THE VIEW FROM MITTELEUROPA: Surviving on life support – Belarus, sanctions and path-dependency

THE VIEW FROM MITTELEUROPA: Surviving on life support – Belarus, sanctions and path-dependency
By Gunter Deuber Head of Research at Raiffeisen Bank International and Marcus How Head of Research & Analysis at ViennEast Consulting in Vienna June 14, 2021

The Ryanair incident on 23 May was as much a bellwether for the status quo in Belarus as it is a geopolitical catalyst. It has had four main consequences:

  1. It sent a strong signal of repression to opponents domestically as well as internationally, thereby rendering impossible any meaningful political transition – for the time being.
  2. It provoked broad-based economic and political sanctions by the European Union and its allies, thereby also creating a foreign policy opponent.
  3. It placed Russia in the role of sole partner for political and economic support, a suboptimal situation for both countries but one that provides some mid to long-term predictability.
  4. It deprioritised economic issues beyond those that are most immediate, with state-owned enterprises zombifying amid synthetic stagnation.

Leaving Kansas

Events built to this point over the past 6-12 months. As the mass protests over the rigged re-election of President Alexander Lukashenko petered out over the winter, both the opposition movement and the Lukashenko administration were mindful that time would play a key role in determining events.

Fronted by Svetlana Tikhanovskaya, the opposition banked on the regime running out of money, which it sought to accelerate by soliciting support for sanctions by Western governments and voluntary boycotts by financial institutions and investors. However, progress was limited on this front before the Ryanair incident. Moreover, the impression has crept in that the (exile) opposition has no substantive masterplan to shape the future. Lukashenko, buoyed by Russian support, similarly relied on time as a form of attrition while he enhanced and consolidated the apparatus for effective repression.

There were numerous indicators of this leading up to the Ryanair incident. Even before (and indeed after) the contested election in August 2020, Lukashenko began replacing market reformers in the cabinet with officials from the security services (‘siloviki’) and/or military-industrial complex, such as his Chief of Staff, Igor Sergeenko, and Prime Minister Raman Golovchenko.

In the autumn, Lukashenko further centralised the security apparatus, swapping out mid-ranking regional inspectors with top brass, such as the former head of the State Security Committee (‘KGB’), Valery Vakulchik, and the former Minister of Internal Affairs, Yuriy Karayeu, who received expanded authority to supervise the governors of the six regions, as well as local officials.

The trend is also reflected by legislative developments. On 9 May, Lukashenko signed a decree that, in the event of his violent death, would see the automatic transfer of presidential competences to the Security Council – nine of whose 20 members are siloviki, plus Lukashenko and his eldest son Viktar  – amid a state of emergency.

One week later, Lukashenko signed amendments which, among other things: permit security agencies to use firearms; conduct unlimited and warrantless surveillance of prospective offenders, including the collection of their personal data; establish the KGB as the operational centre for co-ordinating security agencies; redefine the right to strike; and allow the blocking of newspapers’ editorial offices and internet portals without a court order. Immediately thereafter, Tut.By – a popular independent media portal – was shut down.

In this sense, the only surprise in the detention of Nexta editor-in-chief Roman Protasevich (Raman Pratasevich) was the security agencies’ willingness to affect a geopolitical incident; namely, by hijacking an EU-registered civilian aircraft. This highlights the extent of the path-dependency into which the Lukashenko regime is locked. And it is less about the re-orientation of foreign relations back towards Russia than it is the bed that Lukashenko has made for his saviours in the security services – and in which the president himself must lie.

Beyond the point of no return

Lukashenko would not have remained in power last autumn were it not for the financial and logistical support extended by Moscow. However, his political survival was also necessarily contingent on the loyalty of the security services, chiefly the KGB, the police and the military.

Lukashenko is keenly aware of his debt to these allies. As part of the flurry of amendments signed by Lukashenko last month, the identities of law enforcement officers were effectively anonymised on penalty of criminal prosecution; and the liability of officers for damages or losses abolished. Meanwhile, national defence and law enforcement spending will increase in 2021 by 31% and 12% respectively, even as social spending is quietly cut amid a budget deficit worth over 30% of GDP.

In the autumn, Lukashenko expressed a willingness to embark on a political transition, which would involve constitutional reform and possibly new elections. It is clear from developments in the past six months that this was a ploy to buy time, not least because any consensus supported by the opposition likely would have involved accountability for security officials suspected of human rights abuses. Lukashenko cannot afford to betray his only allies; and even if he took such a risk, they would likely depose him. He is already hedging against such an eventuality by rotating top brass to the regional inspectorates.

