The final push towards Russia’s embrace. How tougher sanctions against Belarus could lead to its disappearance as an independent state

The plane scandal is gaining momentum. Obviously, the European Union did not believe Minsk's official version. It was decided to ban Belavia from flying to the EU. Airlines from many EU countries have already refused to carry passengers over Belarus. The EU and the US are discussing additional sanctions against individuals, businesses and entire sectors. So far it is difficult to say what the scale or depth of these sanctions will be. Even in terms of air travel, it is unclear whether the ban will only be limited to passenger traffic or will extend to commercial flights as well.

One can hypothetically imagine two polar sets of sanctions against Belarus. The first, mild one, implies temporary restrictions on Belavia's flights to the EU, a ban on flights of European passenger airlines over the territory of Belarus, and an expansion of the sanctions list of individuals and companies. The second, harsh set, includes banning of all transport flows through Belarus, including rail and road transport, imposition of sectoral sanctions, primarily in regard to energy, chemical products, metals, wood products, and disconnection from SWIFT and financial markets.

The mild scenario

As the practice of implementing sanctions previously has shown, there will be no critical impact on the economy of Belarus if the sanctions are imposed according to the first, “mild” scenario. Belarusian businesses have been skillfully circumventing the sanctions, showing a much stronger reaction to the global market situation than to how movements of goods affected individual companies. In the first quarter of 2020, the export of goods from Belarus to the EU fell by almost a third in annual terms without any sanctions, which reflected a sharp deterioration in the terms of trade in oil products. In the first quarter of 2021, after the introduction of EU sanctions, the export of Belarusian goods increased by 86.5% compared to the same period in 2020. The EU's share in the country's merchandise exports rose from 17% to 25.4%. As for the reverse direction, from the European Union to Belarus, the picture is quite the opposite: while in the first quarter of 2020 imports grew by 7.2%, they fell by 10.8% in the first quarter of this year.

This year, the strongest growth was seen in exports of petroleum products (nearly 2 times), potash fertilizers (+ 14.8%), ethylene polymers (2.3 times), chipboards (66%). In the first quarter of 2021, Belarus's merchandise exports to the EU amounted to $2,088 million. The share of oil, oil products, and chemical products constitutes some 70-75%. The sanctions that are to be discussed and applied by the EU according to the mild scenario will not affect these product groups.

Moreover, the authorities have demonstrated an unsophisticated way of circumventing sanctions against individual companies. Recently, the LLK-NAFTAN plant in Novopolotsk, which makes additives for oils and fuels, was renamed EddyTech LLC. Naftan, which is under sanctions, was removed from the company name, and a 3% stake in the company was transferred to the Novopolotsk city executive committee. According to the Belarusian authorities, this will help bypass the US sanctions, which will come into force on June 3. In addition to the Belneftekhim entities, eight other Belarusian enterprises on the US sanctions list are working on similar measures or changes in export logistics.

If the EU simply duplicates the US sanctions and does not extend them to companies that deal with sanctioned entities, Belarus will calmly continue to trade with the EU in goods that make up the lion's share of its exports. Undoubtedly, Belarus's aviation infrastructure, national carrier Belavia, transit, logistics and tourism sectors will suffer losses. In addition, the Chinese Belt and Road initiative and the China-Belarus Industrial Park project, conceived as a Chinese gateway to the EU market, will have to be revised. In the current legal regime of Belarus-EU relations, those projects will be impossible to implement.

Taking into account the financial indicators of Belavia, Minsk-2 airport, and Belaeranavigatsia (air navigation service fees) and their financial obligations and investment projects (the second runway was opened two years ago with the expectation of transforming Minsk-2 airport into a fully-fledged regional aviation transit hub), Belarus's losses will amount to 2–2.5% of its GDP ($ 1.2–1.5 billion) in the medium term. If we add the resources spent by Belarus on the development of all kinds of tourism (ecological, historical, business, entertainment, sports, medical), transport, and logistics, the losses may increase by $ 1-1.5 billion provided the sanctions persist for a long time and Belarus will continue to be perceived by EU citizens as a dangerous and risky rogue state. After the lifting of Covid restrictions in the EU, Russia and other regions, the cost of lost profits will be even greater. Finally, if Ukraine joins the EU sanctions, the volume of trade with that country, means that Belarus's losses will be even greater.

In addition, given the vanishing reputation of and trust in the Belarusian authorities, under this scenario Belarus will actually be blocked from the global financial market (borrowing by business companies and the government will be impossible), and its investment projects will be frozen. Therefore, the state will have to either provide additional support to the entire aviation sector and its infrastructure or sell part of the assets to interested investors. In the current situation, Russian airlines and businesses, including banks, will have a clear advantage in entering the Belarusian market. Official Minsk may ask the Kremlin to provide financial assistance to neutralize the EU sanctions. The conditions on which such assistance will be provided may contain provisions for the transfer of ownership of Belarussian assets and infrastructure to Russian creditors.

The harsh scenario

If the harsh package of EU sanctions is adopted, the situation with the Belarusian economy could become radically worse. Russia may be the only source of short-term financial and macroeconomic stabilization. The Kremlin's position today assumes the transfer of real political and economic powers in exchange for financial, informational and diplomatic support.

Belarus's most sensitive goods in terms of its economic relations with the EU countries are oil products, chemical goods, including fertilizers, metal and wood products. The introduction of harsh sectoral sanctions, at least in regard to oil, oil products and fertilizers, would lead to the loss of 5-8% of GDP and more than 20% of foreign exchange earnings, even taking into account the possible reorientation of commodity flows to other markets.

The likelihood of such a scenario is low because achieving consensus in the EU on the introduction of such restrictions is highly problematic. As part of the harsh scenario, certain EU agencies and politicians have proposed blocking all transport flows from and through Belarus, including rail and road transport. Again, the EU's decision-making mechanism will render such a proposal impassable, especially given the influence Russia has in many EU countries.

If the tough confrontation with the European Union persists for 3-5 years in the areas of trade, finance and investment, the Belarusian economy will face a sharp decline in economic activity, a drop in living standards, and a reduction in the financial capabilities of the state and its unreformed commercial sector. The Prime Minister of Belarus admitted on May 26 the sanctions would not be painless:

«We will have to accelerate the diversification of exports, reduce spending on non-priority tasks, and solve a number of other issues.»

And this is just the beginning of the mild scenario. With the harsh scenario, a deep economic crisis, accompanied by social upheavals, may well challenge the very existence of the political project called «The Independent Republic of Belarus». Unfortunately, the implementation of the harsh scenario will greatly increase the Kremlin's chances of success with its “Historical Russia” project.