The key task for the Belarusian economy in the medium term is reforms aimed at preserving and modernising the industrial potential of Belarus. We are not talking about a radical breakdown of the economic system — it is necessary to progressively modernise economic management, change legislation and unify it with that of Russia, optimise the role of the state in the Belarusian economy, and develop its monetary and financial system, writes Valdai Club expert Vyacheslav Sutyrin.
The migration crisis on the Polish-Belarusian border is only the latest episode in the political conflict between Belarus and the European Union. Earlier, Brussels approved the toughest sanctions against the republic’s economy in the history of their diplomatic relations. The stability of the Belarusian economy is one of the key factors that will influence the dynamics of the crisis, which creates risks for Russian interests. Real economic integration with Russia is necessary to maintain social and economic stability in Belarus.
State of the Belarusian economy
The economic performance of Belarus during the first half of 2021 is generally positive, but serious internal problems persist. Significant price inflation has been observed in connection with the post-pandemic recovery and prices are on the rise in external commodity and food markets. At the same time, the Western sanctions, introduced in 2021, have not yet begun to have a profound impact; their effect will fully manifest itself in 2022-2023.
In January-September 2021, the economy of Belarus grew by 2.7% compared to the same period in 2020. These data are consistent with the statistics of the Eurasian Economic Commission (EEC). In the first half of 2021, the volume of Belarusian exports amounted to more than $21 billion, exceeding the indicators for the same period in 2020 by 30%. Foreign trade with the countries of the Eurasian Union grew by 22%, and with third countries — by 30.6%. This is largely a recovery from the downturn in trade witnessed over the past two years.
There are also negative trends. According to the EEC, cited by economist Elena Kuzmina, in January-July 2021 investments in fixed assets decreased by 7.6% and the volume of construction work ebbed 15.9%. The downward trend in traffic volumes in 2019-2020 continues. In the first half of 2021, freight (-1.2%) and passenger traffic (-4.5%) decreased. The real incomes of citizens of Belarus increased 3.1% during the first 7 months of 2021 increased, while the consumer price index increased by 5.1%.
The debt of the flagship enterprises of the Belarusian industry continues to grow, while the number of their employees is decreasing. The government’s ability to stimulate the economy at the expense of the state, including lending to flagship enterprises, will be limited in the next few years, given the large, upcoming payments on external public debt.
Impact of Western sanctions
In 2021, the European Union, Britain and the United States introduced the toughest sanctions against Belarus in the state’s 30-year history. They target the main taxpayers to the Belarusian budget and the state’s main sources of foreign exchange earnings — the potash and oil refining industries. These steps exacerbate the internal problems of the Belarusian economy associated with government lending to large enterprises. Their effect will become noticeable in the next 1-2 years, affecting new contracts.
The EU sanctions package is in many respects similar to the sanctions initiated against Belarus by the UK and the US, and includes:
• a ban on European business cooperating with Belarusian exporters of potash fertilizers (in terms of nomenclature items), oil products and tobacco, as well as banking sector companies;
• restricted access to the European capital market, including a ban on the purchase of Belarusian securities with a maturity of more than 90 days;
• a ban on European banks providing insurance services and loans to the Belarusian government and state bodies, including the suspension of lending through the European Investment Bank;
• a ban on European air carriers flying through Belarus, and Belavia flights over the EU;
• individual sanctions (more than 160 citizens of Belarus are included in the so-called “black lists”), mean a ban on visits to the EU, business interaction and the “freezing” of accounts in EU banks.
Predictions of the future of the Belarusian economy under the pressure of sanctions are complicated by the fact that the real scale of sanctions, first of all, of American sanctions is not yet known: namely, how forcefully the extraterritorial principle of their actions will be imposed on countries which are dependent on the United States.
The World Bank forecasts 1.2% GDP growth in 2022 and 2.3% GDP growth in 2023. According to the Eurasian Development Bank, GDP growth in Belarus in the coming years will be limited to 1 – 1.5%.
