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July 2007

Kari Liuhto:
External economic relations of Belarus
Electronic Publications of
PanEuropean Institute, 8/2007

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Executive Summary

Belarus is widely known for her notorious political situation and the recent energy conflict with Russia. However, only few know Belarus’ economic foundations, and hence the country’s true competitiveness. In order to fill this knowledge gap, the research in hand aims at analysing the country’s true competitiveness via studying Belarus’ external economic relations, as the foreign economic relations of a relatively small country is a rather appropriate indicator of the country’s real competitiveness. By analysing Belarus’ true competitiveness this study tries to predict what might occur in Belarus, when the country’s politicoeconomic transformation begins.

Here, one should emphasise that Belarus has not even started her economic reform. A clear indication of the postponed transformation is the fact that the private sector forms only 25% of the Belarusian GDP, or even less1. In her neighbouring countries, the private sector represents 6575% of their GDP, being lowest in Russia and Ukraine, and correspondingly, highest in Lithuania and Poland (EBRD, Transition report, 2006).

Only Turkmenistan among all the postSoviet republics has as low a private sector share as Belarus. Perhaps, the major difference between these two authoritarian statedictated economies is the fact that peripheral Turkmenistan has significant natural gas reserves, while Belarus has not been blessed with considerable natural resources, except her geographical location; Belarus is situated almost in the heart of the European continent, i.e. at the crossroads between Russia and the EU and Northern and Southern Europe.

Analysing the true competitiveness of Belarus is an utmost acute theme since the country is forced to pay the market price for her natural gas imports from Russia in 2009. Increasing energy bill forces Belarus to reform her economic structures, as Russia has indicated that she will no longer subsidise Belarus with inexpensive energy deliveries.

Moreover, the possible rerouting of oil pipeline from the Belarus border to Primorsk on the Gulf of Finland, and the building of a major natural gas pipe on the bottom of the Baltic Sea to Germany will definitely have a major impact on the position of the Lukashenka regime.

Furthermore, Russia’s possible WTO membership in 20072009 would put extra pressures on Belarus, since after Russia’s accession to the WTO the special relationship between Russia and Belarus is likely to disappear or at least change its character fundamentally. For instance, it is most likely that the shadow imports to Russia via Belarus, including the imports via the Belarusian free economic zones, will be stopped.
Russia’s growing investment in the Belarusian strategic industries strengthens the Russia’s grip over Belarus. Gazprom’s acquisition plan over Beltransgaz is one clear piece of evidence on increasing Russian business dominance in Belarus. In addition to Beltransgaz, the Russian firms eye the two Belarusian oil refineries (Mozyr and Novopolotsk), banks, and telecommunication firms2.

All the aforementioned factors indicate that Russia either pushes the Lukashenka regime to a closer cooperation (even forces Belarus to integrate into Russia), or alternatively, Russia may aim at changing the Belarusian leadership by decreasing Lukashenka’s popularity with various politicoeconomic means in 2011, when Belarus’ next presidential elections are scheduled, or even earlier. Russia’s economic siege around Belarus stresses the need of the decisionmakers in the EU and beyond to be better informed about the economic realities of Belarus.

In order to contribute to this information collection process, a group of nearly 20 academics have combined their efforts to give their view on contemporary Belarus. The researchers represent all the neighbouring countries of Belarus plus Finland, which have been included in the report as an example of economic relations between Belarus and a nonformer socialist country.

The report lacks the official view from Belarus since the Ministry of Foreign Affairs of Belarus failed to deliver the promised contribution, and the papers received from the Belarusian academia did not meet the quality criteria of this report. Luckily, however, we managed to obtain a view of Dr. Aliaksandr Milinkevich, the main figurehead of the Belarusian opposition. Even if his view probably differs from the official standpoint of the Belarus, it nevertheless gives us a perspective on the complex political situation in Belarus. In order to aid a reader to familiarise himself/herself with Belarus’ political and economic background, a 10page information package ‘Belarus in a nutshell’ have been included before the expert articles.

The article on the BelarusFinland economic relations starts the series of the papers on the bilateral relations of Belarus. The author of this article concludes that the trade turnover between Finland and Belarus is small and investments virtually nonexistent, but there are several sectors where the Finnish and Belarusian firms could find mutual interest.

However, before putting money into larger projects, foreign investors need to get necessary investment guarantees. In addition, the article stresses that the regulatory framework in Belarus is far too complicated. One could summarise the core policy recommendation of the paper as follows; less bureaucracy and regulations Belarus sets, more foreign investment and economic growth Belarus gets. The writer ends her article by stating that the rising cost of energy over the following years highlights the vast needs to restructure the Belarusian economy, and to increase exchange of knowledge and experience with her neighbours. The writer wishes that changes in the business environment will prove to be a catalyst for Belarus for embarking on a reform bath and opening up for deeper cooperation with its western partners, Finland being among them.

Two contributions on the LatvianBelarusian relations indicate that the bilateral trade is unjustifiably low for neighbouring countries, but there are major opportunities for increasing trade. In addition, these papers reveal that although the Latvian economy is small, the Latvian companies are active in investing in Belarus. A noteworthy finding is the fact that large Latvian corporations have been rather successful, while smaller firms have encountered bureaucratic difficulties in Belarus. These articles state that tourism plays a small role in the bilateral relations between Latvia and Belarus. These articles reveal also an interesting fact that Belarus is the second largest transit partner for Latvia, as Belarusian firms transport significant amounts of potassium salt and oil products via the Latvian ports.

The paper from Lithuania stresses that the bilateral trade between Lithuania and Belarus has steadily grown despite Lithuania’s accession to the EU in May 2004. The Lithuanian imports from Belarus consist chiefly on natural resources, oil accounting for over a half of the deliveries from Belarus. On the export side, Lithuania sells mainly manufactured goods.

