The economy has long been Lukashenko’s weak spot

Alexander Lukashenko remains firmly in control of Belarus's politics − as shown by the unsurprising result in recent parliamentary elections that saw his supporters take all 110 seats − but his biggest challenge in the next months will come from the economy.

Lukashenko created the economic crisis in 2011 that threatened his hold on the country by promising to increase salaries before the December 2010 presidential election. That set off a bout of inflation − prices shot up by an annual 109 per cent − followed by a balance of payments crisis and a steep depreciation in the value of the rouble.

With no access to western aid because of the brutal crackdown on the opposition in the wake of the rigged presidential elections, Lukashenko was saved by Russia, thanks to a $3bn bailout from the Moscow-dominated EurAsEc organisation of post-Soviet states, a $1bn loan from Sberbank and by selling its share of the Beltransgaz natural gas pipeline to Gazprom for $2.5bn.

That stabilised the country − imported goods again reappeared in shops, lines outside currency exchange shops disappeared and growing public discontent quietened.

However, Lukashenko has not used the time he gained thanks to the Russian rescue to implement deeper reforms that could put Belarus on a sounder footing − instead he is repeating many of the same errors that got him into trouble two years ago.

Lukashenko is again promising that national salaries will rise. This time the goal is to hit $500 by the end of this year, more than double what they were at the beginning of 2012.

“The government is repeating the mistakes of the past,” says Svetlana Kalinkina, editor of Narodnaya Volya, the country’s leading independent newspaper. “Before the presidential election they raised salaries and then the pyramid collapsed − now they’re doing it again.”

As well, the government has baulked at promised privatisation − the Beltransgaz sale is about it, despite Russian interest in acquiring other strategic assets like refineries and Belaruskali, the potash producer.

“There is no such thing as a privatisation plan,” says a despairing Alexander Chubrik, head of the IPM Research Center, an independent economic think tank. “Nobody knows how this process will be organised.”

Despite agreeing to a $7bn privatisation programme as part its EurAsEC bailout, Minsk is reluctant to sell its remaining strategic assets to Moscow, worrying that it will lose the tattered remnants of its independence to Russia. With about 90 per cent of the economy in state hands, the government also worries that selling companies to private owners will reduce the regime’s control over the population − currently dissidents can be threatened with losing their jobs if they get involved politically, something more difficult to do if companies are not state owned.

“Lukashenko worries that reforms will undermine his rule. He doesn’t want to give up any power,” says Kalinkina.

This time the international environment is even more unforgiving for Belarus than it was in 2011, meaning that Lukashenko’s margin for error is even smaller.

The eurozone is in crisis and, with sanctions levied against senior regime officials, there is little appetite in the EU for Belarusian goods and none for helping the country unless the government becomes more democratic.

Minsk is holding talks with the International Monetary Fund on a possible aid programme, but officials acknowledge that there is almost no chance of the package being approved by the IMF’s board unless the nature of the regime changes.

The country has also seen foreign investment dry up − aside from the Russian purchases, there were no significant flows of FDI into Belarus in 2012.

The sanctions also mean that large Belarusian companies cannot apply for external funding and cannot invest. That hurts their ability to modernise, crucial at a time when Russia recently joined the World Trade Organisation, opening Russia − and its customs union partner Belarus − to much fiercer international competition.

“First, more tough competition at Russian markets will deteriorate prospects for Belarusian exporters. Second, positions of Belarusian producers at domestic market are likely to worsen as well. According to our estimations, the access of Russia to the WTO will mostly and rapidly affect Belarusian truck production. In a longer perspective, certain negative effect will spread on producers of pharmaceutical goods, refrigerators, TV-sets, items for shipping and packing of plastic products, truck-tractors,” finds an IPM report.

In a worrying sign, June saw the first fall this year of exports to Russia of goods such as tractors, trucks and agricultural machinery.

“We cannot allow ourselves to be pushed out of that market,” says Sergei Dubkov, deputy governor of the Belarusian central bank.

Government revenues are also likely to fall after Moscow stopped a scheme under which Belarus avoided paying the Russian treasury about $2.5bn by exporting refined fuel products but labelling them as solvents, thereby dodging an agreement to pay Russia duties for fuel exports.

Finally, Belarus is due to start repaying its $3.5bn IMF loan next year.

The country has experienced a dramatic labour outflow as large numbers of workers move to Russia, where they can legally work for much higher wages than in Belarus. There are no official estimates, but observers guess that at much as 10 per cent of the working population has left. The lack of skilled workers has even created problems with the construction of a new hotel within sight of Minsk’s main government buildings

Instead of reforming, the government is hoping to solidify public support by boosting economic growth. Although the economy is currently only growing at an annual rate of 2.8 per cent, the government is planning for 5 per cent growth this year, 8.5 per cent in 2013 and an incredible 12.7 per cent in 2015. That could set off another inflation-depreciation spiral.

The signs of stress are growing. Although hard currency is still available, economists note that Belarusians quickly convert their roubles into dollars and euros as soon as they get the chance, fearing another depreciation.

In smaller factories far from Minsk, worker protests are becoming more frequent, says Kalinkina.

“The whole thing looks very unstable,” says a western diplomat stationed in Minsk.

By Jan Cienski, FT

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