08.02.2006
Russia and Belarus: Between Wishing and Reality
№1 2006 January/March

During the Russia-Belarus Economic Forum held in September 2005,
the participants made flamboyant claims about the alleged success
of ongoing “close” integration between the two countries. However,
the year 2005 vividly demonstrated that in reality the economies of
these countries have been diverging. Minsk’s geo-economic strategy
is changing, thus causing Belarus to noticeably depart from
Russia.

AT A DEADLOCK

The best indicator of Russia’s and Belarus’ real readiness for
integration is the status of their trade. In 2005, Belarusian
economic agents bought 12.7 percent less goods from Russia than in
the previous year. Belarusian exports to Russia dropped by 10.9
percent (they now account for one-third of the total exports) and
are being replaced by supplies from other countries.

In the transportation sphere, there are many unsettled issues,
above all those related to the transit of goods. The problems stem
from growing protectionism on both sides and are indicative of a
need for a ‘common economic space’ in this segment of the market.
Protectionist measures, especially on the part of Belarus, also
involve such economic spheres as brewing, macaroni/noodle
production, flour-milling industry, the processing of agricultural
produce, and light industry. Minsk is clearly determined to oust
Russian products from its market and imposes stringent quotas and
limits on an assortment of Russian goods. In fact, 80 percent of
products now sold on the Belarusian retail market are of domestic
origin. Another hindrance to bilateral relations is that Belarusian
companies working in Russia are subject to all kinds of
restrictions, while the same goes for Russian companies operating
in Belarus.

The Belarusian government continues and even intensifies its
policy of providing – overtly and covertly – subsidies to the
industrial and agricultural sectors of its economy. For example,
the government’s program for the rejuvenation of the agricultural
sector will cost it around U.S. $10 billion. Belarus’ practice of
indirect subsidies to big enterprises, which impedes fair
competition in the country, violates its agreements with
Russia.

Contrary to the Kremlin’s expectations, and being very sensitive
of the disproportionate nature of its trade with Russia, Minsk has
launched an actual war on the market of beer, sugar, flour, bakery
and other foods. Should political relations between the two
countries deteriorate, while, at the same time, the supplies of
Russian oil to the Belarusian oil-refining factories decrease, a
crisis involving the eastern flow of Belarusian exports will be
imminent. Meanwhile, the Russian market continues to be the main
guarantor of Belarus’ economic security.

Meanwhile, the project for creating a common currency between
the two countries is at a deadlock as well. A thoroughly conceived
plan for the introduction of the Russian ruble in Belarus has, in
fact, proven unacceptable for Minsk because of the incompatibility
of their economic policies as regards ideology and basic values.
The state property of Belarus cannot be systemically integrated
with the private property of Russia, while Minsk rules out the very
idea of mutual penetration of capitals.  The existing problems
involving energy resource accounting, VAT payments, and the
participation of Russian capital in a number of Belarusian
enterprises show that the current status of bilateral trade derives
not so much from the policies of the two countries as from the
traditional economic ties between individual economic agents.

NEW DYNAMICS 2005

While in 2004 the situation in Belarusian exports developed in
favor of Russia’s economic space (see Graph 1), in 2005 it showed a
sharp decline (Graph 2). Some analysts explain this change by the
introduction of a new procedure of VAT levying; others believe that
Minsk now finds Western markets to be more profitable and
promising.

Western “imperialism,” which is being severely criticized by
officials in Minsk, is purchasing more and more Belarusian
products, including its most strategic one – oil. To date, the
second and third largest importers of Belarusian products are the
Netherlands and the UK, that is, countries that – together with the
entire European Union – condemn the Lukashenko political
regime.

In 2005, the Netherlands purchased 3.3 times more products from
Belarus than in the previous year. During the first half of 2005,
Dutch buyers (including offshore dealers) paid over $1 billion for
Belarusian petrol and diesel fuel, while British buyers purchased
over $500 million worth. France is also increasing its activities:
compared to 2004, its volume of imports from Belarus grew 3.8 times
in 2005. Remarkably, Belarus’ “bitter enemy” – the United States –
has increased its imports from this country by 50 percent. Due to
the difference in the current prices for oil products set against
those of 1999, Belarus has been gaining around $3 billion of profit
annually.

In May 2004, as a number of East European countries joined the
European Union, most experts looked with pessimism on the future of
Belarusian exports. Indeed, the start of the region’s “new economic
history” was fraught with negative consequences for countries
beyond “The New Europe.” The “New Neighborhood” variant suggested
by Western countries as some sort of sophisticated didactic move –
a surrogate of genuine integration – is unacceptable for
economists. International and regional integration will continue to
be the decisive factor of economic development.

