Return of Russian Subsidies: What Are the Implications for Belarus’ Economy?
Belarus has managed to secure significant monetary benefits in exchange for its active support of the new wave of Russian integration initiatives. Generous Russian subsidies followed almost immediately after the solemn signing of the Declaration on Eurasian Economic Integration on 18 November 2011. On that same day Belaruskali (read Belarus government) got USD 1 billion as a result of a syndicated loan agreement with Sberbank and Eurasian Development Bank.
And last week more economic carrots followed. They included subsidized natural gas prices, new loans and hard cash for the sale of Beltransgaz. Although the Belarusian authorities once again managed to secure significant aid from Russia, in the long-run the return of Russian subsidies is likely to do more harm than good for the unreformed Belarus economy.
Russia Increases Its Subsidies to Belarus
As a result of inter-state talks, Russia provided an unexpectedly generous discount on gas prices. Instead of the USD 244 per 1000 cubic meters that Belarus is currently paying (which is, by the way, also lower than the agreed contract price), in 2012 it will have to pay USD 165.6 (a 32.5% discount). Compared to the contract price for the fourth quarter of 2011 (USD 303), the ‘integration discount’ is even more impressive: 56.7%. It means that the next year Belarus will save around USD 2.5-3 billion on gas.
Another benefit is the restructuring of the debt that resulted from the difference between the contracted gas price for 2011 and the de facto payments made by Belarus. According to the Belarusian Statistic Agency, as of 1 October the debt amounts to USD 106.7 million and will continue to grow until the end of the year. The restructuring comes at the right time time for the crisis-hit Belarusian finances.
It was also announced that Belarus would get a USD 10 billion credit for 15 years to construct a nuclear power plant. If this decision is not reversed or further delayed (which is still a possibility) it will considerably worsen Belarus' sovereign debt problem. But it will also help postpone unpopular socio-economic decisions that the authorities are so afraid of.
Moreover, Belarus struck a deal with Gazprom on Beltransgaz. The Russian monopoly purchased the remaining 50% stake of Beltransgaz for USD 2.5 billion and became the only owner of the company. Taking into account that the market value of Beltransgaz is generally assessed at about USD 3-3.5 billion (which is far from 5) and that the newly opened Nord Stream pipeline and the prospects for the construction of the South Stream pipeline further diminish its market significance, this is a very good deal for Belarus. In the present-day economic situation it is also essential for the Belarusian government that the money is paid in one transaction. Russia paid in four consecutive transactions over four years for the first 50% of Beltransgaz.
There were even more gains for the Belarusian authorities from the new wave of post-Soviet integration. On 28 November it was announced that the Eurasian Economic Community would allocate the second tranche (USD 440 million) of its loan to Belarus. The tranche has been expected for a couple of months. But it did not come until now because the Belarusian side failed to fully fulfill the conditions attached to the loan. Now, in the midst of the ‘integration honey moon’, it seems that the previous conditions do not matter that much.
Implications for the Belarusian Economy
It looks that the ‘good old days’ of affluent Russian subsidies and problem-free credits are back. There are plenty of discussions going on about the Russian rationale behind such generosity and about how long it is going to last. But little is said about the implications of this for the shaky Belarusian economy. And the implications are particularly important for disagreements within the elite on the economic policy which are not yet over.
The new Russian subsidies give more weight to the ‘status quo group’ in the ruling circles who argue against macroeconomic stabilization and any reforms. This group are predominantly representatives of the Presidential Administration. With the newly reached deals on gas and credits it is, of course, very tempting to avoid any socio-political risks associated with reforms and fully resume the proven administrative methods in the economy. The logic of the authorities goes: if the easy money can keep the existing economic model afloa, why reform it and face an unpredictable period of transition?
Unfortunately, this logic can already be seen in the latest decisions and declarations. Take, for example, the return to price regulation which is named as a tool against inflation. Fundamentally, price regulation/non-regulation has nothing to do with the level of inflation. However, it is undoubtedly easier for top Belarusian officials to think so than to curb emission-based state investment that is the real cause of inflation, but which keeps the existing socio-economic model going. As a result, the market distortions and all sorts of deficits will once again be a part of Belarusians’ daily life.
We can also expect that the new Russian subsidies and credits will affect the final discussions regarding the outlook for socio-economic development in 2012 scheduled for mid-December. It will be easier for the ‘status quo group’ to convince Lukashenka that 5-5.5% of GDP growth is possible and desirable in 2012, even though such growth will make 100%+ inflation inevitable. And this will only further aggravate the systemic problems of the Belarusian economy.
To sum up, the new Russian subsidies are likely to once again undermine any hope for market-oriented policies in Belarus. It means that the agony of the Belarusian archaic economic model will last longer and its ultimate demise will be even more tragic.
Yauheni Preiherman is Policy Director at the Discussion and Analytical Society “Liberal Club” in Minsk.
Lukashenka in Moscow: The Prodigal Son Is Coming Back?
Last Friday, after months of uncertainty, Alyaksandr Lukashenka decisively moved to guarantee his political survival for the foreseeable future by signing a series of agreements with Russia. This was the sequel to Belarus's earlier entry into the Russian-led Eurasian Economic Union.
