COMMENT: EU's sanctions need to cover Belarus' 'mini oligarchy'

COMMENT: EU's sanctions need to cover Belarus' 'mini oligarchy'
Businesspeople engaged in major ventures are expected to liaise with President Alexander Lukashenko's office, if not him personally.
By bne IntelliNews March 25, 2022

Since August 2020, and especially in the wake of the Russian invasion of Ukraine, domestic developments in Belarus have become increasingly dependent on decisions made by external actors. And in supporting the Russian invasion by providing its hitherto neutral territory as a staging post for an offensive push towards Kyiv, the regime of Alexander Lukashenko enabled the de facto annexation of the country by Moscow. The regime thereby consolidated Belarus’ status as a rogue vassal state committed to the systematic violation of international law.  

It is therefore unsurprising that the Western sanctions to which Belarus was already subject are now being paired with those faced by Russia. The USA and EU, in particular, have acted decisively in this respect. Indeed, although the pre-war sanctions targeting Belarus were tough on paper, those developed by the EU had many loopholes, while enforcement was lacklustre. Even if oil and potash exports were not reaching EU customers, they were still passing mostly unmolested through Lithuania’s port of Klaipeda to major markets such as China, India and Brazil. 

Meanwhile, Belarusian trade with the EU in 2021 was able to increase to record levels, with sectors not yet singled out for sanctions – such as timber and IT – providing revenues that were badly needed. Given that the EU is the second largest trading partner of Belarus, accounting for 25 per cent of its total experts, this was a significant help. Elsewhere, tobacco exports, including of the smuggled variety, likewise scraped in cash for the budgets of the security and intelligence services. The economic outlook was bleak, but Belarus had sufficient resources to subsist on life support.

No way out?

That is no longer the case. The EU has introduced new sanctions on sectors, while tightening those already in place. The priority is to degrade the military-industrial complex, with the supply of dual-use and other high-tech items that may serve military or technological development or capacities being banned outright. This ban extends to a variety of machinery – which is problematic for the state-owned industrial sector – as well as products needed by the IT sector.

EU individuals and entities are now barred from supplying brokering services, technical assistance, financing or financial assistance to companies in the potash, tobacco, cement, timber, metal and rubber tyre sectors. The latter restriction is very significant, as it extends to financial derivatives and (re-) insurance.

The ban on technical assistance also has implications for logistics, preventing Belarusian exports from reaching third countries through EU transport hubs. This restriction was effectively in place in early February, when Lithuania unilaterally banned any transit of Belarusian potash through its territory. This was significant since 90 per cent of Belarusian potash exports outside the EU pass through the port of Klaipeda.

In the financial sector, the EU is prohibiting three Belarusian banks – Belagroprombank, Bank Dabrabyt, and the Development Bank of the Republic of Belarus, and their domestic subsidiaries – from the SWIFT payment network. There is also spill over from sanctions on Russian banks that have Belarusian subsidiaries. The National Bank is barred from conducting transactions related to the management of assets or reserves, effectively freezing its relations with the EU, while Belarusian nationals and residents may not deposit more than €100,000 with EU banks.

Belarus was already facing a poor economic outlook in 2022. Gross domestic product (GDP) was estimated to grow by 0.5 per cent, down from 2 per cent in 2021 – which was itself a modest rebound from 2020. Now the extended scope of EU sanctions is estimated to have the potential to inflict annual losses to GDP of between 6-8 per cent.

Pockets of oxygen

The sectoral scope of the EU sanctions on Belarus is very comprehensive. The deepening of the measures to preclude any insurance, export financing, supply brokerage or logistical support will have a severe impact on production more generally. Consequently, some 70 per cent of Belarusian exports to the EU are severely limited.

It is noteworthy that of the 183 individuals that the EU has added to its sanctions regime, the majority are public officials suspected of violating human rights, especially among the defence and security services. A limited number of businessmen allegedly close to Lukashenko have been added, along with some of their companies. The justification for their inclusion consisted in suspicions that they provide material or financial support for the regime in exchange for business privileges.

This dynamic reflects the political economy of Belarus. After Lukashenko assumed the presidency in 1994 and centralised power with his office, he resurrected post-Soviet statism as a development model. Private enterprise above a certain size was only permitted with his blessing. And in as far as Lukashenko became an institution in his own right, blurring the boundaries between political and state power, private businesspeople engaged in major ventures were expected to liaise with his office, if not him personally. Corruption is implicit to this dynamic.

