Belarusian Economic Research and Outreach Center

Double Jeopardy: Why Moscow’s Demands Seem Unreasonable to Minsk

Russia’s suggestion that Belarus resurrect a 1999 agreement to get compensation for Russia’s oil tax maneuver looks fairly cynical to Minsk. After all, by joining the EEU, in which single markets—including for energy commodities—are supposed to be created between 2018 and 2024, Belarus has already paid for all of its tariff preferences.

In the past year, several key issues in relations between Russia and Belarus have become trapped in a limbo of uncertainty: formally strengthening their economic integration, Russian compensation for Belarus’s lost oil revenues from Russia’s tax maneuver, the price of gas, and loans worth $800 million that Moscow promised long ago, but which have failed to materialize. It looks as though Moscow is waiting for Minsk to first agree to increased integration before it is prepared to make concessions on other stalled issues.

This format for a possible deal—new Belarusian obligations in exchange for Russian compensation—is perceived as fair in Russia: “Enough of propping up Belarus” is the general idea. In Minsk, however, the situation looks very different. For the Belarusian leadership, the new deal that Moscow is pushing on Minsk is an unprofitable innovation that suddenly changes the rules agreed upon previously, and which forces the Belarusians to pay again for something that seemed to have been paid off a long time ago.

So where did this idea of Russia “propping up” Belarus come from? The main argument to this effect is usually that Belarus gets discounted gas and oil from Russia, special terms for the supply and sale of oil commodities, and a customs tariffs structure on their export that is advantageous for Minsk. In monetary terms, these preferences are worth about $2 billion a year, or 3 percent of Belarus’s GDP. 

Minsk does not get all these preferences for nothing, but as part of a long-established and complex deal with Moscow under which the Belarusian side diligently performs the obligations on its side. This deal has its roots back in the mid-1990s, when after several years of half-hearted market reforms, the Belarusian authorities decided to stabilize the economy, staking everything on the restoration of the Soviet industrial potential. This required barrier-free access to the Russian market, as well as gas prices close to those of the domestic Russian market. Without this second condition, Belarus’s energy-intensive industry would simply have become uncompetitive.  

In exchange, Minsk took on military obligations: to keep Russian military sites on its territory, to provide access to its own military infrastructure if necessary, to take part in the unified air defense system of the Commonwealth of Independent States (CIS), and so on. In addition, the Belarusian leadership stopped demanding compensation for the consequences of the Chernobyl nuclear disaster. 

Subsequently, the two countries signed a raft of agreements relating to the economic and military spheres in 1995 and 1996. Officially, these agreements were not connected, but they de facto constituted a major deal in which Russia’s economic obligations were exchanged for Belarus’s military obligations. 

This format determined the future logic of relations, and was enshrined by the 1999 agreement. Yet in that agreement, each side, pursuing its own interests, included clauses that later became unacceptable to the other: on national bodies, the process of their formation and decisionmaking; a unified monetary, currency, tax, and pricing policy; and a single currency. Entirely predictably, many of the clauses turned out to be unworkable, and by the end of the 2000s, the document had mostly been forgotten.

The only aspect that still functioned quite efficiently was the overall framework of economic obligations in exchange for military obligations. But the spectacular growth in oil and gas prices in the mid-2000s threw a spanner even in that. At first, Russia saw the mechanism for trading oil and oil products as secondary among other economic preferences for Belarus. Now Minsk had started to receive a major profit from that mechanism. The cost of the gas discount had also sharply increased. 

As a result, the two countries increasingly came into conflict over the size of economic preferences and appropriate payment for military obligations. A succession of intermediary agreements from 2003 to 2014 reduced tensions for two to three years at best.

The situation changed fundamentally in 2014, when Russia began creating the Eurasian Economic Union (EEU). The geopolitical component of the project was hard to miss, but officially, the union was purely economic, and was built on the conventional logic of economic integration. For Belarus, what was important was that Russia had agreed to establish a common market for all goods and services, including energy commodities. In joining the EEU, therefore, Minsk expected to agree once and for all the conditions of access to the Russian market, and to end the political wrangling over oil and gas that it had had to take part in from 2003 to 2014. Minsk stipulated clearly that it was not interested in joining the EEU without guarantees of access to the Russian market or without transparent terms for the trade of energy commodities.

Belarus’s negotiating positions were reinforced by the fact that Russia created the EEU in a hurry, and its multilateral format envisaged the inclusion of other countries. This helped Minsk to obtain Moscow’s agreement to leave in the Belarusian budget customs tariffs from the export of oil commodities produced using Russian oil. 

The Belarusian authorities saw this scheme as a transitional phase on the path to a single market of oil and oil commodities within the framework of the EEU. But because of the rush and pressure from Moscow, Minsk agreed to special terms for the trading of oil and oil commodities being set out in a separate bilateral agreement, rather than being included in the agreement on the EEU. At the same time, Minsk’s military obligations under the old raft of deals remained in place.

By 2015, therefore, the new agreements meant that the Belarusian side was committed to military obligations and EEU membership, while the Russian side had promised stable conditions for market access and the trade of energy commodities. Under the new format, Minsk has not deviated from its obligations. The same cannot be said of Moscow, which wants to use its tax maneuver to move energy issues outside the framework of the EEU.

Russia’s proposal to resurrect the stillborn agreement of 1999 in order for Belarus to get compensation for Russia’s tax maneuver looks fairly cynical to Minsk. Firstly, it was Russia that initiated the transition of its economic relations with Belarus to the multilateral format of the EEU. Secondly, by joining the EEU, in which single markets—including for energy commodities—are supposed to be created between 2018 and 2024, Belarus has already paid for all of its tariff preferences. When Moscow suggests that Minsk sign new agreements based on the 1999 deal, it looks to the Belarusian side like an invitation to pay once more for something that was long since paid for.

This moving of the goalposts should in theory be unacceptable to Belarus, yet instead of threatening to leave the EEU, Minsk has said it is prepared to discuss the new terms. The main reason for Minsk’s tractability is the large extent of its dependence on Russian preferences, on which the country’s economic development model has been built for the last few decades. Assuming a tough position could end in economic shock and a serious crisis for Belarus, while there is still hope of avoiding that as long as a flexible position is maintained on the issue of the new format.

Furthermore, an outright confrontation with Moscow would force the Belarusian leadership to admit that it made a mistake by staking too much on the EEU, and that it has become an instrument in Moscow’s hands for coercing Belarus into taking on more and more obligations in exchange for long-existing benefits.

In the negotiations, Minsk most likely plans to answer Moscow’s tax maneuver with a diplomatic maneuver. In order to avoid an economic crisis, Belarus will sign agreements on vague obligations and hope that these documents will sink in the bureaucratic quagmire of both countries. Russian diplomacy may, however, also begin to maneuver in response, and it’s hard to predict whose maneuvers will prove more successful. After all, Minsk’s experience with the EEU shows that even the most successful-seeming agreement can in the long term turn out to be just another instrument for Moscow to exert pressure.

Original article on CARNEGIE.RU >

The opinion expressed in the article may not coincide with the opinion of BEROC. We are not responsible for the content of the article.