Belarus benefits from West-Russia clash over Ukraine

By bne IntelliNews November 4, 2014

Sergei Kuznetsov in Minsk -


While the row over events in Ukraine continues, neighbouring Belarus is trying to balance two opposing forces. On the one hand, Belarus is one of Russia’s last remaining close political allies in the post-Soviet space and is dependent on Russian financial support; on the other, it has shown a desire to improve relations with the West by playing the role of mediator in the Ukrainian crisis.

An International Monetary Fund (IMF) team visited Belarus in late October as part of a process to agree a new economic support programme for the country. David Hofman, head of the IMF mission, acknowledged that the Belarusian authorities have requested a new loan, but said the multinational lender wants to see structural reforms first. “A new programme would continue to require a credible commitment to a comprehensive package of consistent and strong macroeconomic policies and deep frontloaded structural reform that could be supported by IMF membership,” he said. “If the authorities are prepared to make decisive changes to their current policies over the coming months to achieve such a strong package, the Fund stands ready to commence work towards a new programme.”

The IMF has been setting such conditions for Belarus since late 2010, when the previous stand-by loan programme for the country ended and the government launched fresh attempts to get aid to help pay back its debts and support the economy.

While the IMF has refrained from doling out any more money, Belarus obtained financial support from Russia and Russia-backed financial institutions such as the bailout fund of the Eurasian Economic Community. In late September, Belarus obtained a $1.55bn Russian government loan aimed at beefing up its international reserves as well as servicing its external debt. In July, Russia provided a $450m loan to Belarus.

Nadezhda Ermakova, Belarus’ central bank governor, tells bne that Russia’s total support of $2bn means the country’s current level of foreign reserves is adequate. As of October 1, Belarus’ reserves stood at $6bn, which is close to the equivalent of two months’ of import cover. That is enough for the stability of the domestic currency in today’s conditions, but it does not guarantee protection from any external or internal shocks.

However, Ermakova is sceptical about the chances of agreeing a new IMF support package for Belarus in the near future. “Personally, I doubt that it’s possible,” she says. Previously, Ermakova has repeatedly pointed out that there could be problems having any loan approved by the Western nations represented on the IMF Executive Board, due to the West’s strained political relations with the Belarusian authorities.

On the other hand, Ermakova hails the IMF’s potential offer of advisory assistance to the government, considering it a way to send a positive signal to international investors after the financial meltdown of 2011 and the fragile recovery thereafter. “Showing to the world that the IMF works with us is even more important than the money they can allocate to us,” Ermakova says.

Thaw in relations?

Despite Ermakova’s scepticism, some signs of a thaw in the West’s relations with Belarus have appeared over recent months.

A US-Belarus investment forum took place in New York in late September, during which Mikhail Myasnikovich, the Belarusian prime minister, noted positive signals from the US about a change in attitude to Belarus. “Suffice to say that almost every event of the forum was attended by representatives of the US State Department, who thereby demonstrated to businesses that it is worth working with Belarus,” Myasnikovich said, according to his media office. He added that the US representatives didn’t rule out the policy of “small steps” to improve trade and economic relations with Belarus.

Christopher Panico, political and economic counsellor at the US embassy in Minsk, told the Belarusian magazine Delo that the US authorities, “hope that the forum laid the foundation for discussions on how to increase the flow of investment to Belarus and trade with it.”

The softening of US rhetoric towards the Belarusian authorities has coincided with EU officials restraining from taking too tough a line. This has happened against the background of Belarus' active involvement in the EU-Russia-Ukraine peace negotiations that took place in Minsk. Previously, Belarus had been targeted by financial and visa sanctions against a long list of Belarusian companies and officials with links to President Alexander Lukashenko.

In an interview with journalists on October 17 in Minsk, Lukashenko said that he “did everything” to arrange the EU-Russia-Ukraine dialogue in the Belarusian capital. “And it seems that our view on Ukraine gave an incentive and an opportunity for sensible people in the West, in America, to declare their cooperation with us,” the Belarusian president said.

