Belarusian-Russian relations: Eurasian vortex

Summary

In 2013, Russia vigorously promoted the Eurasian integration. Belarus thus has exhausted several integration-related benefits, while the associated expenses have increased. Russia’s accession to the WTO exacerbated problems with sales of Belarusian commodities in the Russian market. The excessive dependence of Belarus on the Russian market amid a recession there has resulted in a growing foreign trade deficit. Complications and conflicts of interests among the Customs Union members were escalating, which will remain a determining factor throughout the entire process of creation of the Eurasian Economic Community (EurAsEC). The problem of oil duties paid to the Russian budget, which has been fundamentally important to the Belarusian leadership, was not resolved, so it remains on the 2014 agenda. Belarus’ exclusive dependence on Russia increasingly restrains the autonomy of the Belarusian government, which in many respects concerns management of national enterprises considering that Russian banks are their direct lenders.

Trends:

• Increasing socioeconomic disparities between the Customs Union members alongside intensified Eurasian integration;
• Increasing internal conflicts within the alliance, which remain unresolved, although the parties are entering into the next integration phase;
• The loss of competitive advantages by Belarus, including those in the Russian market;
• The emergence of a “forceful” component in Russian-Belarusian relations.

Eurasian maze

In 2013, Russia kept accelerating the Eurasian integration as a combination of three ‘nesting dolls’: the Customs Union, the Common Economic Space and the Eurasian Economic Community. As we anticipated in the previous Yearbook1 reviews, complications and conflicts of interest, which manifested themselves when the integration batches were signed, inevitably took their toll at the implementation phase, while the situation was taken to a higher level of complexity. Important is that the ‘deeper level’ of integration does not erase the problems encountered in the previous phases.

Last year it became apparent that Belarus practically exhausted the key benefits (preferential gas prices and beneficial terms of oil supplies) as synchronization within the Customs Union and the Common Economic Space went on. The thing is that, despite the remaining price advantages in supplies of Russian raw materials, competitive advantages of Belarusian commodities in the Russian market were lost, and the energy component in the cost of production in Belarus increased. Against the background of accelerated Eurasian integration, Russia’s accession to the WTO sharply intensified competition in its market, which is a key one for Belarus. Belarusian officials immediately started talking about Belarusian manufacturers of truck tractors, trucks, tires, agricultural machinery and foods being pushed out of the Russian market. “We have already had plenty of troubles, as, in fact, we are already in the WTO being a Customs Union member,” First Deputy Prime Minister of Belarus Vladimir Semashko complained to the president in spring 2013.2

The Belarusian government however believed that new bonuses can be received from the integration into the EurAsEC, which is supposed to be launched on January 1, 2015. It first of all concerns export duties on oil products, which Belarus pays to the Russian budget, but does not want to.

Experts and officials of the Customs Three worked on the EurAsEC treaty throughout the year trying to eliminate exceptions and barriers in the mutual trade, but did not succeed: in autumn 2013, the list of exceptions and limitations in the Union totaled 578 items, including the most painful export duties on oil products, abolition of which the Belarusian leadership desperately has been lobbying at all summits of the Three.

Events and circumstances of the past year showed quite clearly that socioeconomic development gaps within the Customs Union become more and more evident due to the non-uniform affiliation with the WTO. This was an additional incentive for the Three to protect their domestic markets. In spring 2013, Russian Rosagromash Association appealed to the Eurasian Economic Commission for protection against unfair competition on the part of Belarusian agricultural machinery manufacturers. Russian fish producers, the Association of Russian Confectionery Industry Enterprises, and some others also complained about problems arising in the Belarusian market.

Having no obligations to the WTO, Belarus was using market protection tools much more often than the other members of the Customs Union. On the initiative of Minsk, the Eurasian Economic Commission raised import duties on dairy products and agricultural machinery, and considered an increase in tariff rates on a group of other commodity items important to Belarus’ economy.

In 2013, the parties continued discussions on five merger projects, which showed the depth of Belarusian-Russian integration, namely Hrodna Azot with Gazprom, Peleng with Roscosmos, Integral with Ruselectronics, MAZ with KamAZ, and the Minsk Wheel Tractor Plant with the State Corporation Russian Technologies. Quite predictably, none of them have been carried out so far. At the same time, the stakeholders accelerated preparations for the privatization of Integral (in 2013, the parties signed a memorandum of understanding and valuated Integral stocks), Peleng, Hrodna Azot and the Minsk Wheel Tractor Plant.