Estimates of the damage that sanctions have dealt the economy of Belarus vary, ranging from 3% of GDP per year (estimated by the Belarusian government) to 7-13% (expert estimates). The real losses depend on whether the transit of Belarusian potash fertilizers through the Baltic states is blocked, and whether the United States uses the mechanism of extraterritorial jurisdiction as part of its adopted sanctions package. The main consequence of this decision is the ban on purchases of Belarusian oil products by Ukraine, which has become their largest importer. Under this item alone, the losses of Belarus can exceed $5 billion (about 8% of Belarus’ GDP) — these are the volumes of foreign exchange earnings that have accumulated through the export of oil products to the EU, Britain and Ukraine in recent years. This will entail a “radical” scenario of the West’s sanctions policy.
So far, a moderate scenario is playing out. The US is in no hurry to force Kiev to abandon Belarusian oil products, and EU restrictions are coming into force gradually. At the same time, a high probability remains that Brussels will continue to tighten sanctions, including in connection with the migration crisis on the Polish-Belarusian border, for which the EU blames Belarusian leadership. The possibility of accidents or provocations that could lead to an uncontrolled escalation of the situation on the border between Poland and Belarus cannot be completely ruled out. This increases the further unpredictability of the situation in which the Belarusian economy will exist in the coming months and years.
Relations with Russia and prospects
However, the unpredictability of the conditions for the development of the Belarusian economy has its limits. The Russian market and Moscow’s economic support continue to be a key factor in ensuring the stability of the Belarusian economy. Investments and direct lending to Belarus are not the only form of support. According to expert estimates, the difference between the price of Russian oil for Belarus and the world market over the past 10 years has been worth about $5 billion annually to Minsk, while gas benefits have averaged $2 billion per year. For comparison’s sake, over the same period, the average annual wage fund in the budgetary sphere of the republic was $4.1 billion.
The approval of 28 union programmes — the first large package of Russian-Belarusian integration agreements in more than 10 years — has already allowed Minsk to receive bonuses from the European energy crisis. Thus, Belarus’s gain from low prices for Russian gas compared to European ones only by the end of 2021 may exceed $5 billion.
The support of the Belarusian economy by Russia in the foreseeable future will remain the main factor in its development, especially in the context of growing sanctions pressure. Close interaction with Russia offers Minsk the potential to circumvent European sanctions on trade in Belarus’ main export commodities — oil products and potash fertilizers.
In fact, Western sanctions against Belarus create additional costs for Russia, which provides support to the republic. This raises the question of justifying the increase in costs in the eyes of Russian citizens — the reciprocal steps of Minsk in the field of economic, political, and defence integration. At the same time, military and political risks in the region are increasing due to the growing antagonism between Belarus and neighbouring Poland and Lithuania, which are members of NATO.
Economic cooperation between Belarus and China is progressing slowly. The volume of Belarusian exports to China in the first quarter of 2021 amounted to $300 million, while the trade balance is negative: $940 million. For comparison, Belarusian exports to Kazakhstan over the same period were worth $255 million, exports to Lithuania were worth $411 million, and exports to Poland — $592 million. In recent years, support from China has been minimal.
The key task for the Belarusian economy in the medium term is reforms aimed at preserving and modernising the industrial potential of Belarus. We are not talking about a radical breakdown of the economic system — it is necessary to progressively modernise economic management, change legislation and unify it with that of Russia, optimise the role of the state in the Belarusian economy, and develop its monetary and financial system.
To preserve the stability of the industrial flagships of Belarus, it is necessary to consider the possibility of creating joint ventures with Russia, including not only oil refining and industry, but also construction, logistics, pharmaceuticals and other industries. The merger of large enterprises is necessary where it is profitable. It is advisable to transfer to the territory of Russia some of the Belarusian industries, for example, the defence industry.
In the medium term, the launch of real economic integration between Russia and Belarus means that interaction should reach the sectoral level, which was not achieved in previous years. This will prevent a sharp drop in the standard of living of Belarusian citizens in connection with Western sanctions. The key point is not to allow the implementation of the union programmes to be “wrapped up” on a rhetorical level against the background of Minsk’s confrontation with its western neighbours. It is important that the integration process moves according to the plan with the government’s report every six months, in accordance with the reached agreements.