Belarus – Russia: Challenging tracks of the new ‘common market’

Summary

In 2014, Belarus and Russia achieved little progress in accelerating the creation of a common market, which is called the ‘Eurasian Economic Union’ (EEU) since January 1, 2015. The ‘delay’ is not due to the Russian-Ukrainian conflict alone, but also the growing contradictions between the direct participants in the post-Soviet political and economic reintegration and socio-economic disparities in the EEU member states against the background of the deepening regional crisis. These contradictions can be illustrated in terms of the redistribution of benefits, which can be called ‘primary’: speaking of the unhindered access of national products to the common market, we cannot but draw attention to an extensive list of exclusions and limitations, which has not been shortened over the year under review. The bargaining over ‘secondary’ benefits of integration – oil duties and credit resources – which will continue in 2015, was quite uneasy.

Trends:

• The political alliance of Belarus and Russia is becoming more declarative and less effective;
• Bilateral cooperation in key areas is increasingly formalized as ‘special cases’ within the framework of post-Soviet (re)integration institutions;
• The launch of the EEU was botched from the start: economic cooperation within the member states was dwindling; the list of exclusions and limitations remained almost unchanged; the interdependence increased;
• Russia maintains a special regime of energy supplies and credit support for Belarus thus reducing the secondary benefits.

Eurasian Union

It became clear after the Euromaidan events in Kiev and the ‘Russian Spring’ that the Eurasian integration accelerated by the Kremlin ended in a fiasco in its Ukrainian component. The Russian-Ukrainian conflict is just one of a series of symptoms of the continued dismantling of the imperial building, which includes the processes of separation of political and economic systems, while the ‘integration’ is the opposite in meaning and direction political and legal activism of the post-Soviet elites put on top of the actual disintegration. Contradictions between the formal and substantive components of the post-Soviet ‘uniting’ institutions inherently generate logical conflicts of interest between the member states, which cannot be overcome at a ‘deeper level’ of integration.1

The customs Three composed of Russia, Belarus and Kazakhstan should have completed two previous stages first to give a good start to a more advanced form of integration – the Eurasian Economic Union (EEU) – namely to create a full-fledged Customs Union and the Common Economic Space, which they did not do as usual. In particular, the list of exclusions and limitations imposed by the Three totaled around 600 positions by the end of 2013. Almost all of these positions were dragged in to the EEU. As of the beginning of 2015, the EEU existed not so much in reality as in the regulatory domain. On the other hand, like all previous integration institutions, this union promotes an exchange of secondary benefits.

The presidents of Russia, Kazakhstan and Belarus signed the treaty on the establishment of the Eurasian Economic Union on May 29, 2014 in Astana. The new alliance is not about a single monetary, financial or social policy. The creation of single markets in key areas was scheduled for 2025. Before the treaty was signed, Minsk had been bargaining with Moscow hard over the signature terms, among other things because the export duties on oil products – the most sensitive question for Belarus – was on the list of exclusions. The Belarusian government was persistently negotiating the abolition of the export duties on oil products at all summits of the Three (in summer 2014, the duties were estimated at USD 2.5 billion). Alexander Lukashenko and Vladimir Putin reached a compromise on the oil issue on the very day when the EEU treaty was signed. Belarus was promised USD 1.5 billion in export duties on oil products in the next few years.

The question was raised again pretty soon and jeopardized the ratification of the EEU treaty by the Belarusian side. Russia has been carrying out a tax reform of the oil industry since 2015 and, as part of it, raised the entry price of oil for Belarus. The Belarusian oil refining margin was likely to go down, which would probably result in considerable losses. Minsk demanded compensation. After the Russian leadership promised to exempt Belarus from paying export duties on oil products to the Russian budget in 2015, Belarus ratified the EEU treaty and asked to extend this exemption for three years. Moscow only agreed on one year, 2015, which means that the parties will have to go back to the negotiating table again next year.

Shortly after the allies took the issues related to the ratification of the EEU treaty off the agenda, they had to respond to new challenges. At the end of 2014, Russia sharply devalued its national currency, which negatively affected the financial performance of Belarusian enterprises. Kazakhstan devalued its currency as well. So did Armenia (EEU member since January 1, 2015). Belarus did not dare to do the same for a while fearing panic in the currency market. As a result, Belarusian products started losing the Russian and then the domestic market.

Alexander Lukashenko then demanded to protect domestic producers “in every possible way” regardless of the integration agreements. Once again, the Belarusian president made it obvious that the participants in the Eurasian economic integration would ignore their commitments in case their national economies face a serious problem.

