Introduction Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Comments Brief Respite for Lukashenka WP Russian Loans Alleviate Minsk’s Immediate Financial Woes, but Deepen Dependency Janis Kluge S Late on 3 April 2017 in Saint Petersburg, Vladimir Putin and Alyaksandr Lukashenka announced the end of the Belarusian-Russian energy dispute. New loans from Moscow appear to be the central outcome for Minsk. This provides relief for Lukashenka, whose regime currently finds itself squeezed between economic difficulties and social protests. But the agreement leaves Minsk’s underlying economic problems unresolved, while the additional debt ties it even tighter to Moscow. In exchange for its support, the Kremlin could at some point demand Minsk make concessions that contradict the EU’s interests. To date, however, Lukashenka has sought to retain a degree of autonomy from Moscow, with Minsk’s dialogue with the EU providing an important counterweight. The talks in Saint Petersburg followed a Treaty Organisation. At the EEU summit the noticeable deterioration in bilateral rela- heads of state of all member states had tions. In 2016 Belarus paid only $107 per been due to sign the Union’s new Customs thousand cubic metres for Russian gas, Code. rather than the agreed price of $132. Luka- Putin and Lukashenka talked for five shenka argued that Belarus was entitled to hours on 3 April, before holding a brief a reduction because the oil price had fallen, press conference to announce that all whereas Moscow asserted that Minsk had bilateral issues had been resolved. But the accrued arrears exceeding $726 million. In most important aspects of the agreement response, Russia significantly scaled back have only gradually come to light. On the volume of oil delivered to Belarus from 13 April Minsk paid the arrears demanded autumn 2016. And at the same time the by Gazprom and Lukashenka signed the Moscow-controlled Eurasian Fund for Stabi- EEU’s Customs Code. In return Russia re- lisation and Development (EFSD) blocked stored oil deliveries to the originally planned the release of the $300 million third tranche rate of 24 million tonnes per annum (fol- of a major loan. The dispute came to a head lowing the cut to 18 million tonnes per on 26 December 2016, when Lukashenka annum in 2016). On top of this, Minsk will boycotted two summits in Saint Petersburg: receive about $1 billion in new loans from the meetings of the Eurasian Economic Moscow, plus deferment of repayments on Union (EEU) and the Collective Security older loans falling due in 2017 (about $750 Janis Kluge is an Associate in SWP’s Eastern Europe and Eurasia Division SWP Comments 15 May 2017 1 million). Finally, the release of two tranches Additional risks ensue from a deteriora- of the EFSD loan is also expected this year tion in the portfolios of state-owned Bela- ($600 million). rusian banks, which hold significant non- It is, however, unclear whether other performing loans to other state enterprises. disputes have been resolved. A simmering Minsk has sought to avoid insolvencies on trade dispute over Belarusian food exports account of the social repercussions, but the recently came to a head, with Moscow crisis is nevertheless very tangible. Dis- accusing Belarus exporters of using false posable income has fallen 13 percent since declarations of origin to market embargoed 2015 and Lukashenka’s promise of an goods from Ukraine and the EU in Russia. average wage of $500 appears further away Moscow restricted market access to its than ever (current average $378). The old markets for certain Belarus suppliers and “social contract”, under which the regime made legal preparations to completely guaranteed economic security but operated ban the sale of certain EEU re-exports in without democratic controls, is rapidly Russia. There was also friction over new coming apart. Belarusian immigration rules, after Belarus Dissatisfaction with Lukashenka’s eco- suddenly permitted visa-free entry for nomic policies has now become visible on citizens of eighty states (including all EU the streets, with demonstrations in many member states and the United States) in Belarusian cities since 17 February. The February 2017, without consulting Moscow. protests reveal that a growing section of the Moscow responded – also unilaterally – population blames Lukashenka’s regime for by establishing a border strip monitored by the crisis. The specific target of the dem- the state security agency FSB. onstrations is a decree “against social para- sites” of 2015 that forces citizens working less than 183 days in a year and not regis- Economic Travails tered as unemployed to pay an annual tax The promised new loans grant Lukashenka equivalent to €230. The objective is to rein a little respite in difficult economic and in the informal economy while scapegoat- political times. In the past two years Bela- ing “idlers” for the crisis. rus has fallen into a