Does Belarus have a working plan to withstand sanctions?
Since the 2020 political crisis began in Belarus, the EU, the UK, and the US enacted targeted sanctions against Belarusian officials and government-linked businesses. These sanctions did not aim at the economy as a whole. Experts did not expect them to cause any macroeconomic-level damage to Belarus.
Later, in 2021, the Belarusian authorities’ actions against the opposition violated various international laws. Two noteworthy events included the state’s exploitation of Middle Eastern migrants as part of a hybrid attack on Poland’s and Lithuania’s borders and the hijacking of a Ryanair flight from Athens to Vilnius.
These acts of state terrorism resulted in sectoral sanctions by the EU, the UK, and the US. Contemporary estimates predict the 2021 sanctions potentially affect Belarusian exports worth up to 5 per cent of GDP. Given the growth potential of the Belarusian economy of around 2 per cent per year, IMF and EBRD experts expect the negative impact of sanctions should amount to 1.2 and 1.5 percentage points of GDP respectively. But after Lithuania banned the transit of potassium through its territory, forecasts became even gloomier. In January 2022, the World Bank updated its prognosis downward. It estimated a contraction of GDP by 2.8 per cent in 2022.
On 24 February 2022, Russia started a war against Ukraine. Russia used Belarusian soil to launch its troops and missiles into Ukraine. The international community identified Belarus as a party at fault in this aggression. The West then enacted the most severe sanctions in Belarusian history. The sanctions were compounded by a loss of trade from both Russia and Ukraine, which were Belarus’s top international trade partners.
Sanctions and trade distortions
Photo: bne IntelliNews
The sectoral sanctions announced by the EU and the UK forbid the import of nitrogen products, certain types of potash, synthetic materials, wood products, rubber products, cement, and certain metal and machine products. In the previous years, the export of these categories to the EU amounted to 7.3 per cent of Belarus’s GDP. Among the negative factors preventing the reorientation of Belarus’s exports is the high level of toxicity associated with Belarus. Some companies are voluntarily exiting Belarus. Several logistics firms have chosen to avoid it entirely. Probably the main manifestation of this toxicity was a political scandal in Lithuania over the transport of Belarusian fertiliser. Along with several high-profile resignations, the scandal resulted in the restriction on the export of potash goods through Lithuanian territory. Yet another difficulty is that certain exports to the EU were business segment-specific.
Besides formal sanctions, a potentially large negative impact on Belarus comes from the plain fact that Ukraine used to be its second-largest trade partner. Exports to Ukraine sat around 5.5 per cent of GDP and imports at 2.5 per cent. Currently, most of the exports and imports to and from Ukraine are de-facto stopped. The resumption of previous trade volumes with Ukraine is unlikely for the foreseeable future because of Belarus’ co-aggressor status.
Another affected area of the Belarusian economy is its exports of services. Notably, Belarus’s exports of transportation services used to be worth roughly 7 per cent of GDP. In late April 2022, the EU banned Belarusian cargo trucks from entering its territory. In response, European carriers were banned from entry into Belarus. We are yet to see the impact of these bans, but it’s clear that the profits of Belarusian transport companies are set to shrink. In addition, the IT sector, which used to generate 4 per cent of GDP in exports, is likely to contract. There has been a mass exit of IT companies from the country. An expert-opinion based estimate predicts up to a one-quarter loss in these categories.
Policy response by the government
Dealing with the root of the problem, namely the provision of Belarusian territory for Russian military use, was never discussed publicly by Belarusian officials. The government has focused on strategies to treat the symptoms, rather than focusing on the disease itself. Among the coping strategies that have been discussed publicly, the main ones are: (1) an increase in Russian support for Belarus and a rise in Belarusian exports to Russia; (2) the reorientation of exports towards Asian and developing markets; and (3) a greater mobilisation of interior resources that can be done with broader government involvement.
Belarus-Russia border. Photo: jamestown.org
New relationships with Russia
After the escalation of the Russia-Ukraine war, Alexander Lukashenka said he supported Moscow’s decision and was ready to help Russia in everything. In his later comments, he claimed that Belarus together with Russia would survive the sanctions and would live “better than in the Soviet Union.” Currently, Belarus is the only post-soviet country which openly supports the Russian invasion.
