Russian oil blackout – digest of Belarus economy
On 14 September 2016 First Deputy Prime Minister of Belarus Vladimir Semashka announced that negotiations on oil and gas relations between the Belarusian authorities and Russia's main economic players had failed.
Meanwhile, the oil crisis has cast further uncertainty on how long Belarus' economic recession will continue and whether the execution of the state budget for 2017 will be successful.
The only way left for the government to rectify the economic situation is to hope for help from the IMF, which started its mission on 19 September 2016.
Refinery industry: forget the oil
The Belarusian authorities had planned to resolve their problems with Russia in the energy sector on 13-14 September 2016, but negotiations between the governments failed to yield results.
According to the 2011 Belarusian-Russian intergovernmental agreement, the gas contract price for Belarus is pegged to the tariff payable by Russian consumers with the addition of transportation and storage costs, equivalent to $132 for 1,000 cubic meters.
The Belarusian authorities consider a fair charge for Russian gas to be $73, calculated as the cost of gas on the German market minus transportation costs and export duty of 30 per cent.
However, the Russians are insisting that the already signed energy contract is valid for the 2015-2016 period, which includes a predetermined price formula. Thus, there is no possibility that the contract price can be changed. The establishing of equal gas prices will only be possible by the end of 2025 after creating a common gas market within the Eurasian Economic Union.
Meanwhile, the total amount of Belarusian debt for gas supplies has already reached $300m. As a result, on 16 September 2016 Russian Deputy Prime Minister Arkady Dvorkovich announced that the supply of crude oil to Belarus would be reduced by 5m tonnes (or 25 per cent of total supplies) in the second half of the year (see Figure 1).
However, the intergovernmental agreement between Belarus and Russia in the energy sector signed on 29 May 2014 clearly states that Russia has no right to restrict the supply of oil. The document specifies that for each calendar year the parties will jointly develop and approve the volume of oil and petroleum products supplied.
There is provision to vary supply volumes, but not by more than 2 per cent. Therefore, the total variation in oil supply may not exceed about 480 tonnes for the whole year, far from the 5m tonnes threatened by Russia.
Economic growth: diminishing expectations
Initially, the Belarusian authorities forecasted 0.3 per cent economic growth in 2016, but later amended their predictions to a decline in GDP of 2 per cent. However, this year the refining of oil is set to be one of the core brakes on the economy. If the supply of the so-called "black gold" does not double, economic growth in the next year would seem miraculous.
The official forecast for 2017 assumes that Belarus will obtain 24m tonnes of oil. As a result, the recession would end and GDP growth would amount to not less than 0.2 per cent (assuming the average world oil price of $35 per barrel) or 1.5 per cent (assuming an oil price of $45).
However, the official economic plans for the next year do not account for a decline in the volume of Russian oil supplies to the country. On 23 September 2016 Prime Minister of Belarus Andrei Kobyakov announced that the total losses from oil shortages to Belarus's economy had already accounted for 0.3 per cent of GDP.
The latest Belstat data shows that the GDP of Belarus in January-August decreased by 3 per cent on the previous year and had outperformed the January-June GDP data by 0.5 per cent (see Figure 2).
There are other core factors which affect the government's macroeconomic predictions. One of these is investment activity. This year it has been highly unstable. Even agriculture is slowing down. Due to decreasing prices on the Russian market Belarus is unable to benefit from increasing volumes of trade (see Figure 2).
Budget policy: debt manoeuvres
However, another important factor in the oil drought is a decreasing level of income within the Belarusian budget.
In 2016 the government planned to use more than $1.1bn in revenues from export duties on petroleum products and oil to repay foreign debts. In the first half of the year because of lower oil prices and supply cuts from Russia, Belarus received only about $390m or just one-third of the money it had anticipated.
The price of oil has fallen and the country does not have enough money to settle with its main creditors Read more
Meanwhile, the core project of the 2017 budget will involve making payments on external debt and arranging its refinancing. In particular, fees from the sale of petroleum products will go directly towards the repayment of foreign debts. The price of oil has fallen and the country does not have enough money to settle with its main creditors, namely Russia and the Eurasian Fund for Stabilisation and Development (EFSR).
Even if the price of oil does exceed $35 and Belarus receives a new tranche of the $700m loan from the EFSR, it will not help to repay the external debt of $3.2bn in 2017. The budget is still short of $1bn.
Therefore, taking into account all the possible social and economic risks, Belarus urgently needs new credit from the IMF. Belarus has been trying to test the waters during negotiations with the international organisation between 19-30 September 2016. Moreover, the decision from the IMF is being eagerly awaited by the end of the year by the authorities, who hope to receive several tranches as early as 2017.
In conclusion, the longer the Belarusian authorities wait for the introduction of painful structural reforms, the worse the economic situation in the country will become. The time will come when neither financial aid from the West, nor dwindling oil streams from the East will be sufficient to help to revive the crumbling economy.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)
Belarus in the Arab World: a one family business?
On 20 September 2016 Minsk hosted the first Oman-Belarus invest forum. More than 40 Omani businessmen held negotiations with over 70 representatives of various Belarusian companies.
