Belarus is a small open economy with a trade openness of 133% as of 2019[86]. In 2017, exports of goods and services contributed 45% in value to GDP, playing a particularly significant role in manufacturing, transportation, and IT services[87]. Entering new markets or venturing into trading in new goods was difficult for Belarus, with only a 24% export growth in 2004-2018 associated with new goods or markets, and the degree of penetration into new markets remained low[88]. Exports of petrochemicals and potash fertilizers contributed 15.8% and 8.4% respectively to the total exports of goods in 2019. The global competitiveness of Belarusian exports, aside from petrochemicals and potash, is concentrated in agriculture and food processing, while more advanced industrial exports can only compete on traditional CIS markets[89].
Russia has been a major trading partner for Belarus since the country gained independence. Belarus quickly restored its access to the Russian market after the dissolution of the Soviet Union. Belarus was often referred to as the “assembly shop” of the USSR, and restoring economic ties with Russia was key in the quick rebound of the Belarusian economy at the end of the 1990s[90]. The share of the Russian market for Belarusian exports of goods remained relatively constant at 45% from 1995 to 2020, temporarily becoming less in the 2000s due to higher oil and petrochemical prices[91]. Imports from Russia are also critical and are concentrated in energy goods.
Russia is a natural destination for Belarusian exports – trade in goods is largely unrestricted as the countries are in an economic union, a long history of economic ties and common tastes and culture make marketing easier, while a relatively small distance and good logistics lower costs. All of these factors determine Russia’s major role, aided by political preferences. However, several factors have pressured Belarus to diversify away from Russia. First, the dependence on the Russian market has ceased to deliver growth as the Russian economy is stagnating. Moreover, the volatility of oil prices also implies the volatility of the Belarusian economy through the Russian trade channel. For example, in 2015 the Russian economic crisis resulted in a significant export decline which cost Belarus at least 2.4% of GDP[92]. Second, Russia has often used trade as a political instrument. Minor trade wars were common, with Russia using food safety concerns as a pretext for temporarily banning Belarusian food exports. In 2020 failed integration talks culminated in a cut in oil supplies from Russia during the first quarter[93].
These issues and tensions resulted in Belarus adopting a 30/30/30 export strategy aiming to diversify exports equally between Russia, the EU, and other markets, mostly Asia. While the EU is another natural trading partner for Belarus geographically, several impediments exist when it comes to successfully increasing exports. One is the low efficiency of Belarusian state-owned enterprises (SOEs) that dominate the manufacturing industry. These SOEs also have very low incentives to diversify away from the comfortable Russian market. Another reason is the existence of significant trade barriers. While Belarusian agriculture and food processing could potentially be competitive on the EU markets, access is restricted by EU trade protection measures. Finally, the ongoing political crisis and the possibility of EU sanctions are new impediments.
Belarusian exports to Russia are fairly diversified, ranging from food to textiles to electronics, machinery, and transport equipment. In contrast, exports to the EU are more concentrated in certain groups of goods: oil and petrochemicals (over 60% of exports to the EU countries in 2019), timber, and metals. These goods also have lower added value. Belarus imports more advanced goods from the EU, like chemical products, machinery, and transport equipment.
Belarus is quickly developing its exports of services, and here the EU and the US are important destinations. Due to its geographic position between the EU and Russia, Belarus is a net exporter of transportation services, exporting USD 4 billion and importing USD 1.9 billion in 2019. ICT exports have grown quickly with the creation of the High-Tech Park special economic zone in 2006 and amounted to USD 2.4 billion in 2019. The share of the EU in the exports of services from Belarus was 45% in 2019, another 11% (mostly in ICT) went to the US[94].
Belarusian exports transit through EU territory. In 2019, Belarus exported USD 440 million worth of petrochemicals to the Netherlands or 8.5% of its total petrochemical exports. Most of these exports are destined for further re-exports through the Port of Rotterdam. Belarus also relied heavily on Baltic ports, for example, on Klaipeda (Lithuania). Belarus co-owns a specialized potash terminal in the Port of Klaipeda. While Belarus redirected part of its petrochemical exports to Russian ports in 2020 during the political crisis, Klaipeda remains a major port for potash fertilizers which are mostly exported to India, China, and Brazil. Redirecting potash exports to Russian ports would not be an easy task as the ports do not have specialized container terminals.
