Europe’s Economic Sanctions as a Symbolic Gesture
This week the European Union introduced economic sanctions against three Belarusian companies supposedly linked to Alyaksandr Lukashenka. The European Union also imposed an embargo on Belarus on arms and on materials that might be used for internal repression. It is the first time ever that Europe imposed an arms embargo against Belarus and economic sanctions against individual Belarusian companies. Many questioned whether Europe could ever agree on it. The eventual introduction of sanctions shows how alienated from Europe the Belarusian regime is.
Economic sanctions against three Belarusian companies have a great symbolic meaning. But their actual economic effect is likely to be less significant. The impact of sanctions on the business depends heavily on whether the companies still had significant assets in Europe. Discussions about possible sanctions against Belarusian arms exporters have been going on for months. Most likely companies like Beltechexport, one of the companies affected by the sanctions, have already moved what they could to safer locations.
Beltekhexport is already on the United States sanctions list for violation of its nonproliferation regime. Belneftekhim has been under the United States Sanctions since 2007, but Europe hesitates to target it. European companies have significant business contacts with Belneftekhim, which may partially explain the hesitance. Moreover, the largest Belarusian state company, the potash giant Belaruskali remains untouched while the Belarus government is trying to find a buyer for it. Therefore, Europe left itself plenty of space for future manouvering.
The EU deplored the continuing deterioration of media freedom in Belarus, including the lawsuits filed by the Ministry of Information to close two of Belarus’ largest independent newspapers, Nasha Niva and Narodnaya Volya. They also condemned the trial of the journalist Poczobut, and the cancelled licence of radio station Autoradio.
Indeed, journalists in Belarus remain the main target of repression. Although in theory Europe supports media freedom in Belarus, the brunt of that burden remains on Poland. This country hosts the main Belarusian independent outlets such as Belsat and European Radio for Belarus. They produce good content, but the majority of Belarusian population has no regular access to satellite television or Internet. Helping Poland with setting up direct transborder broadcastings could be a better and quicker way to enable Belarusians' access to uncensored information.
Visas for Belarusians
In the resolution on sanctions the European Union also expressed its hope that the Belarusian Government will cooperate with Europe on simplification of visa procedures. In other words, the European Union failed to reach a consensus on a unilateral simplification of Schengen visa procedures. Many believe that it is naive to wait for the Belarus government good will (there may be none) and the European Union should simplify visa procedures unilaterally.
Individual member states already started doing it. Lithuania recently joined Latvia and Poland which agreed to unilaterally waive visa fees for most of the national visas they issue. Lithuanian Parliament amended a law which currently allows to reduce or waive visa fees in the interests of foreign policy and national security. In the past, such reduction required reciprocity. By reducing or waiving visa fees Lithuania attempts to facilitate development of civil society in Belarus. However, getting the most popular short-term Schengen visas, is still more cumbersome and expensive for Belarusians than for any of its neighbours.
Russia promptly condemned European sanctions against Belarus. Moscow is playing is own game in Belarus. The Kremlin decision-makers understand that the recent changes in the level of subsidies to Belarus has a more dramatic effect on Belarus economy and politics than all European or American sanctions combined. For years Belarus has been on the needle of Russian subsidies and now it suffers from a terrible hangover. For Russian businesses the new European sanctions merely create a favourable context to cheaply privatize state-owned assets in Belarus.
Chernobyl-Style Economic Policy of Belarus
The reaction of Belarus' President resembles the Soviet Union’s approach to the Chernobyl accident. At his press conference last Friday he repeated the old mantra: “No crash happened, we have everything under control, do not listen to foreign propaganda, no reason to worry…”
In fact, there is a lot to worry about: an economic meltdown is in full progress. A large number of trading companies, whose business was based on imported goods, are suspending their operations. Factories, which rely on imported components for their production, are running out of material to continue their production. The result is an exploding unemployment rate. Even Belstat, otherwise overoptimistic and very questionable in their data, admitted one month ago that due to the crises about 600 000 people already lost their jobs.
The hot phase of the crisis in Belarus started in mid-March 2011. The Central Bank of Belarus could no longer supply new amounts of foreign currency to the money market. This affected all spheres of the economy and left the country in a desperate situation.
