The slow dance between Minsk and Brussels

10 April 2015

The crisis in Ukraine is making Belarus more dependent on Russia. But it has also made the Belarusian leadership keener to balance its close ties to Moscow with a warmer relationship with Brussels.

Most Europeans think little about Belarus, a country of ten million people that nestles between Russia, Ukraine, Poland, Lithuania and Latvia. It has been politically stable for a long time: Alexander Lukashenko was first elected to the presidency in 1994, and is virtually certain to win the next presidential election, in November. But even though the authoritarian political system seems immutable, the economy and the foreign policy may be less so. The EU needs to wake up to the geopolitical opportunities that could arise in Belarus.

Lukashenko has skilfully managed the Belarus-Russia relationship, accepting Moscow’s lead on many but not all issues, and flirting with the EU when Russia’s embrace threatened to become suffocating. With some reluctance, Belarus has joined the Moscow-led Eurasian Economic Union (EEU), on the understanding that Russia will continue to provide cheap energy. But Belarus has still not recognised the independence of Abkhazia and South Ossetia, as Russia requested after its war with Georgia in 2008. And Lukashenko’s line on Crimea is that Belarus recognises Russia’s annexation de facto – but not de jure.

The war in Ukraine and Russia’s economic crisis have created new strains in a Belarusian economy that was already fragile. Belarus has traditionally relied on export industries like lorries and tractors, but these have been slowly losing competitiveness, as wages – largely set by the state – have risen much faster than productivity.

In recent years, excess consumption has contributed to a large current account deficit, which reached $5 billion, or 6.7 per cent of Belarus’s GDP, in 2014. The problems in the Russian economy – the market for around half of Belarus’s exports – have worsened the current account. The collapse of the Russian rouble meant that Belarusian exports to Russia became uncompetitive. Russia’s accession to the World Trade Organisation (WTO) in 2012 had already hit Belarus by allowing goods from other parts of the world to compete against Belarusian products in the Russian market. The shrinkage of the Ukrainian economy – another important export market – has been an additional blow to Belarus.

In recent months, the government has slowed the growth of demand, hoping that this will help the current account to rebalance. It devalued the currency by 40 per cent at the end of last year, in an attempt to maintain exports to Russia, but the result has been inflation that is now approaching 20 per cent. The Belarusian economy may shrink this year. Officially, unemployment is negligible, but it is becoming a problem and many factories are working only a few days a week.

Belarus is habitually short of the foreign currency reserves that may be needed to plug the current account deficit, repay foreign loans or manage the exchange rate. They currently stand at only $4.6 billion. Every year Minsk asks Russia for loans, and sometimes receives them, but in March, when it asked for $2 billion, Moscow offered only $110 million. The IMF recently sent a mission to Minsk but is unlikely to provide major credits because the government will not commit to privatisation or other structural reforms – such as liberalising prices or cutting subsidies for utility bills.

Belarusian ministers say they know they need to embrace the kinds of structural reform that the IMF demands – and in particular to curb the role of the state, which controls more than 70 per cent of output. But they are reluctant to move quickly, lest reform trigger social instability in the run-up to the presidential election. They are particularly wary of privatisation, pointing to the not entirely happy experiences of Russia and Ukraine: the sale of state assets could allow Russian oligarchs to become established in Belarus. Nor is the government enthusiastic about allowing Western firms to take control of key companies.

Belarus’s economic weakness increases its vulnerability to Russian pressure – and the latest proposal from Moscow, which has not gone down well in Minsk, is for the EEU to become a currency union. Russian subsidies to the economy, in the form of cheap oil and gas, have been worth at least 10 per cent of GDP in recent years (Belarus’s main export to the EU is refined oil products, made with cheap Russian oil). Although the drop in the oil price has diminished the value of the subsidy, Belarusians know they cannot stray too far from Russia’s gravitational field.

Nevertheless, within official circles there are divisions on how far Belarus should lean westwards. First deputy foreign minister Alexander Mikhnevich told a recent international round-table in Minsk that Belarus had made a conscious choice to integrate with both the Eurasian Economic Union and the EU, in search of economic relations with the widest possible range of countries. There are various views on how much the economy should liberalise – with the liberalisers, it seems, not winning the argument at the moment. The officials who want to be a bit less dependent on Russia tend to be the same ones who favour some economic opening.

Some senior figures in Minsk acknowledge that the EEU – whose other members are Armenia, Kazakhstan and Russia, with Kyrgyzstan due to join soon – is not really working. There is free movement of labour among its members. But more than 600 products are currently exempt from the EEU’s free trade provisions. There are countless non-tariff barriers and many parts of EEU treaty will not apply till 2025. Recently, without consulting the Eurasian Economic Commission, which manages the EEU, Moscow blocked imports of many Belarusian products – such as meat, fruit and vegetables. This was to punish Minsk for taking advantage of Russia’s ban on certain EU goods by sending large quantities of them into Russia, labelled ‘Belarusian’. In their more candid moments, officials complain that the Russians only follow the EEU’s rules when they suit Russia. Nevertheless everyone understands the implicit bargain with Russia: Belarus accepts the EEU in return for cheap oil and gas.

