Who bears the costs of the EU’s sanctions?

Protest in Belarus nearby Minsk tractor plant, flag of protesters over the factory and workers coming from their shifts, the beginning of a strike Minsk, Belarus in 2020. Photo: JaneFoxik / Shutterstock

There is a wide variety of sanctions now in place. Restricting regime officials from entering the EU is certainly a symbolic gesture, but it does not largely affect the regime economically, especially if members of the elite are more oriented towards the East. Cutting financial ties for state enterprises will certainly increase the costs of capital for the domestic economy, thus making it less competitive and lowering GDP.

Who will be affected?

As a result of the sanctions, the local currency (the Belarusian rouble) will eventually have to depreciate, thus decreasing the purchasing power of the Belarusians traveling abroad. With a highly dollarised economy, the National Bank (Central Bank) of Belarus has limited options (and resources) to intervene, thus it is very likely that inflation will rise. All these factors, rather than forcing the regime out, will lead to a lowering of living standards.

Sanctions such as limiting the national airline Belavia from flying to destinations across the West will hit Belarusians and limit them from one of the few transit channels remaining. Sectoral sanctions will have a significant impact on the important refinery and petrochemical industry, and it will make the export of Potash more expensive as the Klaipėda port will be closed to Belarusian ships. Yet this will not block exports completely. Of course, some Belarusians – a small minority –  will find it appropriate that the West is interfering, but for most ordinary people it is hard to explain why they should suffer the consequences. State propaganda channels – which are getting more media savvy over time – are easily blaming the West for the worsening economic conditions in the country. In other words, the sanctions will hit Belarusians citizens harder than being able to destroy the domestic economy.

Another key question is whether sanctions will force the local elite to turn against Lukashenka. For the business elite, from the public and private sectors, the sanctions will affect the Belarusian model of acquiring resources and markets in the East, and financing and modernisation technologies from the West. For years now, Belarus (and Lukashenka in particular) have been successful in extracting huge rents from Russia (around 100 billion US dollars between 1995 and 2015) for little more than political loyalty and some economic integration (Union State, etc.). Yet after the Minsk Peace accords on Ukraine in 2015, Lukashenka was able to put himself back in the spotlight as a neutral buffer state, being economically integrated with Russia, but also doing business with its EU neighbours such as Latvia, Lithuania, Poland and Ukraine.

It is ironic that the Belarusian-based Mozyr oil refinery, running on Russian crude oil, has provided most of the fuel for Ukrainian tanks in its war with forces in Donetsk and Luhansk. The Belarusian business elite had profited significantly from this quasi-neutral status, doing business with all sides, without any serious concessions; yet most members of the elite are dissatisfied with the situation where Belarus has been drawn into a geopolitical conflict where it has to choose between the West or Russia. Most of the traditional elite, however, will probably side with Russia for the following reasons: economic integration and dependence; rental gains are higher with Russia than the West; and the threat of a full Russian intervention in the case of a new government.

Not so private sector

It has been argued that the private sector has been growing in Belarus over recent years and that it has the potential to be an agent for democratic change. This is certainly true in part (such as the IT sector), but the private sector that is functioning under normal market conditions is still less than 20 per cent by my estimates (with an overall private sector of around 55 per cent by 2020). The remaining 35 per cent is formally called the private sector but is still dependent on the state and its distribution system – for instance, purchasing equipment from state factories, distributing state products abroad, producing goods from state-owned facilities, production with state subsidies, retail business using state properties and licences, or simply using state connections for protecting businesses from international competition.

The business elites (which add up to around 75 per cent of GDP) have therefore little interest in radical change. They might understand that long term reforms are necessary, but in the short term they will act against any changes they will not be able to adapt quickly to. What is more, many of these business leaders earning real assets inside the country might dislike (or even hate) Lukashenka, but they did not speak out during the protests last year. As a result, they are now in a position where they fear regime change, as they could be held responsible (at least partly) for some of the events in 2020. A new regime could expose their ties with Lukashenka and highlight their personal wealth. Hence, they would probably prefer substituting Lukashenka with a more neutral figure – ideally Russia because the Kremlin would certainly not prosecute them for their ties with Lukashenka.

