MAPLECROFT RISK BRIEFING: Economic dysfunction strengthens Moscow’s hold over Minsk

MAPLECROFT RISK BRIEFING: Economic dysfunction strengthens Moscow’s hold over Minsk
Lukashenko was compelled to supplicate himself to Putin in April 2017 in order to stave off economic collapse.
By Daragh McDowell of Verisk Maplecroft January 22, 2018

Belarusian President Alexander Lukashenko enters 2018 having successfully ridden out an unprecedented series of street protests in 2017, but with few options to move his country forward. The Belarusian economic model, which incorporates large elements of the command economy, has been exhausted due to the steady withdrawal of the Russian subsidies which made it possible. Without them, the economy has become increasingly crisis prone, and the populace has become more disillusioned and politically active.

Ironically, the decrease in Russian financial largesse has made Belarus more dependent on Moscow. This is likely to result in greater Russian penetration and control of Belarus’ national energy infrastructure. Over the longer term, Moscow gaining more control over infrastructure would result in a greater stability of supply of oil transited via Belarus. However, in the near term there is a risk of Belarusian oil infrastructure being disrupted due to political disputes with Moscow.

Since 2007, Russia has progressively reduced the overall level of subsidy to Belarus, which has led to a much more tense bilateral relationship. Minsk, however, was unable to cultivate other external partners or sponsors or enact domestic economic reforms.

Since 2007 Russia has switched from using the subsidy as a ‘fee’ to purchase Belarus’ political loyalty, to using it as an instrument of coercion. By modulating financial terms in order to apply economic pressure on Belarus at key moments, Russia has gained diplomatic and commercial concessions.

This has allowed Russia to increasingly ‘colonise’ the Belarusian economy, for example, by compelling Minsk to sell Gazprom a majority stake in the Belarusian natural gas transportation network in 2011.

As the figure above shows, following the 2014 oil price crash, the level of subsidy – ie the difference between the Urals crude price in Europe and for Belarus – shrank from US$50 to just over US$10 a barrel. Effectively, Russia is no longer able to maintain the subsidy at previous levels even if it were so inclined.

Unsurprisingly, the collapse in the subsidy resulted in a sharp drop in Belarusian GDP, illustrating Minsk’s dependency on Russian support to generate growth. Belarus emerged from recession only in 2017, due to increased export revenue following Russia’s more robust economic recovery, and growth remains mediocre. However, in the absence of a substantial, and permanent, increase in world oil prices, Lukashenko’s subsidy-based economic model will no longer be viable.

Repression in place of reform

Adopting a new model for Belarus is exceedingly difficult due to the interrelation of the economic and political regimes. Political control over the national economy, and the corresponding dependency of most workers on the state for employment, is integral to Lukashenko’s authoritarian method of rule.

The government’s reaction to the recession has also indicated a limited capacity for policy innovation and a reliance on administrative and coercive measures as a response to repeated economic crises. For example, financial collapse was staved off in 2011, and again in 2015, through massive devaluations of the rouble with the effect of substantially reducing the savings and living standards of the populace.

Other, more draconian, measures have also been implemented. In an effort to retain personnel in export-oriented industries, employees in certain professions were prohibited from quitting their jobs without permission in 2013. Most recently, in 2017 Lukashenko attempted to introduce a levy on citizens working less than 183 days per year, the so-called ‘social parasitism tax’.

Unsurprisingly, these measures have been unsuccessful in revitalising the economy, and have only resulted in increased public opposition to the political regime. The ‘social parasitism tax’ appears to have been the straw that broke the camel’s back, unleashing an unprecedented nationwide wave of protests in early 2017. As a result Belarus fell from a score of 7.67/10.00 in the Q1-2017 iteration of Verisk Maplecroft’s Civil Unrest Index to just 4.40/10.00 in Q4, placing Belarus in the high risk category.

As a result, after spending 2016 ostentatiously demonstrating his independence from Moscow, Lukashenko was compelled to supplicate himself to Putin in April 2017 in order to access the economic assistance needed to stave off collapse.

Moscow is likely to make increased equity stakes in Belarus’ oil and gas infrastructure the price of future support.  Gomeltransneft – the operator of the Belarusian section of the Druzhba oil pipeline – will be a particularly tempting target. However, Lukashenko is aware that selling these assets will result in sacrificing a large degree of Belarus’ sovereignty and subordinating the country to Moscow.

As a result, the next economic crisis in Belarus is likely to involve a major political dispute between Minsk and Moscow, as Lukashenko struggles to preserve his freedom of action in the face of Russian economic consolidation. In 2007, when Russia first began reducing the subsidy, Belarus retaliated by temporarily cutting off Russian access to the Druzhba pipeline. Lukashenko is likely to replicate these tactics in future disputes, which increases the risk of more frequent disruptions of Russian oil exports to Europe as Belarus fights to retain its autonomy.

Daragh McDowell is principal analyst – Russia at global risk consultancy Verisk Maplecroft