The war has left Belarus in a predicament, which boils down to depending on Russia for everything without enjoying the advantages of being part of Russia. In combination with the simmering domestic crisis, it leaves ever fewer incentives for the ruling nomenklatura and wider society to value the current Belarusian statehood.
The current agenda of Belarus-Russia relations appears to be dominated by a single question: Will the Kremlin manage to drag the Belarusian armed forces into military action against Ukraine? It would seem that nothing less than the survival of Belarus as a sovereign state rests on this question right now.
Belarus’s veteran leader Alexander Lukashenko, with his unmatched lust for power, may yet find a way to extricate himself and his country from the predicament, dodging Russian pressure as he has done on so many occasions in the past three decades. Otherwise, the prevailing thinking is that if Moscow succeeds in enmeshing Belarusians in the fighting, the swift decimation of the underequipped Belarusian army will lead to a major destabilization at home, prompting Russia to swallow up Belarus once and for all.
Lukashenko’s charisma and understanding of the inner workings of the Kremlin have certainly been an important element in Belarus’s ability to withstand Russia’s growing appetite, but they were hardly the only one. Far more crucial to Lukashenko’s past successes was an overarching consensus shared by the Belarusian elites and wider society that the country’s independence benefitted them, both economically and politically.
That consensus was already strained by the profound political crisis that followed the fraudulent presidential elections in 2020. Now the war has shattered it almost entirely, having transformed many aspects of Belarusian independence from an asset into a liability. Reversing this change will be a Herculean task, if not impossible, regardless of Lukashenko’s ability to keep the Belarusian army out of the bloodshed.
Cashing In on Independence
Ostensibly poor and parochial, Belarus and its regime were for a long time awash with one of the most lucrative rent streams in Eastern Europe. Flanked by restless Ukraine to the south and the Russia-skeptic Baltics to the north, the country enjoyed a unique transit position between resource-abundant Russia and goods-abundant Europe. This advantage was further bolstered by the bizarre Union State established jointly by Minsk and Moscow, which turned Belarus into a semi-offshore territory for Russia.
The integration structure allowed Belarus to combine privileged access to Russia with the perks of being an independent state. This combination brought a constant flow of revenue from a plethora of intermediary activities, ranging from reselling various goods and levying transit fees to tax evasion and state-controlled smuggling. Belarus was a crossroads where loosely accounted-for Russian oil met loosely accounted-for Western shrimp under the watchful eye of the local regime, though the latter was always ready to look the other way if offered a fair share of spoils.
At times, Moscow made half-hearted attempts to curb Minsk’s gray income and divert money back to the Russian budget, but no sooner were opportunities for rent-seeking eliminated than they were replaced with new ones. The Kremlin’s efforts to reassemble post-Soviet states into a customs union, its trade and transport wars with restive neighbors Ukraine and Georgia, and its attempts to counteract Western sanctions with bans on food and other imports from Europe all kept creating new avenues for Belarusian arbitrage, which filled the country’s coffers as well as the pockets of the ruling elite. Doling out the rents was the fuel on which the Belarusian regime ran: financing social programs, subsidizing Soviet-style industrial giants, and buying the loyalty of the bloated bureaucracy and security apparatus.
This system survived even the profound political crisis of 2020 caused by the rigged presidential elections. After Lukashenko violently cracked down on mass protests against electoral fraud, Belarus was increasingly isolated from the West. But the incremental implementation of European sanctions and new opportunities on the Ukrainian market created by Kyiv’s deepening confrontation with Moscow helped the regime in Minsk to muddle through 2021 without the need for a major change. It took a full-scale war in Eastern Europe to bring down the Belarusian model.
Oil Glut
A mere glance at Belarus’s key sources of income is enough to comprehend the watershed political and economic changes that the country has undergone due to the Kremlin’s invasion of Ukraine. Take the most lucrative aspect of the Soviet legacy in Belarus: two large oil refineries in Novopolotsk and Mozyr. For almost three decades, Lukashenko has resisted the attempts of Russian tycoons to acquire the two facilities, jealously keeping both under state control. His obstinacy was well-founded, since the refineries were a crucial pillar sustaining his regime. At their peak in the early 2010s, their production accounted for over a third of all of Belarus’s exports and for up to 30 percent of budget revenues.