In regards to regular workers, it is often argued that if they have nothing to lose, they will finally make some decisive moves. Yet, all evidence so far suggests that even during the peak, the protests were largely engaged by the elite not dependent on the old rent distribution system, mostly from the IT sector, or truly independent private enterprises. The protest mood at state enterprises were brought under control relatively quickly due to the fact that most of them are overstaffed and employees could easily be substituted by other workers. And with average wages of factory workers decreasing, many workers did not have much financial security to take time out of work to protest.

Russian view

It is sometimes argued that sanctions will increase costs of Russia’s support for the Lukashenka regime and that could help in removing him from power. However, in my view, quite the opposite is true. Politically, a weakened and cornered Lukashenka is a lot easier for Moscow to handle and much easier to negotiate with. The additional costs of maintaining Lukashenka in power could add up to a few billion dollars over the next few years, which is actually not very much considering how much the Kremlin has already spent.

Russia would certainly not like to show that public street protests can be successful in a neighbouring country and they would certainly not tolerate a pro-western candidate winning a presidential election in Belarus. Recall Putin’s response after the August 2020 elections. He immediately recognised Lukashenka as the winner (even as Lavrov was talking about questions concerning the election process and the unnecessary use of violence). Putting the Russian National Guard (Rosgvardia) at the border with Belarus in Smolensk was certainly not a sign for change, but more a signal for the local elite to keep quiet.

In this respect, Putin made it very clear that any attempts to force Lukashenka out would be considered as instigated by the West and would lead to Russian intervention.  The Belarusian elite were scared, both in terms of personal safety and financially, and decided to wait for a new window of opportunity rather than risking a conflict with Russia.

Ultimately, the current sanctions by the West could end up being ineffective – if not counterproductive – especially if their primary aim is to move the country onto a more democratic track, independent of Russia. To be sure, sanctions will hit many Belarusians economically and limit their capacity to travel. Yet the sanctions can be interpreted as a moral response to human rights infringements, but it is not clear enough whether European businesses really want or support them.

Alternative approach?

Taking into account the above, I do not propose any easy alternatives to the current situation. Yet there are a few real policy options which could be considered if the EU, and the West in general, want to have an impact on the current regime (rather than struggling Belarusians).

First, use the current sanctions to demand freedom for political prisoners in Belarus; once that happens, then start a de-escalation path to calm down the situation and try and find an agreement for protecting civil society organisations in the country. In my opinion, this is the most that the EU and the US can achieve without a real confrontation with Russia. There is also the option of positive sanctions (i.e. carrots) that could bring about reforms by opening up markets or offering additional financing. This would assist a return to the longer-term strategy of promoting market-oriented reforms in the country and waiting out the old guard which is set to retire in the next 10-15 years. In fact, if a revolution would have happened in the next presidential election of 2025 or 2030, it might have succeeded due to an even greater critical mass.

Another important step should be engagement with Russia in a difficult, but unavoidable, dialogue over Belarus. The aim would be to try and offer Russia some guarantees that a Belarus without Lukashenka will not mean an anti-Russian Belarus. Objectively, the situation in Belarus, where 80 per cent or so of ordinary citizens want Lukashenka out, is different to the situation in Russia, where the leadership is still largely supported for putting Russia back on the global stage. These ambitions are fully absent in any part of the Belarusian elite. They would like to retain their status within the country.

The 2020 protests are an illustration of the weaknesses of the fully centralised decision making system, where one person – completely detached from reality – can cause a lot more damage than a system with proper checks and balances. It took Lukashenka just a few months to destroy the few remaining checks and balances within his own system, and is now fully dependent on a hard line fraction that will divide the country for many years to come.

This division will not be along the lines of ethnic or religious conflict, as in many other countries, but of culprit and victim within the same nation; along the lines of “Yabatka” and “Smagary”, often even within the same families.

At some point we could see even larger numbers of Belarusians on the streets, with more violence, arrests and torture in prisons. The judiciary is not independent and many innocent people will be forced to participate in the falsification of elections or in controlling protests in the factories. Every family has had, or will have, contact with both sides: the culprits and the victims. For the moment, many on the side of Lukashenka fear that they will go to jail if there is a change in power. It will take many years more, if not a generation, until it will be irrelevant which side you took during the summer and autumn of 2020.

Daniel Krutzinna has served as an advisor on business and innovation to the prime minister of Belarus, resigning in 2020 after the falsified elections and subsequent crackdowns.