Belarus Reality Check 2014

On 10 April 2014, the 3rd Belarus Reality Check meeting brought together in Brussels key international and Belarusian experts as well as donors and policy makers.

The current critical engagement - basically a silent dialogue - is likely to develop further, with Brussels deepening this dialogue through an assistance package to give a helping hand to Minsk where it is needed, while maintaining its human rights stance along with support for the opposition as well as civil society.

The Reality Check Policy Review held under Chatham House rules allows individuals to present different local and international perspectives with an emphasis on facts and evidence. Below is a short summary of the discussion. 

Key points

After the annexation of Crimea, Belarus is in an even more complicated situation due its dependency on Russia. The economy is slowing down to a dangerous level, while the government lacks a new economic vision. However, subsidies from Russia and a change in the government's social contract with its citizens may save the day for Lukashenka`s regime.

Despite Russia's similar dip into a recession, the hefty Crimea absorption costs, the needed $4-5bn for the Belarusian budget it is still likely to be allocated to Belarus by Russia. After all, Belarus is Russia`s only formal ally and the poster child of Eurasian integration. Lukashenka has also been maneuvering successfully in the Ukrainian crisis: wavering between the position of Kyiv and Moscow, while maintaining high level working relationships with both. 

Minsk's small, yet recognizable, steps towards moving away from an broad industrial economy towards a locally-based development and information/knowledge-based economy may lead to a subsequent change in the social contract. Already there are positive signs in this direction, including less bureaucracy and a higher number private business initiatives.

But to continue on with these kinds of reforms, Belarus needs to ease its isolation: allow a qualified labour force to enter the country, adopt Western-style management and decrease state control over the economy. At the same time it needs to manage such reforms gradually by maintaining Russian subsidies to keep Belarusians employed in inefficient state factories.

The traditional opposition is in an identity crisis since the Ukraine conflict: according to the latest polls, only 3.6 % of Belarusians support a “revolutionary” scenario similar to Kyiv’s example. The already low support for the opposition has dropped even further. After Ukraine, a successful revolution may bring Russian troops to Belarus, so it is no wonder that Lukashenka’s position has strengthened.

Social contract: less state, more private

The gradual movement towards sustainable development as a reaction to global and regional changes has been gaining momentum in Belarus. Signals of this transition are becoming more and more pronounced from cuts in public administration expenditures and a growing number of private businesses. 

Yet at the same time, the state is maintaining, or even increasing, Russian subsidies in order to keep Belarusians employed in its inefficient enterprises. The security sector's control over private business has yet to unabate. Debt and devaluation is not that important within this context as Belarus can still sell its companies or fixed assets. But the main challenge of keeping its educated work force at home remains a prominent issue: Russia continues to attract qualified Belarusians with higher salaries and better opportunities.

Although the general feeling in the West is that nothing is changing in Belarus, it is important to highlight that 25% of the government employees have been laid off recently, and other various additional criteria were were met in order to position Belarus as recipients of targeted social support. One third of the obligatory pension system has been cut due to these changes. 

As the graph above shows, despite the wide spread “social welfare myth”, the effectiveness of Belarus’ social protection system is low when compared to a majority of Western countries. Taking into account the measures undertaken to further decrease targeted social assistance, the effectiveness and scale of the welfare state in Belarus is likely to decline even further.

However, the over-arching issue that can be found here is tolerance toward these changes as well as the changing expectations of the society. Due to its effective control over society, Belarus’ government is in a much stronger position to carry out such reforms compared not only to Ukraine and Russia but also to the Baltic states. Patterns matter as well: Lukashenka cuts in the state administration apparatus positions him well with Belarusians, as it shows he plays no favorites.   

Cutting social benefits, though, is not as painful as cutting subsidies to state enterprises – this would mean a real redrafting of the social contract that has been in place since Lukashenka came to power. Yet without such measures, international financial institutions will not be willing to provide loans or financing to the Belarusian economy and the question of Russian subsidies and their availability becomes a key question. For example, Belarus is requesting that in exchange for signing the Eurasian Economic Union, it would not have to pay Russia oil export duties in the future.

The duties Minsk paid to Russia amounted to $38bn in 2012 and to $33bn in 2013. Such funds would practically solve the problem of the ‘cash gap’ in the Belarusian budget as well as ostensibly give more freedom to Belarus to resist Russian pressure and its demands (such as privatization). Therefore Moscow is unlikely to agree with such a requirement, though it should be noted that the other Eurasian Union partner, Kazakhstan, is also not supportive of these demands.   

