Belarus – Ukraine: A thaw without significant progress

Aleh Bahutski

Summary

In 2013, Belarusian-Ukrainian relations were as always primarily determined by the economic component, while politics remained less important to the leaderships of both countries. There was however one milestone event: Belarus finally ratified the bilateral border treaty of 1997 after six years of procrastination. Alongside the lifting of restrictions on the export of Belarusian oil products to the Ukrainian market, this largely promoted a thaw in political relations between Kiev and Minsk. In June, Alexander Lukashenko made an official visit to Kiev, which he studiously avoided since the inauguration of Viktor Yanukovych in 2010. The interpersonal conflict between the two presidents was thus forgotten for a while. Despite Moscow’s pressure, official Minsk almost openly supported the Ukraine’s ambition to be a part of United Europe.

Trends:

Gasoline as a foundation for relations

The year 2013 started with Ukraine’s attempts to open one more anti-subsidy investigation against the import of oil products from Belarus. Four out of six Ukrainian refineries lodged a complaint claiming that Belarus provides its refineries six types of subsidies totaling USD 180.84 per metric ton. Despite the controversial nature of the arguments, the Ministry of Economic Development and Trade of Ukraine admitted the complaint to examination in March. The Ukrainians did not like that the Belarusian competitors were exempted from the mandatory sale of a part of currency earnings. Kiev regarded that as “government support” and reported the amount of USD 165 per ton.1

Most Ukrainian experts were critical about the claim, regarding it as lobbying of interests of domestic producers, which would obviously have a negative impact on Ukraine’s economy. The cost of production at Ukrainian refineries is high. They have not been upgraded for long, and oil refining depth is not very satisfactory. The lack of competition in imports can result in a considerable price rise for consumers.2 Besides, Ukrainian refineries are not capable of producing Euro 5 fuels, only Euro 3.3 Euro 5 were imported from Belarus. Also, considering that the Ukrainian refineries were going to focus on resumed oil supplies from Russia, the discontinuance of the diversified oil import would mean total dependence on Russian traders.

The loss of the Ukrainian market can be very painful for Belarus. Ukraine is the primary buyer of Belarusian oil products: in 2012, Ukraine bought 4,358,379 tons of fuel out of a total of 17,493,386 tons. In this regard, the actions of the Ukrainian government were to a large extent determined by one of the leading oligarchic groups led by Dmitry Firtash, who decided to take oil refining under control and was highly motivated to push a strong competitor (Belarus) out of the market. The Firtash group was planning to buy refining facilities of Russian TNK-BP and Lukoil in Ukraine, namely the Odessa and Lisichansk refineries.

At that time, the group was represented in the Ukrainian government by Vice Premier for Energy Yuri Boyko, who instigated Ukrainian refiners to apply for the anti-subsidy investigation. Having connections in the Russian gas monopolist Gazprom and the Kremlin, the group also hoped to achieve the resumption of Russian oil supplies to Ukraine. The situation changed in March 2013. Another oligarchic group, the so-called ‘Family’ linked with the eldest son of the president of Ukraine, Oleksandr Yanukovych, announced its intention to take control over the refining industry. The anti-subsidy investigation was pushed on with active support of Energy Minister Eduard Stavitsky, the lobbyist of the second group in the government.

The oil ambitions of Firtash and the Family got stuck on the position of the Russian side. The Lisichansk refinery fell under control of Rosneft, which stopped the deal on its sale. Rosneft is a co-owner of the Belarusian Mozyr refinery. It was therefore not interested in blocking supplies of Belarusian gasoline to Ukraine.

In April, all stakeholders held informal consultations and managed to reach a compromise. On April 25, Ukraine’s Inter-Departmental Commission for International Trade made the decision to stop the anti-subsidy investigation. The parties agreed on the following: the Lisichansk refinery remained the property of Rosneft, Russia did not resume full-scale oil supplies to Ukraine, and the Family represented by VETEK bought the Odessa refinery from Lukoil and took control over the import of gasoline.

The import of oil products is one of the most attractive sectors in Ukraine, in which corruption is blooming astonishingly. According to the official data provided by the Ministry of Finance of Ukraine, in 2011, the proportion of smuggled and adulterated gasoline in the domestic market reached 22% (almost 1 million tons).4 Chairman of the Fuel and Energy Committee of the Supreme Rada Mykola Martynenko said that the amount actually exceeded 50%.5 The Odessa refinery was an important link in the scheme to legalize smuggling. The Ministry of the Interior of Ukraine declassified this scheme after the fall of the Viktor Yanukovych regime.6

Political discourse: a thaw through demarcation

The compromise on products supplies promoted a rapid thaw in political relations between Minsk and Kiev.

