Is Be­larus pulling away from Rus­sia?

Times are tough, so Minsk is con­sid­er­ing its op­tions

Financial Mirror (Cyprus) - - MARKETS - By Al­li­son Fedirka and Eka­te­rina Zolo­tova

Be­larus has long been a stal­wart ally of Rus­sia and de­pend­able buf­fer be­tween Moscow and the West. But the coun­try has re­cently been send­ing some sig­nals that it may be pulling away from Moscow. Last week, Be­laru­sian Pres­i­dent Alexan­der Lukashenko met with Rus­sian Pres­i­dent Vladimir Putin in Sochi and de­scribed the talks as “dif­fi­cult” – a word you wouldn’t ex­pect to be used to de­scribe a visit be­tween two staunch al­lies. This week, Lukashenko told a group of newly ap­pointed am­bas­sadors to Minsk that his coun­try would pur­sue equal ties with the East and the West. Yes, these are just words, but if these words por­tend a shift in Minsk’s loy­al­ties, it would be a very trou­bling sign for Rus­sia.

For decades, Be­larus and Rus­sia have had a mu­tual in­ter­est in main­tain­ing their bi­lat­eral re­la­tion­ship. It was an im­por­tant Soviet satel­lite state, and its econ­omy be­came in­ex­tri­ca­bly tied to Rus­sia’s af­ter the fall of the Soviet Union. Half of its trade and for­eign di­rect in­vest­ment comes from Moscow, ac­cord­ing to of­fi­cial Be­laru­sian statis­tics. Its de­pen­dency is strong­est in the en­ergy sec­tor. Rus­sia sup­plies much of Be­larus’ oil and nearly all of its nat­u­ral gas. Rus­sia, mean­while, needs Be­larus as a shield against Western in­cur­sion across the North Euro­pean Plain.

But as Rus­sia’s econ­omy weak­ened, so too did the po­tency of its check­book diplo­macy. The Rus­sian gov­ern­ment has been so short of funds that it has had to raise taxes and the age of re­tire­ment de­spite wide­spread protests against these mea­sures. Be­larus’ own econ­omy has suf­fered from Rus­sia’s fi­nan­cial strug­gles. Hence, why Minsk ap­pears to be soft­en­ing its tone to­ward the West.

Lukashenko and Putin have met seven times this year to try to re­solve some of their dif­fer­ences, and they are ex­pected to meet again at the Com­mon­wealth of In­de­pen­dent States sum­mit in Dushanbe, which be­gins to­day. Dur­ing talks held in Sochi last week, Putin even sug­gested that min­is­ters and other Cabi­net of­fi­cials be in­cluded in the ne­go­ti­a­tions – and nearly half of Putin’s Cabi­net showed up. The main top­ics of dis­cus­sion were sim­i­lar to those that came up in talks ear­lier this year: in­te­gra­tion as­so­ci­a­tions, eco­nomic re­la­tions and loans, agri­cul­ture and food sup­ply, in­dus­try, trans­port, en­ergy, the to­bacco mar­ket, ex­cise taxes, and mil­i­tary and po­lit­i­cal is­sues. Putin re­port­edly called Lukashenko a few days later for fol­low-up talks. The ex­tent of these ne­go­ti­a­tions and the num­ber of peo­ple in­volved, as well as the fre­quency of re­cent com­mu­ni­ca­tion and the fact that Rus­sia has been driv­ing much of this ef­fort, in­di­cate just how im­por­tant this re­la­tion­ship is to Moscow.

En­ergy and, to a lesser de­gree, agri­cul­ture, have been the big­gest points of con­tention. On en­ergy, they are di­vided on two is­sues. The first is re­lated to ex­port du­ties on Rus­sian oil prod­ucts. Rus­sia wants to re­duce the amount of duty-free oil prod­ucts it ex­ports to Be­larus, which then sells some of these prod­ucts to other coun­tries and prof­its from the as­so­ci­ated charges.

From Moscow’s per­spec­tive, Rus­sian has been ef­fec­tively sub­si­diz­ing the Be­laru­sian bud­get through its oil prod­ucts and now wants to limit sales to Be­larus so that it can profit from these prod­ucts it­self. One way it plans to do so is through a grad­ual de­crease of oil ex­port du­ties for other des­ti­na­tions over the next six years. The du­ties will en­able Moscow to sell its oil di­rectly to coun­tries to which Be­larus cur­rently re-ex­ports Rus­sian en­ergy prod­ucts. Be­larus is con­cerned they would slash a key source of bud­get rev­enue, and the two coun­tries have so far failed to find a res­o­lu­tion. Ac­cord­ing to Bel­sat TV, July fig­ures show that Rus­sian en­ergy sup­plies have al­ready de­clined.

The se­cond is­sue is Be­larus’ debt to Rus­sian en­ergy gi­ant Gazprom. Roughly 75 per­cent of the en­ergy con­sumed in Be­larus is nat­u­ral gas, which is al­most ex­clu­sively sup­plied by Rus­sia. Be­larus has ac­cu­mu­lated hun­dreds of mil­lions of dol­lars in debt for gas sup­plies, and now Rus­sia wants to col­lect. There have also been dis­putes over pric­ing and sales vol­ume. Be­larus has said that fur­ther dis­cus­sions on a res­o­lu­tion will take place in Minsk, likely by the end of the year.

On agri­cul­ture, Moscow and Minsk have reached some com­pro­mise. Be­larus had ac­cused Rus­sia of ma­nip­u­lat­ing its mar­ket to ben­e­fit its own pro­duc­ers, but the two coun­tries re­cently agreed to reg­u­late the vol­ume of trade for milk, dairy prod­ucts, meat and meat prod­ucts. The deal will see only mi­nor changes in this trade, an in­di­ca­tion that nei­ther coun­try can af­ford dis­rup­tion in this sec­tor. (Agri­cul­ture is Minsk’s se­cond-largest source of ex­ports; nearly 85 per­cent of Rus­sia’s dairy im­ports come from Be­larus.)

Be­larus can’t in­vite the fi­nan­cial risk that would come from re­pu­di­at­ing Rus­sia, but as the weaker part­ner in the eco­nomic re­la­tion­ship, it would likely have to bend to Moscow’s de­mands. It is there­fore look­ing for new sources of en­ergy, in­vest­ment and im­ports. Minsk is con­sid­er­ing in­creas­ing en­ergy im­ports from Iran and Azer­bai­jan. China is a po­ten­tial source of new in­vest­ment and a mar­ket for Be­laru­sian goods. But per­haps the most promis­ing al­ter­na­tive source for both trade and in­vest­ment is the Euro­pean Union. It was an­nounced this week that Ger­many’s Aus­fuhrkredit-Ge­sellschaft bank has agreed with a Be­laru­sian bank to jointly pro­vide fi­nanc­ing for Be­laru­sian com­pa­nies that trade with EU mem­ber states.

Europe can’t be an al­ter­na­tive to Rus­sia in all as­pects. In terms of en­ergy, for ex­am­ple, other Euro­pean coun­tries also rely on Rus­sian sup­plies and so are in no po­si­tion to re­place Moscow as Be­larus’ main source oil and gas im­ports. But by reach­ing out to the West in other ar­eas, Be­larus can re­duce its de­pen­dence on Moscow and vul­ner­a­bil­ity to any po­ten­tial col­lapse of or cri­sis in the Rus­sian econ­omy. It can also cre­ate lever­age for fu­ture ne­go­ti­a­tions with Moscow – af­ter all, one way to per­suade a coun­try to give you what you want is to prove that you can get it some­place else.

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