Belarusian officials claim they have agreed to postpone debt payments to Russia until 2027–2028. The suggestion was also made that Russia would offer low energy prices for Belarus and nominate payment in roubles.
Another important dimension of the Belarus-Russia relationship is trade. Half of Belarus’s foreign trade is linked to its eastern neighbour. Thus, the predicted (by the World Bank) 11 per cent contraction of the Russian economy implies a corresponding decrease in demand for Belarusian goods and services. However, this negative effect can be partially offset by the fact that several international companies are exiting Russia so Belarus may potentially take over some of their markets.
The turn East
Belarusian officials have always articulated the idea of reorientation towards the East. This process is indeed taking place at some scale. But China cannot fully replace European markets for several reasons. First, due to a lack of competition among buyers, China can demand to pay lower prices from Belarus. Second, for a number of Belarusian exports, the EU was a premium, high margin market. Any reorientation of exports towards China means at best lower margins and at worst the loss of any profitability due to higher transport costs. Lastly, China, as a large world player, values its relationships with European and US markets much more than its interactions with Belarus. Any toxicity linked with Belarus is likely to affect China’s decisions as well.
Economic mobilization
A traditional Belarusian coping strategy is the enlargement of the government’s role in the economy during a crisis. Even before the war, Belarus started to tighten fiscal discipline. It raised many taxes and cancelled exemptions. Prominent business associations, which expected certain liberties from the government, have been told the government needs money for the economy and will not postpone or lessen taxes.
With the impact of sanctions, the disruptions of trade with Russia and Ukraine, and the absence of a sound government plan, the war may result in a sharp drop in Belarus’s GDP, a rise in un- and underemployment, and an increase in inflation. The World Bank expects a 6.5 per cent contraction of Belarusian GDP. Other estimates are even more severe, ranging from -8 to -12 per cent of GDP.
Lev Lvovskiy, PhdD
Belarusian Economic Research and Outreach Center (BEROC)
Can Russia compensate Belarus losses from Western sanctions?
On 12–13 April 2022, Alexander Lukashenka paid a working visit to Russia’s Far East. This was his third trip to the neighbouring country this year. According to Russian media, talks taking place between Lukashenka and Russian President Vladimir Putin unexpectedly transformed into a substantive discussion around sanctions. As fresh statistics and new deals show, to withstand Western pressure, the Belarusian regime, far from collapsing, increasingly relies on Moscow. But it results in undermining Belarusian statehood and making the country pliable to Putin’s demands in his war with Ukraine.
Rapid rise in Belarus-Russia trade
Speaking during his recent visit Lukashenka said, “I am glad that these sanctions were imposed on us. Finally, we have begun to cooperate with Russia in the way we should have been cooperating for a long time.” Slightly earlier, at a 9 April Belarusian Security Council meeting, Lukashenka set forth his general vision by saying, “With the departure of Western companies from the markets of the Union State of Belarus and Russia, large niches have been vacated that we need to fill.”
Isolation from the West after August 2020 had already led Belarus to refocus on Russia. Trade between Belarus and Russia in 2021 exceeded $40bn (135 per cent in comparison with 2020). That is a remarkable figure because analysts predicted just 10 per cent growth, to $34bn of annual trade volume, after economic data for the first half-year were published.
Belarusian foreign trade in goods (blue—total, red—export, green—import). Image: Belarusian Ministry of Foreign Affairs.
Last year, state statistics committee Belstat stopped publishing many statistics on exports and imports. But it is safe to assume growth has been driven by the consequences of increasing Western sanctions. Media also reported of Belarusian firms responding to Western sanctions by turning to Russia. For example, BelAZ exchanged the US engines on its trucks for Russian ones.
Trade with Russia will keep growing this year. Harsher Western sanctions on Belarus and the collapse of trade with Ukraine (Belarus’ second-largest economic partner) have produced knock-on effects. Minsk has lost commercial opportunities in multiple areas. At the same time, there are new opportunities in Russian markets due to the rupture in commercial links between Russia and the West.