Trade: some fruits of integration

In 2013, the situation with Belarus’ foreign trade in commodities seriously deteriorated compared with 2012: exports dropped 19.2% to USD 37.2 billion, while imports only decreased 7.3% to USD 43 billion. Russia firmly remained the main trade partner of Belarus. The trade turnover between the two countries amounted to USD 39.7 billion (43.8 billion in 2012) (see Table 1). The trade with Russia constituted 49.5% of the total foreign trade of Belarus.

In turn, Belarus is among the six largest trade partners of the Russian Federation. Russia has become the main export market for Belarus instead of the European Union in 2012 mostly owing to the ‘solvents’ export schemes. In 2013, exports from Belarus to Russia went up 3.2% to USD 16.8 billion, thus the trade with Russia seriously contributed to Belarus’ foreign trade deficit of USD 6 billion (11.26 billion in 2012).

In 2013, Russia, as usual, mostly exported raw materials, energy products making up 52.6%. Belarus exported to Russia more commodity items than it imported from there: 10 commodity groups constitute around 70%, and 15 commodity groups represent 80% of total exports to Russia.4

Machinery, equipment and vehicles, including agricultural machinery, trucks, truck tractors, and lift trucks top the list of Belarusian exports to Russia together with (in decreasing order) foods and agricultural raw materials, chemical products, including pharmaceuticals, and tires. A considerable decrease in the most important exports, such as engineering products, ferrous metal commodities and tires was reported in 2013. At the same time, exports of other items from the top 10, such as foods, plastic goods and woodworking industry products were going up.

The results of the trade with Russia in 2013 arouse concern primarily because Russia has been and still remains the main market for Belarusian non-primary products (see Table 2). Despite a drop in demand for Belarusian products, Belarus did not switch its attention to other markets with respect to most product categories. This means that limitations on the Russian market can result in a crisis of the entire Belarusian industry, unless the government of Belarus formulates a new export diversification policy.

Belarusian Potash Company: Russian-style divorce, Belarusian-style divorce

A big scandal erupted in July 2013: Uralkali pulled out from the Belarusian-Russian potash alliance with the Belarusian Potash Company (BPC). The reaction of the Belarusian authorities to the potash divorce was unprecedentedly strong. Uralkali CEO and Chairman of the Supervisory Board Vladislav Baumgertner was accused of causing USD 100 million worth of damage and was arrested in Belarus.

Moscow retaliated with pinpoint strikes claiming that the quality of Belarusian dairy products was below standards, and announced the intention to cut oil supplies to Belarus. The Russian Foreign Ministry warned the Belarusian side that Baumgertner’s arrest “could affect the schedule of Russian-Belarusian political contacts.” Although the BPC was not a landmark of the Belarusian-Russian integration unlike the above-mentioned five projects, the company’s future basically reflects the depth and quality of cooperation between the two states.

The scandalous ‘divorce’ depleted the BPC: Belaruskali was left without its own distribution network, as the key managers were brought to the BPC by Uralkali. Belaruskali had to start creating its own trade network, claiming that it would take one to three months to build it up. Uralkali not only refused to work with the joint trader, but also launched a new amount-before-price sales strategy that led to at least a landslide of prices in the global potash market down to USD 100 per tonne. Lukashenko said that as a result of Uralkali’s withdrawal Belarus lost USD 1.5 to 2 billion and Russia lost over USD 3 billion.

In order to prevent a loss of Belaruskali’s market share and a currency shortage, the government had to provide substantial support to the country’s leading exporter who was in a difficult economic situation. The export duties established for Belaruskali (EUR 75 to 85 per tonne) were zeroed and a number of payments were postponed, which allowed the company to retain its market power. Nevertheless, the year 2013 was no bed of roses for the company. It was not the end of the world either: exported potash fertilizers totaled 3,437 million tonnes (in terms of 100% of potassium chloride) against 3,668 million tonnes in 2012. Currency receipts thus decreased by USD 599.3 million year-on-year. The total foreign currency receipts went down to USD 2.063 billion.