Events in Crimea and the Donbass have perturbed Belarus’s rulers. They worry about the ‘Putin doctrine’ – that Russia reserves the right to intervene outside its borders to protect ethnic Russian and Russian-speakers. So Belarus’s leaders have given a new priority to improving ties with the EU, to balance Russia’s influence. The EU moves slowly but is now – with the encouragement of the Obama administration – starting to respond.

The EU’s institutions and key governments are in broad agreement that they should seek closer links to Belarus, with a view to lessening its dependence on Russia. This geostrategic approach means the EU will focus somewhat less on human rights. Officials from Minsk and Brussels now meet each other regularly. Belarus’s main demand is that EU sanctions be eased – more than 200 individuals (including Lukashenko) and about 20 companies are blacklisted by the EU on account of human right violations. Brussels’s main demand is that the remaining political prisoners be released (depending on who is counting, there are between three and six of them).

The Belarusians have a particular grievance with the EU. They need to refinance a $1 billion international bond issue that matures in August, and also wish to issue new bonds. But they are barred from the market by Euroclear, the Brussels-based clearing house for international bonds, which interprets EU sanctions to mean that Belarusian issues are prohibited. EU officials say the sanctions should not prevent bond issues and believe that they can fix the problem.

Some opposition activists in Minsk fear that the West will ‘Azerbaijanise’ its relations with Belarus – meaning that it will ignore human rights for the geostrategic gain of strengthening Belarusian independence. But much of civil society would welcome a rapprochement between Minsk and Brussels, in the hope that this could lead to a softer regime, and allow Belarusian NGOs greater access to Western funding and advice.

EU officials are quite optimistic about the possibility of modest change in Belarus, particularly after the presidential election in November. They say that the ministries are comparatively well-organised, efficient and uncorrupt – and sometimes easier to deal with than the government in Ukraine. But this positive mood would soon end if – as has happened in the past – the authorities cracked down on the opposition before or after the presidential election.

If Lukashenko maintains a relatively soft touch, the EU will do a certain amount to help Belarus – even without the release of political prisoners. The two sides have begun a dialogue on the economic modernisation of the country. They have agreed to restart a dialogue on human rights that met on only one previous occasion, in 2009. The EU could assist Belarus’s entry into the World Trade Organisation by forging a bilateral deal with it on WTO issues. It could expand the modest role of the European Bank for Reconstruction and Development in Belarus, and allow the European Investment Bank to operate there.

Much more would happen if the political prisoners were freed. The EU would then lift sanctions. It would make Belarus a full member of its Eastern Partnership (alongside Armenia, Azerbaijan, Georgia, Moldova and Ukraine), thereby giving it access to several sorts of EU funding. Brussels would probably negotiate something similar to the ‘enhanced partnership and co-operation agreement’ that it initialled with the Kazakh government in January.

This slow dance between Minsk and Brussels has begun despite the Ukraine crisis having damaged the EU’s brand in Belarus. The fighting in the Donbass made Belarusians fear that progress towards Europe could lead to chaos. One recent opinion poll showed that 55 per cent of Belarusians view Russia favourably, against 30 per cent for the EU (according to some estimates, two thirds of Belarusians watch Russian TV, which is very biased to Russia’s point of view, and about a third watch Belarusian TV, which is rather less biased in Russia’s favour). But this has not deterred Lukashenko and his ministers from seeking to use the EU as a lever to curb their economic and cultural dependency on Russia.

Since the annexation of Crimea, Lukashenko has tried to encourage a greater sense of national identity, for example by promoting more use of the Belarusian language. He has emphasised his role as a ‘peacemaker’ – hosting the summits which led to the two Minsk agreements on the Donbass – who is neither in Russia’s camp nor the West’s. He has even spoken of the army’s capacity to transfer troops from the west of the country to Vitebsk (in north-east Belarus), which implies a potential threat to the east. Opinion polls suggest that nearly half of Belarusians resent the Russian military bases in their country. And a recent argument over the Belarusian Orthodox church, which comes under that of Russia, annoyed some Belarusians. The Russian church replaced a respected head of the church in Minsk with a Russian who has little feel for the country.

The country’s sense of identity is certainly weak, even compared to Ukraine. Much of it is negative: Belarusians think they are not Russian, not Polish (Poland dominated the country for more centuries than Russia has done) and not Western. A lot of people probably care more about their economic prospects than national feelings. But the Ukraine crisis has given a fillip to some Belarusians’s sense of national identity, in the sense that they do not want to be subsumed into Russia.

The EU should seek to engage not only civil society but also President Lukashenko’s regime. This could help to strengthen the country’s independence, encourage the government to treat NGOs and the opposition more kindly, reduce Belarus’s isolation and make it a little more European. Such outcomes, though far from certain, would be a worthwhile achievement.

Charles Grant is director of the Centre for European Reform. He recently took part in a study trip to Belarus, organised by the European Council on Foreign Relations.