This chapter explores Belarus’ economic position in two key Russia-led integration projects in the post-Soviet region – the Union State between Russia and Belarus and the Eurasian Economic Union. The sections below provide a brief overview of the characteristics of Belarus’ economic system. The chapter then continues with an assessment of Belarus’ position in the Union State, as well as its role in wider Eurasian integrative processes. The chapter then explores Minsk’s interests beyond Russian-led integration initiatives and concludes with a discussion on the effectiveness of economic sanctions as an instrument to influence the regime’s cost-benefit calculations.

The Belarusian economy

With state-owned enterprises accounting for an estimated 48.8% of GDP in 2019, the Belarusian economic model remains extraordinarily centralized.[52] As a landlocked, resource-poor country, Belarus has relied on energy subsidies from the Russian Federation to maintain its economic system.[53] Approximately 30% of the state budget is acquired through importing subsidized crude oil from Russia and subsequently exporting petroleum to western partners.[54] Although financial cushioning provided by the Kremlin has kept the Belarusian economy afloat, it has also inhibited the implementation of necessary economic reforms for long-term growth.

Lukashenko has managed to maintain an extremely tight grip on the Belarusian economy, dismissing and appointing key economic figures through a patron-client system of punishment and reward. As a result, compared to other post-Soviet economies, Belarus distinguishes itself by an absence of oligarchs. One of the risks that would come with a potential privatization scenario would thus be the rise of a new class of business oligarchs. Matthew Frear demonstrates, however, that Lukashenko has so far managed to preserve a highly personalised economic system, in which ‘there is no influential independent business lobby to agitate for or against regional economic integration.’[55] To determine the country’s economic course of action, Lukashenko has sought advice from both pro-Russian traditionalists supportive of deeper integration with the Kremlin and economic nationalists in favour of closer ties with Western partners. Lukashenko has changed the composition of his ruling elites routinely to fit whatever economic agenda he has been pursuing at a given time, in line with the pattern of alternating between deeper integration with the Russian Federation and closer engagement with the West as outlined in chapter 3.[56]

The unmet economic promises of the Union State

After his initial enthusiasm for closer integration with the Russian Federation waned in the early 2000s, Lukashenko has largely treated the Union State as a framework to extract financial benefits from the Russian leadership in return for concessions in the military and political sphere. Although Lukashenko has had little choice but to engage with this Russia-led integration initiative, Belarus should not be portrayed as a passive victim of Kremlin pressures. Minsk has consistently managed to negotiate preferential terms of engagement with its larger neighbour, not in the least due to its strategic position as an economic transit route to the European Union.[57]

Although originally envisioned as an economic and political union, which would offer a legal roadmap to joint citizenship, a common currency, and a dismantling of state borders, both countries have been selective and strategic in the implementation of the negotiated agreements in those domains. From a Russian perspective, Lukashenko’s unwillingness to reform Belarus’ economy has made a true unification of the Russian and Belarusian markets undesirable, since Belarus’ weak economic performance is likely to have a destabilising effect on the Russian economy.[58] From a Belarusian perspective, Putin’s refusal to grant Belarus an equal say in the Union State has curbed Lukashenko’s enthusiasm, since further integration within the Union State has become associated with threats to national sovereignty and independence. These hurdles have inhibited deeper economic integration and may well continue to do so should Lukashenko’s position vis-à-vis Russia remain the same. For both leaders, the true importance of this project does not lie in economic integration per se but in its symbolic value.[59]

Thus, what in appearance might seem like the single most ambitious integration project in the post-Soviet region has so far failed to yield any effective steps towards true economic unification between the two member states. At best, the Union State has functioned as a political pressure tool employed by both countries’ leaderships to extract benefits from one another. At the same time, the significance of the Union State should not be underestimated, as it has provided the Kremlin with a modest testing ground for integration in the wider Eurasian space.

