Belarus – Russia: War and peace

Summary

The year 2018 was marked by a large number of trade and economic conflicts and disputes between Belarus and Russia, including those on supplies of Russian oil products to Belarus, re-export of Western embargoed foods to Russia by Belarusian companies, etc. Although Belarusian-Russian relations topped the news throughout the year, and an impressive number of inter-departmental and high-level meetings were held, not a single important agreement was achieved.

Belarus’ deficit in trade with Russia reached nearly USD 10 billion, the highest amount in absolute terms since 2012.

In contrast, political cooperation was calm and frosty-friendly, rather than heated and confrontational.

Trends:

• Expansion of the list of the matters of dispute in trade and economic cooperation;
• Stable political relations;
• Growth of bilateral trade (not in favor of Belarus);
• Strengthening of sovereignization, mutual distancing of the allied states, Russia outstripping Belarus in terms of the progress achieved.

Disposition of friendly forces

Belarusian-Russian relations developed amid the confrontation between Russia and the West. The Russian-Ukrainian conflict and Western sanctions against Moscow put Belarus in a “special place” in Russia’s foreign policy. Belarus reserved the place of one of the few allies and, de facto, the only coherent ally of Russia.

In 2018, Belarus remained the fourth largest trading partner of the Russian Federation and first within the CIS with USD 35.6 billion in bilateral trade turnover after China (USD 108 billion), Germany (USD 59.6 billion) and the Netherlands (USD 47.2 billion).1 The increased importance of Belarus as a transit corridor should also be taken into account.

Minsk had a stronger position in negotiations, which gave reason to assume that in 2018, the country would achieve better terms, including the lifting of trade restrictions, equal conditions for oil refineries, gas prices lowered to those in Russia, etc. It was also pretty clear that this would not be easy to achieve.

Firstly, amid the economic difficulties (financial and economic crises, depreciation of the currencies, oil price drops and Western sanctions), Russia started showing mercantilism in relation to Belarus, which politicians and experts often call “pragmatism.” Moscow began reviewing its expenses, interpreting the numbers in a rather peculiar way. According to Russian Ambassador to Belarus Mikhail Babich,2 from 2000 to 2010, the Russian Federation was losing hundreds of millions of dollars, or even USD 2-3 billion a year, supporting Belarus financially. Later, the diplomat began talking about USD 5 to 6 billion a year.3 In other words, Russia was thinking again how much friendship with Belarus really costs.

Secondly, Belarus is entering the next election phase (presidential and parliamentary elections in 2019 and 2020), so the Kremlin considers it premature to make concessions, since there will be a more suitable and high-keyed period for the Belarusian leadership.

Although Belarusian-Russian relations topped the news throughout the year, and an impressive number of inter-departmental and high-level meetings were held (Alexander Lukashenko and Vladimir Putin alone met a dozen of times), the period under review was totally fruitless. Not a single important agreement was achieved.

This was partly due to the replacements in the negotiating teams. After the re-election of the president of Russia, Deputy Prime Minister Arkady Dvorkovich was replaced by Alexei Gordeyev, Agriculture Minister Andrei Tkachev was replaced by Dmitry Patrushev, and Ambassador to Belarus Alexander Surikov was replaced by Mikhail Babich.

Belarus also replaced Sergei Sidorsky and Valery Koreshkov with Alexander Subbotin and Viktor Nazarenko in the Eurasian Economic Commission. Sergei Rumas was appointed prime minister. Igor Lyashenko replaced Deputy Prime Minister Vladimir Semashko. The negotiating team was reinforced by former Ambassador of Belarus to Russia Igor Petrishenko. Former Vice Premier Vladimir Semashko was appointed ambassador to Russia. Although, theoretically, the new composition of the group looks fitter to respond to the “pragmatization” challenges, it has not achieved any success so far.

2018 agenda: issues that could (not) be resolved

The entry of the EEU Customs Code into force on January 1, 2018 should be considered a significant step in bilateral relations. Additional barriers to Belarusian in the Russian market arose after Russian companies were massively given control over the issuing of certificates of origin. In fact, the right to export commodities to the Russian market will now be bought from Russian companies, and this right can be bought out by competitors.

In general, the year 2018 was full of conflicts and disputes over (a) re-exports of Western foods embargoed by Russia as part of counter-sanctions by Belarusian companies to the Russian market; (b) supplies of Belarusian dairy that Rosselkhoznadzor considered to be of low quality;4 (c) the terms of supplies of Russian oil products to Belarus and the price of natural gas after 2019; (d) long-drawn talks on Russia’s financial assistance to Belarus by means of crediting and refinancing of debts, and possible measures to compensate Belarus’ losses incurred due to the tax maneuver in the Russian oil industry.

This list of dispute is more or less typical of the last five years. The so-called “tax maneuver” coupled with a significant convergence of the price of crude oil for Belarus with the world price was, perhaps, the most high-profile issue last year. According to experts, in four years (2015–2018), Belarus’ lost USD 7.836 billion due to the tax maneuver, and the forecasted losses in the next four years (2019–2022) could reach USD 20 billion.5

However, the lost income, as well as the Russian “subsidies”, is a highly speculative topic. The calculations are mainly based on two presumptions: (a) consumer demand does not matter (the buyer will buy the same amount of oil whatever the price may be); (b) the transit position of Belarus is irrelevant either. Anyway, as of the end of 2018, this controversial matter was far from being resolved.

