The disputed election and subsequent crackdowns in Belarus have trod on freedoms and led to at least three deaths and hundreds of injuries. The Belarusian economy may become another casualty.
Since the protests started less than two weeks ago, Belarusian companies lost an estimated half a billion dollars, said Valery Kavaleuski, an expert at the World Bank, who previously served in the Belarusian Ministry of Foreign Affairs.
The Belarusian economy was already under stress from reduced subsidies from Russia and increasing border controls and agricultural subsidies in Russia, according to Eric Hontz, deputy regional director at think tank Center for International Private Enterprise.
“Add to these reduced subsidies the disruption incurred by (the COVID-19 pandemic), internet shutdowns that hurt a burgeoning IT sector, and now labor trouble, and Belarus is facing a severe economic downturn,” Hontz said.
The lawlessness and pending sanctions from the EU and U.S. are already driving away prospective investments. If President Alexander Lukashenko does not step down in a peaceful power transition, Belarus will lose not just future investors but current businesses as well.
As one of Belarus’s closest trading partners, Ukraine will feel the impact of the protests via supply chain disruptions from Belarus — the country supplies 4 million tons of oil products to Ukraine as well as a big volume of fertilizers. While Ukraine will be able to buy these goods elsewhere, it will be a blow against trade between the two countries, which experts say is underdeveloped.
Worse still, if Lukashenko does not step down, Belarus will have to align itself even more closely with Russia, according to experts. This will be bad for bilateral relations, bad for Ukrainian national security and let Russia extend its encirclement of Ukraine.
In recent days, Lukashenko’s rhetoric turned hostile — he blamed Ukraine and other neighbors for stirring up the protests. He also returned a team of suspected Wagner mercenaries back to Russia despite Kyiv’s request to extradite them to Ukraine. The mercenaries are suspected of having fought in the Donbas on Russia’s behalf.
Soviet legacy
State enterprises employ half of all Belarusians and account for about three quarters of the total gross domestic product which in 2019 accounted to $63 billion, according to the World Bank. Hontz said the country has “a tale of two economies.” One economy is more innovative with higher wages and the other — a heavily subsidized state sector.
Manufacturing and industry secure 25.7% of Belarus’s gross domestic product, according to state statistics service Belstat. About 74-80% of it is state-owned, according to various estimates from the IMF, the CIA World Handbook and Kavaleuski.
Belstat shows that 26.6% of the manufacturing sector makes food, drinks and tobacco products; 16.2% makes refined oil products, 10.1% makes chemicals, 7.7% makes metals; 7.6% makes rubber and plastic products and 7.4% makes vehicles and equipment.
Belarus’s best-known enterprises include MAZ and BelAZ, which produce heavy trucks, public transportation vehicles and mining equipment. Minsk Tractor Works is a top producer of agricultural machinery.
The country provides 20% of the world’s potash. State enterprise Belaruskali is a key supplier to large buyers like China and India but also — Ukraine.
Belarus also has two refineries that refine about 20 million tons of oil per year. Much of the oil comes from Russia, as it is much cheaper than from other destinations. Ukraine buys four million tons of diesel and bitumen from Belarus, though COVID-19 cut into those exports.
Traditionally, manufacturing workers comprised Lukashenko’s support base but many turned against him. Automotive, steelworks and potash factory employees protested throughout the week.
The outpouring wasn’t universal said Kavaleuski. Nonetheless, the government imposed a crackdown. Others were threatened with mass dismissals. Some factories reportedly locked their employees inside, he added.
This is bad for Belarus, which makes 93% of its foreign currency earnings on its manufacturing sector, according to economic research center BEROC, as quoted by the BBC.
The strikes at Belaruskali are especially problematic. Workers there joined the protests earlier this week. This spells an opportunity for rival Potash producers to rally in other countries, Financial Times reports. Russia is one of the main competitors.
Despite manufacturing being only 25% of the GDP, much of the country’s service sector, which is about 50% of the GDP, may be heavily impacted by manufacturing disruptions.
This week, the EU refused to acknowledge the election results and warned it was introducing sanctions. The U.S. had sanctions against Belarus since 2006, but Kavaleuski said Lukashenko may have torpedoed attempts to normalize relations and new sanctions are possible.
This would be terrible for investment in the country as EU and U.S. sanctions are not something any third country or company wants to deal with. Credit rating agency S&P wrote that Belarus risks losing access to the international financial market, partly due to the new sanction threat.
What this means for Ukraine
According to researchers at international economic consultancy Berlin Economics, Belarus exported $4.1 billion in goods to Ukraine in 2019 and imported $1.7 billion.
“Ukraine is the second most important trade partner of Belarus (13% of total exports) after Russia (41%),” wrote Dmitry Chervyakov, a consultant with the institute, in an email.
More than half of Belarusian exports to Ukraine ($ 2.4 billion in 2019) are oil products. The second most important good is fertilizers ($300 million).
Chervyakov said that, taking into account that strikes are happening at Belaruskali and Naftan, one of the refineries, “it would not be too far-fetched to assume that Belarusian exports to Ukraine of oil products and especially fertilizer will be negatively affected in Q3 2020.”
“The overall impact, once again, depends on how the situation will further unfold,” he said. “At the same time, we do not see real supply risks, as such goods should be available from alternative suppliers.”
Hontz believes that if the standoff continues, there will be serious supply chain issues. “I’d look for parallels to the disruption that was caused in Ukraine-Russia supply chains in 2015–2016. It will not be painless,” he said.
But that’s in the future. Serhiy Kuyun, the director of energy consultancy A-95 said that for now, oil supplies will proceed to Ukraine unimpeded. Furthermore, partial production is ongoing in Belarusian state-owned enterprises — many workers appear to be losing heart against the regime’s pressure.
Belarus’s IT sector also suffered under Lukashenko’s internet cutoffs. Companies were losing a total of tens of millions of dollars every day that the internet was down. The IT companies were also especially outspoken opponents of Lukashenko and the vengeful leader may target them in the future, which will leave many looking for the door.
Other tech investors, while initially attracted to Belarus’s highly educated population, won’t be rushing to replace them, according to Kavaleuski.
“The market is fairly interesting to many companies, they are willing to invest,” said Kavaleuski. “But when they see this kind of lawlessness, businesses will have to rethink.”
Hontz believes that many will look to move to the Baltics. But he and other experts also said that there’s a good chance that some will look to relocate to Ukraine, which has also moved to reinvent itself as a regional IT hub. And Ukraine, which has a major IT expert shortage, will be happy to receive them.
Experts believe that if Lukashenko stays, many opportunities for cooperation with Ukraine may die on the vine. For example, building up a comprehensive transportation network through the region, which would expand Belarus’s options and give it access to Ukrainian ports for its oil products, instead of having to turn to the Baltics or Russia.
Another would be access to international oil. This may become necessary as Russia winds down the preferable tariff regime that allowed Belarus to get Russian oil at a discount of billions of dollars.
Kuyun added that Ukraine, as a major buyer of Belarusian oil products could stand to take a firmer stance with Belarus. The country’s refined exports to Ukraine are higher than for other buyers.
“If Belarus wants to participate in this market, which is very important for (Belarus), we are the most liquid direction of supply,” he said.
