Belarus – Russia: Two decades of regressive integration

Summary

The year 2019 saw intensified Belarusian-Russian integration. A rather large-scale attempt was made to revise the Belarus-Russia Union State Treaty. Belarus was trying to achieve special (favorable) terms of Russian supplies of energy commodities. By the end of the year, the comprehensive negotiations reached a stalemate. The increased frequency of contacts between the political and economic elites of Belarus and Russia did not help remove any points from the bilateral agenda, which lead to total uncertainty in bilateral relations in early 2020.

Trends:

• Extremely low effectiveness of negotiations between the leaders of Belarus and Russia;
• Hard efforts made by both parties to modify and deepen integration;
• Continuing deterioration in the terms set for the supply of crude oil to Belarus and, consequently, the loss of regional competitive advantages for Belarus;
• Continuing heavy dependence of the Belarusian economy on Russia.

Reproduction of the agenda: the goal is nothing, negotiations are everything

The extremely low effectiveness of Belarusian-Russian political and economic dialogue was crystal clear in 2019. Although the presidents and top executives held talks and consultations a huge number of times, no important agreements were reached, as in 2018. The few signed agreements cover short periods of time, which indirectly indicates that the parties did not expect to finally agree on anything.

This is true not only when it comes to the usual trade disputes, especially regarding of Russian oil and gas supplies to Belarus, but also the areas where concord seemed to be quite achievable. For instance, the abolition of roaming in the Union State, which was said to be ‘a matter of little time’ as far back as late 2018, was suddenly linked with Minsk’s consent to accept all deeper integration roadmaps. In other words, it was postponed indefinitely. In December 2019, State Secretary of the Union State Grigory Rapota said, among other things, that telecom operators were reluctant to abolish roaming as it contradicted their business interests.1

The situation with the mutual recognition of visas by Belarus and Russia is similar, although both had been working hard for years to approach an agreement. Officials say everything was ready, and “only the presidents’ signatures were needed.”2

There is an extensive list of “virtually resolved” issues and “prepared” agreements awaiting a final political decision at the highest level. However, this list has not become shorter over the past twenty years since the signing of the Union State Treaty in 1999.

Acceleration of integration: regressive mode

Updates of the agenda of Belarusian-Russian integration and concrete steps to accelerate it topped the political news and gave rise to numerous speculations in 2019. Russia initiated a legal revision (or ‘fine tuning’) of the Union State Treaty in 2018 against the backdrop of heated debates on equality for business entities of the two states regarding energy prices.

An ad hoc group was appointed in late 2018 to resolve pressing issues and step up integration processes. Announcing the results achieved by this group, all persons involved reported that the approved version of the Program of Action of the Russian Federation and the Republic of Belarus to Implement Provisions of the Treaty on the Establishment of the Union State of December 8, 1999 (the name of the ad hoc group’s product) leaves the basic principles of the Treaty unchanged. This particularly concerns the parity in making decisions.3 The Constitutions, sensitive political matters and all points directly connected with the sovereignty of the countries were taken out of the picture. Belarusian Prime Minister Sergei Rumas described the cornerstone of the Program as “two countries – one market”,4 which means that uniform rules are applied to economic agents, whereas the governments abide by their own rules.

The work on integration continued throughout the year with some interim success. On September 6, Sergei Rumas and his Russian counterpart Dmitry Medvedev initialed an updated integration program, a framework plan for the progressive implementation of the roadmaps. This symbolic success was, in fact, the last, despite the growing number of bilateral consultations in the last quarter of the year. There was a probability that some important integration documents would be signed at least in the most general form and presented to the public before December 8, 2019, the 20th anniversary of the Union State Treaty. But after a regular round of bargaining over the energy supply terms and some other cooperation matters, which took place in December, it became clear that the most important negotiations on the harmonization of the roadmaps were postponed.

It is significant that the talks on accelerated integration were nontransparent to the uttermost. Even the regulatory legal acts that sanctioned the talks on the text of the Treaty were not available in the public domain.5 Since only snippets of information on the subject of the negotiations could be obtained, the final package of agreements remains a sealed book. Those involved in their development spoke about 28 or 30 integration roadmaps. During the December series of talks, information surfaced that Belarus was presumably suggested signing the 31st roadmap that prescribed the establishment of several joint supranational bodies, including tax and customs agencies, a single court, chamber of accounts and ministry of defense, a single currency, etc.6

Also, there are questions about the international legal status of such integration roadmaps that were not expressly named in the Union State Treaty. Despite public inquiries, Belarusian state bodies (the Ministry of Economy in particular) still have not given a clear answer about the status of the initialed action program and the roadmaps.7

Energy: beyond the action plan

The talks on Russia’s oil and gas supplies to Belarus have usually remained outside integration processes, being a sole prerogative of the top leadership of the countries and supplying companies, although, theoretically, supply agreements could be reached and executed by agencies of the Union State or the Eurasian Economic Union (EEU, previously EurAsEC), and Russia often uses supplies as leverage to pressurize its ally.

“Cheap energy in exchange for integration” is a possible formula for a compromise. However, many years of bickering have not produced any significant results, and the problem of energy contracts is an area of opportunistic and voluntaristic decisions. No one can say exactly how deep Belarusian-Russian integration should be at the current energy prices, or what the price should be at this depth.