The day before the forum, the Omani delegation met with Aliaksandr Lukashenka, who urged the Omani businessmen to invest more in Belarus.
While the Middle Eastern vector of Belarusian foreign policy plays an important role in public declarations, actual trade and business has yet to follow.
Grand plans rather than roadmapping
In August 2016 the Belarusian government adopted a new strategy for export development in 2016-2020. According to this plan, one third of Belarusian exports would go to the Eurasian Union, one third to the EU, and one third to so-called “far arc” countries.
As is often the case with Belarusian state programmes, such ambitious plans are rarely supported by practical follow-through. Statistics illustrate opposing trends in the development of Belarusian exports: Belarus is failing to retain its share of all markets outside Russia. Low quality, high prices on manufactured goods, excessive bureaucracy, and degradation of technology all prevent Belarus from finding new prospective markets abroad.
No place for Belarusian goods in Arab countries?
Despite pretentious declarations about the importance of Arab countries for the Belarusian economy, the actual figures do not support these claims. In January-July 2016 the total turnover between Belarus and the region amounted to around $120m, i.e. less than five per cent of the total turnover.
The following table illustrates Belarusian export (in $m) to Arab countries:
Over the past five years the value of Belarusian exports to the region has remained fairly static: about $250-300m. On one hand this can be seen as a success, given that the total value of Belarusian export has fallen by 35 per cent since 2011.
On the other hand, this also shows the unstable character of Belarusian trade with Arab countries: export and import can fluctuate by 1000-1500 per cent. This is caused by signing one-time contracts without a permanent presence on these markets.
Contrary to widespread belief, Belarus has failed to attain a positive trade balance with all Arab countries. In January-July 2016 Belarus had a negative trade balance with Lebanon, Morocco, Saudi Arabia and Somalia with a roughly $66.5m trade deficit. Moreover, in 2011-2016 Belarus actually lost the Algerian and Lebanese markets. The table below illustrates these trends:
The variety of Belarusian goods exported to Arab countries also remains very limited. Official documents mention powdered milk, tyres, different kinds of steel, tractors and machinery. Egypt and Jordan are among the most important consumers of these goods, but even here the volumes and amounts of these exports is comparatively low.
Numerous reports indicate that Belarus has become a successful supplier of weapons to several Arab countries, including Iraq, Syria and Sudan, while nevertheless managing to avoid any serious involvement in regional conflicts.
Personal relations over public interests
Many experts emphasise the importance of personal ties in this process. Belarus has become sadly notorious for its close relations with Iraq during the presidency of Hussein, with Gaddafi’s Libya, with the Sudanese leader al-Bashir, and the Syrian president Bashar al-Assad.
Such relations can be seen as a form of mutual support between authoritarian and anti-Western leaders. However, Lukashenka and his family also maintain good personal relations with the Gulf monarchies, particularly with the ruling families in Qatar and the UAE. Belarusian researcher Siarhei Bohdan considers that Belarus's relations with the Gulf States are the main vector in Belarusian foreign policy in the Middle East.
The economic benefits for Belarus of such friendship are dubious, and moreover are a source of much gossip about the nontransparent nature of cooperation, especially in the finance and security sectors.
Some experts believe that Lukashenka's family's hidden billions are stored in Gulf banks. The personal devotion of the president’s eldest son – Viktar Lukashenka – to the Formula 1 races in Abu Dhabi is no secret in the region.
Belarus actively participates in training Qatar’s and the UAE’s security forces, as well as in presenting its weapons at military exhibitions in the Gulf. Russian political commentator Evgeny Satanovski has accused Belarus of working against Russia's interests in the Middle East. According to him, Qatar and the UAE purchase arms for ISIS largely from Belarus.
The Gulf States are among the largest investors in Belarus from the Middle East. However, they invest mainly in lands and resorts, while the financial details of these operations remain unknown.
The Omani case
The Omani case serves as an example of the unstable and personally motivated character of Belarusian foreign policy in the region. Actual relations broke off in 2007 after Lukashenka’s visit to Muscat. Trade turnover amounted to $7m, with several Omani businessmen working in Russia becoming a driving force for this cooperation. In the following years the trade turnover fell to $1m and all contacts practically ceased.
Belarusian state companies complain about low demand for Belarusian products in Oman. However, the Belarusian company Sohra Group has become a successful seller of Belarusian machinery in Oman and in the Gulf countries in general. The actual scheme according to which business has been unprofitable for state companies but profitable for one private company remains murky.
In 2010-2012 Omani businessmen tried to purchase a large plot of land in the centre of Minsk for the ridiculously low price of $10m but could not reach a final agreement. Even the price itself led to suspicions about the non-business nature of such investments.
Uncertainty and mysteries
Belarus has failed to establish efficient and sustainable economic relations with the Arab countries. Instead of transparent and profitable business, the Belarusian authorities prefer personally grounded backroom dealings with their counterparts in the Arab world.
At certain points in time, Belarus has vigorously sought closer ties with anti-Western Arab regimes but thoroughly avoids any real engagement in regional conflicts.
Nontransparent business schemes and security cooperation with pro-Western Gulf States seem to be the current preference of the Belarusian foreign policy in the Middle East. Its public economic component becomes less significant.