For instance, when trying to force the Belarusians to join the Russian embargo, Moscow prohibited imports of meat and dairy products of a number of Belarusian enterprises and the transit of the banned foods from Belarus to third countries via Russia. By doing this, Russia ignored the Customs Union laws, which say that the customs control is moved to the external border of the single customs territory of the Union, and that issues related to customs restrictions in the integration union must be resolved trilaterally under the jurisdiction of a supranational body – the Eurasian Economic Commission.

The fact that Rosselkhoznadzor (the Russian Federal Veterinary and Phytosanitary Monitoring Service), acting on behalf of the Russian government, disregarded the procedure established by the Three just shows that Putin’s ‘child’, the EEU, is more like a political project, which lacks effective tools to reach compromises when protecting national interests. Instead of the “integration of integrations”, which the leaders of the Three were talking about throughout the past year, the new alliance exacerbated disintegration processes against the background of recession problems in the economies of the Three.

‘Secondary’ benefit No. 1: Oil

Belarus is known for being practically a net importer of oil buying around 22 million metric tons a year to load its two refineries, while the domestic extraction is only at 1.645 million tons. Theoretically, a fall in world oil prices allows an importer to reduce energy costs. However, a cost reduction can be accompanied by a decrease in the benefits from the broadly defined oil business.

In 2014, Belarus purchased 22,507 million tons of Russian oil against 21.26 million in 2013 and paid USD 763.15 million less owing to the lower prices. For the same reason, in 2014, Belarus earned USD 117 million less than in 2013 from the export of its own oil. The most significant losses (USD 193.8 million in currency receipts) were due to the deterioration of the pricing environment in the market of oil products.2

As already mentioned above, oil revenues are among the most pressing issues of Belarusian-Russian cooperation under the sign of ‘integration.’ Belarus always demanded the right to keep the export duties on oil products for itself instead of transferring them to the Russian budget. Lukashenko said that if not for the obligation to give the export duties away to Russia, he would have built ‘Emirates’ in the country. This goal is totally out of reach despite the fact that the entire amount of the export duties on oil products stayed in Belarus last year.

The oil pie, which could be counted on before world the oil prices dropped was at least halved. According to the Finance Ministry of Belarus, the amount of the export duties will be down to USD 1.89 billion in 2015 (for comparison, Belarus transferred USD 3.32 billion in export duties on oil products to the Russian budget in 2013, and 2.89 billion in 2014). The 1.89 billion is a preliminary estimate, because the Belarusian budget for 2015 was calculated with allowance for the world oil price standing at USD 83 per barrel.3

Besides, due to Russia’s tax maneuver, the price of oil for Belarus increased by USD 107 per ton since January 1, 2015. The Belarusian government had to take measures to support the oil industry by reducing excise duties on oil products by 22% and increasing fuel prices for domestic consumers.

‘Secondary’ benefit No. 2: Credit support

The credit support for Belarus is one of the basic ‘secondary’ benefits associated with the country’s active presence in Russian integration initiatives. In late June 2014, one of the largest Russian banks, VTB, the controlling stake in which belongs to the government, gave Belarus a highly anticipated loan in the amount of USD 2 billion.4 Belarus repaid USD 440 million borrowed from the bank on the New Year’s Eve and used the rest of the money to clear other debts. The USD 440 million given by VTB at the end of 2013 were declared a term (replacement) bridge loan on account of the USD 2 billion intergovernmental loan, which could only be granted after a revision of the Russian budget.

In 2014, the Belarusian government was waiting for the last (sixth) tranche of a loan from the EEU Anti-Crisis Fund (USD 440 million), which was not received by the end of the year. Earlier, on June 4, 2011, the Anti-Crisis Fund Council approved a USD 3 billion loan for Belarus in six tranches during 2011–2013 as the Belarusian government was implementing the credit program stage by stage.

In late 2013, the ACF Council adjourned the consideration of the loan for six months because Belarus failed to meet credit program requirements, namely the obligations on gross and net international reserves, privatization, etc. The alignment of the excise rates on alcohol and tobacco products with those established in Russia was not carried out either.

In total, in 2014, Belarus borrowed USD 5,200.8 million and repaid USD 4,563.0 million. Currency payments on public debt will peak again in 2015. Belarus is to pay the creditors USD 4.1 billion (about 3 billion under the principal debt and 1.1 billion for its servicing). In 2015, Belarus will repay USD 716.3 million to Russia, 541.2 million to the Anti-Crisis Fund (indirectly to Russia), 380.4 million to China, 130 million to the International Bank for Reconstruction and Development, and 121.8 to Venezuela.