In 2019, Belarus received oil under previously signed yearly contracts. Numerous (and ineffective) negotiations mainly focused on compensation for Belarus’ losses incurred due to the tax maneuver in the Russian oil sector, which has been carried out since 2015. Table 1 shows that at the end of the year, Belarus’ oil margin was the lowest in the past 10 years, and Belarus was a petroleum state for only five years. Formally, the Russian government is responsible for this, given its fiscal manipulation, i. e. taxing the entire volume of produced oil instead of only exported crude.8

The descending curve of the share of Belarusian transit in the export of Russian oil is even a more significant factor in bilateral relations in the energy segment. Russia is working on the routes for delivering oil to customers that bypass Belarus, and, accordingly, is losing interest in the Druzhba pipeline.

The incident with contaminated oil in the Belarusian pipeline (the largest one in the history of Soviet and Russian oil supplies to Europe) was an outstanding marker of the state of affairs in this area. The substandard oil ‘selectively’ damaged Druzhba, but not the new BTS-2, which starts from the same Unecha (Vysokoye) point as the Belarusian pipeline. This circumstance once again actualized the question about the importance of the Druzhba pipeline to Russia’s oil transit.

Over the past two decades, Belarus’ share in Russia’s oil export has more than halved to 15.7% in 2019 from 38% in 2000-2001.9 In these circumstances, Belarus can hardly claim the status of a petroleum state even in exchange for deeper integration. As of early April 2020, Belarus did not have a single contract with the largest Russian oil companies, and only procures small volumes from minor traders.

The situation was somewhat better with natural gas supplies to Belarus. It became obvious in the autumn of 2019 that the commissioning of the Nord Stream 2 gas pipeline was postponed to at least the second half of 2020, among other things, because of the American sanctions. Gas prices in Europe fell considerably by December. Ukraine grabbed the opportunity and entered into a relatively lucrative 5-year contract with Gazprom. Belarus’ bargaining position in talks with Gazprom is generally not worse, as the country is the second largest transiter of gas to the EU after Ukraine and the second largest market for Russian gas in Europe after Germany (Table 2).

The parties traditionally were bearish, being a pain in the neck for each other as they have been doing for quite a while as ‘good allies’, failing to enter into a supply contract before the end of the year. In the dying hours of 2019, Gazprom head Alexei Miller and Belarusian Ambassador to Russia Vladimir Semashko signed a protocol on gas prices for Belarus for the first two months of 2020. The price remained at USD 127 per 1,000 cubic meters. Amendments to gas transit and supply contracts extended them until 2021.

Trade

In 2019, Belarusian-Russian trade turnover decreased by just 0.2% year on year in value terms. Belarus reported a trade deficit of USD 8.414 billion, which can be considered an improvement compared with 2018. Belarus’ exports to Russia grew by 4.5%, while imports reduced by 2.8%, mainly because of a decrease in oil purchases (Table 3).

It is significant that over the past ten years, Belarus increased food supplies to Russia, whereas the proportion of products of Belarusian industrial giants is in decline. According to the Embassy of Belarus in Russia, in 2019, Belarus mainly exported:

• cheeses and cottage cheese (6.9% of Belarus’ total commodity exports to Russia);
• trucks (5.5%);
• butter (2.7%);
• tractors and truck tractors (2.4%);
• parts and accessories for cars and tractors (2.2%);
• furniture (2.1%);
• condensed and dried milk and cream (1.9%);
• fresh or chilled beef (1.6%);
• meat and edible offal of poultry (1.6%).

Belarus mainly imported from Russia:

• crude oil, including gas condensate (29.9% of total commodity imports from Russia);
• petroleum gases and other gaseous hydrocarbons (12.0%);
• passenger cars (4.3%);
• waste and scrap of ferrous metals (1.5%).11

As in 2018, Russia accounted for 49.2% of Belarus’ exports. In accordance with resolution No.18 of the Council of Ministers of Belarus of January 12, 2017, the export diversification target for 2019 was as follows: EEU – 36.6%, EU – 31.8%, other countries – 31.6%. The goal is to reduce Belarus’ dependence on external factors and approach new markets.

In fact, the even distribution of trade flows in 2019 was a spectacular failure. Without economic reforms, Russia remains a single-alternative trading partner of Belarus.

Conclusion

The allies entered the year 2020 in a state of actual (albeit silent) oil war. The possibility of large energy contracts, which are the most important motive and, at the same time, a stumbling block for integration, does not look very encouraging for Belarus. Compromise oil supply agreements, which would not entirely satisfy the parties, are possible as the presidential election in Belarus approaches.

It is likely that the debates about the integration roadmaps will resume at this point. Alongside the oil supply uncertainty, the economic recession will grow worse in 2020, and Alexander Lukashenko will have to once again resort to integration bargaining, blatantly ignoring the interests of the only beneficiaries of integration, the full-fledged members of the world community–the peoples of Belarus and Russia.

It is highly improbable that the declared revision of the Union Treaty will result in major changes in the Treaty itself and in Belarusian-Russian relations. It is possible, however, that some roadmaps may be adopted as early as 2020 in the form of intergovernmental agreements without subsequent ratification or distinct obligations to put them in practice.