Belarus faces its first investment claims
Since gaining independence, Belarus has never participated in proper investor-state disputes. Nevertheless, in late 2017 and 2018, Belarus faced a record-breaking three investment arbitration claims. A Dutch investor in a Belarusian financial institution and two Russian investors in the Belarusian manufacturing registered their claims against the state. All three investors accused the Belarusian government of stripping them of their Belarusian assets and breaking mutual investment treaties.
Such claims potentially harm the image of Belarus for investors, despite the success of such large investment projects as the High-Tech Park and Great Stone Industrial Park. Although Belarus occupies a remarkable 37th place in the Doing Business ratings, the state’s attitude towards foreign investors remains far from perfect.
A scandalous banker claims assets back: JSC Delta Bank versus Belarus
On 22 March 2018, a Dutchman who had invested in a Belarusian financial institution, JSC Delta Bank, registered a claim at the International Centre for Settlement of Investment Disputes (ICSID) in Washington. According to the Dutch claimant, Belarus breached a bilateral Dutch-Belarusian investment treaty.
Prior to 2015, the Dutch claimant had held 75% of JSC Delta Bank, with the remaining 25 % belonging to a Ukrainian businessman, Mykola Lagun. In 2015 Belarus’s Central Bank stripped JSC Delta Bank of its licence. The Belarusian authorities maintained that JSC Delta Bank illegally withdrew money from the country and failed to meet its obligations to creditors. The authorities initiated several criminal cases against the bank’s top management on charges relating to the withdrawal of funds. JSC Delta Bank was later declared bankrupt, yet the bank’s liquidation procedures still continue.
By 2016 JSC Delta Bank’s part-owner, Mykola Lagun, had threatened the Belarusian authorities with the international courts. Interestingly, Lagun, also retained partial ownership of Ukraine’s Delta Bank until 2015. With the bankruptcy of Delta Bank the same year, the country’s deposit guarantee agency reportedly paid out more than $600m to depositors. Lagun has been cooperating with Ukraine’s investigative authorities on charges of failure to meet the Delta Bank’s obligations to Ukrainian creditors. The JSC Delta Bank’s case became the third investment arbitration case against Belarus since late 2017.
A failed manufacture giant in Asipovichy: Grand Express versus Belarus
On 31 January 2018, Russian company Grand Express also registered the largest arbitration case against Belarus with the ICSID in Washington. The Russian company claimed that Belarus breached two treaties protecting foreign investment in the Eurasian Economic Union.
Prior to 2015, Grand Express owned a 74% stake in the Asipovichsky Carriage Works (AVZ). The remaining stake belonged to the Belarusian Railways (BelZhD). The partners intended to build a plant with a production capacity of 2,500 freight cars and 2,000 tank containers per year.
Grand Express participated in the plant’s infrastructure building and acquired modern equipment. Nevertheless, in 2015, the parties quarrelled regarding the purchase of rail wagons. Grand Express maintained that the Belarusian government and BelZhD failed to meet their obligations; the Belarusian authorities, on the contrary, blamed the Russian stakeholder.
Grand Express failed to acquire compensation for the built assets from the Belarusian authorities and, in March 2017, AVZ filed for bankruptcy.
$200m for a trolleybus depot? Manolium Processing versus Belarus
On 15 November 2017, the Russian company Manolium Processing informed the authorities of their arbitration claim against the Republic of Belarus. Similarly to Grand Express, Manolium Processing accused the Belarusian authorities of breaching the 2014 Treaty on the Eurasian Economic Union. The amount of the claim reached $200m.
The cooperation between Manolium Processing and the Belarusian government began in 2003, when Manolium’s owners, Russian citizens Aram Yekavian and his partner Andrei Dolgov, won a land plot tender in the centre of Minsk. The Russian investors planned to build a business centre and a five-star hotel at a total cost $200m. In return, the investors agreed to invest $15m in a trolleybus depot nearby and $1m into the National Library construction fund.
As a result, Manolium Processing had built a trolleybus depot, however, the Belarusian authorities failed to transfer the land plot. The Russian company asked for the compensation over the built depot, yet the Belarusian authorities maintained that Manolium Processing breached its obligations to the investment contract.
The Russian company further tried to restore its rights in Belarusian courts, however, the courts also failed to secure the compensation for the depot and obliged Manolium Processing to pay damages to Belarus.
In early May 2017, the Russian company submitted a pre-arbitration request, thus allowing Belarus six months to resolve the dispute amicably. Nevertheless, the sides failed to reach a pre-arbitration settlement. Currently, Manolium Processing requests compensation of $171m in lost profits and $37m over the expropriated property. The hearings will take place in summer 2019 at the Permanent Court of Arbitration in Hague. The Ministry of the Economy will represent Belarus.
The winner takes all
The largest investors to Belarus come from Austria, China, Russia, Ukraine, and the United Kingdom. On the verge of the growing conflict with Russia, Belarus will have to increase and diversify its foreign investment flows. This will allow to modernise the national economy and decrease the economic dependence on Russia. At the same time, according to Jason Pellmar from the International Finance Corporation, Belarusian legislation still lacks proper legal protections for foreign investors. As a result, Belarus inevitably makes mistakes in dealing with foreign investors.
Should the Dutch and the Russian claimants win their investment cases, other investors might consider applying to international courts rather than conduct difficult talks with the Belarusian authorities. Belarus might also reconsider its rough attitude towards foreign investors. The Belarusian government might finally realize that unwise stripping foreign investors of assets not only results in high compensations but also in the country’s reputation damage.
Russian oil subsidies: a ticking bomb scenario?