Over time, however, the economic realities changed the situation
for the better. Today, Belarus can sell more expensive oil products
while disregarding Western investments. Belarusian exports to the
CIS countries, and other regions beyond the economic borders of the
United Europe, have been showing a consistent growth. During the
first half of 2005, the total volume of Belarusian exports grew by
19.7 percent.

So there is direct evidence of a new geo-economic quality being
formed in Belarus. Some even predict that the country may
“automatically integrate” into the European economic space.

At the same time, as Russia has reduced its exports from Belarus
(with some items of equipment and component parts, the reduction
has reached two times), local enterprises are now inundated by an
excessive stock of export products, mainly machinery and other
equipment.

Graph 1. Belarusian Exports in 2004

 

 

 

 

 

 

Graph 2. Belarusian Exports in 2005

 

 

 

 

 

 

Note: Estimates by the author based on official state
statistics
Under the circumstances, Belarus’ restoration of its export
position on the Eastern front is becoming not just important for
its economy; it is a strategic task. There is another option,
though: Belarus may give up its active export policy on the Russian
market altogether and engage in trade on more distant yet highly
promising markets of Latin America and Africa.

THE STRUCTURE OF BELARUSIAN EXPORTS

Let us now consider the current composition and potential of
Belarusian exports.
Belarus receives significant revenues from the processing of
Russian oil, the extraction of potassium salt on its territory, and
the production of high-quality metals (the Zhlobin Metallurgic
Works is, perhaps, the most promising exporter in this respect).
Importantly, the export potential of oil products and potassium,
which brings Belarus around $4 billion annually, is noticeably
higher than that of other exported goods.

However, neither Russian oil, nor domestic resources should make
up the bulk of Belarusian exports. The increased volume of trade on
the EU market, which mainly relies on oil products, can cease at
any moment. Thus, it would be wise to get ready for this turn of
events, and seek other new markets while reinforcing traditional
ones.
    
Table 1.  Top Ten Products Exported by Belarus in
2004

No. Export products Sales volume (U.S. dollars,
  million)
Strategic buyers
1 Oil products 3, 295 89% – countries beyond the CIS
   (Great Britain and the Netherlands –
   $1,932 million)
2 Potash fertilizers 752 98% – countries beyond the CIS
   (Brazil, China, Poland)
3 Ferrous metals 629 41% – Russia, 6% – Italy,
   5% – Taiwan, 5% – Latvia
4 Trucks 532.5 73.5% – Russia, 6.7% – Ukraine,
   3.6% – Syria
5 Clothes 415 40%-68% – Russia, 58%–31% –
   countries beyond the CIS
6 Milk and milk products 368 99% – Russia
7 Tractors 339.8 55 % – Russia, 11% – Ukraine,
   4% – Kazakhstan, 3% – Pakistan
8 Refrigerators 320 86% – Russia, 9% – Ukraine,
   2% – Kazakhstan
9 Spare parts 298 80% – Russia, 6.4% – Poland,
   4% – Ukraine
10 Furniture 277 76% – Russia, 6.4% – Germany,
   4.6% – France

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

None of the Belarusian top ten export products has real
breakthrough potential. The technological level of oil processing
and ferrous metals production is fairly high, yet these cannot be
considered high tech industries. Neither forms an advanced sector
of the global economy that is able to provide a powerful impetus to
the total development of the country’s exports.

Today, Belarus lacks the industries that would help it intensify
the sale of new products on the global markets, where
pharmaceutical, information and telecommunications transnational
corporations now hold the leading positions. Belarus and Russia
have no effective cooperative projects in these fields. Moreover,
the two countries have been demonstrating a clash of corporate
interests of lobbyist groups, competing with each other (overtly
and covertly), as opposed to working together toward a strategic
bridgehead on the international market.

RAPPROCHEMENT OR DIVORCE?

The Russian-Belarusian joint initiative toward economic
integration is now characterized by a slow pace and the vagueness
of objectives. In the last few years, the Russian government has
been demonstrating more self-interest and less commitment to
cooperation in the post-Soviet space, which now suffers from
divergence processes, together with the increased involvement of
the U.S. and EU member states.