deep recession, with The regime has clamped down increas- GDP shrinking by 3.9 percent in 2015, ingly harshly, with several hundred peace- 2.6 percent in 2016. The economy is suffer- ful protesters arrested during the last wave ing from the low price of oil, which has of protests on 25 March. This represents a dragged down margins in refining too. The departure from Lukashenka’s policy of the loss of Russian markets has also caused past two years, where demonstrators could difficulties for Belarusian industry. usually expect only to be fined. But unlike In fact, Lukashenka faces stability risks during the crushing of the December 2010 much greater than the current visible crisis. protests most of those detained were re- Minsk’s foreign debt has ballooned, as state- leased within a few hours. So repression has controlled credit-funded growth filled the tightened, but without reaching the level gap left by declining Russian energy sub- of 2010 when the EU imposed sanctions in sidies from 2007 onward. The Belarusian response to the crack-down. rouble has devalued markedly, causing the country’s foreign debt to multiply relative to GDP (without the new loans from Russia: Quid pro Quo? 78.6 percent). With export revenues de- The agreement with Russia gives Luka- pressed and scarce currency reserves of its shenka a political boost, but does nothing own ($5 billion) Belarus will soon find itself to resolve the underlying problems of the facing new pressure to find funds to roll Belarusian economy. It is currently almost over its loans. out of the question for Minsk to repay its SWP Comments 15 May 2017 2 debts in full. The heaviest burden is the purposes represents quasi-bilateral eco- nuclear power station under construction nomic integration with Russia (50.5 per- at Astravets, which is financed with a cent). The economic risks of this one-sided $10 billion loan from Moscow (and built by relationship became clear when the Rus- Russia’s Rosatom). For this project alone sian recession caused demand for many Minsk will have to repay fifteen annual Belarusian exports – such as vehicle com- instalments of almost $1 billion each, ponents – to collapse in 2014. starting in 2021. Belarus is also negotiating Moreover, the recent history of the EEU with the IMF, but the Putin/Lukashenka demonstrates that the theory of an un- reconciliation makes new IMF loans – and political economic union of equals is a the associated painful economic reforms – fiction. Although the EEU’s highest organs an unlikely proposition. require unanimous agreement, Moscow Even if the Saint Petersburg agreement remains in charge. The EEU’s administra- grants Minsk relief for 2017, loan repay- tion is recruited in proportion to popula- ments are sure to be back on the agenda by tion and therefore 84 percent Russian. And 2018. There are a number of potential Russia possesses the means to exert great concessions Minsk could offer in return for bilateral pressure on any other member. new aid. For example, Lukashenka could Russia could potentially draw the other agree to permit Russian investors to take member states into its politically motivated over Belarusian state enterprises. There is import embargo by way of their Customs precedent for this: in 2012, after a long Union. One example of how this could tussle, Moscow persuaded Minsk to sell occur is the import ban on meat from Mol- its stake in Beltransgaz to Gazprom in dova, which Russia imposed in October exchange for new loans and cheaper gas 2014 in response to Chişinău’s overtures prices. Since then the Russians have ex- towards the European Union. Although pressed interest in other major industrial Minsk initially criticised the Russian ban, it enterprises. was expanded to include Belarus following In view of its confrontation with the controls by officials of the Customs Union West, Moscow is also likely to be interested (the EEU’s predecessor). Russia also used the in foreign policy and security concessions. EEU to increase pressure on Minsk during Concretely, Minsk could agree to the es- their bilateral gas dispute, for example tablishment of a Russian military base in holding back the third tranche of the EFSD Babruysk, which Lukashenka has been stabilisation loan, which should actually resisting since 2015. More broadly, Moscow have been released in October 2016. expects Lukashenka to demonstrate greater loyalty in foreign policy matters, for exam- ple in the Ukraine crisis and on Syria. In Challenges for the EU these arenas too, Minsk has to date insisted Even if economic difficulties force Luka- on distance from Russia, with a notably shenka to demonstrate greater loyalty reserved response to the US air strike in towards Russia, Minsk will continue to look Syria in April 2017. for possibilities to distance itself from Moscow. Here the dialogue with the EU represents an important counterweight for Consequences of EEU Integration Lukashenka.