BELARUS NEWS AND ANALYSIS

DATE:

27/07/2006

A Refined Regime

by Siarhej Karol

Belarus now pumps large quantities of oil to the EU. What does this mean for the economy and the prospects for democratization?

Belarus as a trade-based economy oriented towards Europe sounds like a vision of Belarus' embattled opposition politicians - but in fact, this is the picture that emerges from European Union trade statistics. With over half of its exports going to Europe and billions of euros in revenue and profits flowing back, Belarus appears to be in far better shape today than just three years ago, when its outdated goods could not compete even in Russia. So what happened in the last few years?

A EUROPEAN ECONOMY?

In 2003, the $32 million of exports from Belarus to the United Kingdom could be disregarded as a rounding error. But just two years later Britain imported goods worth 12 times as much, and is on track to exceed $700 million in 2006. As an exporter to the U.K., Belarus is now ahead of Ukraine.

In the greater EU, the picture is the same: between 2003 and 2005, exports from Belarus to the 25 current member states increased by 70 percent and amounted to 3.3 billion euros last year. Where less than 20 percent of Belarusian exports went to the EU just three years ago, this share has now grown to over 50 percent.

This is a remarkable transformation, and even more remarkable is how little it's been noticed. But there's a simple explanation: the increase is due entirely to changes in the global energy markets. The annual average price of oil doubled between 2003 and 2005, while exports of petroleum products from Belarus to Europe increased by a factor of 2.7, outpacing the mere price effect.

The increase in Belarus' petroleum exports was the result of a deliberate policy by the government of Belarus to use Soviet-era refineries in Mazyr and Novapolatsk to refine Russian oil and sell it to the West. The refineries, whose capacity far exceeds the domestic needs of Belarus, were designed as part of the Soviet energy strategy in the 1970s.

Back then, rising oil prices prolonged the life of the moribund Soviet economy by a decade. President Lukashenka clearly hopes for a similar effect on his regime.

The Brezhnev-era factories were put back to work and the volume of petroleum pumped to Europe rose by 37 percent in just two years. The share of fuels in the total trade flow to Europe rose from 36 to 56 percent. The money earned accounts for more than 15 percent of the total national product.

Just as in a Middle East oil state, Belarus' prosperity is now built on oil.

AN OIL BOOM SPONSORED BY THE NEIGHBOR

But unlike most other oil states, Belarus does not have its own mineral deposits; rather, it refines the crude it gets from Russia. Oil constitutes roughly 40 percent of Belarusian exports; it also constitutes about 40 percent of Belarusian imports.

The country's economy has become a pipeline with a refinery on top.

Refining other people's oil is not a bad business, especially at a time when global refining capacities cannot meet demand, as is currently the case. But it normally does not yield the sort of profit that Belarus is now realizing. From 2003 to 2005, the difference between the market price for Russian crude and the price paid for it by the Belarusian refineries was between 35 and 45 percent, according to Belarusian government statistics quoted by Jaroslav Romanchuk of the opposition United Civic Party. Other observers quote similar margins.

This difference allows Belarusian refineries to make around $10 profit per barrel, after accounting for the unprofitable domestic oil consumption. (For comparison, the European refining industry, which does not have access to discounted Russian crude, was losing about $4 per barrel in 2005.) This is a fantastic profit: Russia itself makes less money on extraction than it allows Belarus to make on refining.

This lucrative trade now generates profits of some $1 billion for Belarus every year.

In a country personally run by the president, it is all too obvious where these profits go: the national library building, the celebrations for the national holiday on 3 July, armored vehicles for the police.

The transformation of Belarus into an oil state would not have been possible without changes in Russia. In fact, it is another aspect of a dramatic transformation that has occurred in Belarus' mighty neighbor to the east since 2003.

A few years ago, the direct integration of the Belarusian economy into that of Russia would not have been possible. Oligarchic, chaotic, and corrupt as it may have been, Russia was nevertheless a market not controlled by the state. Today, things are very different. Still operating on market principles, engaging foreign capital, and participating in global economic clubs, Russia has re-established the central role of the state in economic management. Its leadership is pursuing a deliberate strategy of creating a powerful but state-centric domestic economy built around energy assets.

Having rationalized and partly renationalized its energy industry, the Kremlin created a system of large core enterprises run by current or former government officials and personal allies of President Putin. In this new emerging Russia Inc., Belarus Inc. is a small subsidiary that is allowed to refine some of the Russian oil in order to sustain its otherwise stagnant Soviet industries.

Meanwhile, just as Russia has increased the role of the state in its economy, Lukashenka is allowing a greater role for the market in his. Unlike Putin, he does not have to appoint his people to key management posts - no serious business has ever been possible in Belarus without an affiliation with the president's apparatus. In the end, the two countries' systems are converging, and this, just as Belarus' reliance on oil, has clear political implications.

WHAT IT ALL MEANS

First, the Belarusian opposition has to accept that its traditional economic message that the regime has failed the economy is not going to work when billions of euros are flowing into the country. The non-oil economy is deteriorating fast, but it is being sustained by redistribution of oil profits. Paid as salaries or given as holidays, subsidies continue to make things look normal in regular workers' eyes. The opposition needs a different message. The electoral speeches by opposition leader Alyaksandr Kozulin, now in jail, may provide a useful template: rather than try to convince his audiences that the economy was stagnating, he talked of how the benefits of the so-called economic miracle had not trickled down to ordinary workers even while the lifestyle of Belarus' pro-Lukashenka elite was taking on a sheikh-like flavor.

Second, Europe is now Belarus' main trading partner, which means that it has vastly more influence than commonly thought. Europe has far more influence on Belarus than on Russia, on whose energy Europe is critically dependent. Even though Europe buys fuel from Belarus, it does not depend on it, since anyone can refine oil but only a few countries actually have it. Even though large for Belarus, its fuel imports to Europe are only three percent of those from Russia and can easily be replaced by other refiners.

Direct hard sanctions against Belarus, or at least its fuel export industry, would be extremely effective. However, they would also be difficult to implement given the collateral damage, and the propaganda opportunities for Lukashenka, that they would cause. But the mere threat of sanctions, and pointed public references to Belarus' dependence on Europe, could have some influence, and there are certainly no limitations on public campaigns of opposition activists against the European energy companies that trade with the dictator. In the age of the global brand, grassroots pressure on companies can have dramatic effects.

Finally, there is always the possibility that Belarus could fully converge with Russia in a model combining political authoritarianism with economic modernization. Should this happen, the chances of changing the political regime in Belarus in the foreseeable future would virtually disappear. If the temporary oil windfall can be translated into a more sustainable, more modern, and more open economy built for the future, most Belarusians are likely to follow the example of Malaysians, Koreans, and Chinese who at various points of time happily traded large amounts of political freedom for a certain amount of economic well-being.

Source:

http://www.tol.cz/look/TOL/article.tpl?IdLanguage=1&IdPublication=4&NrIssue=177&NrSection=4&NrArticle=17407