The Belarusian government hopes to benefit from the increasing access of Belarusian firms to Russian public procurement. In May, Russia’s Finance Ministry will initiate proceedings to empower five Belarusian banks to issue guarantees for suppliers willing to participate in Russian government procurements. This will simplify participation in Russian state orders for Belarusian suppliers. During the recent Far-East visit, Lukashenka lobbied for Belarusian participation in the construction of Russia’s new spaceport near Blagoveshchensk. The purpose of the spaceport is to diminish Moscow’s dependence on the former Soviet Baikonur Cosmodrome in Kazakhstan.
Energy problems
More important news was announced after the Lukashenka-Putin summit. An agreement is in the works between Russia and Belarus to set up a single electricity market, which would launch in 2024. Such an agreement will help Minsk to export excess electricity from Belarus’ nuclear power plant—built with a Russian loan—to Russia.
After investing heavily in energy, Minsk found itself in dire straits when meaningful economic ties with all neighbouring countries except Russia became disrupted. Belarus itself does not need additional energy. The country in 2020, even without a working nuclear power plant (NPP), had an energy surplus: generation amounted to 38.68bn kWh, with a consumption of 33.2bn kWh, and a relatively stable internal demand for electricity.
Astraviets nuclear power plant. Image: zviazda.by.
Minsk built an NPP for two reasons. First, it sought to reduce dependence on Russian gas. Throughout the 2010s, Minsk quarrelled with Gazprom. The second reason it built an NPP was to export energy. Lithuania has opposed the project from the very beginning. The first 1.2 GW nuclear power unit of the Russian-built NPP in Belarus was put into commercial operation in July 2021, and the second will go online by the end of 2022. But in recent months all prospects for export in the foreseeable future have evaporated.
Minimal export opportunities
Another important point discussed at the Putin-Lukashenka talks involves oil deals: Russia announced its willingness to support Belarusian refineries. They are the most advanced in the region but have suddenly lost their regional market access.
Although Minsk signed contracts with Russian oil suppliers for 2022 on better terms than in previous years, the EU in June 2021 introduced sanctions against Belarusian oil and chemical exports. Belarusian petrochemical products cannot be exported via traditional routes. Anticipating troubles, the Belarusian government planned only 12.5m tons of crude oil would be refined this year. To compare, Belarusian refineries usually refine about 17–18m tons a year.
What helps the Belarusian authorities to keep the country running is getting gas from Russia at a fixed price of $128.5 per 1,000 cubic metres, which is a fraction of world market prices. Presidential Administration Deputy Head and former Economy Minister Dzmitry Krutoy earlier commented that Belarus considers gas agreements with Russia as a resource to compensate for losses incurred by sanctions and as a source of competitive advantage.
Dzmitry Krutoy. Image: BelTA.
A history of troubled relations
Good relations between Minsk and Moscow are not taken for granted, and the Belarusian leadership is perfectly aware of this. When asked in jest whether Lukashenka himself would like to journey into outer space, he responded in kind, “I would like to! I used to think that my older brother might send me there and never bring me back. Now, I don’t think so anymore.”
Lukashenka’s reply alludes to the complicated history between Minsk and Moscow. For example, on 13 January, President Putin held an open, friendly meeting with Dmitri Mazepin, owner of Uralkhim, a major potash producer and the key competitor of Belarus’ potash company Belaruskali. Recent allegations were made that Uralkhim had financed political projects aimed at toppling Lukashenka. Russian newspaper Kommersant reported, “We can safely assume that Uralkhim owner [Dmitri Mazepin] financed the Belarusian opposition with the blessing of the Russian president.”
The new political economy of the Belarusian regime—with Belarus’ external economic relations being either limited to Russia or done through Russia—has been a predictable consequence of the 2020 post-election crisis in Belarus and the deterioration between Belarus and the West that followed. The government can preserve the current political situation in Belarus for as long as Putin backs it because of severed ties with all but Russia. That, obviously, harms the development prospects of a nation that can tap on Russian resources but has been largely cut off from the rest of the world.
