Crisis in Belarus
Nils van der Vegte
May 25, 2011

Currently, The European Union is coping with an unprecedented debt crisis. The media is full of the budget problems in Portugal, Ireland, Spain, Italy and of course Greece. Whilst these countries get a lot of attention there is a much bigger crisis on in Belarus. The crisis started out as a financial one but it has now evolved into a severe economic depression. This crisis deserves our attention because Belarus is, together with Ukraine, one of the main transit countries for our gas and oil supplies. In addition, Belarus has been subject of ‘the battle of influence’ between Russia and the European Union.

Russia reduces its economic support

The Belarusian economy is the most unreformed economy of the former Soviet Union. The country has maintained a state-run economy and a privatisation agenda (above the level of small shops) was never implemented. This does not mean that the Belarusian economy has not seen any growth: in the period 1997-1998 the Belarusian economy grew between eight and eleven percent. In 2004 the GDP grew by eleven percent. In this sense, it seems that Belarus has successfully maintained a Soviet era command economy with good results. However, the reasons for this economic growth are solely external and Russia plays a very important role in this. Russia helped Belarus in several ways over the past twenty years.

  1. Strong economic growth in Russia increased the demand of Belarusian products.
  2. Belarus could profit from very cheap energy supplies from Russia (both gas and oil).
  3. Belarus has duty-free acces to the Russian market.
  4. The appreciation of the Russian Ruble and the Euro made Belarusian products more competitive.
  5. Russia, on multiple occasions, allowed Belarus to pay with barter instead of with money. As a whole, it is estimated that Russian subsidies over the past twenty years amount to 52 billion Dollar, about 17% of the Belarusian GDP.

The most important of these is the cheap energy for Belarus. As far as oil is concerned, Belarus yearly buys about twenty million tonnes of crude oil from Russia, used five million for itself and refines about fifteen million tonnes and then sells it on to Europe against usual market prices. It is estimated that oil accounts for on third of the Belarusian budget. The Russian ministry of Finances has recently calculated that just this arrangement costs Russia about 4 billion Dollar annually. The same goes for gas: until 2007 Belarus paid about 47 Dollar per thousand cubic meters. However, since 2006/2007 Russia has become far less generous with Belarus which is strongly connected to the anti-Russian statements made by the Belarusian president, Alexander Lukashenko.

When Lukashenko started to flirt with the European Union, Moscow was not pleased. First of all, the gas price was increased from 47 Dollar in 2007 to 169 Dollar in 2010. Then, Russia changed the conditions of the oil deliveries. Belarus could now still buy the five million tonnes against the usual favourable agreement but for the remaining fifteen tonnes, Belarus had to pay an export tariff of 100%. The consequences were severe: the export of oil products from Belarus decreased by forty percent and the output of the oil industry by thirty percent. External debt exploded:

Needless to say, after this relations between Minsk and Moscow reached an all time low. Eventually, Lukashenko went to court to prove that Russia’s actions were illegal because Belarus and Russia form a customs union. The court advised Russia to abolish the 100% export tariff on oil for Belarus and Belarus agreed to hand over the export duties of the refined oil to Russia. So, whilst Belarus won some concessions from Moscow it did not really help the country.

The crisis sets in

Some observers have stated that the crisis in Belarus is a consequence of the increases spending before the re-election of the Belarusian president, Alexander Lukashenko. This is true, however, as stated above, the increased spending was merely the catalyst for the crisis rather than the main reason as external debt was already high and an economic and financial crisis has been looming for the past years. In 2008 for example, the trade balance deficit grew by 47% and the trade balance deficit with Russia grew by 87%.

The financial crisis started just after the re-election of Lukashenko at the end of 2010. In the first five months of 2011 hard currency reserves have fallen by twenty percent to less than four billion Dollar. Officially, the exchange rate was fixed by the Belarusian authorities but in the recent months the unofficial exchange rate went up to almost 10.000 Belarusian Ruble for 1 Dollar.