Two articles on the PolandBelarus economic relations indicate that Poland plays a significant role in the Belarusian external economic relations. In 2006, Poland ranked the fifth among the largest foreign trade partners of Belarus. Due to the proximity of the two countries, also informal trade has emerged, i.e. small amounts of goods cross the border to be resold on the other side. One of the articles argues that such informal trade may amount to approximately 30% of the total trade between the two countries. In addition to the bilateral trade, also other fields of economic collaboration may emerge, such as ecotourism and health vacations, if the borders are open enough, and hence, the authors recommend that the EU should concentrate on developing policies that make the border more accessible for the local traffic and inhabitants.

Also two articles study Russia’s multisided relations with Belarus. In the first article, the writer argues that the recent energy conflict between Belarus and Russia worsens their relations in short run, but brings this relationship on a more rational basis in the mediumterm. Besides, he discusses the possible impact of Russia’s WTO accession on Belarus.

The second article on the BelarusRussia economic relations deals with the Russian investments in Belarus. The author concludes that Russia is the largest foreign investor in Belarus with a share of 80% of the Belarusian annual FDI inflows during the recent years.

The recent energy dispute and subsequent deterioration of the relationships between Russia and Belarus are likely to yield more strategic acquisitions by Russian companies in Belarus. The writer argues that the increasing Russian business presence in Belarus holds increasing stabilisation on one hand, but increasing dominance of Russia over her energy supplies, on the other. The growing uncertainty over Russian energy deliveries and supply disruptions similar to those witnessed in the beginning of the previous years, are hardly in the interest of the EU. The key issue to be considered by the European policymakers is at which point does the stability provided by Russia’s control over her energy supplies and assets in the region turn into economic and political supremacy.

The article on the UkrainianBelarusian economic relations concludes that the bilateral economic relations between Ukraine and Belarus are not particularly intensive. Belarus accounts for a bit less than 3% of the Ukrainian foreign trade, while Ukraine represents some 5% of the Belarusian external trade. The paper suggests that the CIS countries do not have strong economic incentives to cooperate between each other after the disintegration of the USSR, if one excludes the energyrelated trade. The writer discovers that a major shift in the Belarusian foreign trade from the CIS to other countries could be observed during the past few years. In 2000, 60% of the Belarus foreign trade was conducted with other CIS countries, whereas five years later, the CIS accounted for 44% of her foreign trade. The article reveals that the bilateral investments and tourist flows between Belarus and Ukraine are still relatively insignificant.

The article on the trilateral regional cooperation describes the cooperation between neighbouring regions of Belarus, Poland and Ukraine. The author recommends that the infrastructure for trade and tourism should belong to the top priorities of the border regions, as the roads and border crossings are below modern standards. Academic institutions should be more integrated into regional planning to increase the absorptive capacity and better manage financial aid from the EU Neighbourhood Programme. Environmental collaboration is also a very important field for future crossborder cooperation.

Author tentatively suggests visafree travel between countries in case of short visits. In general, the author finds that the growth triangle between Belarus, Poland and Ukraine has a lot of unused potential for future development. A lower level integration, i.e. the regional cooperation, is most needed under the current conditions when the political and diplomatic relations between Belarus and the EU are far from optimal at the higher level.

The paper on the free economic zones (FEZs) in Belarus concludes that the FEZs have been rather disappointing in their performance. The total amount of foreign investments accumulated by the FEZs represents some 17% of the extremely modest total Belarusian FDI stock for the period between 2001 and 2006. Furthermore, the Belarusian FEZs account for less than 4% of the total Belarusian exports. The author concludes that the FEZs’ main activities are to import goods from the nonCIS countries, to process them, and later to export them to the CIS countries in general, and Russia in particular. In other words, the Belarusian FEZs have become gateways to Russia, which allow foreign products to enter the Russian market without customs fee. The future of these gateways is uncertain, if there is a further political drift between the two countries. The author indicates that the EU and Russia are the main potential sources of foreign investments, but the author does not foresee any major change related to foreign investment inflow unless Belarus’ political relations with the EU and Russia improve.

At the end of this report, Liuhto describes five future scenarios for Belarus, namely NorthKorean path, the model of China, the European way, the model of the Karelian Republic, and a nondependent country inbetween.

The first scenario is based on the hypothetical assumption that Belarus would break her relations with both the EU and Russia. NorthKorean path would lead to the isolation of Belarus, deteriorating living standards, and finally to coup d’etat sooner or later. The Chinese model is based on starting the economic reform accompanied with gradual political liberalisation. As partial political reforms are not sustainable solutions, accumulating social pressure would lead to the European way, the model of the Karelian Republic or a nondependent country inbetween at the end. The adoption of the European way would require Lukashenka to allow a full political and economic liberalisation to take place in the country. The model of the Karelian Republic assumes Belarus becoming a part of the Russian Federation. If the Karelian Republic scenario comes to existence, it can be expected that the Kremlin use decisive measures to replace the Lukashenka regime and the Belarusian oligarchy, and replaces them with more obedient leaders to the Kremlin. The fifth scenario assumes that Belarus does not belong neither to the sphere of influence of Russia nor the EU. A successful nondependent country inbetween status requires that Belarus is reliable partner for both the EU and Russia, and hence, the EU and Russia should have a common goal over Belarus.

Both of them ought to support political and economic liberalisation in Belarus. The editor wishes to give a special thanks to Poland’s Embassy in Helsinki and Latvia’s Embassy in Minsk for their aid. The research funding from the Academy of Finland and Foundation for Economic Education (Liikesivistysrahasto) is gladly acknowledged.

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