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Belarus and the EEU: caught between a rock and a hard place

On 29 May, Belarus, Russia and Kazakhstan are set to sign an agreement on the formation of the EEU (Eurasian Economic Union), designed to take the economic integration of the three countries to a new level. But the cracks are already showing.

The Eurasian Economic Union (EEU) would replace the existing Eurasian Customs Union (ECU), which was set up in 2010 and has already created a single market in goods, services, banking and labour in its three member countries. Belarus President Alyaksandr Lukashenka initially backed the project with enthusiasm, but its potential benefits to Belarus are no longer so clear; in fact, what is clear, from a meeting held by the three countries’ leaders on 29 April, is that there are deep and as yet insoluble differences between them. 

A rock and a hard place

Just a few years ago, Belarus was so keen on integration with Russia and Kazakhstan that it failed to grasp the implications of Russia’s entry into the World Trade Organisation (WTO) in 2012, which improved Russia's international economic future, outside of anything it was planning for the EEU. Belarus is still only in talks about WTO accession, so for the moment, while in practice it will have to conform to WTO rules while also being part of the EEU, it cannot take advantage of the benefits of WTO membership. Only later did Lukashenka publically admit that ‘people are laughing at us’, and that Russia had ‘screwed’ his country.

Initially the Belarus government propaganda machine was loud in its praise for membership of the ECU and a free market zone. In practice, however, the benefits boiled down to a mere two: advantageous conditions for the import of Russian electricity, oil and gas, and an improved market for Belarusian goods in Russia and Kazakhstan. But after the 29 April meeting it was announced that existing agreements on energy supplies within the ECU would be retained until 2025, and questions of gas prices and customs duties on oil would continue to be decided on a bilateral basis.   

Initially, Lukashenka failed to grasp the implications for Belarus of Russia's entry into the WTO Photo: kremlin.ru

These decisions, driven by Russia, led to an announcement by Lukashenka that he no longer wished to sign the proposed EEU agreement, since it would not be in Belarus’s national interest to do so. He first made this announcement in his annual State of the Nation address on 22 April, and repeated it in Vladimir Putin’s presence at the 29 April summit. 

After a visit to Moscow on 7-8 May, however, Lukashenka announced that Russia and Belarus had settled all their mutual problems and that the oil duties would be gradually abolished over the next few years, while the question of oil and gas supplies would be sorted out over a period of ten years. Russia also promised Lukashenka two billion dollars’ worth of credit to shore up Belarus’s dwindling gold and foreign exchange reserves. This generous gift is no surprise: with increasing Western political pressure and economic sanctions being imposed because of the annexation of Crimea, Putin needs to do everything he can to hold on to his few remaining allies and not derail his Grand Plan, a full Eurasian Union.

Minsk, in other words, is making some gains from increased Eurasian integration. But these gains will backfire in the longer term: low prices for energy resources will increase Belarus’s dependency on Russian oil because the refining and profitable resale of that oil is the main source of foreign exchange in the country. The same goes for gas prices, which are an important factor for the competitiveness of its industry. Moreover, the transfer of energy issues from an EEU to bilateral level means that Russia will be in control of any contracts, and can use them to put pressure on its neighbour. 

Belarus is making some gains from increased Eurasian integration, but they will backfire in the longer term

As for the second supposed benefit of integration, better access to foreign markets for Belarusian goods, this seems to have backfired already. As Deputy PM Vladimir Semashka has noted, the legal foundation of the ECU and EEU is not yet complete and contains many exceptions and waivers, so that Belarus is still liable for considerable costs, and is thereby losing whole niche market sectors. Semashka gave as an example the fact that Russia has more or less closed its markets to Belarusian agricultural machinery. Another problem is the scrappage tax which has to be levied by the country of destination. 

According to Belarus’s PM Mikhail Myasnikovich, the value of reciprocal trade in the ECU zone actually fell by 15% in the first quarter of 2014; and an analysis of the figures reveals that the growth in export of traditional Belarusian goods has been down due to price undercutting, the devaluation of the Belarus rouble, cheap energy imports and direct Russian subsidy. Belarus has also failed to make much headway on the Kazakh market, which also depends on traditional trade sectors. In other words, the promised significant increase in outlets for Belarusian goods, that Eurasian integration was supposed to create, just isn’t happening.

The hard-pressed Belarusian public

Some of the effects of integration are having a direct impact on the Belarusian public. Firstly, equalisation of prices across the ECU has meant price rises in various retail sectors, particularly food and vehicle fuels. Belarusians, however, have lost the habit of protesting, and so there have been no mass displays of public anger. Most people are more accustomed to adapting to life’s difficulties than trying to challenge them, and have quite quickly got used to the new prices, reserving their gripes for private conversations.

Prices have risen inside Belarus as a direct result of integration. Photo via RIA: Sergei Samokhin

The only notable exception to this rule was the 2011 motorists’ ‘Stop Petrol’ action. After the fourth price hike of the year, car owners blocked streets in Minsk in protest, but this rare display of public protest had no effect on rising prices. The government merely reacted in its usual fashion, by fining the demonstrators for public order offences. 

Belarusians have lost the habit of protesting, and so there have been no mass displays of public anger.