As part of its diversification efforts, Belarus is actively developing trade ties with China. Imports from China (USD 3.8 billion in 2019) are significantly higher than exports (USD 0.67 billion in 2019). While Belarusian exports to China are rapidly increasing (to USD 0.75 billion in 2020), they are concentrated on several goods: poultry, dried milk powder, whey, timber, and cellulose. The large distance together with the unfamiliarity of Belarusian producers and their low competitiveness remain as obstacles when it comes to a significant growth in exports to China.
Despite the recent efforts to diversify, Belarusian trade remains largely concentrated, with 37% of goods and services being exported to Russia and 30% to the EU. Most of the success in diversification has come from the trade in services. However, those gains in diversification are now under threat as the political crisis threatens Belarusian transit, and the IT sector might relocate due to repression[95].
Energy ties and dependencies
62% of energy in Belarus in 2019 was produced from imported natural gas, 28% from oil[96]. Belarus is highly dependent on Russian supplies of oil and natural gas. Oil supplies could be diversified to some extent if necessary – in 2020, Belarus imported only 90% of mineral fuels from Russia because of the oil supply conflict during the first quarter. Diversifying the supplies of natural gas would be more problematic, as the only supply route is the Gazprom-owned pipeline, and 100% of natural gas supplies come from Russia.
Energy dependence has often become a source of conflict and has led to several gas and oil wars. In 2004, Russia cut the gas supply for one day; in 2020 it cut oil supplies almost completely for three months. However, it is not easy for Belarus to diversify away from this dependency both due to technical supply issues, and also because Russia subsidizes Belarus through energy price discounts, as outlined in chapters 3 and 5.
In 2011 Belarus signed a USD 10 billion loan agreement with Russia to secure funding for the construction of the Astravets Nuclear Power Plant (NPP). The first energy block was launched in 2020 at 40% of its full capacity of 1200 Mw. The NPP was supposed to lessen Belarus' dependency on Russian energy imports. However, Belarus needs significant infrastructure investment – around USD 3 billion, according to the State Programme on Energy Security - to switch from oil and gas-based energy and heat production to electricity. EBRD and EIB were ready to provide part of the funding that was necessary, but the situation changed with the political crisis.
The perspectives for exporting Belarusian electricity are bleak. Belarus viewed Poland, Lithuania, and Ukraine as major export markets once the NPP has been launched. Lithuania was sceptical about the idea from the start, fearing the environmental implications of the NPP built very close to the Lithuanian border. After the start of the political crisis in August 2020, the Baltic countries decided to halt any electricity imports from Belarus. Ukraine is also reluctant, and Belarus lacks the necessary infrastructure to export to Poland[97]. Once the first energy block reaches full capacity, and especially when the second block is launched, Belarus is likely to face a surplus of electricity. The energy dependence on Russian supplies of oil and gas is likely to remain for the next few years until Belarus rebuilds its energy infrastructure.
Foreign Direct Investment flows
Belarus has never attracted large flows of foreign direct investment (FDI), mostly due to the absence of large-scale privatization in the 1990s and the poor protection of property rights. In the 2010s, when Belarus set on a path of private sector liberalization, FDI inflows fluctuated from USD 1.3 to 2 billion per year. Since 2016, most of the FDI inflows have come into finance, ICT, the wholesale trade, transportation, and the timber sectors. Aside from ICT, most of the FDI in those sectors goes into greenfield investment.
Russia is the largest source of FDI, contributing 33.9% of total inflows during 2011-2020. Russian ownership extends from several large banks to a gas pipeline to a major brewery. Unlike other investors, Russian investors do not focus exclusively on greenfield projects. Cyprus is the second major source with 14.9% of FDI, often used as a jurisdiction for Russian capital.
Several EU countries – the Netherlands, Germany, Lithuania, Poland, Latvia - contribute 1-3% of FDI inflows each. Dutch investments are in food processing, the pharma industry, IT, textiles, and logistics. The US, Switzerland, and the UK also have comparable contributions. While Austria is less important in terms of volume, it has several signature investments – Prior Bank as part of the Raiffeisen group, and A1, one of the two major cell phone providers in Belarus. Austrian banks, along with the Russian banks, are the major providers of short-term liquidity loans to Belarusian banks.