Wider Eurasian integration: ECU, SES, and EEU

Russia’s economic integration initiative in the wider Eurasian region, the Eurasian Economic Union (EEU), has been developed in three stages. The first step was the creation of a Eurasian Customs Union (ECU) in 2010, establishing a free trade zone and a common customs tariff among the Eurasian ‘troika’ states: Russia, Belarus, and Kazakhstan. The subsequent stage was the establishment of the Single Economic Space (SES) in 2012, which pursued further unification of the troika states’ economies through the coordination of a common market for goods, capital, and labour and the stipulation of common tax policies.[60] Finally, in 2015, Russia, Belarus, and Kazakhstan proceeded with the formal establishment of the EEU, rapidly adding Armenia and Kyrgyzstan to their ranks. Notwithstanding Russia’s continuous rhetorical efforts to politicise the EEU, its main competencies continue to fall narrowly within the economic domain. With sovereignty high on the agenda, EEU institutions have remained weak, however. This has meant that economic issues continue to be resolved on a bilateral level.[61]

The impact of the EEU on the Belarusian economy has been significant. Even though Russia’s Eurasian project offered a free trade zone accessible to Belarus, its requirements have limited Belarus in pursuing trade relations beyond the Eurasian region. Additionally, the EEU market has remained small and uncompetitive.[62] Participation in the EEU has moreover increased Minsk’s economic reliance on Russia, creating a downward spiral for the Belarusian economy.

Lukashenko has conditionally supported Russia’s EEU initiative from the outset, using participation in the EEU as a bargaining chip to extract economic benefits from the Kremlin.[63] The Kremlin has met Minsk’s demand for economic advantages by offering discounted oil and gas prices, preferential customs fees, and advantageous loans.[64] Rather than being a ‘true’ believer in Eurasian integration or a staunchly loyal supporter of Putin, Lukashenko’s participation in the EEU has been a pragmatic – albeit short-sighted – calculation. Although Belarus benefited substantially from Russia’s energy subsidies in the short term – between 2011 and 2015 alone Belarus profited to the extent of $7.5 billion from its energy contracts with the Russian Federation[65] – the country’s participation in the EEU is likely to inhibit its economic development in the long term.[66]

Lured by subsidised energy prices, Lukashenko has fallen for the short-term benefits of participating in the Russia-led integration project. At the same time, the Belarusian leadership is well aware that this commitment has increased Belarus’ economic dependence on the Kremlin. The Lukashenko regime – already extremely wary of reforms – is now experiencing an economic deadlock: maintaining a state-run economy is unviable in the medium to long term, yet privatization and liberalisation are deemed impossible due to a not entirely unreasonable fear of Russian monopolies. Importantly, although Lukashenko wants to maintain a tight grip on the Belarusian economy, his reluctance to reform is not necessarily driven by a dogmatic belief in what he has called ‘market socialism’ but rather a fear of Russian capital dominating the Belarusian market.[67] The Kremlin may force Lukashenko to liberalise parts of the economy in return for continued regime support, however. Moreover, even in a scenario in which the Lukashenko regime would be replaced by moderate opposition forces, privatisation would still come with a threat of increased Russian ownership.

Overall, the Lukashenko regime has balanced between wanting to extract economic benefits from Russia, while not wanting to cede sovereignty through political integration within the EEU framework. Adversely, Russia has expressed interest in more political integration within the EEU (or even incorporation within the Union State), while increasingly wanting to avoid the costs that come with having to provide economic support to its smaller neighbour. The Ukraine crisis has exacerbated this push-and-pull dynamic in which Belarus (and Kazakhstan) try to block political integration and Russia is increasingly reluctant to continue on a path of economic integration, insofar as this requires the Kremlin to offer ‘integration discounts’ to weaker member states.[68] This impasse is unlikely to be resolved in those scenarios where Lukashenko remains in power or where he is replaced by someone who pursues a similar hedging strategy towards Russia, as further discussed in chapter 6.