After Crimea: Eurasian Economic Union in the making

The crisis in Ukraine has further decreased the trust between EEU partners but it is unlikely to undermine the integration process. Besides Russia, no country has any aims to make political gains from the EEU: economic benefits are the key issue at stake, which means that Belarus’ rationale for joining the EEU is its potential access to both its transit route to Asia and to the Russian market.

Russia reduced a number of external tariffs as a result of EEU negotiations - contrary to the commonly held opinion that Russia dictates the conditions of the Eurasian integration – the costs to its own economy for the integration project was even estimated to be some $40 bn/year.

Lukashenka's de facto acceptance of the Crimean referendum was an act of reciprocity: Russia has always accepted the results of Belarus`s dubious elections (and referendums). However, Lukashenka continues to maintain balance as he came out strongly against the federalization of Ukraine. Yet this balancing act has changed: given the weakness of the Western response to the Ukraine crisis, Belarus finds itself no longer between Russia and the West but between the Eurasian Economic Union and the “Russian World” policy. In the latter, there is no independent Belarus.

The scale of penetration of Russian financial capital into the Belarusian market is a more powerful tool than all other agreements within the Eurasian integration. Currently, Russian capital controls seven out of 31 banks operating in Belarus. The influence of Russian capital will likely grow after signing the EEU treaty as a result of better entry conditions into the Belarusian banking sector.

It is important to note that Russian banks, besides playing an important commercial role, also serves as a tool for the Russian government to analyze and understand the economic, political and social developments in the country. In other words, they are not only performing a commercial, but also a political function.

Until now Lukashenka was able to cunningly solve the problem of Russian investors: he allowed them to invest in Belarusian enterprises without giving them access to their managerial functions. The conflict within the potash cartel last summer - when Belarus placed the Uralkalij CEO under arrest and detained him for months - was a very good indicator of how Lukashenka treats Russian businesses. Another example is his refusal to import oil through Rosneft: Russian oil companies continue to sell oil to firms identified by Minsk.

Minsk has been able to control its local economic elites by controlling their income: small scale corruption is possible but under the watchful eye of the state secret services. Frequent corruption cases ensure the loyalty of these elites as there is a “kompromat” for everyone. Lukashenka has also created his own business elite. Improving business conditions does not only serve to better Belarus’ rank in the Doing Business ratings (doing business is easier in Belarus than in Russia), but it creates an atmosphere where a businessman who is satisfied with the current establishment and infrastructure will not have aspirations to change the current leadership.

Belarus could be described as a positive counter-example to Russia with respect to its rather low level of corruption and absence of uncontrolled organised crime. In the eyes of the Belarusian population, Belarus is a positive counter-example to the entire region with its stability, particularly when bearing in mind the unrest in Ukraine. 

Relations with the EU:  Silent Dialogue

The annexation of Crimea has further reduced the Lukashenka regime's ability maneuver with the EU. Ukraine overshadows Belarus to a much larger extent than before, while Moscow is now more suspicious and aggressive.  At the same time Belarus is the only country in the Eastern Partnership in control of all of its territorial integrity and its borders. Within this context the West's influence is likely to be balanced out with a more pragmatic policy than may be possible elsewhere in the region.

The main question – how the EU can achieve its grand vision, the democratization of Belarus – remains unanswered. No realistic strategy and clear steps towards achieving this goal have emerged. Moreover, the Ukrainian crisis raises the issue of destabilization throughout the entire region via an out of control downward spiral of zero sum internal politics taken to the extreme. 

As seen from Minsk, there is no offer on the table from the EU that is comparable to the EEU.  As much as the issue of the release of political prisoners is crucial for widening the ‘critical engagement’ policy, the absence of political prisoners in Belarus is a ‘weak’ goal for the EU in Belarus. Under the current circumstances, Minsk has no rationale to provide the EU with any concessions, that is, to release political prisoners.

The challenge of the EU`s policy towards Belarus is not so much the heralded "lack of unity" - it is the absence of serious interest and attention. Very few care about Belarus at the moment, with most of the issues at hand being stuck at a technical (working) level, without reaching any strategic depth (save, perhaps, the issue of whether Russia would use Belarus’ territory to invade Ukraine).

The current critical engagement - basically a silent (mostly technical) dialogue - is likely to develop further. Brussels could deepen this dialogue through an assistance package to give a helping hand to Minsk where it is needed (see social contract changes) while maintaining its human rights stance along with support for the opposition as well as civil society.

You can download the full version of the Reality Check Policy Review in PDF here. 

The Belarus Reality Check was organised with the support of and input from the Konrad Adenauer Stiftung (Germany), Pact (US), the European Endowment for Democracy (Brussels) and the Eastern Europe Studies Centre (Lithuania). This is a peer reviewed summary of the discussion and does not necessary reflect the opinion of the organisers.

Originally published on BelarusDigest