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  • Diagnosis for the Belarusian Economy – sanctions, foreign trade, dependence on Russia, and legal manipulations

    The situation in Eastern Europe remains turbulent, which also affects Belarus. Although the political implications of the matter are greatly discussed, the economic side of the issue doesn’t receive as much attention. In this article, we are analyzing the current state of the Belarusian economy, its autonomy, trade and financial situations, sanctions, and ways to circumvent them.

    Is Belarus still sovereign?

    The dependence of Belarus on Russia is alarming. For a long time, Russia has been building political leverage in Belarus, with a significant acceleration in 2020, due to a political crisis in Belarus. This process became even more influential after 2022 when Russia launched a full-scale invasion of Ukraine.

    We can assess the politico-economic and societal defense of Belarus according to its actual level of dependence or Russian and the ability to resist.

    In economic and security spheres, the dependence on Russia is critical. In fact, there are few to no alternatives to the relations with Russia: critical infrastructure, fossil fuels, and the majority of trade are connected to Russia. As for the security sphere, military cooperation between Belarus and Russia is strengthening, which also undermines the autonomy of Belarus.

    In the political sphere, the dependence is almost critical. Even though Moscow doesn’t have direct control over Lukashenka, economic and military influence creates leverage, which can be used to manipulate Lukashenka’s actions. In general, for the Belarusian ruling class, Russia is probably the only partner with whom they have come fruitful contact. These contacts have even been institutionalized through integration roadmaps. 

    Belarusian society, however, is different from the Russian one. Nowadays, the main watershed is in the perception of the war, where Belarusians support the war in Ukraine substantially less than Russians. Another point of difference is the media: even though Russian media, both pro-government and the opposition, are quite popular in Belarus, a significant portion of Belarusians choose to consume purely Belarusian content. 

    Even after Lukashenka and Putin, Russia will probably maintain its control over the processes in Belarus. This influence won’t likely abolish Belarusian sovereignty at all, but the existing system of leverage will still allow Russia to control the processes in Belarus.

    Belarusian foreign trade: trends, changes, new vectors, old problems

    In 2022, Belarus has had to reorient its foreign trade from the EU and Ukrainian markets to Asia, Africa, and Russia. Currently, the main trade partner of Belarus is Russia, totalling  an approximate 65% share of all trade. The second biggest partner is China with 5.8 billion USD in turnover. What’s important is that Belarus remains the net-importer from China (3.8 billion USD from import vs. 2 billion USD from export).

    In terms of financial independence, we can observe a strong correlation between the Russian rouble and the Belarusian rouble.

    Current statistics in the domain of the trends of the Belarusian economy can become misleading. Even though the import and goods export growth figures have been positive and high in the last year, this effect was achieved due to the low base in 2022. It is unlikely that the Belarusian economy will continue increasing its foreign trade activity.

    Going into the details, the import of non-food consumer products to Belarus increased by more than 75% in January-August 2023 to January-August 2022. This could be explained by the growth of domestic consumption and re-export to Russia.

    On another hand, the trade balance in services deteriorated, mostly due to the decrease in transport and IT exports.

    As mentioned before, currently there are three main vectors of foreign trade for Belarus: Russia, Asia, and Africa.

    The African market is too complicated for foreign trade development, predominantly because of complicated logistics, and differences in business traditions. 

    China, in turn, occupies a significant part of Belarusian foreign trade, but can’t compensate for the loss of Ukrainian and EU market positions. For example, in 2021 the exports from Belarus to the Netherlands, Ukraine, Germany, Poland, Lithuania, and Latvia exceeded 13.2 billion USD, whereas the export to China by the end of 2023 is expected to be around 2 – 2.3 billion USD.

    Lost partnerships

    An example of potash fertilizers exemplifies well the current situation with Belarusian foreign trade. Due to the sanctions, the costs of potash delivery have increased. In addition, the global prices of potash are falling. But even in these conditions, Belarus has to sell potash at a discounted rate.

    Several additional factors that exacerbate the current situation. First, due to sanctions, Belarusian exporters don’t have access to the Lithuanian ports, which used to be an important route. Second, the sanctions against banks lead to problems with international payments. There are two factors that increase the reliance on Russian markets even more as it remains relatively accessible.

    Furthermore, the breakdown of economic relations between Belarus and Ukraine with the EU led to the problem of electricity oversupply in the country. Another significant factor affects human capital: economic uncertainties and political risks lead to the migration of professionals and their families from Belarus.

    Investments

    There are three key issues in the Belarusian investment sector. 

    First, the only feasible sources of foreign investments are now Russia, China, and the UAE. All the other sources are either insignificant or inaccessible due to the sanctions.

    Second, the Suspension of Belarus from the ratings of the main rating agencies, such as S&P and Fitch, deteriorated the situation with the investment climate due to transparency issues.

    Third, the denial of Belarus to pay its foreign debt in any other currency except for the Belarusian rouble rendered the country technically insolvent.

