Return of Russian Subsidies: What Are the Implications for Belarus' Economy?

Belarus has managed to secure significant monetary benefits in exchange for its active support of the new wave of Russian integration initiatives. Generous Russian subsidies followed almost immediately after the solemn signing of the Declaration on Eurasian Economic Integration on 18 November 2011. On that same day Belaruskali (read Belarus government) got USD 1 billion as a result of a syndicated loan agreement with Sberbank and Eurasian Development Bank.

And last week more economic carrots followed. They included subsidized natural gas prices, new loans and hard cash for the sale of Beltransgaz.  Although the Belarusian authorities once again managed to secure significant aid from Russia, in the long-run the return of Russian subsidies is likely to do more harm than good for the unreformed Belarus economy. 

Russia Increases Its Subsidies to Belarus

As a result of inter-state talks, Russia provided an unexpectedly generous discount on gas prices. Instead of the USD 244 per 1000 cubic meters that Belarus is currently paying (which is, by the way, also lower than the agreed contract price), in 2012 it will have to pay USD 165.6 (a 32.5% discount). Compared to the contract price for the fourth quarter of 2011 (USD 303), the ‘integration discount’ is even more impressive: 56.7%. It means that the next year Belarus will save around USD 2.5-3 billion on gas.

Another benefit is the restructuring of the debt that resulted from the difference between the contracted gas price for 2011 and the de facto payments made by Belarus. According to the Belarusian Statistic Agency, as of 1 October the debt amounts to USD 106.7 million and will continue to grow until the end of the year. The restructuring comes at the right time time for the crisis-hit Belarusian finances.

It was also announced that Belarus would get a USD 10 billion credit for 15 years to construct a nuclear power plant. If this decision is not reversed or further delayed (which is still a possibility) it will considerably worsen Belarus' sovereign debt problem. But it will also help postpone unpopular socio-economic decisions that the authorities are so afraid of.

Moreover, Belarus struck a deal with Gazprom on Beltransgaz. The Russian monopoly purchased the remaining 50% stake of Beltransgaz for USD 2.5 billion and became the only owner of the company. Taking into account that the market value of Beltransgaz is generally assessed at about USD 3-3.5 billion (which is far from 5) and that the newly opened Nord Stream pipeline and the prospects for the construction of the South Stream pipeline further diminish its market significance, this is a very good deal for Belarus. In the present-day economic situation it is also essential for the Belarusian government that the money is paid in one transaction. Russia paid in four consecutive transactions over four years for the first 50% of Beltransgaz.

There were even more gains for the Belarusian authorities from the new wave of post-Soviet integration. On 28 November it was announced that the Eurasian Economic Community would allocate the second tranche (USD 440 million) of its loan to Belarus. The tranche has been expected for a couple of months. But it did not come until now because the Belarusian side failed to fully fulfill the conditions attached to the loan. Now, in the midst of the ‘integration honey moon’, it seems that the previous conditions do not matter that much.

Implications for the Belarusian Economy

It looks that the ‘good old days’ of affluent Russian subsidies and problem-free credits are back. There are plenty of discussions going on about the Russian rationale behind such generosity and about how long it is going to last. But little is said about the implications of this for the shaky Belarusian economy. And the implications are particularly important for disagreements within the elite on the economic policy which are not yet over.

The new Russian subsidies give more weight to the ‘status quo group’ in the ruling circles who argue against macroeconomic stabilization and any reforms. This group are predominantly representatives of the Presidential Administration. With the newly reached deals on gas and credits it is, of course, very tempting to avoid any socio-political risks associated with reforms and fully resume the proven administrative methods in the economy. The logic of the authorities goes: if the easy money can keep the existing economic model afloa, why reform it and face an unpredictable period of transition?

Unfortunately, this logic can already be seen in the latest decisions and declarations. Take, for example, the return to price regulation which is named as a tool against inflation. Fundamentally, price regulation/non-regulation has nothing to do with the level of inflation. However, it is undoubtedly easier for top Belarusian officials to think so than to curb emission-based state investment that is the real cause of inflation, but which keeps the existing socio-economic model going. As a result, the market distortions and all sorts of deficits will once again be a part of Belarusians’ daily life.

We can also expect that the new Russian subsidies and credits will affect the final discussions regarding the outlook for socio-economic development in 2012 scheduled for mid-December. It will be easier for the ‘status quo group’ to convince Lukashenka that 5-5.5% of GDP growth is possible and desirable in 2012, even though such growth will make 100%+ inflation inevitable. And this will only further aggravate the systemic problems of the Belarusian economy.

To sum up, the new Russian subsidies are likely to once again undermine any hope for market-oriented policies in Belarus. It means that the agony of the Belarusian archaic economic model will last longer and its ultimate demise will be even more tragic.

Yauheni Preiherman

Yauheni Preiherman is Policy Director at the Discussion and Analytical Society “Liberal Club” in Minsk.

Yauheni Preiherman is Policy Director of the Discussion and Analytical Society Liberal Club in Minsk.

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