In August-October 2018, Belarus and Russia held difficult negotiations on duty-free supplies of crude oil and oil products for the remaining part of 2018 and for 2019. Russia insisted that in order to receive concessions in future, Belarus had to supply oil products produced from Russian oil only through Russian ports. Belarus, on the contrary, refused to abandon Baltic ports in favour of the Russian ones for political and economic reasons.
Several Russian analytics claimed that with Russia’s termination of the duty-free oil supplies, Belarus’s economy would immensely suffer. In order to stay afloat, Belarus would have to immediately agree on Russia’s demands on further integration and thus lose a large part of its sovereignty. Moreover, in the times of economic hardships, Alexander Lukashenka could lose his presidency as well.
Belarus’s dilemma: Russian v Baltic ports
On 10 August, Russia suspended the provision of loans to Belarus and ceased its duty-free deliveries of crude oil and oil products. The reason for that was the refusal of the Belarusian authorities to supply oil products produced from Russian oil through Russian ports. Mr Belozerov, the head of Russian Railways, informed the Russian President Vladimir Putin that the Belarusian oil refineries refused to cooperate with Russian Railways, despite the 50% discount on the transportation of their products. Belarus continued to use the infrastructure of Lithuania and Latvia for the transportation of oil products.
According to Belozerov, since the beginning of the year, Russian Railways has transported only 300 thousand tons of oil products produced in Belarus – a far cry from the millions of tons that Belarus has been transporting through Baltic ports. Deputy Prime Minister of Belarus Vladimir Semashko said that Belarus would not reorient the supply of its oil products from the Baltic countries’ ports but would be ready in 2018 to export up to one million tons of oil products through Russian ports would it be cost-efficient.
It follows from the statements of Belarusian government officials that, besides economic benefit, political reasons remained no less important reasons for refusing to use Russian ports. Abandoning the Baltic States’ ports in favour of the Russian ports would mean increased dependence on Russia.
In addition, by controlling the Belarusian export of oil products (and it remains the most important article of Belarusian exports), Russia would have fully accurate (up to a ton) data on its volume. It would then be impossible to repeat the situation of 2011-2012, when, in violation of its obligations towards Russia, without paying duties to the Russian budget, Belarus sold oil products worth over 1.5 billion USD.
Lukashenka’s cold reception in Sochi
On 10 August, Lukashenka immediately commented on Russia’s actions that “the Russians are behaving barbarously towards us. They demand something from us as if we were their vassals. And they don’t want to fulfil their obligations under EurAsEC,4 which they invited us to join.”
Belarusian officials said that, given the existence of the union state of Belarus and Russia, Belarus should receive compensation for losses caused by the termination of transfer of the export duty on oil products to the Belarusian budget.
On 22 August, Lukashenka landed at Sochi to meet with the President of Russia. He was immediately made to understand that there would be no easy talks. At the airport, he was met by the head of the administration of Krasnodar Region.
On the eve of the talks, Lukashenka said that he would discuss with Putin questions related to the resumption of duty-free oil supplies and the provision of loans. However, there are reasons to believe that Putin spoke with Lukashenka as he would speak with the head of the administration of one of the Russian regions, who asked him to provide subsidies. There was no regular press briefing after the talks. Lukashenka failed to attend the “cultural program” after the meeting – a wrestling tournament.
Off with oil subsidies – and off with Lukashenka?
At that time, Belarus appeared in a difficult situation. If Russia proceeded with a unilateral decision to terminate the duty-free oil supplies, the price of crude oil for Belarus would have significantly increased, which would entail strong deterioration in the balance of payments. The budget losses for Belarus would be so large that they could not be covered by the current sources of foreign exchange earnings.
E. Koltashov, a Russian energy expert, claimed that “in this situation, Belarus [had] only one option – to integrate Russia”.
The Russian online portal Pravda.ru published an article entitled “Lukashenka’s Double Game” claiming that
a possible collapse of the Belarusian economy will force the country to accept all Russia’s conditions for the sake of survival, and these are well known. This is the deployment of a Russian airbase in Belarus; the introduction of a single currency for the two countries with an emission centre in Moscow; and the establishment of an interstate political and economic body like the European Commission, whose decisions will be binding on Minsk.
Only after Minsk agrees to all these conditions will Moscow give the go-ahead to the implementation of a kind of “Marshall Plan” to save the Belarusian economy from the default”.
Mr Holmogorov, a Russian publicist interviewed by the website EurAsia Daily, noted that in the background of economic crisis in Belarus, Russia could give a clear signal to the Belarusian society that it supported not Lukashenka but another politician, a pro-Russian one.
Mr Dryze, a columnist at the popular Russian newspaper Kommersant, expressed the same opinion claiming that
“Russia is tired of Lukashenka and no longer wants to give him money. He has been issued a tough ultimatum.”
In early August, the Russian news agency TASS published a report that Lukashenka had a stroke. This information had a certain resonance. Lukashenka himself denied those rumours.
How long will the peace last?
By the end of September, it was already clear that Russia underestimated Belarus’s capacities to resist pressure. The threat of Ukrainian autocephaly added additional bonuses to the Belarusian side. On 22 September, Putin called Lukashenka. It was at the initiative of the Russian side that they discussed and resolved the issue “on the implementation of agreements on the cash inflow from crude oil duties to the budget of Belarus”.
The sides did not negotiate the issues of creating a common visa space, of dislocating a Russian military base in the territory of Belarus, of selling Belarusian enterprises of the military industrial complex. The Russian side neither set the claim to transport oil products via Russian ports.
Nevertheless, though Russia has recently backed down on its threats, the question of Belarus’s dangerous economic dependence on Russia remains as acute as ever. When Belarus eventually fails to find reasonable counter-arguments, Russia may exert further pressure on Belarus to proceed with genuine integration as it is understood in Moscow. A high probability remains that such negotiations will be accompanied by pressure, including the curtailment of oil and gas subsidies on a critical scale for Belarus.