Russia – Belarus: Eurasian waltz

Kirill Koktysh

Summary

Last year, Russia’s influence on Belarus was steadily growing, while Belarus’ influence on Russia was not. The scandal over solvents left Belarus without an essential part of export incomes. The labor outflow from Belarus to Russia within the Customs Union and common economic area was so massive, that Minsk had to pose administrative barriers that certainly did not improve its international reputation. The equaling of domestic prices with other Customs Union members smoothed down a bit by increased nominal wages was one more threat, which undermined the foundation of the Belarusian economic and political model.

Maneuvers around the EurAsEC loan when Minsk received scheduled tranches not meeting the privatization obligations established as a conditionof the loan, could be regarded as the only relative success. It was the only time in the entire year when Minsk somehow managed to take advantage of the increasing gap between Russian elite groups. In general, those opportunities were not capitalized on: Minsk neither obtained afoothold for its own aggressive game, nor broadened the room for maneuver. This can turn into a serious problem at the next stage of construction of the Eurasian Union as Minsk will inevitably lose the game given the imposed integration formats.

Trends:

Introduction

The last year was decisive in Belarus–Russia mutual relations. The next electoral cycle ended in Russia, where aconceptually new configuration of forces has emerged: two resisting elite groups – the Putin oil-and-gas lobby together with the liberals united around Medvedev, and the protesting middle class coming on the streets with anti-Putin rhetoric and slogans. However, the middle class got off the “firing line” after a series of failures. The situation lost most of its dynamics and the media partly lost their enthusiasm. The inter-clan struggle did not become less fierce, but turned into internal squabbles andtrench warfare, rather than concept-based confrontation.

A year ago, detection of a gap in the Putin–Medvedev tandem could give the Belarusian regime the long-expected room for maneuvers determining future victories. Minsk however either looked the other way this time, or intentionally ignored the open possibilities taking no advantage of it whatsoever.

Throughout the entire year, communication with Russia was going on in the atmosphere of increasing pressure on the part of Russia, to which Minsk could only react thus not finding a possibility to hold the initiative that not only affected mutual relations right away, but also had an impact on the architecture of integration projects Belarus and Russia are involved in, first of all the Eurasian project.

“Solvents” and the first loss

The year, which Belarus entered looking at economic development with optimism, was clouded in the middle by the scandal over “solvents.” Russia noticed the multiple growth of Belarus’ export of customs free solvents to the West and very soon discovered that it was gasoline suppliedunder the guise of solvents. A scandal erupted as the unpaid customs duties resulted in USD 1.5 to 2 bn losses for the Russian budget, according to Moscow calculations. The supplies of solvents were stopped in August.

The scandal certainly affected the level or confidence between the Russian and Belarusian leaderships, which was low even without that. Screws were tightened institutionally: in December 2012, amendments were made to the agreement on the customs code of the Customs Union aimed at liquidation of the solvents and thinners export schemes, which did not provide payments of duties to the Russian budget. Since then, any mixtures of petroleum derivatives and alcohols, of which solvents and thinners were made, are regarded as customable petrochemicals and their export has no sense in terms of commerce anymore.

Also, Russia pointed at the obligations on deliveries of gasoline made of Russian oil by Belarusian refineries back to Russia (the indicative balance envisaged return deliveries of one million tons of oil products to Russia. Nevertheless, till autumn, neither Belarusian, nor the Russian producers who processed oil on a give-and-take basis, made any deliveries of this kind. In the 4th quarter, Moscow pressurized Belarus by cutting oil supplies, and around 300,000 tons of oil products returned to Russia by the end of the year. Obligatory return deliveries were also set as a condition for the next year’s oil supplies, which have not been agreed on so far. Moscow wants at least 2 million tons of oil products in exchange for the amount of oil requested by Minsk.

The ruining of the “solvent scheme” thus had a much more serious impact on Belarus’ economy than could be expected. The incomes from the export of solvents were vital, rather than auxiliary. The amount established by Russia was essential for maintaining the stability of the Belarusian model. As soon as April 2013, Lukashenko confirmed a decline in the commodity turnover with Europe that quite correlates with the reduction in Belarus’ energy export to the European Union.

Privatization and loans

Minsk managed to use contradictions between Medvedev’s liberals and Putin’s raw material traders to avoid fulfilling obligations in the privatization sector, which were a stringent requirement for giving a stabilization loan from the EurAsEC anti-recessionary fund (June 2011). Minsk was supposed to privatize state property worth at least USD 2.5 bn every year within three years in exchange for USD 3 bn in six tranches. This obligation was discharged in 2011 when the last state-owned 50% of Beltransgaz shares were sold to Gazprom. But in the next years, Minsk totally ignored its privatization commitments.

There is a quite clear explanation. Medvedev’s liberals arefruitlessly trying to start the second wave of privatization in Russia for over two years hoping for greater influence comparable with that of Putin’s elites. Putin is obviously not interested in this and has been stalling the process. In this situation, Medvedev’s elites cannot but look at privatization in Belarus as an alternative way to find a resource, and they demanded this privatization in the most categorical form.

The challenge apparently comprised an answer: by agreeing from the very beginning to surrender such crucial asset as Beltransgaz to Gazprom that was important to Putin, Lukashenko could count on the Russian president’s support in blocking other privatization attempts, which, if successful, could strengthen the liberal opponents to Putin’s governance. As a result, the Belarusian president publicly rejected the list of the enterprises intended for privatization compiled by the government. He said time had not come to give state property away. During the first visit to Minsk, the first one after the election, president Putin did not reprove Lukashenko, but spoke about similar feelings, and Belarus was then given the next (third at that time) tranche of the loan.