Last year, Lukashenko faced what was described as his “Ceausescu moment,” as previously subservient factory workers booed him during a speech. The ghosts of the Romanian revolution sent their regards, but the unity of the siloviki around Lukashenko prevented history from repeating itself. Yet if fractures emerge, Lukashenko may yet become the expendable liability that Ceausescu suddenly discovered himself to be.

Picking an asymmetric fight

The deepening of the authoritarian apparatus in Belarus, which burst into international view following the Ryanair incident, has left the European Union and its allies (not least the United States) with virtually no choice but to impose decisive sanctions.

Trade and investment relations between the EU and Belarus are very considerable, but in relative terms, only for the latter. Belarus accounts for 0.3% of the EU’s foreign trade, ranking as the 40th largest trading partner – on a par with Bosnia and Iraq. This contrasts with Russia, which is the fifth largest trading partner, accounting for 5% of the market share. And where Germany and France are among the largest foreign investors in Russia, they have limited direct exposure to Belarus, where Austria accounts for the largest share of EU investment in the real economy.

Belarus is also relatively insignificant from the perspective of global or market spill-over. Where international debt securities out of Russia amount to close to €200bn, Belarus has placed some $6bn-10bn. Western international bank exposures amount to $3bn in Belarus – approximating the balance sheet of a mid-sized savings bank in Germany – compared with $100bn in Russia, which accounts for 10% of the CEE region. Sanctioning an economy the size of Russia is politically complicated; but boycotting its small, state-dominated Belarusian counterpart is considerably less so.

Therefore, EU member states can afford to take a hit they were already enduring, while inflicting crippling damage to Belarus’ export-oriented economy via broad-based sectoral sanctions, namely its oil, petrochemical and potash sectors but also finance, investments and automotive. Member states that are usually dovish – such as Austria, Cyprus and Hungary – will have little appetite to equivocate, not least because the Lukashenko regime has burned most bridges by itself.

The choice that the EU faces is whether or not to couple its sanctions with geopolitical initiatives. On 28 May, the Commission took a cautious step in this direction, proposing economic support of €3bn – an insufficient amount given the needs of the Belarusian economy, and payable only in the event of a democratic transition. And while the sanctions announced thus far were significant, Belarusian diplomatic missions – in which intelligence operatives are embedded – continue to operate across the bloc, providing an opportunity to track the democratic opposition, the active leadership of which is almost entirely internationally based at present.

Regardless, it is very unlikely that Lukashenko will ever have a chance at rapprochement with the EU, leaving no way back for the hybrid foreign policy of the past decade that facilitated rebalancing away from Russia. If anything, the EU now provides Lukashenko with a convenient scapegoat for which economic losses can be blamed. This may create a “sanctions paradox” that strengthens Lukashenko’s inner circle even as taxpayers endure falling real incomes and the private sector flounders. In this sense, achieving the appropriate balance of sanctions will be a challenge for the EU.

The ambivalent benefactor

This leaves Lukashenko, as per last year, dependent on Russia for the survival of his regime. But it is not an uncomplicated relationship. Prior to Lukashenko’s lurch into survival mode in 2020, relations between Belarus and Russia were markedly deteriorating, reflecting divergences over the increased conditionality the Kremlin wants in order to subsidise the Belarusian economic model, especially the oil and gas sectors.

The costs of these energy subsidies prior to 2020 had levelled out at approximately $2bn-3bn per year, which drove Belarus into recession even before the coronavirus (COVID-19) pandemic. If the Kremlin is to keep the Belarusian economy afloat, and also the Lukashenko regime, the costs will have to rise in the direction of the previous decade, which peaked at over $9bn. This is compounded by the country’s extremely weak macroeconomic indicators, which the Lukashenko regime – in replacing market reformists such as former Prime Minister Siarhei Rumas with siloviki – signalled to international capital markets are no longer a priority.

Thus far, material support has been modest: financial assistance was not increased beyond the tranche-based loan of $1.5bn that was agreed in 2020, while piecemeal agreements such as Moscow’s permission for Belarusian petroleum exports to be redirected from Baltic state ports to its own extract a pound of flesh through tariff formulas that are unfavourable to Minsk. And based on the experiences of Russian dependencies elsewhere – such as Crimea, Donbas and South Ossetia – life support is preferable to recovery because the power dynamic favours the doctor.