Belarus kept from Soviet times the old system of fixed foreign exchange rates. The foreign loans have been used to supplement the deficit in foreign currency which was caused by an enormous trade deficit all the while keeping the financial system more or less stable. Over recent years Belarus got used to a steady inflow of foreign currency mainly through foreign loans (Russia, IMF, Eurobonds). They used this money in two ways. First, to provide foreign currency to the domestic money market and maintain an exchange rate set up by the government. Second, it helped the government to fill holes in the state budget.
The price of such economic strategy was very high. According to official data of Belstat (National Statistic Agency of Belarus) the gross external debt rose to 87% of the GDP (as per June 1st 2011 calculated on the official exchange rate). Taking in account that the Belarusian rouble is still overvalued the real external debt should be around 140% of the GDP. These are alarming figures as the method of taking new loans is still the main issue of Belarusian financial policy.
A steep hike in salaries in the state sector, which accounts for about 85% of the GDP before the elections in December 2010. Printing additional money and maintaining a unrealistic exchange rate of 1$= 3 000 BYR proved that the president kept his pre-election promise of an average salary of 500 US$. Unfortunately, this promise lasted only until mid-March.
Suddenly foreign currency completely disappeared from the market. Reluctance of foreign lenders and dramatic reduction in Russian subsidies through cheap energy lead to devastating results. Companies, which urgently needed to buy goods abroad, either for trading or for production purposes, could in the past buy foreign currency only on the so-called inter-bank market where exchange rates were about 30-40% higher than the official rate.
But this possibility was also closed very quickly when the Central Bank recommended (in fact, ordered) commercial banks to sell their foreign currency not at a higher rate but at the official rate of 1US$= 5000 BYR. The commercial banks showed no enthusiasm and refused to sell cheap their valuable foreign currency assets received from exporters or deposits of citizens. Businesses were also cut off and now there is no way for them to buy hard currency at all. Certain dubious ways to buy hard currency remain. These methods, however, are illegal and no executive in a company wants to risk his freedom for that.
The economic situation today
The only remaining market, which works in Belarus, is the black market. This market developed over the last three months as a reminder of the old Soviet times. The rate on that market is about 1US$= 6000-6300 BYR. But this rate is meaningless because it reflects only the money circulating in the pockets of individuals who are not afraid to expose themselves in illegal currency operations.
The demands of Russia and the IMF to let the Belarusian rouble flow and to let the money market fix a rate have so far been ignored. The exchange rate of about 1US$=8000-9000 BYR would be a serious slap in the face. After all, the regimes’ political mantra has been economic and political stability. This stability is a thing of the past. For example, the author of this post learned from a Belarusian tax inspector that her net income in April 2011 was 850 000 BYR. Applying the above-mentioned real rate this is just about 100 US$ or 70€. Of course, the government cannot admit such a grim reality. It would confirm that the incomes of his citizens has reached the level of Zimbabwe.
The countermeasures initiated by the government reflect the Soviet style mentality of the political establishment. New market bans and restrictions only confirm the helplessness to cope with the real problems.
New large loans, to which the government was used to in recent years, are not in sight. The unwillingness to follow recommendations of the Russians and the IMF to initiate structural reforms put in question also the „small credit“ promised by EurASEC. It looks suspicious that the loan promised two weeks ago in Kyiv has not arrived to Minsk yet. Perhaps that loan was promised under certain preconditions, which have not been met yet by the Belarusian side. It is also doubtful that the IMF, not taking in account political odds, will give money before seeing any substantial change in the Belarus. Borrowing money on the international money markets is only possible at very high interest rates, since international rating agencies downgraded Belarus bonds to junk status.
How to fix it
The only solution to receive large amounts of hard currency for the time being is to sell state assets. This is also difficult because the other side (evidently Russia) can play on time and squeeze the price to a desired level. Russia is not pressed to buy anything, but Belarus desperately needs to sell. Lukashenka is really not willing to sell therefore he requests high prices and imposes additional conditions which no buyer can accept.
What will happen next? Lukashenka will continue Chernobyl-style policy to let the things go as they go without offering a real solution. So far he needs not to fear the pressure of voters, opposition, unions or other potential opponents to his policy. Repressions against these groups have worked very well thus far. However, pressure from the street will grow as well repressive actions by the state.
The final showdown is difficult to predict. If the discontent of the citizens goes beyond a critical point there will be not 3 000 as on June 15th but 500 000 people on the streets of Minsk. No security force will be able to confine such a force easily. This can result in a chain reaction where all options will be open.