The refineries’ profitability was chiefly based on the difference in duties on Russian oil exports to Belarus and to other European states, which enabled Belarusians to resell refined Russian oil in the EU and Ukraine at a premium. Besides topping up the state budget, the resulting rents were widely utilized informally. The fortunes of leading Belarusian businessmen sanctioned by the West as Lukashenko’s sponsors stem from trading in oil products. The industry was also known as a favorite sector for protection rackets run by the Belarusian security services. Finally, oil trading schemes helped Lukashenko to forge special partnerships with some of Russia’s oil giants, who lobbied his cause inside Russia in return.
In the mid-2010s, Moscow launched an offensive against Minsk’s oil rents by gradually replacing the export duty with a production tax. The process—termed the “tax maneuver”—was extremely unpopular with the Belarusian regime and caused a lot of bad blood between the two countries, but fortunately for Minsk, progress in implementing the new system was very slow. At the beginning of 2020, Belarusian oil refineries still provided about a quarter of the country’s total exports and around 20 percent of budget revenues.
In 2021, Moscow loosened the screws somewhat to help Lukashenko survive the mass protests against him at home, but then the war broke out in February 2022. With the Kremlin embroiling Minsk in its aggression against Ukraine by using Belarus as a staging ground for its invasion from the north, the Belarusian refineries soon lost access to both the Ukrainian and European markets. In June 2022, Belarusian exports of oil products to the EU were 99 percent lower than a year earlier due to the harsher sanctions imposed on the country. Deliveries to Ukraine collapsed from $249 million in January to a mere $19 million in May. Some supplies are likely to continue unofficially, regardless of the war and sanctions, but their scale and profitability are hardly comparable to prewar figures.
The only significant market left for Belarusian oil products is Russia, and here the new costs of independence are making themselves felt. For decades, Belarusian statehood furnished the refineries with a beneficial customs regime and privileged position en route from Russia to other markets. Belarusian independence was the foundation of their profitability. Now, however, it has become an obstacle in their pursuit of profit, because it hampers their access to Russia, the only market left available.
Unlike in Belarus, Russian refineries are entitled to a special state subsidy—a so-called “damper”—that is supposed to compensate them for the difference between domestic and global prices for oil products. This damper subsidy makes the Belarusian refineries uncompetitive on the Russian market. In other words, they forfeit a significant portion of revenue for the reason of not being Russian.
In early October, Moscow finally agreed to extend the damper to Belarusian refineries starting next year, but the price of its consent was high. Belarus had to sign a new tax agreement with Russia, obliging it to coordinate changes in indirect taxes and excise duties with Moscow. The agreement also granted Russia access to all data on indirect taxes levied in Belarus. Minsk effectively sold Moscow its autonomy in indirect taxation in order to put the Belarusian refineries on the same footing as Russian ones. Elements of Belarusian sovereignty are no longer exchanged for extra benefits; now they have to be offered for mere equality.
At Moscow’s Mercy
In a similar vein, the war has transformed Belarusian statehood into a burden for many other cash-making industries. The production of fertilizers, above all potassium, used to account for 10 percent of Belarusian exports. This tenth was far more important than any other, because it did not depend on Russia, either for demand or for the supply of raw materials. Sitting on rich local deposits of potassium, the fertilizer giant Belaruskali was long coveted by Russian oligarchs, but Lukashenko kept demanding exorbitant sums for the company’s privatization, claiming that no price was high enough for a national treasure.
As Belaruskali provided over 15 percent of global potassium exports, the West was slow to impose comprehensive sanctions on the company, even in the face of Lukashenko’s repressions. The war, however, precipitated a total ban. On top of lost access to the lucrative markets of Europe and Ukraine, Belarusian fertilizers were cut off from profitable transport routes through Lithuanian and Ukrainian seaports. It took mere weeks to shatter the industry’s self-sufficiency, as all of Belarus’s remaining export options now go through Russia.
The global potassium market is booming, with dozens of developing economies eager for Belarus’s supplies, regardless of the country’s military or human rights record. But deliveries have never been so challenging for Belarusian fertilizer producers. Not Russian, but left at Russia’s mercy, they can either invest a few years and several hundred million dollars in constructing their own port facilities near St. Petersburg, or offer significant discounts to undercut the pricing of their Russian competitors using existing infrastructure.