FDI flows from China contributed 2.8% of total FDI over the last ten years. Chinese FDI peaked in 2018-2019 with several large investment projects, including those connected to the Great Stone Industrial Park, a special economic zone with tax preferences designed to lure Chinese industrial tech companies. China viewed the Great Stone Park as part of its Belt and Road Initiative[98]. Chinese projects in Belarus were often not FDI-based. Chinese state banks opened a USD 14 billion credit line for Belarus in 2014, but most of the funding remained unused as the parties could not find suitable projects. Several large loan-financed Belarus-China projects were successfully realized, with the most prominent being the automobile manufacturer BelGee assembling Geely cars. Several Chinese projects, however, were deemed to be a failure, as Chinese contractors were not able to meet the technical standards, as in the case of the cellulose factory in Svetlogorsk[99]. To avoid the Chinese debt trap, Belarus chose the strategy of maximizing the FDI-based financing from China[100]. By the end of 2019, the Great Stone Industrial Park had attracted more than USD 520 million FDI and planned to increase this figure to USD 1.5 bn in 2020. But after the political crisis erupted in the second half of 2020, the FDI flows from China stopped.
Financing of the public debt and infrastructure projects
The Belarusian public debt has grown significantly since 2010 when it was at only 19% of GDP. As of 1 January 2021, public debt amounted to 37.3% of GDP. As the financial markets are underdeveloped in Belarus, a large proportion of the public debt is external, with 30.9% of GDP or USD 18.6 billion in external public debt. A significant share of the internal public debt is denominated in US dollars, and only 2.4% of the total public debt is denominated in Belarusian rubles[101]. This classic original sin dilemma makes Belarus vulnerable to exchange rate devaluations. Belarus will have to repay around USD 3 billion annually in the coming years, and securing external funding for 50-75% of these payments will be critical to avoid default.
Russia has often played the role of the funder of last resort for Belarus, both directly through government loans, and indirectly through Eurasian integration institutions like the Eurasian Fund for Stabilization and Development (EFSD). Belarus owes around USD 8.3 billion to Russia and USD 2.5 billion to the EFSD. Hence, Belarus owes over 50% of its external public debt to Russia and associated institutions. Russia also pledged USD 1.5 billion in loans at the height of the political crisis in the autumn of 2020, thereby helping Belarus to stabilize its currency market.
Chinese loans constitute USD 4.8 billion or 24% of Belarus’ external public debt. While most of these loans were investment loans guaranteed by the state, Belarus also secured a USD 500 million Chinese government loan at the end of 2019[102], amid the heated integration talks with Russia. While the Belarusian government has often mentioned China as a potential source of funding to finance the public debt in 2020-2021, no official talks are ongoing.
Belarus has also developed relationships with international financial institutions like IMF and EBRD. The USD 2.5 billion programme with the IMF started in 2009 after the financial crisis. However, the programme ended with Belarus not following IMF advice and collapsing into a currency crisis in 2011. The talks on a new programme in 2015-2016 were not successful as the Belarusian government could not commit itself to economic reforms[103]. In 2020, Belarus failed to secure COVID-19 relief funding through the Rapid Financing Instrument as the country has not followed the WHO recommendations on the COVID-19 response[104]. EBRD cooperation was more successful, with EBRD agreeing to work with state-owned enterprises in Belarus. While the current portfolio of EBRD projects in Belarus is almost EUR 1 billion, the political crisis has made further cooperation with the government impossible, putting the financing of multiple infrastructure projects at risk.
Conclusions on Belarus’ key economic dependencies
Belarus has multiple economic ties with Russia and it depends on the Russian market as the major destination for its exports, on Russian gas supplies for energy security, and on Russian funding for public debt sustainability. Russia also remains committed to economic support for Belarus amidst the ongoing political crisis, while at the same time exploring the opportunities for its economic gains. The EU is also a major economic partner with significant roles in trade and FDI, but the further development of economic ties is hindered by the political crisis. While the economic ties with China were rapidly developing, China's role is currently only significant in debt financing. Moreover, China is likely to reconsider the role of Belarus in the Belt and Road Initiative as a transit point between Russia and the EU if the relationship with the EU continues to deteriorate.