Under the current circumstances, however, both Russia and Belarus have shown themselves to be willing to concede if the political or economic realities of their countries so demand. On the Russian side, such a concession was offered in the aftermath of the Ukraine crisis, when the Kremlin considered it to be critical for the Eurasian project to succeed. It was thus that Lukashenko found himself in a position where he could push the Eurasian project into his desired direction, for example, by blocking the use of the term ‘Eurasian integration’ in favour of ‘Eurasian economic integration’ and by obstructing the formation of supranational bodies with strong institutional power.[69] On the Belarusian side, a concession seems to grow more probable, as Lukashenko might be compelled to accept deeper political integration in return for continued ‘life support’ offered to his regime by the Kremlin.

Importantly, since the collapse of the Soviet Union, both the economic and the political relationship between Russia and Belarus have always followed a cyclical pattern in which one actor manages to profit from the temporarily weakened position of the other. Although the scales may now be tipped in Russia’s favour, there has always been back and forth positioning between the two countries in terms of extracting benefits and pushing the Union State and EEU in their desired (at times opposing) directions. What we are currently observing might therefore be a mere snapshot, since the dynamic has shown itself to change regularly and rapidly. Although supportive of closer economic ties with Russia, insofar as this provides the Lukashenko regime with economic benefits, Minsk has also sought to build relations with partners in the West and China. It is therefore also important to look at the effects of the economic sanctions imposed by the EU and others in response to the crackdown and the diverted Ryanair flight.

Economic sanctions… and incentives?

The EU is limited in its options in the economic domain and can either choose between a normative or pragmatic strategy. Since the onset of the crisis in August 2020, the EU has opted for a normative approach built around negative conditionality and reinforcing its criticism of Lukashenko’s repressive strategies with both individual and sectoral sanctions meant to hurt the regime ‘in its wallet’. However, sanctions against individuals within the regime, including Lukashenko himself, have so far demonstrated to be largely ineffective. In the cost-benefit calculation of the regime, the risk of losing power far exceeds the reward of being able to travel or do business in Europe. Rather, the EU sanctions are mostly of a symbolic nature, reinforcing the EU’s message both to its own constituencies and to the people of Belarus that autocratic behaviour and human rights violations have no place within the EU’s community of values. Adversely, the EU’s flight ban imposed after the arrest of Roman Pratasevich could even have adverse effects on the freedom of members of the opposition to leave the country and flee from Lukashenko's repressive regime.[70]

Sectoral sanctions and targeted sanctions against state-owned enterprises, on the other hand, directly target the regime’s sources of income. If well designed, these sanctions could exploit its economic weaknesses and significantly influence the cost-benefit analysis of both Belarus and the Russian Federation. In order for this to have a genuine impact, however, the sanctions need to be ‘smart’ enough to maximize the economic pressure on the regime while minimizing the economic costs to the population - and by limiting the regime’s sanction-busting or trade-diversion options. They should therefore take Belarus’ economic relationship with the Russian Federation within the Union State and the Eurasian Economic Union into account, as well as Western sanction policies against the Russian Federation itself. The Russian authorities have already hinted that there may be a concerted EEU response to the EU’s sanctions against Russia and Belarus, although Kazakhstan has categorically rejected this proposal.[71] Given the interlinked nature of both countries’ economies, they are well positioned to engage in ‘sanction busting’ against sectoral sanctions that target only one of the two countries – even if other EEU members such as Kazakhstan presently appear to be unwilling to be dragged into a ‘bloc versus bloc’ sanctions showdown.[72]

