Belarus and its neighbourhood become a dead end for Europe
In the fifth round of EU sanctions adopted in response to Putin’s invasion of Ukraine, the union prohibited freight transport on member state territory by Russian and Belarusian carriers from 16 April.
Alongside the EU prohibitions on flights and the Baltic States’ decision to close their ports to Belarus, the new restrictions doom the country and its neighbourhood to degradation.
Transit sanctions on Belarus are a part of an economic war against Russia launched in response to its invasion of Ukraine, rather than a part of a realistic plan for regime change in Minsk.
All roads lead to Russia
After Brussels banned Belarusian and Russian heavy goods vehicles (HGVs) from entering the EU territory, many branch operators expected the worst. They feared Minsk would mirror the response and prohibit all EU freight carriers from entering the country. So far, the Belarusian government has taken a milder course. It has restricted EU-based HGVs from moving inside Belarus farther than 50 km. All HGVs will have to deposit their freight at logistics centres in Belarus. From these centres, transportation will be taken over by Belarusian or Russian firms.
Brussels’ move didn’t come from the blue. Poland and Lithuania began unofficially limiting the transit of goods via Belarus approximately a year ago. For example, in mid-February, Lithuania and Poland processed only 60 per cent of the daily, officially agreed to norm. Last week, the Belarusian State Border Committee complained that Polish and Lithuanian authorities were processing less than 40 per cent of the mutually agreed norms for HGV trade.
The bad news, therefore, was not unexpected in Minsk. But it still comes as a blow. HGV transport had been a growth industry, ranking second behind IT in Belarus’ export of services. The Belarusian Ministry of Transport calculates, that in 2021, the value of transport services had increased by almost 40 per cent to $4.3bn. This is the fastest growth rate in the sector’s history. Of this growth, automobile transport companies provided 76 per cent of the total.
Much of this business presumably involved the transport of goods to and from the EU. Minsk continues to withhold accurate statistics. The disruption of supply will not only result in economic decline. It will also reorientate Belarusian citizens more firmly to Russian, Chinese, and other non-Western sources of consumption. Divisions with the EU will not only be political but increasingly a cultural divide, too. This may prove to be the worst blow to regional cooperation and reintegration.
Belarusian access to the sea
Roadway transportation has been exacerbated by continuing difficulties with shipping Belarusian exports and imports. Belarus, as a landlocked country, is now totally dependent on Russian ports. Other neighbouring countries have prohibited Belarusian entities from using their seaports. After the EU introduced limitations on the export of Belarusian oil products, Minsk signed a February 2021 agreement with Moscow on the export of these goods via Russian ports. A one-sided Belarusian dependence on Russia is solidifying.
Minsk has worked to retain access to the sea. Two years ago, Lithuania started to restrict Belarusian potash exports. After Vilnius had rejected the Belarusian investors’ offers to develop the Lithuanian port of Klaipeda, Minsk looked for alternative export routes. Officials redirected leftover credit from a Russian loan to finance a nuclear power plant. In the second half of 2021, these funds were used to begin construction on Belarus’ own, purpose-built port facility near Saint Petersburg, in Russia. These terminals, built specifically for the export of potash, will enter service in 2023.
So, last November, while Vilnius announced the forthcoming prohibition of Belarusian potash transport via its territory, Minsk did face a problem. But it also had a solution literally under construction. In fact, the Lithuanian government acted on its own initiative—US and EU sanctions at the time did not require such measures from Vilnius.
After the problems with potash exports, Minsk then encountered increasing limitations and bans on other types of cargo. By early 2022, Belarus found itself semi-blockaded by all neighbouring states except Russia. It is reported that since March, the Estonian government has banned all transit—even for Belarusian oil products not included in EU sanctions—via Estonia.
In March, Belarusian dictator Alexander Lukashenka announced (and Russian President Vladimir Putin later confirmed) that in two years Belarus would have its “own ports” on Russia’s Baltic shores. Minsk plans to concentrate its imports and exports via these seaports. Construction is reportedly already underway. This case suggests the Belarusian government is working to maintain its agency, rather than simply capitulating to directives from Moscow. Not only has Minsk avoided going to war for Putin, but it also proactively seeks to relieve political and economic pressure from Russia by taking the initiative.
However, the ports of North-Western Russia may not provide a full-fledged alternative for Belarusian firms. Indeed, in a few months, they may lose up to 90 per cent of container cargo volumes, warn Russian logistics experts. These losses would result from the newest round of Western sanctions, decisions taken by European trade hubs, and global container shipping lines, which all aim to stop working with Russia. Of about twenty major container shipping lines, fourteen have already refused to work with Russia. It appears the rest are about to do so, too. Only one, China’s COSCO, appears ready to keep moving Russia-related goods. At the same time, large oceangoing ships (especially from South-East Asia) cannot reach North-Western Russian ports, because of the shallowness in the Baltic Sea. Instead, cargo must be reloaded on small feeders in some European havens to be then brought to Russia.
In this grim situation, Belarusian state media like to emphasise that neighbouring countries, by cutting the links with Belarus, are making this region of Europe into a dead end. Decreasing transit and trade will generate poverty for all involved.
For example, with the loss of the Belarusian potash business, cargo turnover at Lithuania’s Klaipeda port is forecast to fall by almost a third. In addition, Latvian railways are set to lose about a third of total freight turnover (last year, Belarusian freight made up 27 per cent).
However, Belarus itself is also becoming a dead-end. Its significance for both its closest allies, Russia and China, is rapidly fading. The main cause is the ongoing disruption of links between Belarus and its neighbours. Belarus is central to the region between the Black and Baltic seas. The entire area faces a decline with dim prospects for development.
This article cites just some of the numerous instances illustrating how general sanctions imposed on Belarus, and upon entire branches of its economy so far failed to make the regime capitulate. Instead, they drive the region into poverty and Belarus into Putin’s hands. Even worse, many of these sanctions were imposed on Belarus for actions taken by Russia. In a paradox, they further limit any autonomy of Belarus from Russia and at the same time punish it for Russia’s actions. Future efforts to promote democracy and prosperity in the region require revising this approach.
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
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.
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.
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)