In summer (June 18–19), President of Belarus Alexander Lukashenko made an official visit to Ukraine. The final ratification of the 1997 border treaty and the exchange of instruments of ratification topped the agenda. Resolution of the border issue was crucial to Ukraine, which pursued the policy of the European integration and proclaimed the willingness to join NATO more than once. The updated National Security Strategy of Ukraine of June 8, 2012 called the demarcation of the borders with Russia, Belarus and Moldova one of the main challenges to national security.7

Belarus had been purposefully stalling the resolution of this issue for 18 years, seeing it as effective leverage in relations with Kiev. Ukraine’s unpaid government debt was the formal reason for the delay. The Ukrainian authorities did not want to acknowledge the debt for years.

President Viktor Yushchenko managed to resolve this problem in 2009. Ukraine acknowledge the debt (USD 134 million), and Belarus ratified the treaty of 1997. However, Lukashenko had evaded the exchange of instruments of ratification with the new President of Ukraine Viktor Yanukovych for over three years.

A number of analysts believe that the Belarusian side quickly reconsidered the attitude once the compromise on oil products was achieved, as the border ratification was allegedly included in a batch of informal agreements. Anyway, the long-standing problem was solved, and the intensive process of creation of a required regulatory framework and demarcation procedures started in autumn 2013.

A ‘thaw’ without significant progress

Although Lukashenko’s visit to Kiev in June marked a ‘defrosting’ of the political dialogue between the neighbors, no breakthrough followed. It is obvious that, despite the exterior reconciliation after the scandalous events of 2011,8 Yanukovych and Lukashenko still showed signs of strong repulsion for each other. As a result, the bilateral political agenda remained as narrow as it used to be.

Theoretically, Yanukovych might be interested to have Belarus as an ally in the Customs Union so that it could obstruct anti-Ukrainian initiatives of the Kremlin. It did happen every now and then, but this benevolence can be explained by Belarus’ own mercantile interests.

New Ukrainian President Viktor Yanukovych was unable to initiate alternative political and economic projects within the CIS like his predecessors Leonid Kuchma and Viktor Yushchenko tried to do (such as GUUAM, GUAM, etc.), because he did not have the political weight or true potential in the eyes of post-Soviet leaders. Lukashenko disregarded Yanukovych’s attempts to proffer his help as a lobbyist of official Minsk in the West, because the Ukrainian president quickly turned into a persona non grata there himself.

Belarus’ refusal to deliver Venezuelan and Azerbaijani oil through the Ukrainian Odessa-Brody main practically brought cooperation in the energy and transit sectors to naught. Kiev’s attempts to persuade Minsk to redirect at least a part of the exports from Baltic to Ukrainian ports were met with no or little success. Some progress in certain areas was made, though. For instance, in 2013, after the residual fuel transit from Russia and Kazakhstan dropped dramatically, the transit of residual fuel from Belarus through Ukraine increased 40% year-on-year.9

Trade exchanges

The Ukrainian government wants the bilateral trade with Belarus to be more balanced and tries to reduce the trade deficit. The Belarusian side makes promises from time to time, but does nothing. In 2013, Belarus’ export surplus in the trade with Ukraine amounted to USD 2,138 billion. It dropped one-third from USD 3,248 billion since 2012. Both exports and imports decreased considerably: in 2013, Belarus’ exports to Ukraine went down from USD 5,557 to 4,195 billion year-on-year, and imports declined from USD 3,247 to 2,138 billion.10

Oil products still constitute the major proportion of exports to Ukraine (USD 2,849 billion or 67.9% in 2013) and a one-third decrease in this area was also reported. Belarus also supplies Ukraine with tractors and truck-tractors (USD 101.1 million), liquefied gas (USD 99.8 million), tires (USD 89.6 million), mixed mineral fertilizers (USD 79.9 million), and potash fertilizers (USD 67.4 million).

Metallurgy products remain the major item of import from Ukraine totaling USD 409.1 million. Ukrainian largest player in this market – Rinat Akhmetov’s Metinvest Holding – decided to expand its own sales network in Belarus in late 2013. Belarus is the largest importer of electric energy from Ukraine (a third of the total Ukrainian export amounted to USD 184.7 million as of late 2013). Belarus however informed in December that the import of electric energy would be reduced by 30% in 2014.11 Ukraine also supplies Belarus with oil cakes, vegetable oil, rail cars, confectionery, and pharmaceuticals.