It’s little wonder, then, that Belarus’s potassium exports are estimated to have halved in the first six months of 2022 (the official data has been classified by the authorities). Further cuts are sure to be under way, as most of the recorded deliveries were in the first quarter. In addition, this summer brought new troubles when Moscow secured sanctions relief for Russian producers of fertilizers in return for unblocking the export of Ukrainian grain through the Black Sea. The deal made no mention of Belarusian producers still saddled with the full pack of Western restrictions. The cost for Belarus of not being Russian has never been more stark.
Another industry that has lost vital rents for the Belarusian regime as a result of the war is the gas industry. When Poland put Gazprom under national sanctions this spring, Russia retaliated by halting gas deliveries via the Yamal-Europe pipeline. The Belarusian segment of this pipeline belongs to Gazprom, which acquired it back in 2011 for $5 billion. That did not preclude Minsk from levying transit fees, estimated at $300–400 million annually. Now that money is gone.
Even before the war, access to cheap Russian gas was the strongest argument Moscow used to drag Minsk into deeper integration. High energy costs are a death sentence for Belarusian manufacturers, as their Russian competitors will simply drive them out of the market. Currently, Belarus is still able to buy Russian gas at a relatively low fixed price of $128 per 1,000 cubic meters, but that agreement is subject to annual renewal, and the war has made Minsk’s bargaining position in future gas talks worse than ever.
Now Belarus sits at the dead end of a Russian pipeline, with no other customers further down the line. Due to its energy-intensive economy and Russia’s loss of the European markets, Belarus has become Gazprom’s third largest foreign client after China and Turkey. The Russian gas giant will be tempted to squeeze as much as possible from one of its last large clients, while the Kremlin is likely to stick to its old mantra that the easiest way to get cheap Russian gas is to become part of Russia.
One Last Trickle
The list of rents and incomes lost by Belarus due to the war could go on and on. Within weeks of the start of the invasion, the EU had banned Belarusian transport companies from European roads. This dealt a severe blow to the country, which used to feed on transit flows between Europe and Russia, earning up to $4 billion a year on the export of transport services. The decision also destroyed a lot of smuggling and customs fraud schemes controlled by businesses close to Lukashenko. Gone are the times when landlocked, chilly Belarus enjoyed the status of a leading exporter of seafood and fresh cut flowers to Russia.
Tougher Western sanctions prompted by the war also sealed the fate of other industries that the Belarusian regime had cultivated as a source of income independent of Russia. Timber processing, IT services, and cigarette production were all industries that for years had enjoyed tax breaks and state subsidies thanks to their good sales in Europe. Now they face steep decline in production and income, having no option but to crowd into the shrinking Russian market, hamstrung by not being Russian.
As Russia becomes the only export market for a growing number of Belarusian goods and services, the Russian budget is increasingly viewed as the only source of rents by the Belarusian ruling elite. To be sure, Russia’s state finances are also in dire straits right now, but oil revenues and accumulated reserves are helping to keep them afloat, while the Kremlin’s determination to withstand Western pressure holds out promises of lavish state spending.
It is no wonder that in recent months, the key priority for Belarusian ministries and big business has been to plug themselves into the Russian behemoth of import substitution. They have achieved a degree of success: Moscow has promised to issue $1.5 billion in loans to finance the Belarusian contribution to the common goal of substituting Western imports. Here, too, however, the problem of not being Russian takes its toll. The money will be disbursed over the next few years on a project-by-project basis, and constitutes just a fraction of the vast state subsidies earmarked for Russian companies.
Belarusian efforts to gain access to Russian government procurements have also yielded certain results. But even simplified procedures for Belarusian allies are still more complicated than those for Russian companies. In the absence of viable alternatives, Belarusians must endure currency risks, regulatory differences, and the overall lack of a level playing field to be able to conduct business and seek rents in Russia. Unless they find a way to stop not being Russian.
The Burden of Statehood
The differences between Belarusian and Russian identities are not very pronounced, and the ideology of Belarusian ethnic nationalism has always had many opponents in the country, including Lukashenko himself. Still, over the decades, the regime has elaborated a compromise approach to the issue, which prized Belarusian statehood without the tinge of anti-Russian sentiment typical of many other post-Soviet states.
The approach was vague enough to accommodate very diverse ideas of Belarusian independence, ranging from a romantic belief that Belarusians, unlike their Russian neighbors, are “genuine Europeans” to a pragmatic calculation that the country can only maintain a relatively just social system by remaining outside of Russia.
