Belarus blames Russia for economic woes in trade war

Belarus blames Russia for economic woes in trade war

A trade dispute between Russia and Belarus over potash threatens the stability of the Eurasian Customs Union and demonstrates once again how dependent Belarus is on its larger neighbour.

Vladislav Baumgertner, director of the Russian potash mining company Uralkali, returned to Russia on November 21st, ending a trade dispute between Moscow and its western neighbor, the former Soviet republic of Belarus. Soon afterwards, Belarus’s state-owned firm Belaruskali announced that it was prepared to resume its partnership with Uralkali.

Uralkali had pulled out of a sales partnership with Belaruskali last July, ostensibly because Belarus made deliveries outside the joint venture. Belarusian authorities consequently arrested Baumgertner while he was in Minsk in August to protest the end of the sales partnership. The partnership, which produced 40% of global potash exports, had propped up potash fertilizer prices as well as the landlocked former Soviet state’s export earnings.

The Belarusians failed to get the $100 million they had hoped to receive in damages, but the changes to Uralkali’s shareholder structure that Minsk demanded were implemented when Mikhail Prokhorov, the Russian oligarch and owner of the Brooklyn Nets, agreed to purchase the 21.75% controlling stake from fellow oligarch Suleiman Kerimov. Minsk issued an arrest warrant with Interpol for Kerimov in September for the economic damages caused by the end of the joint venture.

Belarus is highly dependent on the sale of potash, an ingredient that is used in fertilizer to mitigate the effects of drought and which accounts for 12% of Belarus’s state revenues. Previous attempts by foreign companies to purchase large stakes in Belaruskali have been rejected by Belarus. The end of the partnership dealt a heavy blow to Belaruskali, which was forced to dramatically reduce production and deeply cut wages. The separation from Belarus’s potash producers benefited only Uralkali, however, whose third quarter production was 5% higher than in 2012.

Hooked on Moscow

Belarus’s economic dependence on Moscow has only grown since the onset of the 2008 economic crisis and the transformation of Belarusian gas company Beltranzgas into a fully owned subsidiary of Gazprom. The demands for financial compensation highlight a need for Belarus to offset its own sclerotic economic performance, to which the Belarusian state has responded with increasingly erratic policy proposals, including the use of child labor in state enterprises.

In addition to demonstrating this dependence, the “potash war” destabilizes the Customs Union, a free trade bloc formed between Russia, Belarus and Kazakhstan in 2010. Despite formally sharing a single market, the arbitration of trade disputes between Minsk and Moscow are still taking place via trade wars, not through the Union’s Eurasian Economic Commission, the formal arbiter.

Trade zone woes

Furthermore, the dispute took place in the midst of increasing criticism of the Customs Union by President Alexander Lukashenko’s government. In early November Belarus’s Vice Premier Minister Vladimir Semashko blasted the Customs Union as the reason for the sclerotic state of his country’s economy, claiming that it allowed Moscow to still make unilateral decisions that are detrimental to Minsk.

These statements followed a warning from Lukashenko that Belarus would reconsider its participation in the Customs Union if Russia maintains export duties on petroleum. Lukashenko also recently met with his Kazakh counterpart, Nursultan Nazarbayev, to issue a joint statement reminding all parties involved that the Customs Union and its would-be successor organization, the Eurasian Union, are purely economic projects and must not become political.

However, further Russian control over the Belarusian economy may inevitably turn into political control, a prospect exemplified by Russia’s hardball tactics toward Ukraine in the lead-up to the Eastern Partnership Summit.

Belarus has attempted to improve its business climate and ease of doing business over the past several years, but levels of Foreign Direct Investment in the country remain stubbornly low. Perhaps the willingness of the government to go to such lengths in the defense of inefficient state-owned enterprises against foreign business interests provides a clue.

Categories: Economics, Europe

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Luke Rodeheffer

Luke Rodeheffer is a cyberthreat researcher at Flashpoint in New York City. He holds an MA from Stanford University, where he was a FLAS Fellow for Turkish. Luke was previously a Fulbright Fellow in Ukraine and a research assistant at Koç University in Istanbul. You can follow him on Twitter @LukeRodeheffer