MOSCOW BLOG - Is Belarus on the cusp of an economic crisis?

MOSCOW BLOG - Is Belarus on the cusp of an economic crisis?
Happier times between Alexander Lukashenko and Vladimir Putin.
By Ben Aris in Berlin March 3, 2017

Things are not going well for Belarusian President Alexander Lukashenko. In late February he flew down to the Russian Black Sea resort town of Sochi to participate in the annual investment forum, but was snubbed by Russian President Vladimir Putin, who refused to meet with him.

Russia is supposed to be Belarus’ close ally, with a shared Soviet past and – until recently at least – a unified front against Western influences. But the two countries are currently locked in a very nasty row. Nominally a disagreement about the cost of Russian gas imports, the rift runs much deeper as Lukashenko now flirts with the West and plays his perennial game of trying to squeeze more subsidies out of Russia by attempting to play Brussels off against Moscow, while his country's economy continues to deteriorate.

The problem with Lukashenko's gambit is that Russia’s economy is stagnating and has no money to spare. But more importantly, Putin is galled at Belarus breaking ranks just as he is embroiled in the worst stand-off with the West since the end of the Cold War. Has Lukashenko miscalculated? Without more Russian support his small landlocked republic is facing yet another financial crisis.

Belarus is mired in its own recession and will probably be the only Commonwealth of Independent States (CIS) country this year to show no growth – despite some relatively upbeat forecasts earlier this year.

The gas imports are key as cheap energy is the only thing that keeps Belarus competitive. When Ukraine was paying over $400 per thousand cubic metres for gas a couple of years ago, Minsk was paying less than half that. Gazprom in February reported that its average export price to Europe is $167 per thousand cubic metres and was expecting the price to rise to about $180 this year. In December, Minsk unilaterally cut the price it pays for Russian natural gas to around $80 from the $132 set in the current contract with Gazprom. Since then Moscow says Minsk has run up a $600mn bill, according to Russia’s first deputy Prime Minister Arkady Dvorkovich.

In October, Minsk and Moscow agreed that the Belarusian government will repay at least $270mn of the debt for previously supplied gas, while state-controlled Gazprom will cut the gas price for Belarus in 2016-2017 with support from the Russian government. However, there is no confirmation that this agreement was fulfilled and the debt is still rising.

In a series of mutual gut punches, Belarus unilaterally put up transit tariffs for oil transiting its territory, while Moscow reduced oil deliveries to its neighbour by 40%, which has done real economic damage.

The Belarusian economy declined in January by 0.5% year-on-year instead of a forecasted growth of 1% due to the cut in crude oil supplies from Russia, Prime Minister Andrei Kobyakov told the cabinet on February 21. "A year ago we refined 0.8mn tonnes of oil more [than in January 2017]. This resulted in a 3.3-percentage-point decline in industry and 4.5-percentage-point decline in wholesale trade," Interfax news agency quoted Kobyakov as saying. "As a result, 1.5% of GDP was lost. That is, if oil supplies were the same as last year, GDP would have grown 1% in January."

On top of the hydrocarbon problems Russia has recently slapped bans on Belarusian agricultural imports, accusing Minsk of sanction busting; Russia has banned agricultural imports from the EU in a tit-for-tat retaliation to Western sanctions imposed after its annexation of the Crimea in 2014. Belarus is a major source of food products, but many were clearly just rerouted (and relabelled) European products, taking advantage of the free trade zone between Russia and Belarus as part of Putin’s Eurasian Economic Union (EEU).

 

 

In short, all of Belarus’ best money-makers have been hit hard by the deterioration in relations. To put these sums into context, the economy of Belarus was worth $82bn in 2015 and currently has gross international reserves of $4.9bn as of January 1. The difficulty this year is the external debt now maturing amounts to $3.4bn, or just under 70% of the country’s entire stock of hard currency. Belarus has suffered several big currency devaluations starting in 2010 and if Minsk can’t refinance this debt it will have another one this year.

