“Potash conflict” exposed the scale of Belarus’ dependence on Russia

On August 28^th, Epidemiology Department Head Onishchenko talked about Russia’s claims on Belarusian dairy products.

Belarus’ actions added a political dimension to the economic conflict. Conventionally, Russia has marked out the potential losses for Belarus if the conflict deteriorates. Reduced foreign currency proceeds against the background of substantial public debt payments and deeply rooted reliance on raw material supplies from Russia do not leave Belarus a chance for long-term confrontation in the conflict.

The breakup between Uralkali and the Belarusian Potash Company has damaged Belarus’ economy. Belaruskali, one of the major donors to the economy, reduced its production volumes in August, and plans further cuts in September. Around 4,000 employees receive only two thirds of their salary, and due to reduced export volumes, the proceeds from foreign currency have fallen. All these financial losses have provoked a harsh reaction from the Belarusian authorities against potential perpetrators. The Prime Minister’s invitation to Uralkali’s CEO and the subsequent arrest of the latter, following the meeting, has moved the conflict to an inter-state level.

Russia’s reaction was quite predictable. It has used economic coercion tactics and then outlined the potential losses if the conflict exacerbates. Firstly, they outlined potential losses from cutting Belarusian dairy product exports. In Q1 and Q2 2013 the volume of dairy exports to Russia was USD 1 billion (the main contributor to exports growth in Belarus in 2013). Secondly, Russia talked about reducing oil supplies to Belarusian refineries by 400,000 tons. As a result, annual oil supplies to Belarus will be reduced to 18.5 million tones instead of 23 million tons. Thirdly, as the conflict was escalating, Russia banned pork exports from Belarus (In Q1 and Q2 2013 exports brought USD 80 million). In addition, Russia ordered a thorough inspection of Belarusian meat products (exports in 2013 – USD 132 million). Finally, Russia may introduce a ban on other exports from Belarus.

If all outlined sanctions are introduced, the loss in exports could be catastrophic for Belarus. Russia’s share in Belarus’ exports in the first half of 2013 was up to 42.5 %. Reduced oil supply may reduce Belarus’ exports to the Netherlands, Italy, and Great Britain, since Belarus mainly exports petroleum products to these countries. Reduced foreign currency proceeds against the background of substantial international public debt payments and heavy reliance on raw material supplies from Russia do not leave a chance for a long confrontation in the conflict. Belarus has no substantial counter-arguments in the conflict, and, if it attempts to break cooperation within the Customs Union, it will suffer from higher energy prices (they will pay at world level) and the painful closure of the Russian market for Belarusian products.

Belarus’ systemic reduction in international trade diversification has resulted in its greater dependence on its largest trade partner (Russia) and this trend will only continue.