Earlier this year, there was intense speculation in Moscow that the Kremlin was looking at putting flesh on the bones of the Union State as a platform for President Putin to stay in office after 2024 as leader of a Russian-Belarusian confederation. The joint state has only existed on paper since its formal establishment in 1999.
The ‘integration plan’ negotiated by the ministers of the economy of Russia and Belarus falls far short of establishing a single monetary, banking and customs system as foreseen in the original Union State Treaty. The draft agreement focuses on a more modest range of economic integration measures including a single tax code, a single regulator for the energy markets and deepening of common customs policies. Russian President Vladimir Putin and Belarusian President Alexander Lukashenka are due to sign the agreement in December to mark the 20th anniversary of the signing of the Union Treaty.
If implemented, these steps would certainly mark a significant deepening of integration between the two countries. However, as some Belarusian analysts have pointed out, creating a single tax code by the beginning of 2021 is mission impossible because of the scale of the task. Moreover, disagreements on energy issues have plagued bilateral relations for years, while many customs issues within the Eurasian Economic Union to which Russia and Belarus both belong have remain unresolved since the introduction of a single customs tariff in 2010.
However, this does not mean that Putin will not try to put further pressure on Lukashenka to trade sovereignty for the economic support on which his system depends. There are signs of concern in the Russian intelligence services about the influence of Western countries in Belarus after the thaw in their relations with Minsk that followed Russia’s annexation of Crimea in 2014. A wave of repression of political dissent after the presidential election in 2010 had led to the imposition of US and EU sanctions against a number of senior officials, judges and businesspeople.
There appears to be a consensus in Moscow among different government constituencies dealing with Belarus that Russia is not receiving enough in return for its subsidies of around $5 billion per year. There is considerable anxiety in Minsk about the impact of Russia’s reform of taxation in the oil sector, which is set to increase gradually the price of crude oil to Belarusian refineries. These account for around 20% of GDP. The Belarusian government has calculated that without compensation, the measure could cost Belarus 4% of GDP by 2024. At the same time, the two sides are in dispute about the gas price that Russia charges Belarus.
Lukashenka has tried to increase trade with the EU and China to reduce his dependency on Russia, but while exports to the EU have grown, Belarus is highly dependent on cheap Russian oil.
Putin finds it hard to suppress his irritation with Lukashenka personally. This almost certainly relates to Lukashenka’s repeated success over 25 years of extracting economic largesse from Moscow while safeguarding a measure of sovereignty and independence for Belarus. For example, he has resisted the opening of a Russian military base and has not recognized the independence of Abkhazia and South Ossetia. In 2017, he established a visa-free regime with 80 countries that ran counter to plans to establish a mutual visa recognition system with Russia.
Moscow’s time horizon is short and appears to disregard the dangers of propping up a regime committed to keeping most of the economy in state hands and sustaining the old Soviet welfare system. It is not calling on Lukashenka to conduct reforms. With limited foreign investment, ageing industrial plant and shrinking markets, his system is going to come under increasing strain and become a greater burden on Russia. Admittedly, some parts of the economy are in private hands and flourishing, chief among them the IT industry. Yet these sectors cannot replace the state-owned enterprises that still employ most of the workforce.
Despite a weak hand, Lukashenka plays his cards with Moscow with considerable skill. He supports the integration agenda yet tries to cede as little control as possible in return for Russia’s economic support. His masterstroke has been to rid the political space of potential competitors, effectively forcing Putin to keep him in power for fear of an unpredictable transition that could cost Russia influence in Belarus. Moscow has not yet found a way to manage this problem and shows no signs of doing so.