 

 

 

So far Minsk has been able to turn in its search for extra cash to the Russia-led Eurasian Fund for Stabilisation and Development (EFSD), a sort of International Monetary Fund (IMF) for the EEU members. Last year, the EFSD paid out the first $800mn of a $2bn loan facility, but the pay-outs are painfully slow; the last tranche of $300mn was withheld. Moscow has been using the tranches to put more pressure on Minsk, as Belarus searches for the means to pay and service its external government debt of $13.5bn.

At the same time, Belarus has been talking to the IMF about a possible new $3bn stand-by loan. But since Lukashenko hates being told what to do by outsiders and lacks the required deep reform programme, Minsk is unlikely to see any of this money.

In late October, Lukashenko even publicly urged his government "to stop talking about the need for reforms" of his country's battered economy. "Without order and discipline, especially now, we will not be able to make progress," Lukashenko added.

A month earlier, the IMF published its staff report, noting the Belarusian authorities' interest in a lender-supported programme, and "underscored the importance of strong commitment at the highest level to consistent macroeconomic policies and deep, market-oriented reforms".

That is not to say Lukashenko is doing nothing. The looming crisis has forced the government to tackle some of its problems. Minsk has introduced a sweeping set of regulation measures designed to end wasteful government-sponsored investment programmes. These measures were praised in the latest Heritage Foundation economic freedom rankings released on February 27. The whole state procurement system has also been overhauled and put under the control of the new Belarus Development Bank, but it is all too little, too late.

“Belarus has achieved minor success in deregulation, but more liberal economic policies have not been a priority. Pervasive state involvement and control hamper the economy. Restructuring of the economic system has been very slow, and the small private sector is marginalized. Undercut by domestic structural weaknesses, the economy has little resilience against external shocks,” Heritage said in its report.

The economics are a problem, but what has really driven the wedge between Moscow and Minsk is Lukashenko’s refusal to support Putin in his fight with the West, and it seems that he is making a genuine effort to loosen ties with Moscow and improve them with Brussels.

This has shown up in many ways. Most obvious have been the political concessions; Minsk released its political prisoners thanks to US prompting and allowed two opposition politicians to enter parliament in the last elections. For these acts Brussels withdrew most of its sanctions on Belarus, imposed after the government brutally cracked down on rioters following rigged 2010 parliamentary elections. But despite the improving climate these reconciliations have had no beneficial impact on the Belarusian economy.

Meanwhile, Lukashenko seems to have gone out of his way to poke Putin in the eye. At the start of the Ukraine conflict with Russia, Lukashenko reached out with supportive words to Ukrainian President Petro Poroshenko, and Belarus has refused to recognise Russia’s annexation of Crimea. More recently Minsk balked at the establishment of a Russian airbase at Bobruisk and then unilaterally dropped visa requirements for 80 countries despite having an open border with Russia that requires visas for almost all these nationals.

Lukashenko is now looking at a brick wall. Unwilling to make the reforms that the IMF demands and unable to bully Putin into more subsidies, Lukashenko’s neo-socialist model is broken.

Belarus’s GDP fell by 2.6% last year and is now at 2007 levels. Exports have decreased by 13% and there is no way for the country to grow itself out of its hole. In what smacks of desperation, the authorities have sparked country-wide protests, the largest since 2010, by trying to impose a so-called “social parasite” tax on people with no jobs.

 

 

Belarus can probably muddle through for the moment, but Russia is now in a position to trigger the collapse of the Belarusian economy simply by turning the oil and gas spigots a bit more or delaying the next bail-out tranche for a few more months. At the same time, there is a chance, albeit slim, that another round of domestic protests could radicalise and turn into a coloured revolution that ousts Lukashenko. As these possibilities are starting to look increasingly real, academics are calling for Europe to get ready.

“The EU’s current, post-sanctions policy of technocratic ‘go-slow’ re-engagement with Belarus is a fair weather policy. The time may be ripe, however, to start thinking about the previously unthinkable, be it economic collapse in Belarus, radical internal transformations or an externally-triggered crisis. All of these scenarios would require a much higher level of preparedness, commitment and resources from Europe,” Arkady Moshes and Ryhor Nizhnikau from the Finnish Institute of International Affairs said in a recent paper entitled “One Year after the Sanctions: Is Europe ready for the Belarus crisis?”

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