This situation is further aggravated by a new challenge facing
Russia: stop viewing its political and economic interests in the
post-Soviet space as exclusively its internal policy. Russia should
advance its foreign policy activity with the ‘Near Abroad’ by
forming a markedly new economic and political environment around
its perimeters. In line with such a strategy, Moscow’s partnership
with Minsk will slowly but steadily evolve to a lower level. Of
course, it is necessary that Russia maintain a certain pace of
development and seek success in important spheres of interest
(while avoiding the waste of resources), yet it should not focus
its efforts primarily on achieving a rapid and complete integration
with Belarus. Any notion of a Russia-Belarus Union will come to
nothing if the Commonwealth of Independent States ceases to exist
and Russia’s strategic partners abandon it for NATO or the European
Union.

The gulf between Moscow and Minsk is becoming more noticeable
every year, while the rather nervous and senseless attacks on
Russia by Belarus only add weight to the Belarusian political
elites who are provincial by nature. Russia prefers – for no clear
reasons – to keep silent in the face of this criticism,
demonstrating the traditional Soviet “significance attitude” while,
in fact, only proving that it fears to act as a strong power.

What will be the outcome of the ongoing attempts for
Russian-Belarusian integration?
As far back as 2003, the Belarusian president undertook an
unmistakable course toward sovereignty and the preservation of
statehood; the majority of the national elite, including the
opposition, approved this strategic line. At that point, it became
obvious that a full-fledged Russian-Belarusian Union had no future.
Today, there are three possible scenarios for the future
development of relations between Moscow and Minsk.

 1. Inertia model. The unification process continues but
principal issues stay off the main agenda. In the meantime,
feverish activity around the concept of integration continues,
especially as presidential elections approach in both countries.
However, the integration game will only confuse the partners and
make them hostages to momentary gains.

2. “The Four” model. This innovative and strategic model sees
the Russian Federation and Belarus developing within a Common
Economic Space, where they build their relations with respect to
the interests of all of its member countries. If this process
proves efficient, Ukraine may signal a desire to participate in
such an alliance as well.

3. “Post-Soviet disintegration.” In this model, relations
between Russia and Belarus as members of the Commonwealth of
Independent States develop in accordance with the evolution of the
CIS per se. In this case, if the inertia model prevails, one can
expect the total collapse of the integration processes and the
emergence of a long period of historical uncertainty.

In these conditions, the most efficacious strategy for Minsk
would be to use all mechanisms of cooperation in order to defend
its national economic interests and bring them into line with the
modern realities. Belarus will no longer be able to demand from
Russia preferential treatment on its market of natural resources,
for example, which means purchasing them at Russian domestic
prices.

There are currently two factors impairing the development of
Russia-Belarus relations: the lack of political will and the
existence of formal barriers that impede the implementation of the
rights of Russian and Belarusian citizens. Notwithstanding
intergovernmental agreements on the provision of equal rights to
Belarusians and Russians in the virtual “union state,” there is a
great divergence in the implementation of these rights. It is time
to break the archaic political traditions and form a new
environment for the citizens of the two countries. The main
priorities of Russian-Belarusian cooperation are:

The provision of genuinely free movement of labor, products,
capital and resources. To this end, it is necessary to ensure equal
rights for Belarusians and Russians concerning their registration
during visits, which may involve the outright cancellation of
registration requirements altogether. There should exist equal
opportunities for receiving emergency medical aid and treatment in
state medical institutions, purchasing housing and land plots, and
receiving a higher education out of proceeds from national budget
allocations (national certificates and vouchers);

Joint oil and gas production by newly formed economic agents
using Belarusian joint stock and workforce. Belarus could possibly
establish a “public joint stock company” that would engage in the
development of oil and gas fields for the country. Such a public
company could serve as a model for economic cooperation between the
two countries, while the operation of Belarusian companies on the
Russian monopolized market could become a powerful tool for
removing the notorious oligarchy from the natural resources
sector.

Meanwhile, Russian capital could participate in the
establishment of processing facilities in Belarus on the basis of
currently operating chemical and petrochemical factories. The
development of transparent Russian-Belarusian corporations could
reduce the influence of self-seeking monopolies and owners that
emerged at the initial, inefficient stage of privatization;

The creation of a strategic partnership in social spheres
between Russia and Belarus (and possibly other CIS countries); this
would provide for the unification and compatibility of insurance
regulations between the two countries. For example, it seems
feasible to make civil liability insurance policies universal. In
the social insurance sphere, it is advisable to build mechanisms
for national transfers based on individual insurance plans.
Finally, tax legislation concerning private individuals and
corporate economic agents (in the long term) also requires
unification.

As a result of such measures, the economic and social barriers
now dividing Russia and Belarus will be removed. However, if this
fails to materialize, Belarusians may prefer to integrate into a
different social and economic space – that of Europe.