Another sore point for ordinary Belarusians has been a change in the rules governing imports from third countries, especially those in the EU. According to Lukashenka, it was the rise in duty on used cars that caused Belarus’s financial crisis in 2011. Neighbouring Poland and Lithuania were Belarusians’ favourite places for buying second hand vehicles, household appliances and other goods more cheaply than at home. So when, in 2001, the ECU imposed import duties on second hand cars, many Belarusians rushed to make use of their last chance to buy them abroad, for their own use or to sell. As a consequence, several billion dollars were drained from the country’s foreign currency reserves. 

Lukashenka may have blamed the motorists for Belarus’s financial crisis in 2011, when its rouble was devalued by 189% in the space of nine months, but financial analysts see here a desire to lay the blame for his own government’s failed economic policies at the feet of ordinary Belarusians. 

Money, please, but politics, no thank you  

In general, price hikes and customs duties have had little effect on the mindset of the Belarusian public, most of whom seem pro-Eastern integration, or at worst indifferent to it. According to a poll by the Eurasian Development Bank, for example, amongst people in Belarus, Kazakhstan and Russia there is still a high level of public approval for Eurasian integration: 65%, 73% and 67% respectively. At the same time, a comparison between figures from 2012 and 2014 showed a drop in approval in Kazakhstan (7%) and Russia (5%), whereas in Belarus the figure rose from 60% to 65%. 

Belarusians are only bothered about their own standard of living, and have little interest in grand political projects.

A March 2014 study by Belarus’s Independent Institute for Social, Economic and Political Research meanwhile asked the question: ‘If you had to choose between unification with Russia or membership of the EU, which would you choose?’  When the same question was asked in December 2013, about half of respondents answered in favour of the EU, but now, three months later, with the crisis in Ukraine and the help of a powerful Russian propaganda campaign, opinion has swung away from Europe, although more than a  half of Belarusians still oppose the idea of hypothetical unification with Russia. 

In other words, Belarusians are only interested in the economic side of integration, or to be more precise its impact on their own standard of living, and have little interest in grand political projects. If Eurasian integration brings no financial benefits, they will happily turn their attention back to the West. But recent events have shown that although Eurasian integration doesn’t seem to be moving very fast, the Lukashenka government is wary of sowing the seeds of disaffection among the public, to avoid annoying Russia. 

Business is bad for Belarusian business

The business sector, interested in its own profits, is usually a major, if not a deciding, player in determining anything to do with  integration. However, Belarusian business, like the Belarusian public, plays a very minor role in decision making, although recently its importance, and its interaction with the government, has been increasing. In general, the issue of Eurasian integration hasn’t particularly bothered business. The only organised protest against the new rules imposed by the ECU was a national strike of small business owners in June 2013: they were unhappy with the technical regulations.  

Belarusian small and medium business has not been able to take maximum advantage of the single market.

A poll conducted by the Belarus Business and Management Institute’s Research Centre, in 2013 found that over 50% of owners of small-and-medium-sized businesses (SMB) saw the current level of integration in a fairly positive light, and 44% were in favour of further integration. Only 19% spoke out against the present situation, and 23% against an increase in integration. These figures nevertheless show a significant drop in approval compared to 2012: pro-integration numbers were down by 17%, and anti-integration ones up by 7%.

A large proportion of Belarusians are only interested in the EEU in so far as it effects their own pockets. Photo cc: kov09

The most likely reason for this pessimism is that Belarusian small and medium business has not so far been able to take maximum advantage of the opportunities presented by the single market in the three countries. The main reason for this is that these companies have fewer resources than those in Russia and Kazakhstan, and their access to credit facilities is more limited. Macroeconomic factors also play a role, with inflation rates particularly important. This all restricts SMB’s competitiveness in its partner countries’ markets.

Benefits in kind 

Eurasian integration has not, in fact, had any significant economic effect on Belarus, primarily because its partnership with Russia predates the ECU and EEU; in 1999 Lukashenka and then Russian president Boris Yeltsin set up the Union State of Russia and Belarus, which created close economic ties between the two countries. The current political situation is good for Lukashenka: the increasing external pressure on Russia over the crisis in Ukraine has brought concessions from the Kremlin on the single energy market, although Putin’s insistence on bilateral agreements means that he wants to use annual energy supply contracts to keep Belarus under his thumb. It also means that Belarus will be even more economically dependent on Russia than before (and it is already deeply dependent).

The current political situation is good for Lukashenka

In terms of expanding its own sales market, Minsk has probably lost out. Its market share has fallen because of Russia’s joining the WTO, and its own business sector’s lack of competitiveness. Belarus’s elite has not been able to capitalise on the potential opportunities, and all its public has got from integration is higher prices at home and high duties on cars bought abroad. The public’s continuing support for Eurasian integration is pretty fragile and is to a large extent kept alive only by government propaganda and the influence of the Russian media. 

Belarus then, on the one hand, is increasingly dependent on cheap Russian energy, and, on the other, is stymied by a shrinking market for its own products. In this situation, Lukashenka will find it increasingly difficult to maintain the political independence which he has been so adroit at preserving. Having apparently rejected the option of an improvement in relations with the West, which might give him some room for manoeuvre with Russia, Lukashenka is making Belarus’s future as a sovereign state increasingly problematic.     

 

About the author

Vadzim Smok is a Minsk-based journalist. 


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