As a result, placid but firm support for independence became a consensus point in Belarusian society, producing a surprising unanimity on foreign policy issues: a rare find in the post-Soviet space. Over the years, opinion polls have consistently demonstrated that the overwhelming majority of Belarusians, regardless of their attitude to the Lukashenko regime, tended to agree that Belarus should be a neutral state that cooperates with Russia but preserves its sovereignty.
Lukashenko’s violent crackdown on the mass protests of 2020, however, severely damaged this consensus. Clinging to power against the will of the majority, the Belarusian leader had to resort to Russian support, including in the domain of ideology and propaganda. He borrowed heavily from the Kremlin’s propagandistic narratives, vilifying the West, dismissing protesters as Western pawns, and preaching that Belarus should emulate Russia in following a unique civilizational path devoid of depraved European values and freedoms.
In doing so, Lukashenko dragged foreign policy issues into the realm of domestic politics and started to polarize Belarusian society, engendering package views. His supporters were expected to be unconditionally pro-Russian and anti-Western, while his opponents naturally gravitated toward the West, since they felt betrayed by Moscow, which had rescued the hated autocrat.
Russia’s invasion of Ukraine has further precipitated that trend, leaving almost no common ground between the polarized parts of Belarusian society. Lukashenko has wholeheartedly rallied to the Kremlin’s cause by justifying and assisting in the aggression. His supporters are called on to stay by his and the Kremlin’s side in the existential confrontation with the malign West and its “puppets” in Kyiv. In the meantime, Lukashenko’s opponents sympathize with Ukrainians and increasingly view the Belarusian leader as a figurehead of an occupational regime imposed by Russia.
Paradoxically, this polarization, confirmed by numerous opinion polls, devalues the current Belarusian statehood in the eyes of both camps. Lukashenko’s fervent support for the Kremlin blurs the difference between all things Belarusian and Russian. Pro-government rallies are now adorned by both Belarusian and Russian flags, and schoolchildren study medieval Russian princes as their national heroes, while Belarusian state propaganda has become almost indistinguishable from its Russian counterpart, at times even taking a more pro-Kremlin stance than official Minsk. The pro-regime part of Belarusian society is at pains to understand why their country cannot follow in the footsteps of the Donbas separatist republics and move under Moscow’s rule, if the outside world is such a dangerous place and the only safe haven is Russia.
Lukashenko’s opponents, on the other hand, tend to consider Belarus already under de facto Russian occupation. Inspired by Ukraine’s military successes and the example of Belarusian volunteers fighting for Kyiv in the war, they believe their country needs a liberating crusade, and see little value in the remaining trappings of independence.
The growing indifference of Belarusian society to its current statehood gives the regime a free hand to dispense with the country’s sovereignty. The recent deal, which largely ceded control over indirect taxes to Moscow in exchange for Russian oil subsidies, may become a model for the similar trading of parts of Belarusian sovereignty for short-term financial gains. In the past, Lukashenko has been very careful in such negotiations: he views Belarusian statehood as a key element of his legacy, and is no longer interested in crude material benefits. The Belarusian nomenklatura, however, may prove less concerned with its place in the history books.
The nomenklatura’s autonomy from Lukashenko has increased significantly over recent months. Belarusian dignitaries now establish direct and frequent contact with their Russian counterparts, bypassing the country’s leader. They learn firsthand about the remaining cash flows in Russia and the ways in which they are appropriated by the ruling elite. Some of them dare to call for more pro-Russian policies and even object to Lukashenko publicly. Since the ability of the Belarusian leader to muster mass support and dole out rents has almost evaporated, the nomenklatura is eager to seek other sources of income, even if they involve defying their erstwhile patron or forfeiting their sense of “Belarusianness” for the more profitable status of a Russian.
The war has left Belarus in a predicament, which boils down to depending on Russia for everything without enjoying the advantages of being part of Russia. In combination with the simmering domestic crisis, it leaves ever fewer incentives for the ruling nomenklatura and wider society to value the current Belarusian statehood.
In the new reality, the Kremlin no longer needs to bother to pressure Belarus into deeper integration. Amid the indifference of a disillusioned society, the country’s rent-seeking elites are eager to sacrifice Belarusian sovereignty voluntarily, if for nothing else, then simply to achieve equal status with their Russian counterparts.