    Breaches in sanctions

    From 2020, we see the same sanction evasion schemes. Such schemes make the sanctions against Lukashenka’s personal wallets ineffective.

    The main evasion schemes exploit the notion of personal sanctions. In fact, the sanctions are usually applied against people and firms, where their share is greater than 50%+1. From here, the most used way to circumvent such issues is just reregistering the company on relatives.

    Another way to avoid sanctions is through shares. We can take Belarusian businessmen, who didn’t reregister his businesses. Despite having some assets in the EU – some of them are in Germany – he manages to import some brands that declared their exit from Belarusian markets. This scheme works in the following way.

    Two other evasion schemes operate through Central Asian countries, mainly Kyrgyzstan and Uzbekistan. 

    First, after the sanctions were imposed, the export of wood from Kyrgyzstan to other countries that respect EU sanctions, increased suspiciously. The problem is that the forest coverage of Kyrgyzstan is too low to export any wood. Hence, this country is used as a mediator to avoid the sanctions.

    Another case is Uzbekistan. The officials of this country demonstrated their support to the Belarusian regime multiple times. In fact, Uzbek officials issue documents for the goods stating that they will be sent from Belarus to Uzbekistan, mentioning in the appendix that the final destination is the EU. Consequently, the goods aren’t considered sanctioned as they come from Uzbekistan, which makes the export from de facto Belarus to the EU possible.

    A similar scheme is used to avoid import sanctions. In this scenario, the goods that officially have Central Asia as their destination, enter Belarus allegedly as transit. However, in fact, after crossing the border, the goods don’t leave either Belarus or Russia. 

    Parallel import

    Parallel import – a term from the Russian economic-political vocabulary. It refers to the goods imported to the country without the consent of the producer. Even before 2022, Russia was under sanctions. During this time, several goods were imported through Belarus as a mediator to circumvent the limitations imposed by the EU and other trade partners.

    Nowadays, it continues. Even though the detailed statistics on Belarusian foreign trade aren’t published, the growth of exports to Russia can demonstrate that such measures exist.

    So no effect?

    In fact, despite all criticism, the current sanctions have a lot of effect on the Belarusian economy. For example, the movement of woods and fertilizers across the border decreased. Furthermore, the amount of contraband cigarettes crossing the EU-Belarusian border became lower. Hence, we can say that in general, the sanctions affect the Belarusian economy, though there are loopholes to cover. In fact, such limitations influence around ⅔ of the Belarusian economy.

    Structural problem with the sanctions

    There are two main entities imposing the sanctions on Belarus: the EU and the US. The US has limited influence over Belarus, since the amount of trade between the US and Belarus is low. However, the US controls USD, which, in turn, can be a leverage for economic sanctions.

    The main problem with the sanctions from the EU is the fact that the EU isn’t a single nation. Nation states comprising the EU are not ready to delegate their control over economic and foreign trade policy to a main EU authority. As a result, there is no single agency controlling the sanctions against Belarus. The situation is exacerbated by the difference in legislation between member states, which, in turn, creates many loopholes described above.

    Some nations, such as Poland and Lithuania, express the political will to strengthen their sanctions. In the example of these two countries, they have increased the time of cargo checking, which leads to a 5-day waiting time to cross the border from Belarus to those EU countries.

    In the EU governance, there is, in fact, a group of about 12 people who are responsible for sanctions and sanction evasion control. This group can help to make sanctions more efficient, but is lacking in size and influence: their actions are limited. Giving this group more power faces reluctance from other member states.

    Message to the EU

    To help Belarus become more robust, as well as to increase its influence in the country, the EU should increase its presence in Belarus. Presently, this doesn’t seem possible, though there are two short-term suggestions that could help to increase the distance between Russia and Belarus.

    1. The EU should support those who want Belarus to leave the Russian sphere. The regime itself is composed of people; hence it is not homogenous. There are those inside the country, including the government, who would be willing to decrease the level of dependency on Russia. The EU officials can use such people to separate Russia and Belarus.
    2. The EU should strive not to let Lukashenka completely lose its sovereignty to Russia.
    3. The EU should demonstrate to Belarusians inside the country that they care. This message can be sent through appointing a special diplomatic envoy and through policies of the EU towards Belarus.

    To address the challenges described above, the EU should focus on 3 actions.

    1. Prioritize evasion control. Currently, the share of the Belarusian economy under sanctions is already high enough. However, the effect of the sanctions on those who are the sanctions’ target is low due to the current evasion schemes.
    2. Separate the introduction of new sanctions from additional measures against proxy businesses and sanctions evasion.
    3. Switch the main pressure from small enterprises to the major wallets of Lukashenka. In the current situation, the wallets of Lukashenka can circumvent the sanctions due to the existing loopholes. At the same time, small economic actors, such as small businesses, don’t have such a possibility and suffer from the sanctions in full. Hence, it is important to redirect the effect of the sanctions.

    Photo: Bloomberg

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