Lukashenko’s dwindling business model

Source: Pixaby

This is a translation of an article by Benjamin Bidder from SPIEGEL. I am from Belarus and given that the majority of people I meet in the West can’t even find Belarus on the map, or believe it is a region of Russia, I cannot expect people to know anything about the Belarusian economy. Due to the current political crisis after the election that look place last Sunday, Belarus is all over the media. But people still know little to nothing about Belarus and its economic development since the collapse of the Soviet Union and what economic challenges it is facing right now (which are the main cause of the political challenges Lukashenko is currently facing).

It is an excellent article which clearly shows the uniqueness of Belarus compared to other countries it is often compared to (like Ukraine). I translated it because I wanted to spread awareness and share it with my friends and over social media. I want to make absolutely clear that it is a translation and I am not taking any credit for the content. I also want to note that I am by no means a professional translator. If you can read German, I highly encourage you to read the original.

With the formalities out of the way — here is the English translation

Lukashenko’s dwindling business model

Belarus has achieved modest prosperity which earned president Lukashenko high popularity, even in neighbouring States. However, his economic model faces difficulties.

For years now there exist no independent opinion polls in Belarus. Does Lukashenko still have backing by the about 9.5 million inhabitants — and, if yes, how much? Nobody is able to say this exactly.

One of the specific features of Lukashenko’s “Belarusian model” is the creator’s popularity abroad. If Russian pollsters ask citizens to name the “most popular foreign politician”, Lukashenko usually leads the list, usually far ahead of western actors like Angela Merkel or Barack Obama.

The reason for this is not only the propaganda of Russian state media. Also in Ukraine, which enjoys more freedom politically and socially than Russia, Lukashenko leads similar opinion polls. The explanations for this phenomenon are found in the long-standing economic development of the Post-Soviet state.

A small Belarusian economic miracle

Belarus has reached substantial economic power in comparison to its neighbouring states. GDP per head is nearly twice as high as in Ukraine. The Russians are richer on average, however (!), there is a much larger gap between the rich and the poor in Russia than in Belarus. Please refer to the original article for the graph that shows GDP per capita of Ukraine, Georgia, Moldova, Belarus and Russia.

Belarus, unlike its eastern neighbour, is not blessed with gas and oil resources. Belarus, however, is known in Russia for making the most out of its modest possibilities, to be better organised and distribute the little resources more fairly.

The Gini coefficient — a measure for economic inequality — is therefore clearly lower than Russia’s. According to the World Bank, the percentage of the population living below the poverty is over twice as high in Russia than in Belarus. For both graphs refer to original article.

After the breakup of the Soviet Union, Belarus inherited numerous industrial conglomerates with relatively modern technology, like tractor factories and large-scale oil refineries. Private investors never managed to get going and, therefore, three-quarters of the economy are state-owned. Workers and pensioners always get their salaries and pension on time, something that many neighbouring states see as a success.

The IT-sector is booming — but that is not enough

For about two decades this economic model has worked reasonably well. The Belarusian economy grew and often grew more solidly than in neighbouring states that were shaken from crises and wars. After Lukashenko’s first assumption of office in 1994 “the economic power has tripled”, analysts of the Russian state bank Sberbank appreciatively point out.

For the past years, however, the economic development has been stagnating. Although the Belarusian internationally successful IT industry is booming, the IT sector does not have the economic weight to carry the whole economy all together. (For the graph please refer to the original article. It shows that in the early 2010s the economy started stagnating.)

A reason for the crisis is the huge dependence on Russia, especially oil. Belarus’ deficit in the balance of trade with Russia amounts to 9 billion dollars. In other words: Belarus imports many more goods from Russia than it exports.

This is the core of Lukashenko’s business model: a considerable part of the imports from Russia consists of crude oil (about 24 million tons per year). Russia has sold the raw material to Belarus at dumping prices in the past, without the usual export tariffs. Belarus sells around 6 million tonnes to the world market, estimates Berlin Economics, an eastern Europe specialised thinktank. (For the graph of Belarus-Russia exports and import refer to the original article)

The remaining 18 million tonnes are processed to fuel in the big refineries Naftan and Mozyr. Belarus, therefore, profits twice — from the low costs of petrol at home, and the high profits from the exported refinery production.

This model is as remunerative as it is susceptible to crises: the drastic steep falls in oil prices at the end of 2014 and the beginning of this year have hit the Belarusian economy, although it is not an oil-producing country.

Besides, there has been growing pressure from Russia: The Kremlin has decided to reform the export taxation of crude oil. By 2024 Belarus will be paying market prices for oil, without any discounts. This will hit the Belarusian economy hard: the oil price would rise by 130 dollars per tonne. According to calculations from Berlin Economics, this would cost Belarus 1.5 percent of GDP. “Nevertheless, the main effect will be reflected in a loss of income of approximately 3.1 billion euros which corresponds to 15 percent of budget revenues”, one analysis says.

Belarus hardly has any economic alternatives. The number of foreign direct investments is low — and half of the 1.3 billion euros that came into the country in 2019, came from Russian state-owned companies.

Western companies stay away — except Ikea

Although Belarus has a highly qualified workforce, its labour costs are higher than those of many neighbouring countries. Also, due to the country’s membership in the Eurasian economic union controlled by Russia, trading with the EU introduces custom duties.

Until this day only very few western companies are based in Minsk (or anywhere else). The German economy is not represented with a foreign trade chamber in Minsk (there is solely a “representative” in Minsk) and the number of German enterprises probably lies around 300.

At least the Swedish furniture giant Ikea imports furniture and pre-products from Belarus for some time now, worth around 130 million euros. This is not enough to compensate the losses of the oil business or to form a counterbalance to fight the integration with Russia. An Ikea representative confirmed to SPIEGEL the presence of a shopping team of the company in Belarus, however, did not want to express the business volume.

However, there is the possibility of another actor assisting Lukashenko: in the past, China has over and over again helped the autocrat out with loans. The last time was not too long ago: in December the developing bank of China has promised Belarus 500 million dollars.



I just finished my PhD in Computer Science at UCL and currently work as a Data Scientist at - LinkedIn: lisanka93

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Lisa A. Chalaguine

I just finished my PhD in Computer Science at UCL and currently work as a Data Scientist at - LinkedIn: lisanka93