Belarus needs Russian preferences to balance its budget

On October 11^th, Lukashenko talked about a personal agreement with Putin which will not require export duties on oil products to be listed to the Russian budget.

Lukashenko’s statement about his agreement with Putin, which will not require export duties on oil products to be listed to the Russian budget, has revealed the size of additional annual income needed to keep the Belarusian economy afloat. Lukashenko has reinforced his desires with a threat to leave the Customs Union, but the chances are low that he will go through with this The chances of Russia accepting his proposal in full are also small.

Lukashenko’s statement about lifting export duty payments to the Russian budget as of January 1^st, 2014 is at odds with his Decree No 457, of October 7^th, 2013, which authorizes the Chairman of the Board of Belarus’ Development Bank to sign the protocol on the extension of the agreement on payments and listings of export duties to the Russian budget. The Russian Finance Ministry regarded these payments as a possible resource to compensate for falling revenues and would not agree to increase losses. Even if Russia agrees, it will keep at least half of the payments, since the volume of customer-owned processing carried out by Russian companies at Belarusian refineries is 50%, therefore Russian companies will also increase proceeds. Later their ‘additional’ incomes may somehow be listed to the Russian budget.

In 2012 Belarus listed USD 3.847 billion to the Russian budget in export duties. The size of payments in 2013 will about the same. Therefore, de facto, Lukashenko has made known the size of additional economic preferences, in addition to those already obtained, which would balance Belarus’ budget. In H1 2013 the current account balance deficit was USD 3.1 billion. By year-end, the deficit may reach slightly over USD 4 billion. USD 4 billion would eliminate a potential deficit in the current account and balance out the country’s economy.

Belarus’ declarations about leaving the Customs Union are merely a bargaining factor, meant to increase Belarus’ benefits from CU membership. Belarus receives benefits from CU membership anyway. If Belarus left the CU, it would lose the Russian market, which, given its high export dependence and weak exports diversification, would result in rapid devastating consequences for Belarus’ economy. Russia wants to increase CU attractiveness for new candidates, which means increasing preference size for its members (Kazakhstan and Belarus). Russia is the main initiator and the driver of the Eurasian integration project and has to bear some costs to continue developing the project.

One potential candidate for CU membership is Ukraine. Ukraine is currently moving towards the EU regardless of the proposed energy supply and Russian market access preferences promised by Russia if Ukraine were to join the CU. Armenia and Kyrgyzstan have also talked about their intentions to join the CU, but further steps will depend on the real benefits Russia has to offer. Belarus wants to be a showcase in terms of benefits received from the Customs Union.

The Belarusian government attempts to find additional resources in Russia to continue its inefficient economic policies. Belarus will not receive the requested funds in full, due to Russia’s own budgetary problems, however it may count on additional loans or small benefits within the Customs Union.