The trust in the Belarusian Ruble within Belarus has been decreasing rapidly and there have been long lines in front of exchange offices and banks to change Belarusian Rubles for Euros or Dollars. On Monday the national bank of Belarus finally allowed for a devaluation of the Belarusian Ruble: by 55 percent. This has not helped yet as the exchange rate (on Tuesday) reached 12.000 Belarusian Ruble for 1 Dollar. The economic crisis continues as well: products like tooth paste are rapidly disappearing from the shops especially after Belarus severely restricted import.

When Alexander Lukashenko was reelected in December 2010, many people (especially the younger people) took to the streets to demonstrate against Lukashenka’s authoritarian policies. Lukashenko’s security apparatus intervened and many people got arrested. Recently, one of the opposition leaders was convicted to four years in a penal colony. Lukashenko’s actions were condemned by the European Union and sanctions were put into place. Relations between the European Union and Belarus are now frozen. More importantly, just before the elections both America and the European Union had promised to provide loans to Belarus if the elections were free and fair. The elections did not comply to these standards and Belarus missed a loan of 4.2 billion Dollar.

As a consequence of this, Russia’ holds all the cards’ and has ample of room to ‘provide a bail out with strings attached’. Indeed, Russia has been holding back on providing a loan to Belarus of three billion Dollar to somewhat stabilise the situation.

Consequences of crisis

On Tuesday, the Russian minister of Finances put forward the demands by Russia. First of all, Belarus was not to use the loan to stablise the exchange rate and, more importantly, Belarus was to pay back Russia with assets (Belarus is to sell Belarusian firms to Russia as a collateral). In addition, Russia is also looking at the complete take over of Beltransgaz (of which Gazprom already holds fifty percent of the shares), the state company in charge of the pipeline system in Belarus.

Kudrin added that “Belarus is in no position to turn Russia down” and “Otherwise, Belarus has to apply to the IMF for loans but the IMF has loan conditions which Belarus is ill equipped to meet”. Russia has long looked at the unprivatized economy of Belarus but Lukashenko has always managed to prevent privatization because the fact that he controls the companies (and provides people with jobs) provides an important source of support for him.

Without financial support from the West and cheap energy from Russia the Belarusian economy cannot function properly anymore and will need to undergo painful reforms which were postponed for so long. Needless to say, Russia will increase its influence even more in Belarus.

Nils van der Vegte wrote his master thesis on Russian-Belarussian relations: “Sojuzniki bez doverija
Alexander Lukashenko’s strategy vis-à-vis Russia seen within the framework of Relation Specific Assets”.

  • AK

    “… in the period 1997-1998 the Belarusian economy grew between eight and eleven percent”: you mean 1997-2008?

    It will be a pity if Belarus collapses. Until recently, perhaps, it was the most successful of the major post-Soviet economies. A flame of hope that market socialism has a future.

  • Anonymous

    I don’t agree with the thesis, that price hikes in gas were a result of ‘Lukashenko flirting with the EU’. In the end of 2006 the price formula was negotiated by Lukashenko. 2006 was another year of presidential elections declared neither free and fair by the EU – and the Lukashenko regime was confronted with EU sanctions directly imposed on Lukashenko and about 40 officials for politically motivated harrassment in Belarus.

    Lukashenko’s so-called flirting with the West mainly had the purpose to get access to loans – in particular to IMF loans – in order to get access to convertible means for to finance imports of goods and energy. This strategy is reflected in external debt statistics and the high GDP – which was possible only in a short period of extremely low repayments of loans – and by keeping the (virtual) exchange rate of the Belarusian Ruble (BYR) relatively high for to avoid negative impact on the GDP measured in dollar. Stabilisation of the domestic currency meant: selling dollars to consumers and Belarusian companies at an unrealistic exchange rates for years – and this has exhausted most of the foreign currency reserves. It is clear that Russia now refuses to give billions of dollars for such economic nonsense.

    Domestic crises in Belarus have just begun – and the economy may fall back to the level of Ukraine without reforms in almost all public sectors – including the banking sector – but also politically there might be fundamental changes ahead of Belarus.

    • Nils van der Vegte

      No, not exclusively but it was one of the reasons. As for the rest of your comment: that is exactly what I said above, albeit with some shortcuts.

  • MHN Paree

    Belarus has to become like Russia or even better part of Customs Union in order to survive!