Belarus-Latvia: Economic Interests Prevail
Latvia has been consistently opposing economic sanctions against the Belarusian government. The EU hopes to use sanctions to persuade Belarus authorities stop human rights violations.
However, Lativa is sceptical about their effectiveness and can suffer significant economic losses as a result of them. Last year the amount of bilateral trade reached a historical maximum of $33bn.
Despite that, the two countries chose different geopolitical paths of development and thus their relations depend heavily on the EU and Russia – their patrons, accordingly. And while Belarus is a dictatorship and conflicts continue with the EU, it is difficult to expect any breakthroughs in Belarus-Latvia cooperation.
From Wars to Good Neighbourhood
The history of Belarusian-Latvian relations can be traced back to the 12th-13th centuries when the Principality of Polatsk held its authority over the Livs and the Latgallian principality of Jersika in the southeastern part of today’s Latvia. The Polatsk Principality is a forerunner of modern Belarusian sovereignty and was founded on the Dvina river that flows right through Latvia to the Baltic Sea.
Polatsk controlled this important water trade route for a long period of time. Nevertheless, German knights compelled the principality to grant German merchants free river passage and concede all possessions within the Latvian territory in 1212.
Until the end of the 16th century Latvia stood apart from the Grand Duchy of Lithuania that embraced the Belarusian territories. In the 18th century Latvian territories were annexed by the Russian Empire. Since then, Belarus and Latvia lived in one state for the most of time which resulted in intensified trade and industrial ties. They have especially grown under the Soviet Union.
Belarus never condemned Latvia for its language policy and its approach towards the Second World War Read more
After its collapse, Belarus and Latvia became independent states with different geopolitical paths of development. However, Belarus never condemned Latvia for its language policy and its approach towards the Second World War, in contrast with Russia.
But scandals have not evaded the two countries. In July 2006 Belarusian authorities opened a criminal case against Latvian diplomat Reimo Shmits for "distribution of obscene materials" and searched his apartment in Minsk. There is possibly no coincidence that this person was responsible for contacts with Belarusian opposition leaders. Latvia recalled its ambassador Maira Mora (who is now head of the EU mission in Minsk) for almost three months. Apart from this incident, Belarus and Latvia have enjoyed mostly harmonious relations.
Strong Ties Between Businessmen
An impressive number of joint organisations work on relations between the two states: Belarusian-Latvian Investments Forum (since 2005), Belarusian-Latvian Business Forum (since 2008), Belarusian-Latvian Society for Economic Ties, Club of Latvian Businessmen under the Latvian Embassy in Minsk and many others.
Direct foreign investments from Belarus into the Latvian economy almost doubled in 2011 Read more
Direct foreign investments from Belarus into the Latvian economy almost doubled in 2011 in comparison with the previous year. It was a historical high of the decade. Latvian businessmen are not behind: they invested more than $700m into the Belarusian economy over the last five years.
As for trade ties, Belarus traditionally enjoys significant surplus due to beneficial supplies of petrochemicals produced from Russian oil. Last year Belarusian export to Latvia was 20 times higher than import from Latvia while the amount of trade rose to approximately $3.3bn. Notice the difference: it dropped to $1bn when Belarus was at odds with Russia over oil prices in 2010.
This proves again that Belarusian trade ties with the EU countries are not so fundamental as with Russia. It is one of the main reasons why Lukashenka so easily ignores the EU criticism of his policies.
Why Latvia Opposed EU Sanctions Against Belarus
During the EU-Belarus diplomatic row in February-March, many analysts were confident that Brussels may impose tough economic sanctions on Belarusian enterprises. Politicians in Baltic states were aware of the impact of this step on their economies, that is why Lithuania and Latvia opposed EU sanctions.
8.1% of Latvian state budget revenues depend on railway transit of Belarusian cargoes Read more
For example, director of the Latvian Employers Confederation Liga Mengelsone said that Latvia's colls could be $480m in case of sanctions and European institutions would definitely not refund this money. According to her, 8.1% of Latvian state budget revenues depend on railway transit of Belarusian cargoes.
Of course, Latvia depends much more on the EU, so Latvian officials finally expressed their solidarity with the EU approach towards the Belarusian regime. But there is still covert dissatisfaction with what is going on in EU-Belarus relations.
In 2009 the Latvian GDP fell by 18% and its economy now needs sources for development which may be found in Belarus. Recently a prominent Latvian construction company won a $100m tender to build a Hyatt Regency hotel in Minsk. In addition to that, Rietumu bank experts assure that Latvian businessmen are ready to take active participation in privatisation of Belarusian state assets.
People-to-People Contacts Stalled by Authoritarian Belarus
Latvia is a pioneer of small border traffic with Belarus that entered into force this March. More than four thousand Latvians and almost a thousand Belarusians have already obtained permission to cross the border between two countries without visas for 90 days over half a year. Latvia also joined Polish initiative to issue no-fee national visas for Belarusians since January 2011.
Last May Belarusian Railways restored a railway route "Minsk-Riga" that had existed until the USSR collapse Read more
Each year about 100 thousand Latvians visit Belarus. Close ties that were established by them and Belarusians during the Soviet times explain this. Moreover, many of those Latvians are actually of Russian ethnic origins – relatives of those who worked for Latvian industries or the USSR Baltic fleet. Last May Belarusian Railways restored a railway route "Minsk-Riga" that had existed until the USSR collapse.
Latvia is also of great importance for Belarusian diaspora. Belausians are the second largest ethnic minority in the country after Russians. Around 80 thousand Belarusians permanently live on the Latvian territory. There is even a Belarusian school in Riga patronised by the Latvian state. This lays the foundation for greater cooperation between Belarusian and Latvian people.