In this sense, a state-sanctioned ‘mini-oligarchy’ emerged, the interests of which were often co-opted by or intermingled with the state. These mini-oligarchs became of increasing importance in the 2000s as the Belarusian economic model reached a high water mark, after which its sustainability was compromised by the 2011 and 2015 financial crises and the way Moscow coupled Russian subsidies for Belarusian export sectors with greater conditionality.

Private participation on a hybrid basis in strategic sectors of the economy thus began to increase, creating pockets of oxygen for the state budget. They have been described as “wallets” of Lukashenko, operating across a range of sectors. Some of them are effectively trustees of the regime, while others are businessmen who are self made but who entered into pragmatic collaboration with the state in order to survive and prosper. Nonetheless, the result was much the same, namely that they materially support the Lukashenko regime. 

The EU sanctioned the highest profile of these individuals, including Nikolay Vorobey, Aliaksey Aleksin and Alexander Zaitsev, along with their co-owned logistics company Bremino Group, as well as Alexander Shakutin. The entities owned by them escaped sanctions, in part because ownership was transferred to relatives or otherwise sold or restructured. Mikhail Gutseriev, a Russian oligarch active in the oil sector in Belarus, was also listed.

The ones that got away

However, if the EU sanctions targeting Belarus are to be paired with that of Russia, they would need to be applied to the mini-oligarchy more rigorously, including up to a further half dozen businesspeople who enjoy the patronage of Lukashenko. Most of them have been able to evade sanctions due to their lower profiles but in some cases also due to their suspected support from contacts in EU member states.

Nonetheless, their collaboration with the regime is evidenced by their public roles and participation in sports. Superficially, these appointments appear innocuous, but in the context of the personalised authoritarianism central to governance in Belarus, they are indicators of the exchange of support under the “krysha” system of patronage.

One such entrepreneur is Pavel Bely,  a former ice hockey champion whose primary holding is the Tapas Group of Companies. He has a demonstrably close relationship with Lukashenko, serving on his personal ice hockey team as his “favourite” player. Lukashenko previously intervened to have Bely released from custody when he was detained in 2012 on charges of money laundering.

When Bely launched Tapas, which is the largest real estate developer in Belarus, his business fortunes rose quickly. Currently, Bely is ranked as the 21st wealthiest entrepreneur. Among major projects, Tapas was permitted to build a luxury residential complex on the Lebyazhy nature reserve. It included a sports complex and restaurant, which Bely later donated to the Belarus Olympic Committee, which is chaired by Lukashenko’s son.

Another entrepreneur is Pavel Topuzidis, an ethnic Greek originally from Abkhazia who made his original fortune in the tobacco sector in the 1990s. Until 2017, Topuzidis’ company Tabak-Invest was the only private producer of tobacco alongside the state-owned monopoly and continues to account for 30 per cent of production. Nonetheless, Tabak-Invest has escaped the wide-ranging EU sanctions that have been imposed on the tobacco sector.

This is not because Topuzidis is independent of the Lukashenko regime. He has specifically stated that he funded the construction of three ice hockey palaces, one of which is on the grounds of a private residence of Lukashenko. Indeed, the Belarusian opposition proposed that the EU include Topuzidis when it developed its sanctions regime already in 2011. His influence remained thereafter, peaking in 2017 when he was ranked as the second wealthiest entrepreneur, before falling to 12th in 2021. Nonetheless, his influence remains considerable, as is evidenced by his deputy chairmanship of the Entrepreneurship Development Council.

A report by Inside Story, a Greek media outlet, claimed that Topuzidis escaped sanctions in 2021 because of support he is suspected of having enjoyed from key contacts in the Greek government, with whom he liaises owing to his role as Honorary Consul of Belarus to Greece. Yet according to research by Belarusian investigative journalists, Tabak-Invest appears to have smuggled cigarettes worth hundreds of thousands of USD through Russia. Topuzidis denies the allegations.

Follow the money

The priority of the EU with respect to its sanctions strategy so far has been to penalise individuals suspected of engaging in or otherwise enabling the abuse of human rights. And if war is politics by other means, it stands to reason that the easiest way to block the funding of such politics is through sectoral sanctions.

But in order for the sanctions to become fully effective, the number of individuals and entities that are acting as fundraising operations of the Lukashenko regime will need to be extended. Belarusian mini-oligarchs may not have the political influence of their Russian counterparts, but they are major enablers of the illegal conduct of the Lukashenko regime, both at home and abroad.

This article has been edited after publication to remove a reference to Alexander Zingman. bne IntelliNews acknowledges that the statement that Mr Zingman is an arms dealer is untrue and we also confirm that he was cleared after his arrest in the Democratic Republic of Congo of attempting to sell arms to former DRC president Joseph Kabila.