The sanctions on potash, for example, are touted by the EU as a strong message meant to ‘drive the country to its economic knees’ by targeting one of its most prominent SOEs, Belaruskali. While potash indeed makes up a significant part of Belarus’ exports, only approximately 8-10% of those go to the European Union itself. And because the EU has exempted contracts signed before 24 June from the sanctions in order to protect its own business and farming interests, they are estimated to only affect approximately 15% of the total trade flow of potash to the EU, i.e., not more than a negligible 1.5% of total Belarusian potash exports.[73] In addition, the Russian potash producing company Uralkali – which has a long but strained relationship with Belaruskali – can easily take over Belaruskali’s market share in Europe while Belarus reorients its exports to third countries such as China and Brazil. Ironically, it may well be the Lithuanian port of Klaipeda with its dedicated potash terminal that suffers most from these sanctions, not the Belarusian regime.[74]

To conclude, the structure of Belarus’ largely state-led economy and the preference of the Lukashenko regime to retain control and also uphold its economic sovereignty has curbed its enthusiasm for full economic integration with the Russian Federation through regional projects such as the Union State and the Eurasian Economic Union. Its membership of these bodies nonetheless constrains Minsk’s economic options, both in its relations with the EU and with third parties, and also affects the effectiveness of Western economic sanctions. The more Belarus integrates its economy with the Russian Federation, the stronger these effects will be. The effects of different levels of future integration will be further examined in the next chapter.

Nacionalnye scheta respubliki belarus,” Nacionalnyj statisticheskij komitet Respubliki Belarus, 2021.
Rilka Dragneva and Christopher A. Hartwell, “The Eurasian Economic Union: Integration without Liberalisation?Post-Communist Economies 33, no. 2–3 (3 April 2021): 206.
Frear, “Belarus: Player and Pawn in the Integration Game,” 121–22.
Ibid., 121
Ibid., 120.
Clingendael interview, 2 June 2021.
This is visible in Russia’s hesitance to take steps towards the implementation of a joint currency within the framework of the Union State, for example (Clingendael interview, 2 June 2021).
Generally, the richness of cooperative links has been treasured more than the actual effectiveness of integration projects in the post-Soviet region (Clingendael interview, June 10, 2021). This explains why failed integration projects such as the Union State and CIS continue to exist. The tenacity of Russia’s integration efforts is driven by a desire to portray itself as a great power actor capable of integrating the wider Eurasian region (Clingendael interview, 2 June 2021). The de jure existence of these integrative links is therefore more important than the de facto success of Russia’s integrative efforts.
Yevgeny Troitskiy, “The Eurasian Economic Union at Five: Great Expectations and Hard Times,” Kennan Institute, 14 January 2020.
Clingendael interview, 10 June 2021.
Clingendael interview, 10 June 2021
Alena Vieira, “A Tale of Two Unions: Russia–Belarus Integration Experience and Its Lessons for the Eurasian Economic Union,” Journal of Borderlands Studies 32, no. 1 (2 January 2017): 48.
Anna Maria Dyner and Natalia Ryabova, “Belarus in the CES: Advantages and Disadvantages of Economic Integration,” Polski Instytut Spraw Międzynarodowych, 2013.
For Russia, the economic benefits of the EEU have been limited. At best, the EEU has served Russia’s food-security and self-sufficiency objective by offering an economic buffer of friendly states away from the global market, which Russia sees as unfairly dominated by the West (Clingendael interview, 10 June 2021).
Frear, “Belarus: Player and Pawn in the Integration Game,” 2013; Sean P. Roberts and Arkady Moshes, “The Eurasian Economic Union,” 2016.
Russia’s unwillingness to offer integration discounts has recently culminated in the Kremlin’s so-called ‘tax manoeuvre’, by which Russia has lowered export duties on crude oil, while increasing its mineral extraction tax. This tax manoeuvre has led to a significant increase in crude oil prices paid by Belarusian SOEs.
Astapenia, “Belarus and the Eurasian Economic Union,” 2015.
Benas Gerdžiūnas, ‘Will the flight ban trap Belarusian dissidents in the hands of Lukashenko?’, EurActiv, 26 May 2021.
Michael Scollon, Maria Kugel and Matthew Luxmoore, “EU sanctions poised to harm Belarus, help Russia,” RFE/RL, 26 June 2021.