Latvia as well as Poland and Lithuania certainly need Belarus to increase the weight of Eastern Europe in the EU affairs, because the strongest Eurozone countries dictate their terms to the rest of Europe. Unfortunately, the potential of regional cooperation is not easy to fulfil until Belarus is a dictatorship.
Economic Liberalisation in Belarus: Yet Again?
On 7 May Alexander Lukashenka signed Decree No. 6, a measure that could dramatically improve the business climate in Belarus. This is one of the most advanced pieces of economic legislation adopted by the current government.
The decree is a reaction to the challenges of the Eurasian economic integration project with Russia and Kazakhstan and aims to boost the attractiveness of Belarus for foreign and domestic investments. However, previous attempts to improve the business climate showed that it was not enough to adopt liberal legislation to bring about real change.
The inconsistency from the government, its poor macroeconomic policy and opposition to reform from within the political elite remain the main major obstacles standing in the way of prospective investors.
Previous Attempts to Liberalise the Belarusian Economy
The Belarusian authorities have declared liberalisation of the country’s business climate as their priority many times before. Several years ago Alexander Lukashenka demanded that the country entered the top-30 list of the World Bank’s Doing Business ranking. Then the government initiated a series of improvements to the business climate – among other measures it liberalised start-up procedures and slightly enhanced the taxation system. But this effort was not enough. Currently, the country is ranked 69th.
In 2008 and 2009, presidential decrees established favourable conditions for doing business in rural areas and small towns. They simplified procedures and waived certain taxes for small enterprises there. The decree became a model for a more fundamental document, Directive No. 4, that was signed on 30 December 2010.
it even seemed that after the return of generous Russian subsidies in 2012 liberalisation was off the agenda. Read more
Directive No. 4 laid out a detailed vision for microeconomic liberalisation across the whole country. Its pro-market spirit caused high expectations in the Belarusian business community and among local and international experts. However, the authorities failed to carry out the essential reforms that Directive No. 4 envisioned. The government’s contradictory policies during the economic crisis of 2011 “buried” all the expectations. And it even seemed that after the return of Russian subsidies in 2012, liberalisation was off the agenda.
Competition in the New Economic Reality
On 1 January 2012 Belarus became a part of the Single Economic Space with Kazakhstan and Russia. Goods, services, capital and labour forces can now freely move across the SES. Belarus has to compete with its integration partners for businesses that want to work on the SES market and also for foreign investments.
It is clear that without real liberalisation Belarus will lose the competition. Both Russia and Kazakhstan have more stable and less regulated economies. Some of Belarus' own entrepreneurs have transferred their businesses to Russia, primarily to its western regions. And foreign investors do not want to invest in Belarusian administrative economy either: in 2011 Belarus received only $1.5bn of foreign direct investments.
Wonderful Act of Legislation
The newly signed liberalisation decree (Decree No. 6) comes as a response to the economic realities of the Single Economic Space. Like the decrees of 2008 and 2009, it does not affect cities, but aims to stimulate entrepreneurial activity in small and medium-size towns and rural areas (almost half of the population of the country live there). And it is better than the previous acts because it has more explicit provisions of direct effectiveness which do not require additional implementation measures.
Decree No 6 significantly lightens the financial and administrative burden for businessmen in rural areas and small and medium-size towns. It exempts companies from income and property taxes and tax for individual entrepreneurs that produce their own goods and services (i.e. that do not just trade). It exempts businesses from the obligation to pay certain duties, make mandatory contributions to the so-called state innovation funds and sell 30% of their foreign currency revenues to the state. It also provides easier access to loans and better terms of their repayment.
the decree creates a big special economic zone that spreads over half of Belarus' territory Read more
Moreover, entrepreneurs and companies became absolutely free to choose their commercial partners and conclude contracts with them. In other words, the state significantly relaxed control over business activities. Essentially, the decree creates a big special economic zone that spreads over half of Belarus' territory.
Businesses will enjoy all these rights for seven years after their registration.
Importantly, Decree No. 6 tackles the problem of regional development in Belarus. According to the official statistics, the population of rural areas and small and medium-size towns has been diminishing for the last decade while the population of cities has been growing. As a result, the economic activity in the regions is extremely weak and the quality of life is much lower than in the cities.
What to Expect?
The decree is a very promising piece of legislation. It shows that the current situation forces the authorities to think in the right direction. However, as the previous experience showed, it is not enough just to sign decrees. There are several factors that can undermine the good spirit of Decree No. 6.
First, the Belarusian government has a serious problem with transforming its own strategies and decrees into consistent policies. The aforementioned Directive No. 4 is the most recent example. In spite of numerous declarations, only 20 per cent of that directive’s provisions have been practically implemented.
With inflation exceeding 100 percent a country cannot expect to receive considerable amounts of foreign investment Read more
Second, the government’s awful macroeconomic policy can overshadow any success in microeconomic liberalisation. With inflation exceeding 100 percent like in 2011, a country cannot expect to receive considerable amounts of foreign investment or to revive the activity of local entrepreneurs. Hopefully, in 2012 inflation will not exceed the level of 25-30 per cent. But these are still shocking numbers for investors.
Moreover, in September Belarus will hold parliamentary elections. And elections traditionally cause macroeconomic destabilisation in the country, as Lukashenka’s populist government likes to bribe voters by raising their salaries (which usually means essential money emission). These days we once again hear the same old story about the average salary across the country: Lukashenka is once again demanding that it reach $500 a month by the end of the year. Today the figure stands at $370.
Finally, there are different views on liberalisation inside the ruling elite. There are opponents of reforms in Lukashenka’s closest circle. And there are lots of regional officials and directors of state enterprises who do not see their interests being served in liberalisation. Therefore, they will keep undermining any sound pieces of legislation, including Decree No 6.