In November, Belarusian Prime Minister Mikhail Myasnikovich made the final refusal to meet the terms of the loan. He said no tragedy happened “as we have other ways to preserve the gold and foreign exchange reserves.” Nevertheless, Belarus received the next (already fourth) tranche of the EurAsEC loan in late January.

Eurasian construction

The process of the Eurasian construction gives a strong impression that Minsk signed the founding documents on the Customs Union and common economic area without any profound preliminary analysis of the consequences and calculation of costs and benefits. It looks like ministries and departments did not accurately estimate possible impacts for each branch of the economy that could have converted into a comprehension of strengths and weaknesses and determining of a corresponding negotiation strategy for the next stage.

It is even harder to explain why they did not do it considering that Russia’s accession to the WTO in August, which was a definite possibility when the documents on the Customs Union and common economic area were waiting to be signed, took the situation to a new level of complexity. Staying outside the WTO Belarus and Kazakhstan will face all the downside problems like global competition at home, thus not getting any rights or bonuses WTO members enjoy. The openness of domestic markets ensured by the European principle of “four freedoms,”i. e. the free movement of goods, services, people and capital, which also lie in the foundation of the Eurasian Union, means that even least effective barriers cannot be posed to goods and services from the outside.

The conflicts of interests not settled at the signing stage certainly arose at the stage of implementation of the agreements. At the end of the year Aeroflot was close to taking control over Belavia, the symbol of Belarus’ sovereignty, when the Russian air carrier unexpectedly demanded free movement of services through a major increase in the number of flights to Minsk. Then came the time of stiff competition for highly skilled work force. This year, Russia considerably simplified the procedure of granting its citizenship for natives of the former USSR and even allowed foreigners, nationals of the member states of the Customs Union and common economic area, piloting Russian planes. Belarus and Kazakhstan faced a serious threat of becoming resource centers of Russia’s economy.

The competition for medium skilled work force was also stiff. Presidential decree No. 9 issued in autumn forbade early termination of labor contracts at the initiative of employees without sanction of employers. This was the first but obviously not the last step against the outflow of human resources from enterprises and against the massive migration, mainly to Russia. The process of equaling the prices for basic foods with the Customs Union partners will inevitability devaluate today’s symbol of stability – USD 500 wages – and stimulate labor migration from Belarus. Prices have been going up since mid-May when the Ministry of Economy, which had been keeping prices under control for a year after the recession, started lifting restrictions on the selling price limits established for socially significant goods.

These conflicts will only grow inherently, as they are directly assumed by the present architecture of the Eurasian Union based on the liberal principle of “four freedoms,” i. e. the free movement of goods, services, people and capital, which actually means a redistribution of influence from national states to corporations. The strongest corporations take over resources and markets of the weakest, whereas the state only acts as an arbitrator who watches how the rules of the game are being followed.

Russia’saccession to the WTO means that not Russian, but foreign global corporations will appear the strongest eventually. At this junction, Russia does not have the potential or ambition to maintain global competitiveness outside the oil-and-gas sector. For Belarus it means a threat of losing its status of an industrial nation.

Oddly enough, neither Belarus, nor Kazakhstan has initiated the process of development and adoption of the Eurasian Union architecture, which would be favorable for both. In particular, Belarus could be interested in the regime of protectionism for its industrial products in the Customs Union member states. As far as one can judge by the paper flow within the Customs Union and common economic area, a tactical solution to these quite premeditated problems was predictably found in protracting the coordination of regulations, which would take the framework agreements to the level of practice. Minsk and Astana are blocking to restrict access to their internal economic space stalling the introduction of new procedures and rules. It is clear that this response is only a temporary measure, which can well turn out to be ineffective.

Today, the EurAsEC has performed its tasks and transformed into the Eurasian Economic Commission.

Infrastructure

A cooling in relations between Ukraine and Russia resulted in an improvement of relations between Russia and Belarus. Ukraine started re-exporting Russian gas from Hungary which, in turn, does not receive it from Gazprom, but from a European buyer, so Gazprom finally lost patience and got back to the idea of the second string of Yamal–Europe gas main to be running through Belarus. Together with the already working North and South streams, it will completely deprive Ukraine of its transit status. However, it does not promise Belarus any special benefits, because having no share in Beltransgaz (the national gas transit operator) the country will be unable to turn the new amounts of gas into extra incomes or political power.

Conclusion

Belarus still retains an opportunity to turn the currentdisadvantageous variant of the Eurasian Union into an advantageous one. Since the internal design of the Union is still not quite clear, Belarus can impose its viewpoint. And this viewpoint (as amandatory requirement) can imply both industrial production and high-level cooperation and at the same time the terms for making this production and cooperation beneficial, inevitably entailing more or less smooth closing of the domestic market.

Given that the Russian and Belarusian elites do not trust each other, this imposition cannot just have a format of intra-elite arrangements: reliance on public attitude and, in a more comprehensive sense, shared values can be the only guarantee of their endurance. But these values and attitudes never emerge from nothing. They must be created and cultivated.

In other words, development and public imposition of the ideology of Eurasianism of Belarus’ origin could be the only successful format of the Eurasian Union, which Belarus can advocate and benefit from. It is the only way to anchor the cooperative industrial model as uniquely fair and mutually advantageous, as well as to ensure the proper degree of closeness of the domestic market from the external competition needed for its actualization as a natural and matter-of-course step.

Implementation of such strategy is certainly quite problematic given all the complexities. But, on the other hand, preservation of the status quo, i.e. realization of the principle of “four freedoms” without any other value-based framework context will simply lead Belarus and Kazakhstan to splitting into “spare parts.”