Lucky Lukashenko

I am tempted to write again about Russia, but will leave that to my colleague Dmitry Babich for now. My predictions for the New Year will look at what a weakened Putin might mean for Eastern Europe. But first, I should catch up on the story in Belarus, where Lukashenko signed a series of deals with Russia at the end of November that seems to have given his beleaguered regime an undeserved lifeline.

The first deal finalised the sale of Beltransgaz to Gazprom for $2.5 billion and agreed the rollover of $100 million in payment arrears. Russia also agreed to a massive 40 per cent reduction in the gas price to Belarus to $165 until 2014, saving Minsk $2 billion. This means that Russia’s on-off campaign to charge its neighbours in the Commonwealth of Independent States (CIS) proper market prices for energy is dramatically off again. The pendulum has swung back to using energy as a political and foreign policy tool, which will cost Russia dearly, especially in Ukraine. Transnistria can also campaign for continued debt forgiveness, Armenia for continued subsidies. But with Nordstream now on-stream, Belarus seems to have ensured that its pipelines will continue to be used. This can only increase the pressure on Ukraine.

Russia also lent Belarus $10 billion for the construction of a nuclear power plant in Astravets, on top of an earlier Sberbank loan of $1 billion to the potash company Belaruskali (in return for shares in other target companies) and an agreement to free up the second $440 million tranche of the loan from the Eurasian Economic Union agreed last summer.

Belarusian officials could barely contain their glee that the golden age of Russian subsidies seemed to be back. A total of $8.5 billion will keep the economy afloat in 2012-14.

But who has increased their leverage more with the recent deals? The Belaruskali deal could be the thin end of the wedge, but Russia’s shopping basket is not yet as full as it might have been. Mass privatisation, which would cause so much tension within the elite and strain the tattered ‘social contract’, is once again pushed back into the future. Beltransgas had to be fattened up with guaranteed prices and lower taxes before sale. Russia will now control gas transit and Lukashenko cannot play chicken in the event of future cut-offs, at least not directly. The contract says that the Russia-owned Beltransgas cannot raise prises unilaterally to domestic consumers; but it will be much tougher on actual bill payment. Gazprom’s next target could be the internal distribution company Beltopgaz if local customers fall behind.

Gazprom has announced that it will triple Beltransgaz salaries – a clear attempt to show the clout they intend to wield.

Cheaper gas will only cut the balance of payments deficit by about a third. Belarus still has an export problem. Moreover, there is a danger the subsidies will just feed the vicious circle of devaluation and inflation, which is forecast to exceed 120 per cent by year end. With real wages down dramatically, there is a real risk of a sudden wave of out-migration (partly encouraged for political reasons), and Belarus’s long-term slide towards becoming a remittance economy. In recent years, most state-directed credit has gone to agriculture and construction, neither of which are export-oriented; and given Lukashenko’s political weakness, a lot will go into rebuilding the welfare state.

There is therefore no long-term growth strategy. The divisions over economic policy that surfaced before the deals were finalised have only been papered over. Lukashenko’s economic adviser Siarhei Tkachow thinks the answer to every economic problem is to print more money. The ‘reformists’ led by deputy Prime Minister Siarhei Rumas and Economy Minister Mikalai Snapkow want to see at least some semblance of fiscal and monetary discipline, especially if Belarus is to be more successful at attracting money from the likes of China.

The negotiations with China, however, had not gone as well as Minsk had hoped – hence the turn to Russia. China may want to use Belarus as a Trojan Horse to escape Russian protectionism in the long run. China doesn’t care about political conditionality. But it does care about economic conditionality, and it may not yet see its money as safe enough in Belarus.

Shifting the burden of debt onto state-owned enterprises does little to disguise the growing problem of debt addiction. Russia has paid at the higher end of expectations, but is not funding every kopek of the annual $7 billion or $8 billion balance of payments bill. Before the deals, Belarusian Eurobonds were trading at up to 20 per cent. After the deal that fell to 13 per cent, but that is still too high to return to the market – which hopefully would be politically impossible anyway. The wolf is no longer at the door, but Belarus still has bills to pay.

Why has Russia done the deal? The answer seems to be simple – Putin, Putin seems unlikely to run for reelection in 2012 on shaky domestic achievements. Putin’s personal prioritisation of ‘Eurasian Union’ has suddenly gifted Lukashenko news cards to play when his hand seemed to be at its weakest. But Lukashenko can now block or go slow on integration schemes. And Moscow will hardly want a key member of its new union go bust.  Putin is now also preoccupied with domestic problems, and there is no guarantee that Lukashenko will not return to his traditional slipperiness after March. The EU, on the other hand, sees its influence diminishing fast.

Lukashenko may be a dictator, but he is lucky. Every time he seems to be cornered he invents a new role to play and to trade. Unless of course events in Russia provide an external shock.

Andrew Wilson is a Senior Policy Fellow with the European Council on Foreign Relations (ECFR) and the author of Belarus: The Last European Dictatorship, published by Yale University Press.

This week in the East is a weekly commentary by Andrew Wilson for New Eastern Europe.