Oil and refining

The year 2012 was a resounding success for the Belarusian oil industry owing to the notorious ‘solvent’ business. Belarus had to close it up under Russia’s pressure, and the revenues shrank very quickly. By the end of 2013, the Belarusian oil industry exported 4 million tonnes of fuels less than in 2012 (13,563 million). Currency receipts dropped to USD 10,176 billion.

In 2013, Russia declaratively linked oil supplies to Belarus with five integration projects for the first time. The parties did not sign a supply agreement for the year, so Belarusian refineries had to work on quarterly schedules. The potash crisis contributed to the oil sector turmoil, as the Russian government considerably reduced oil supplies to Belarus through the ‘pipe’ in the fourth quarter.

Belarusian refineries faced the immediate threat of a starvation diet, but Rosneft head Igor Sechin gave Minsk a helping hand just in time. At a meeting with Lukashenko in September 2013, he announced that Rosneft managed to convince the Russian leadership to maintain full-scale oil supplies to Belarus.5 On the one hand, Sechin was guided by purely pragmatic considerations trying to minimize losses of his own company (around USD 3 million in case of cut supplies to Belarus). On the other hand, the recent fuel and energy industry supervisor in the Russian government acted as a peacemaker in the potash conflict.

Also, Sechin cast himself for the role of informal curator of economic ties between the two countries, for instance with a view to Russian investors’ plans to buy Belarusian enterprises. He is in the top of the list himself with an appetite for some strategic assets in Belarus, especially the Mozyr refinery, where Rosneft owns 12.5% of stocks through Slavneft. In late 2013, Belarusian officials seriously considered the intention of Rosneft to become a general supplier of oil to Belarus. Moreover, the Belarusian leadership and Rosneft discussed plans to supply natural gas to Belneftekhim enterprises, including Grodno Azot. None of these plans have reached the implementation stage, though.

Credit backing

On April 30, 2013, Belarus received the fifth tranche of a loan from the EurAsEC Anti-Crisis Fund (ACF). This story dates back to June 4, 2011, when the ACF Council approved a USD 3 billion loan for Belarus to be provided in six tranches over 2011-2013 on condition that the Belarusian government would comply with the loan program requirements. The Ministry of Finance of Belarus expected the sixth tranche (USD 440 million) already in November 2013. In late 2013, the ACF Council however decided to postpone its consideration for six months as Belarus failed to fulfill its credit program obligations, specifically those on the terms of gross and net international reserves, privatization, and an increase in loans in the economy, as well as the aligning of excise duties on alcohol and tobacco products with Russian duties.

In March 2013, following a session of the Supreme State Council of the Union State, Vladimir Putin said that the government of the Russian Federation would lend Belarus extra funds in the amount of up to USD 2 billion in 2014. Russian Minister of Finance Anton Siluanov specified that the loan would be given from the federal budget and other sources for 10 years. Belarus received the first tranche (USD 440 million) at the very end of 2013.

One more aspect of Russian loans to Belarus became apparent in 2013. Russian Savings Bank Chairman of the Board German Gref said during a meeting with Lukashenko on September 25 that, over a period of three years, the bank had infused USD 11 billion in Belarus,6 meaning crediting of Belarusian enterprises. Even if it was an exaggeration (let us say the real amount is half as large), this means that the debts of Belarusian enterprises are debts to the Russian state budget. So, Belarus’ critical dependence on Russian loans would thus top the future agenda alongside with energy dependence.

Conclusion

2013 was another year, when Belarus became increasingly dependent on Russia with respect to a group of critical parameters, including energy supplies, merchandise exports and loans. This dependence was not, however, accompanied by noticeable economic effects like economic growth, increased household incomes, boosted exports, etc. Apparently, this downward trend will continue, among other things due to a recession in Russia.

In anticipation of the launch of the EurAsEC, the Belarusian authorities are trying to resolve the problem of duties on petroleum products in their favor (the value of the matter in dispute being USD 2 to 3 billion), and the chance to succeed is pretty good.

As for the forecasts, there are some uncertainties associated with the Russian-Ukrainian conflict. The Belarusian government will obviously try to seize opportunities opened up as a result of this conflict and haggle over certain preferences, although it is hard to vouch for the ultimate success of this endeavor. Even if Russia offers more generous support in 2014, the Belarusian side will not be able to take advantage of the preferences to the full extent, because the Belarusian economic model generates escalating costs. In the long term, the implicit lending to Belarusian enterprises by the Russian government can only aggravate the problem of economic independence of Belarus.