Last year, the Belarusian government expected that nearly half of the foreign debt could be repaid from the export duties on oil products (around USD 1.9 billion) and the export duties on Belarusian oil (around USD 300 million). However, since the estimated oil revenues were going down, the Belarusian economy needed financial support to pull through the crisis. It is possible that the Belarusian leadership will try to refinance the payments above in 2015 by borrowing more money from Russia.

Economic and trade exchanges

Statistics shows a noticeable decrease in the trade turnover between the founding nations of the EEU over the past two years. In 2014, Belarus’ turnover with other member of the customs Three dropped to 95.3% against 2013 (94.7% in the trade with Russia). In the past two years, the trade turnover with Russia decreased by 14.2% from USD 43.86 billion to USD 37.63 billion (see Table. 1).

Nevertheless, the proportion of the trade with Russia in Belarus’ total turnover remains very high: it increased from 45% in 2011 to 49% in 2014, including exports increased from 34% to 42.4%, while imports shrank from 54.5% to 54.8%, respectively. With respect to a number of important positions, Russia is practically an exclusive foreign trade partner of Belarus. Russia mainly supplies Belarus with commodities (usually of critical importance) being the main market for Belarusian goods (with some minor exceptions related to oil and oil products, timber and potash fertilizers). In other words, Belarus traditionally supplies Russia with end-use products, which, by the way, Russian consumers can substitute with goods from third countries.

Besides, Belarus has to pay Russia in currency, while revenues from sales of Belarusian goods in the Russian market are in rubles. This means that the weakening of the Russian ruble, which led to a decrease in Belarusian exports in dollar terms, hit the Belarusian economy much more than the drop of the world oil prices.

Last year, the U. S. dollar officially rose by 72% in Russia. The unwillingness of the Belarusian authorities to adjust the exchange rate in connection with the devaluation of the Russian currency strengthened the Belarusian ruble against the Russian, which, in turn, has led companies controlled by the Belarusian Ministry of Industry to serious financial problems. In January-October 2014, their total losses amounted to nearly one trillion Belarusian rubles.6 According to the Ministry of Agriculture, Belarusian exporters of foods lost USD 362 million due to the same problems.7

Belarus reacted to this situation with the declarative commitment to protect the currency equivalent of the cost of Belarusian goods in rubles from a massive decline. At the end of 2014, Alexander Lukashenko demanded to peg the prices of Belarusian goods to the dollar or euro, which, of course, was not done: Belarusian goods are already not very competitive in the Russian market, including that in price terms. The Belarusian economic authorities finally came out with a ‘natural’ reaction–the devaluation of the national currency following the EEU partners.

Conclusion

Currently, there are no visible prerequisites for overcoming or at least relieving of the regional crisis, which can be characterized as political and economic. Since the Belarusian ruling elite sees the cause of this crisis mostly in transient ‘external’ factors, it does not display any willingness or political will to make changes or reform the system. It is therefore clear that in the ‘hard times’, the Lukashenko regime places its stake on foreign borrowings and a variety of benefits one way or another connected with the post-Soviet integration.

It is easy to predict that in 2015, Minsk will finally receive the last tranche of the loan from the EEU Anti-Crisis Fund (USD 440 million) and repay its debt to the Fund. Belarus applied to the ACF for one more loan in April 2015 and will probably get it. We can only guess whether the first tranche will be received before the end of the year.

As concerns Russian intergovernmental loans, they can be refinanced by means of new borrowings. Russia, as its top officials say, is ready to lend a helping hand “in case of emergency.” Therefore, the question is whether this ‘emergency’ will occur and how Russia will evaluate its helping hand in the context of this ‘emergency’ in view of the presidential election in Belarus. In short, there are uncertainties in the details.

As is the case with the redistribution of oil rents, due to the shaky situation in the world oil market, the talks between Belarus and Russia over the export duties on oil products in 2016, which the parties agreed to continue in early 2015, can be postponed until the end of the year.

Since Minsk’s benefits from the participation in Russian integration projects are becoming less tangible and less and less guaranteed, Belarus will contribute to the creation of a ‘common market’ accordingly. We believe that in 2015, most likely, the list of exclusions and limitations will not be shortened, or shortened insignificantly. It will be a challenging year for the integration.