similar dynamics was observed (with a surplus over the seven months and a deficit in August and September).
Implications of Russia’s membership in the WTO
A strong challenge comes from Russian membership in the WTO. Belarusian producers are likely to face more intense competition at home and abroad. WTO membership makes Belarus a de-facto member, due to the Customs Union with Russia. Heavy trucks production could be adversely affected in the short run, while production of refrigerators, TV-sets, and pharmaceuticals – over the medium to the long run.
Moreover, WTO rules demand to reduce support for agriculture, which is heavily subsidised. In response, Russian government may impose quotas on Belarusian agricultural products. In that case, dairy and meat production would be negatively affected.
The challenge of labour migration
Another important challenge is also related to the eastern neighbour: Russia becomes an increasingly attractive option for temporary labour migration. In 2012, formal employment continued to decrease, and released labour forcehas opted for temporary labour migration. Despite administratively-enforced wage increases, wage gap remains an important push factor of migration. Estimates vary from 400 to 700 thousand temporary labour migrants from Belarus per annum.
At home, a pilot labour force survey provides a very preliminary figure of unemployment, ranging from five to six per cent, which is rather similar to the figure recorded in the 2009 census.
The problem of ‘disappearing labour’ has also been recognised by the authorities. The President demanded to check job leavers at wood processing companies with modernization underway, while the Deputy Prime Minister proposed to charge non-contributors to the State pension fund for visiting hospitals.
Prospects for 2013
A forthcoming year is the time to prepare for repayment of accumulated foreign debts, as debt burden increases considerably in 2014–2015. Current account pressures are likely to remain strong, so depreciation of the national currency seems to be a feasible option. As the economy drifts away from the peak of the political business cycle, expansionary policy is no longer necessary. In this situation, economic growth is likely to be modest.
Belarusian Economic Research and Outreach Center
This article is a part of a new joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC) – a Minsk-based economic think tank.