In the middle of the year, Moscow put forward claims to Belarus for refining and exporting Russian heavy oil products. Russia ignored that for a while, then cut supplies of heavy oil products, and later announced that deliveries will be stopped starting from 2019.

In contrast to trade and economic relations, political cooperation was calm and frosty-friendly, rather than heated and confrontational. At this stage, Russian bad capitalism and Belarusian bad socialism were progressing in diverging trajectories.

Minsk pursued the policy of the cautious normalization of relations with the West, and the Kremlin was relatively stand-offish (especially in comparison with 2014–2017). The Foreign Ministries kept speaking about strategic partnership, and Moscow did not particularly pay attention to the numerous European and U.S. delegations coming to Minsk, or to the “mild Belarusization” that was gaining momentum, largely because Belarus continued supporting Russia when it came to fundamental strategic issues, for example, Ukrainian resolutions in the UN.6 Even Putin and Lukashenko’s heated argument at the EEU summit in St. Petersburg at the end of the year did not trigger a political crisis in the bilateral relations.

The “ultimatum” delivered by Russian Premier Medvedev in December 2018 in Brest, stirred up things a little. The manner of its presentation and its content (“compensation in exchange for integration”) rekindled the speculations about Russia’s intent to annex Belarus.

Another interpretation is realistic as well, though. Medvedev’s ultimatum is very similar to Kasyanov’s ultimatum of 2000, when the newly elected president, Vladimir Putin, instructed to “sort out all this mess”. Today, almost two decades after the entry into the Union State Treaty, not only the nature of cooperation between the two countries has changed, but also its institutional component, i.e. tax regulations, the laws designed to encourage business development, etc. A number of functions of the Union State were taken over by institutions of the Eurasian Economic Union. Therefore, from the point of view of Moscow, the time has come to adjust the 1999 Treaty, taking into account the new realities.

Trade exchanges

Russia traditionally remains the largest trading partner of Belarus and a source of the largest trade imbalance. In 2018, imports from the Russian Federation exceeded Belarusian exports by almost USD 10 billion. A year before, Belarus’ deficit amounted to “just” USD 6.7 billion.

The rapid increase in Belarus’ trade deficit to the largest amount since 2012 was caused by a dramatic growth in imports (+15.5%), while the increase in exports was very modest (+0.9%). Imports increased mainly due to higher prices of oil and oil products. Exports stagnated among other things due to the bans on meat and dairy imposed by Russia, as well as the factors below.

First of all, the main paradoxes of the Eurasian Economic Union (EEU) should be pointed at. Instead of being a stimulant of bilateral trade (as originally intended), the EEU turned into the exact opposite. Belarus is by no means the only victim of endless trade restrictions. It is enough to mention that, according to the European Commission’s latest report on trade and investment barriers, by the end of 2017, Russia became the absolute world leader in the number of trade barriers posed to EU countries.8 Belarusian-Russian trade is only part of the basic trend. In the EEU, Russian lobbyists in the real sector have big competitive advantages in comparison with their Belarusian counterparts, and this situation is unlikely to change in the foreseeable future. As a result, exports of a number of positions sensitive for the Belarusian economy dropped considerably.

Also, instead of being something like a splash pool for the EEU developing economies, which would buffer globalization effects (as it was meant to be), the EEU became just the opposite. The paradox is that competition in the Russian market grew heavier. Despite the huge number of trade and investment barriers in this market, Belarusian manufacturers are increasingly losing to their direct competitors in Europe and China. As a result, exports from many Belarusian heavyweights, such as the Minsk Tractor Plant, are shrinking in monetary terms. Let’s call this “an effect of seasonal sales”. For instance, although supplies of tractors and truck tractors to Russia increased 25.1% (from 2017), sales dropped 7.1% in monetary terms. The situation with agricultural machinery looks even more depressing: plus 12.5% and minus 47.8%, respectively.

Despite Belarus and Russia’s mutual rapprochement and mutual fencing-off, only third countries benefited from this. Belarusian Deputy Prime Minister Igor Petrishenko described this well saying, “When starting the integration, we were going to consider each other’s commodities and enterprises as our own. There is no such thing yet. Incredible as it may seem, third countries benefit from this, and we increasingly trade with each other in the Union not in our own goods, but in goods from third countries. In 2011, their proportion in mutual trade of the member states only made up 3.4%, and it increased to 8.4% in 2016”.9

Conclusion

Currently, there is no reason to believe that the year 2019 will see a breakthrough in the elimination of barriers to Belarusian-Russian trade, or solutions to other pressing issues. On the contrary, the very nature of the Eurasian Economic Union contributes to state protectionism, rather than prevents it. Some issues, in particular oil and gas prices and a compensation for the impact of the tax maneuver, are likely to be resolved by the end of the year as a “temporary compromise”.

In the second half of 2019, probably, attempts will be made to resuscitate the Union State before the 10^th anniversary of the Union Treaty. A reset of the integration in the current format will hardly result in notable successes.

In the Union State, the integration has come to a standstill because the 1999 Treaty establishes equal rather than proportional vote, which means that Belarus’ vote is equal to Russia’s. Moscow cannot agree with this. In the EEU, Russia is much more powerful in decision making than other Union members.