Furthermore, while it is in the Kremlin’s interest to keep Belarus stable, the trends of the past decade are not reversing even if they are changing. And it is only for the lack of acceptable alternatives that Lukashenko is being permitted to remain in office. The president is less a puppet of the Kremlin than an increasingly errant sibling who demands equal treatment but needs money to avoid destitution, which is provided through gritted teeth and with conditions attached that will prevent future wayward escapades.

Enduring marriages of convenience

Despite the subsequent gestures of solidarity by Moscow, the Ryanair incident very much counted as a wayward escapade. As the Kremlin seeks to work towards de-escalation with the US and EU – Vladimir Putin will be meeting Joe Biden in Geneva on 16 June – while simultaneously finding itself increasingly preoccupied with the security situation in Central Asia, actions by Minsk that turn domestic flies into geopolitical elephants are met with exasperation in private.

While it was initially assumed that the Russian intelligence forces were directly involved in Pratasevich’s kidnapping, subsequent evidence indicates that none of the suspected operatives on board the Ryanair flight were Russian nationals. If there was Russian involvement in the incident, it was most likely indirect.

Since the election, the Kremlin has recognised the unsustainability of the status quo in Belarus. Its interventions at the time, which included the deployment of security professionals to pull together Lukashenko’s failing operation, were primarily designed to slow down events so that they could be influenced. Although unlikely, a “humanitarian intervention” by Moscow at the time was a real prospect precisely because the situation had the potential to spiral out of control.

But ultimately the Kremlin favours a political transition to a more pluralistic – albeit largely cosmetic – institutional arrangement in Belarus, a compromise that Lukashenko has entertained for appearances’ sake. A greater range of stakeholders, including ones that are anti-Lukashenko, provides Moscow with avenues for influence and therefore leverage. For example, it has already supported the pro-Russian Soyuz party, which held its founding congress in the spring – but whose registration as a political party was rejected. A document leaked from the Russian presidential administration confirmed the strategy.

Such a transition, conducted quietly, may serve the Kremlin’s most likely underlying goal; namely, to increase its direct stake in Belarus at the lowest reasonable cost. Over the past couple of years, discussions between Moscow and Minsk entertained the prospect of fully realising the “Union State” agreed on paper between the two states in 1999. But Lukashenko was resistant, citing national sovereignty, which is code for his own authority.

For the Kremlin, mentioning unification was post-Soviet theatre to gain leverage over Minsk. Full annexation has never made sense; but softer forms of annexation, snowballed over time through hybrid institutional integration, provide many of the same benefits but without the need to administer a state with an economic model that is increasingly moribund. Defence and strategic economic sectors are the primary areas to be targeted.

The political instability of the past year has accelerated this game plan. In March, the two countries’ defence ministries agreed a five-year strategic partnership for the first time. Moscow also wrangled the establishment of a permanent joint military training facility in Brest region – which borders Nato member states Poland and Lithuania – while Lukashenko indicated that he would drop his opposition to a Russian airbase in Belarus. Meanwhile, appointees to senior security posts – such as KGB chairman Ivan Tertel – are closer to the Russian defence establishment than their predecessors, even if they are not puppets.

Meanwhile, even as Lukashenko shuns the foreign investment courted in the past decade to reassert the desirability of centralised planning, Russian oligarchic interests are serving as pathfinders. In the past year, the son of Mikhail Gutseriyev bought Paritetbank from the Belarusian state, while Seliman Kerimov’s Uralkali and Dmitri Mazepin’s Uralchem have been eying the fertiliser sector for some time. This would complement reported discussions over the construction of a terminal in Usta-Luga to receive Belarusian transhipments of fertiliser products.

Becoming redundant

The Lukashenko regime has run out of options and is therefore dependent on Russia for practically its entire livelihood. Lukashenko is desperate enough to be pliable, but he remains an obstacle for Moscow, as rogue outbursts and authoritarian consolidation increase the costs of keeping him in office. If these costs become unacceptably high, any transition from the Lukashenko era will rely less on the ability of Moscow to broker a consensus with the opposition than with the siloviki, who will likely need to be bought.

Any consensus with the siloviki will not be acceptable for the opposition, nor the EU, at least in the medium term. However, it is likely to cap the costs of propping up Belarus, even as the economic outlook remains negative, with Russian-financed stagnation blocking the country’s developmental potential. But for a ruling elite that is purely focused on survival, economic stagnation facilitated by a partner as experienced as Russia is far from the worst outcome.

Meanwhile, for the opposition it could be a long time before anything can change in the country. In the case of Russia, far-reaching Western sanctions have not brought much change in any dimension over the last seven years.