“Winter is coming”: What has put Lukashenko on edge?

The recent developments have shown that the Belarusian leadership failed to use all the benefits of the single economic space with Russia and the Eurasian Economic Union. The collapsing economy, uncertain foreign policy and the falling authority of the Minsk talks on Donbass have put the leadership of Belarus on edge. And the strain in the Belarus-Russia relations is due to go beyond the “dispute of companies.”

Neither negotiations nor direct interference of Alexander Lukashenko has helped settling the gas dispute of Belarus and Gazprom OJSC, which is a large obstacle to the bilateral relations of the countries. Belarus owes more than $300 million to the Russian monopolist and is not likely to pay, as it is short of money. That is why, perhaps, Minsk refuses from its debt and reserves the right to violate all the arrangements made earlier.

Formally, Minsk has three sources of financing: IMF, Russia and financial institutions under its control, and China. However, the recent events showed that Belarus will have to rely on its own forces. For instance, the IMF mission once again failed to get any exact answer from Minsk over the reforms it requires. Furthermore, the Belarusian president personally demanded his team to stand up against bankers. Alexander Lukashenko said they suggest he could write a letter to IMF head Christine Lagarde. “It would be demeaning not only for me. It would be demeaning for our nation,” he said. In short, Lukashenko refused from the IMF-suggested model of reforming the social and economic structure of the country not to disturb the political situation inside the country. As a result, Belarus will hardly receive financing from the west within the visible future.

The relations with China have gloomy prospects as well. This September, Lukashenko travelled to that country for the ninth time already bringing with him nothing specific, just smiles, handshaking and “potential projects” and “contracts for about $11bln.” Beijing did not give Belarus a single yuan, just agreed to “unite and coordinate the development strategies of the two countries.” Belarusian Ambassador to China Kirill Rudy said the sides have set a task to develop a joint strategy for 2030. As for the tied loans of China, Minsk comprehends that they will not help settling such strategic issue as filling the budget gaps.

As for Russia, Minsk’s pride would not allow it to ask money from Moscow after the recent strain relationships between them. In addition, Minsk still hopes for a regular tranche under the credit program of the Eurasian Development Bank. Yet, Belarus will have to spend the borrowed $300 million mainly to support lossmaking enterprises and pay salaries. As for the debt to Gazprom, Minsk will hardly manage to redeem it, while “winter is coming.” All this “has got Lukashenko in a tight corner.” Eventually, the Belarusian government decided to raise oil transit tariffs for Russia, which could not but anger Moscow. It is known that the northern and southern sections of the Druzhba (“Friendship”) oil pipeline run across Belarus supplying the Russian oil to Central and Eastern Europe (about 50 million tons per year).

This route has become vital for Russia after the coup in Ukraine: in 2014-2016, the transit via Ukraine and Baltic States fell by 65%, while the transit via Belarus increased by about 30%. The anti-monopoly watchdog of Belarus adopted a decision on September 28 2016 to raise the oil transit tariff for Russia by 50% in average (the decision will come into effect on October 11 2016). By the current data, Russia pays Belarus for transit of oil about 10 billion rubles a year. It is not hard to calculate the future losses of the Russian companies and profits of the Belarusian ones. Meantime, the tariffs are regulated by the intergovernmental agreement that was signed in January 2010 after long negotiations. The sides approve tariffs by February 1 of each year, while extraordinary rise of tariffs is possible only “in case of tangible changes in the terms of business activity in case of unforeseen emergencies.” However, even in such case, the change of tariff must be agreed with Transneft, the agent of the Russian companies, and the Russian government. If the sides fail to agree on the tariff, Belarus can raise it to the level of the average annual inflation + 0.03% at most. Therefore, it is natural that such groundless rise of the tariff provoked indignation of Russia. To be fair, such developments were predictable.

On the one hand, the actions of Belarus is retaliation to Russia’s intractability and reduction of oil supplies, which Moscow explains with Minsk’s debts for the gas consumed. All this has seriously affected the economy of Belarus. According to Prime Minister of Belarus Andrei Kobyakov, reduction of supplies by 2,25million tons in Q3 caused a 0.3% GDP decline (by about $150 million). Transneft Spokesperson Igor Demim said on September 23, Russia will supply 3mln tons of oil in Q4 (by 0.5mln tons less than on Q3). If this happens, the country will receive a total of 18mln tons of oil instead of anticipated 23-24million tons. This will seriously affect the petroleum-refining sector and the economy, in general. That is why the authorities of Belarus decided to “grab the bull by the horns” and make the Kremlin go on a concession ahead of the regular round of the gas talks.

On the other hand, it may sound trivial but Belarus decided to remind Moscow that not all pipes in Belarus belong to Russia and take advantage of the situation to get compensation for its losses in the gas conflict (though, no one doubts that Minsk will have to pay eventually). If they fail to agree upon the gas debt, the leadership of Belarus may offer to “cancel the new oil transit tariffs in exchange for writing off the debt for gas.” Such a simple formula of the Belarusian officials appears to be the last economic argument in the talks. If the sides fail to agree again, Belarus may resort to political instruments, starting from direct allegations against the Russian leadership up to blatant blackmail and threats to leave the Eurasian integration projects.

It appears that the leadership of Belarus makes desperate measures, as it has run out of arguments in the dispute with Russia. This will strain their relations even more, though EU’s uncertain stance and China’s indifference to the country will not let the conflict “cross the line.” Nonetheless, the cornered Minsk will try its best to thrill Moscow.

By Pavel Yurintsev