However, it looks like Lukashenko is prepared for the long haul. “They [the US and EU] considered me as a dictator and continue to consider me this way. But now it’s not so convenient to voice this idea,” he underlined.

Most likely, the EU and Belarus will remain locked in a situation of “neither peace nor war” for the near future: European nations are hardly ready to abandon their quest for Belarus to improve the human rights situation, while Lukashenko doesn’t appear willing to embark on any wholesale political and economic liberalization.

This view is supported by the EU’s recent decision, announced on October 30, to extend for another 12 months a package of travel and financial sanctions against companies and officials related to the Belarusian government. “This is because not all political prisoners have been released and rehabilitated, and the respect for human rights, the rule of law and democratic principles has not significantly improved in Belarus," the Council of the European Union explained in a statement.

Russia’s support

Lukashenko has also openly expressed his disagreement with Russia’s annexation of Crimea in March. "It is unacceptable for a state to violate the territorial integrity of another country, to take away a part of that country," he said. However, the president tempers such criticism with statements of loyalty to Russia, and to Vladimir Putin personally. “If we need to stand back to back with Russia, with Putin, we will do it,” Lukashenko said.

Even more importantly, Belarus is one of the founding members of the Customs Union trade bloc (together with Kazakhstan and Russia), which will deepen into the Eurasian Economic Union (EEU) from January 1, 2015. And this brings with it Russian support in certain areas. In particular, Russia and Kazakhstan agreed that Belarus has the right to leave in place capital outflow controls as well as the obligatory sale of foreign currency earnings of Belarusian firms inside the country, Ermakova says. “Both Russia and Kazakhstan have already been removed these regulations,” she explains.

In October, Russia agreed to compensate Belarus for any possible losses from recent tax changes regarding oil extraction in Russia. According to the changes, taxes on the extraction of oil will be increased and export duty on oil and oil products reduced. Currently, Belarus purchases oil in Russia for its refineries without duty (as a Customs Union member), but channels most of its export duties to Russia’s budget. As a result of the manoeuvre, the country could face losses of up to $1bn in the next year. After negotiations between the two governments, Russia has agreed that export duty on oil products made using Russian oil in 2015 will be fully credited to the state budget of Belarus.

However, despite the favourable resolution of this situation, Lukashenko has slammed Russia over what he perceives as “abnormal relations”. “In neighbouring countries, former republics of the Soviet Union, [Russia’s] behaviour is often branded as imperialistic ambition,” he said.

Oleg Andreyev, managing director of investment banking at Minsk-based EnterInvest, tells bne that Russia provides financial benefits to Belarus as a sign of gratitude for its commitment to post-Soviet integration. “On the other hand, Belarus is fixed into Russia’s oil processing chain. Belarus has two large refineries, and according to my sources, Belarus has agreed that a large amount of Russian oil should flow back to Russia in the form of oil products, which helps to ensure that any shortage of petroleum there is avoided,” Andreyev says.

Re-export of banned food

Despite Lukashenko’s recent caustic remarks towards Russia, the Belarusian government tries to be a reliable partner for Moscow in its tit-for-tat trade war with the West. “The re-export [of Western food banned in Russia from the territory of Belarus] is impossible – it’s closely tracked,” Lukashenko said in an interview on October 17, refuting suspicions that Belarus will use its membership in the Customs Union and future EEU to cash in from re-export “grey schemes.”

At the same time, Lukashenko has underlined that Belarus retains the right to process banned Western food products and sell them on the Russian market. As Andreyev points out: “Obviously, Belarus has no desire to make an extra profit by unfair means. But private companies have their interests there, and sometimes they try to involve state-owned firms in these schemes. Sometimes, for example, private companies turn to state-run cheese factories requesting to re-export prohibited [Western] products [under Belarusian brands].”

However, it’s impossible to say that such schemes are rife, Andreyev adds. “The Russian regulatory authorities work closely with the Belarusian ones. And as soon as the volume of transit of food through Belarus or food exports to Belarus from the EU increase sharply, the Belarusian authorities promptly respond to the situation,” he explains.

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