The agreements came as a disappointment to Western politicians who had speculated that the isolation of Belarus, coupled with the economic crisis, would eventually bring down or at least affect the regime. Speaking on Wednesday, Russian ambassador to Belarus declared that Russian support to the Belarusian regime in 2011-2012 would exceed $7 bn, and assumed that in two to three years living standards in the country would return to the level of early 2011.
Belarus sold its remaining 50 percent stake of “Beltransgaz” to Russia for $2.5 bn, giving Russia full ownership over the distribution of Siberian gas pumped to Europe. In exchange, Belarus received a $10 bn soft loan to build a nuclear power plant in Hrodna region; a three-year agreement whereby Belarus will get Russian natural gas for less than half the selling price to Europe, saving Belarus an estimated $3 bn a year; and finally, confirmation of the next tranche of the bailout loan from the Eurasian Economic Community.
Belarus in Russian Hands
The Belarusian regime has sold Beltransgaz, entered the Eurasian Economic Union, and eagerly taken Russian loans. According to Dzianis Melyantsou of the Belarusian Institute of Strategic Studies, Lukashenka essentially reverted to the subsidies mechanism that earlier defined Belarus-Russia relations – even at the price of national independence. As Melyantsou notes, this is still less of a price to pay than accepting the conditionality imposed by Western nations in return for uncertain promises of financial support.
With Russian support, Lukashenka has more freedom to adopt authoritarian measures. He can use fear in society to avert liberalization and maintain his grip on power. The Belarusian opposition and civil society will have less room to maneuver and will face a new wave of persecutions.
The Russian politicians toyed with the idea of supporting an alternative to Lukashenka recently, but the Kremlin seems to have realized that the Belarusian ruler satisfies its needs by maintaining the status quo, ruling efficiently, and professing a stronger loyalty toward Russia than many other post-Soviet nations. Ahead of the presidential elections in Russia next year, Vladimir Putin touts the integration theme – the Kremlin is willing to help Lukashenka to guarantee his support for the Eurasian Economic Union.
Deutsche Welle is Welcoming Moscow's Influence in Belarus
Now more than ever, the European Union's stance on the 'Belarus issue' matters, because national pro-democracy movement has been weakened and is in need of extensive support. Unfortunately, many in the European Union are apparently comfortable with Belarus staying in the Russian sphere of influence. Particularly disturbing is a recent commentary given by Deutsche Welle (DW) – a public broadcaster supervised by the German government – on the recent agreements between Belarus and Russia.
Andrei Gurkov of DW, emphasized the political component of the new agreements, defining two main tasks of new treaties as “to take under complete [Russian] control the gas transportation system of this country and to stimulate Eurasian integration processes in this country. In other words, to more strongly tie Minsk to itself”. And to leave no ambiguities: “In principle, both aims correspond with the interests of the Europeans*.”
Even worse, DW has been most concerned with whether the bailouts to Belarus might hurt Moscow in the future. Underlying this is a clear parallel can be drawn between Belarus and Greece: the commentator wants Russia to avoid the problems the EU is now facing. DW analyzes how Russia can gain from issuing loans and seizing Belarusian assets. Gurkov states: “We want to believe that Moscow understands it well and is operating out of sober calculation. A borrower sinking in his own debts will sooner or later pay with shares of the most attractive [Belarusian] enterprises. However, it is very important not to mistake the true value of these assets.”
Such views have been commonplace in Europe. Many believe that already in the late 1990s, the OSCE helped Russia to neutralize Belarusian opposition, giving Lukashenka time to consolidate his rule. Some German diplomats suggested then that Russia could help democratize Belarus.
It appears that today Poland is the only EU country that seriously takes the idea of an independent and free Belarus. The rest of the EU – including the largest members – are not especially interested, and if they are, they often favor the Russian position. The failure of the Eastern Partnership demonstrated just how little the smaller eastern neighbors matter to most EU members.
EU Can but Does Not Act
In the short term, Europe can do next to nothing about the Belarusian regime. Its best bet is to concentrate on longer-term leverage. Sanctions and isolation, however, are not always conducive to this process and have failed to bring about democratic change in the past in too many cases around the world. Surprisingly, the West keeps talking about punishing the dictatorship even though it is obvious that Belarus has an open border with Russia and no change will come unless Belarus' ties with an increasingly authoritarian Russia are undermined.
Weakening these ties is not impossible. Belarusians view Europe as the most attractive destination for travel and labor migration. The EU would loose little by removing visa and travel restrictions for Belarus's 9.5 million citizens, who have never posed a serious threat to the EU in terms of security or illegal migration. At present, well-educated Belarusians can only work without restrictions in Russia and Poland. Western countries could also launch more exchange and cooperation projects with the public and private sector in Belarus to provide them with alternatives outside Russia.
The EU should seriously consider engaging Belarusian government officials and regime insiders to provide the nomenclature with an exit option. Even many officials known for their hardline rhetoric are already accepting Western values in practice by sending their children to Western Europe and the United States. If given a choice, they could defect.
But to make them understand that choice the West has to interact with these people and convince them that there are other ways of doing things besides the Russian-style authoritarianism. After all, it is not just some abstract democratic ideal but also the best national interest of European countries to have on their eastern borders a free and stable nation and not a dictatorial outpost of the “Eurasian integration”.