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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...

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)

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