Most problems arise in the trade in meat, milk, beer and confectionery. Trade wars are common in these sectors. For example, in January, the State Veterinary Service of Ukraine restricted the import of dairy products supplied by three major Belarusian producers: Orsha Dairy Plant, Mahilieŭ-based Babushkina Krynka and Homiel-based Molochnye Produkty. The official reason was that the three failed to meet Ukrainian safety standards. Experts say the reason was that Belarus aggressively escalated supplies, which, according to the State Statistics Committee of Ukraine, more than doubled up to 10,500 tons worth nearly USD 23 million in January-November 2012. Early in April, in response to the milk war, Belarus actually banned Ukrainian confectionary keeping the cargoes at the border for additional checks.12

Dairy, confectionery and beer wars break out over and over again because these three industries are well developed in both countries, and lobbyists pressurize their governments seeking protection in the domestic markets. Cyclical escalations happen when curators of the Belarusian direction in the Ukrainian government are replaced. So it was in early 2012, when Andriy Klyuev left the Cabinet of Ministers of Ukraine, and in early 2013, when Petro Poroshenko resigned from the government.

In May 2013, the new curator, First Vice Premier of Ukraine Serhiy Arbuzov and his Belarusian counterpart Vladimir Semashko settled all major disputes. No aggravation in the bilateral trade was observed till the end of the year. On the contrary, despite Russia’s pressure, Belarus refused to ban Ukrainian Roshen confectionery in August. In turn, the Ukrainian authorities took no notice of regular requests made by Ukrainian milk producers, who complained about the boosting import of Belarusian milk, which soared 80% in the first half of 2013.

Foreign policy games

The preparation for signing of an association agreement and an agreement on free trade area between Ukraine and the European Union was the most important point on the agenda in 2013. The Kremlin displayed its extremely critical attitude towards the European integration plans of Ukraine. Alongside a massive media campaign in August, Russia exerted economic pressure on Ukraine and almost completely blocked Ukrainian exports for a few days. Alexander Lukashenko thus constantly reaffirmed his support for Kiev’s aspiration.

Throughout October and in the first half of November, Belarus de facto conducted an information campaign in support of the Ukraine-EU association agreement, the main message being “We do not see any problems in cooperation between the European Union and Ukraine.” Lukashenko consistently emphasized (apparently to irritate the Kremlin) that politicization of the ‘Ukrainian question’ would result in nothing but damage. He not only publicly supported Ukraine, but also, together with President of Kazakhstan Nursultan Nazarbayev, thwarted Putin’s attempts to launch economic attacks on Ukraine on the part of the Customs Union. The three presidents agreed on November 15 that each Customs Union member is entitled to independently take protective measures against Ukraine in case the agreement on free trade area with the European Union is signed.

The support for the European integration policy of Ukraine proclaimed by Lukashenko was apparently not caused by his fellow-feeling for Kiev or, especially, the European Union. The geopolitical choice made by Ukraine in favor of the West means that Belarus remains almost only ally of Russia, which gives Minsk an opportunity to request new and much bigger economic preferences. Also, the change in the geopolitical situation in the region could stimulate Europe’s interest in Belarus, and the Belarusian authorities would have a chance to return to their favorite policy of a geopolitical ‘swing.’

The Belarusian president was obviously irritated by Viktor Yanukovych’s refusal to sign the association agreement, and he has not supported the Ukrainian president in any way since the beginning of the mass protests in Kiev.

Conclusion

The collapse of the Viktor Yanukovych regime means that Minsk will have to build up relations with the new Ukrainian leadership. Lukashenko officially stated that Belarus was “fated to live in peace and harmony” with the new government of Ukraine. Speaking about the Russian-Ukrainian conflict over the Crimea, Foreign Minister of Belarus Vladimir Makei said during his visit to Riga, “Minsk is interested in Ukraine remaining a sovereign, independent and territorially integral country.”13

So, as concerns future relations with the new leadership of Ukraine, Minsk has a reason to hope for an outlook with fair promise.

Firstly, Alexander Lukashenko is known for having better, trust-based relations with leaders of pro-Western regimes in the CIS (Mikheil Saakashvili, Ilham Aliyev, Viktor Yushchenko, Mihai Ghimpu) than with pro-Russian ones. Besides, he already maintains relations with two potential presidential candidates in Ukraine, Yulia Tymoshenko and Petro Poroshenko.

Secondly, dramatic geopolitical shifts in the region related to Ukraine will help to strengthen Minsk’s position as the “only ally” of the Kremlin. Also, the West will have to intensify the Eastern Partnership project, which can give a new impetus to the attempts to unfreeze the dialogue between Belarus and the European Union. Finally, in the face of the military threat from Russia, the new Ukrainian government will be interested in a partnership with official Minsk and, probably, they can become new advocates of Alexander Lukashenko in the West. The Belarusian leadership will thus be able to get back to its favorite policy of a geopolitical ‘swing.’