When the wind blows
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Emerging Markets

When the wind blows

Moscow is forcing the hand of Belarus leader Aleksandr Lukashenko in its bid to reclaim the spoils of high energy prices

By Simon Pirani


Moscow is forcing the hand of Belarus leader Aleksandr Lukashenko in its bid to reclaim the spoils of high energy prices


The winds of change in Belarus’s state-dominated economy are blowing not from the west but from the east.

Moscow’s decision to scrap cheap gas, duty-free oil and other forms of support for Minsk has opened up a $2 billion trade gap – and forced president Aleksandr Lukashenko’s government to ponder the distasteful alternatives of devaluation, privatization and foreign borrowing.


Harsh choices will have to be made by the summer. Certainly, stability and improving living standards – keystones of popular acceptance of Lukashenko’s rule – are in danger. Probably, industrial assets will be sold, with Russian companies the first-choice buyers. Possibly, the state’s grip on the economy will be loosened.


Change has been forced by Russian president Vladimir Putin’s drive to take back the fruits of high energy prices from all those – be they wayward oligarchs or heads of neighbouring states – for whom Russia cut generous deals in the past. This is geo-economics more than geo-politics. With every dollar added to European gas prices in the past five years, Gazprom, Russia’s state-owned gas producer, felt more keenly the costs of bargain-basement sales to former soviet republics, and lobbied for price increases.


Double up


From January 1 this year, Belarus is paying $100 per thousand cubic metres (mcm) of gas – more than double the $46.68/mcm it paid last year (but still less than half of what Poland pays). Belarus’s closer ties with Russia and the conspicuous lack of anything like a Ukrainian “Orange revolution” didn’t save it from the price rises – and had it not agreed to sell 50% of its national gas company, Beltransgaz, to Russia, they would have been steeper. Just ask the Georgians, who are paying $235/mcm.


Russia has also trashed Belarus’s status as a duty-free, offshore, oil-refining haven. Until last year, Russian oil companies exported about 20 million tonnes of crude per year to Belarus, where it was refined – mostly on tolling terms – and the products exported, or used to subsidize Belarussian manufacturing. State-owned Belarussian refineries and privately-owned Russian oil producers profited; the Russian treasury didn’t.


In January, time was called by Moscow. Now export duties are levied on the crude, and Belarus has agreed to tax exported products at the same rate as Russia. The oil companies have stopped tolling; Belarus is trying to cut tax deals for the refineries to stop them going into the red.


The blow to Belarus’s state finances is a heavy one. The extra gas and the new oil processing regime will cost more than $2 billion. That’s about 10% of GDP, and has to be financed.


Yaroslav Romanchuk, head of the independent Mizes Research Centre in Minsk and a long-time advocate of market reforms, tells Emerging Markets: “The Russian measures will have a serious effect on the budget. With such a substantial cut in revenues, the national bank should be tightening monetary policy, but it won’t do this, as the state sector would face severe cutbacks, and the bank’s hands are tied by the government.”


Romanchuk advocates privatization and abolition of bureaucratic restrictions on business and trade as a way forward. But Minsk’s failure to implement such policies, lack of WTO membership and the possible loss of its EU trading privileges in the summer leaves it with no short-term alternative but coming to terms with Russia, Romanchuk believes.


Three ways


President Lukashenko’s government has looked at three alternatives:


1) Devaluation. This is likely in the summer, but it won’t go too far. Forward contracts were being sold in March at 2,500 Belarussian rubles (BYR) to the dollar, against an official exchange rate of 2,143. Tatiana Lysenko, an EBRD economist who follows Belarus, says: “The authorities are desperate to avoid taking this route. In recent years, people have started putting their savings into the domestic currency, and too great a devaluation could discourage them. There could be a domino effect. I expect the government to seek other solutions.”


2) Asset sales. The economics ministry was directed by the government in February to draw up a list of state-controlled industrial enterprises in which stakes could be sold. Sources in Minsk say that majority holdings are unlikely to be on offer, and the most likely buyers will be Russians. Deals in the banking sector – by state-controlled Russia’s state-controlled banks, themselves on the road to privatization – are indicative: VTB and Vneshekonombank are close to completing the purchases of Slavneftebank and Belvneshekonombank respectively, while Bank of Moscow is also in the market.


3) Foreign loans. VTB (with Sberbank and Gazprombank) and Vneshekonombank are also understood to have talked to Minsk about a $1.5 billion plus loan package. A source close to the deal says it would be “heavily collateralized”, and might be another route to Russian control of industrial assets. An alternative has been offered to Minsk by Raiffeisen Bank of Austria, which owns Belarus’s only sizeable private bank, Priorbank – and has said it would package a deal with western lenders. Raiffeisen board member Patrick Butler tells Emerging Markets that the bank is “in talks – no more, no less – to arrange a financing programme to attract further foreign investment into Belarus.” This is part of Raiffeisen’s strategy of participating actively in “the economic development and transformation process”.


After Belarus’s dispute with Russia at the New Year, western European politicians waxed optimistic about opportunities for rapid reform, and Rene van der Linden, president of the parliamentary assembly of the Council of Europe, hurried to Minsk. But Belarus has neither the mindset nor the means to turn west, say market sources.


Thomas Lempuhl, director of relationship banking in central and eastern Europe for BayernLB, who knows the Belarussian market well, argues: “Belarus doesn’t have the framework to embrace the market. So its leadership will have to accept most of what Russia proposes to them, as it is doing on Beltransgaz. The gas price rise was the first step, and the aim is to make Minsk more open to Moscow. Strategic assets in the energy and financial sectors are of interest to Moscow.”


Winds of change, for sure. But from the other direction.

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