The End of Lukashenko’s Economic Balancing Act?

Last year’s large-scale protests against Alexander Lukashenko and his subsequent violent repression of them have dominated headlines on Belarus. Meanwhile, however, the economic policy shift of the man often called Europe’s last dictator garnered less attention. While they do hurt the Belarusian economy, half-hearted Western sanctions will not topple Lukashenko’s regime. Instead, they are driving him into Putin’s arms for support. This is one of his last options for staying in power, but it marks a definitive change in Belarusian foreign policy.

Lukashenko, a former collective farm manager, came to power in 1994 in what are generally seen as Belarus’ most democratic elections. He promised to fight corruption but instead used this idea to quickly tighten his grip on power and suppress opposition to his rule. Although the Belarusian tech sector has boomed in recent years, this has been only one beacon of hope in an otherwise stagnant economy. The country’s reliance on agriculture and Soviet-style state-owned industry means there is relatively little outright poverty, but also little real development. 

Up until last year, much of Lukashenko’s international efforts were marked by attracting financial support from both Russia and the EU, all while maintaining a highly centralised economic system at home. In the past, this attitude led him to announce improved ties with NATO and seek temporary alternatives to its dependence on Russian oil while simultaneously maintaining a close geopolitical alliance with Vladimir Putin. Over time, this behaviour earned him the nickname of ‘ultimate dealmaker’. Lukashenko leveraged this favourable position to uphold a social contract with the Belarusian population: he could ensure economic stability, but civil rights were minimal. This implicit agreement has been under pressure since 2012 due to increasing inequality and sluggish GDP growth. Last year’s mass protests against the fraudulent presidential elections signalled a disruption in the social contract, and the violent crackdown provoked a response from Belarus’ Western partners.

Western governments refused to accept the ‘official’ results of the 2020 presidential election, instead siding with Svetlana Tikhanovskaya’s opposition movement and condemning the Belarusian regime’s “unacceptable violence against peaceful protesters.” Based in Vilnius, the opposition met with Western leaders over the past year to garner support and destabilise Lukashenko’s rule. In four rounds of sanctions, the EU placed restrictions on a total of 166 individuals and 15 entities close to Lukashenko, as well as specific sectors of the Belarusian economy. A fifth-round of sanctions is now on its way after Belarus began literally pushing migrants across its borders with Lithuania, Latvia, and Poland. While they do send a signal to Lukashenko that his behaviour is unacceptable, it seems that the sanctions have done little to chip away at his power base.

EU sanctions on Belarus are intended to create economic pressure on Lukashenko and encourage his domestic allies to turn on him. So far, the sectoral measures have hit Belarus’ dependency on the export of oil and fertilisers but have failed to deal a definitive blow. While trade on these goods is restricted, analysts point out that exports to the EU of potash, one of the state’s largest money-makers, are still largely unaffected, while there are also efforts to continue selling Belarusian oil products through Russian ports. Income streams such as this ensure stable incomes for a significant part of the population, but they also allow Lukashenko’s associates and the state system to stay afloat. While Belarus’ opposition urges the EU (Belarus’ second-largest trading partner) to impose even tougher sanctions, some member states, such as Germany, are reluctant due to concerns over the effectiveness of such measures and the potential damage to European businesses which rely on imports from Belarus. As a result, their support comes mainly in the form of words and empty promises.

In this context, the IMF’s recent decision to allocate almost $1 billion in reserve funds (so-called ‘special drawing rights’) to help support the economy’s recovery from COVID-19 was met with opposition by Svetlana Tikhanovskaya and some of her key Western allies. Critics note that such injections of capital, no matter how well-intended, represent international support for the violent reign of Belarus’ de facto president and help prop up the very industries targeted by Western sanctions.

Are the current sanctions effective at all? Half of Belarus’ GDP comes from state-owned enterprises, which already required modernisation and contributed to economic stagnation since 2012. Sanctions are drastically decreasing the profits from these businesses and creating economic instability, but since the state actively subsidises key export sectors, the regime has time to avoid collapse by expanding its trade relations with partners like Russia and China (even if the latter has not shown much enthusiasm for Belarus in recent years). 

The prospect of stable exports is driving Lukashenko into the Kremlin’s arms, which can support the regime economically, politically, and (if necessary) militarily. In six face-to-face meetings and many more phone calls this year, Lukashenko and Putin discussed substantial loans for the stabilisation of Belarus’ economy, the continuation of subsidies on energy imports to Belarus, and the implementation of the 20-year-old Union State treaty through 28 roadmaps. The agreements include cooperation on macroeconomic issues, common taxing and customs legislation, and the integration of the countries’ energy markets. At this point, such integration is beneficial for both Putin and Lukashenko: the former can avert a colour revolution scenario and potentially gift his electorate another ‘geopolitical present’ one day by annexing Belarus altogether; the latter can stay in power and use attempt to reinstate the breached social contract with Russia’s help.

Reverting to the previous status quo may prove difficult for Lukashenko, as Belarusians now experience economic pressure on an everyday basis: the combined pressures of state violence, Western sanctions, and a lack of privatisation fuel the existing uncertainty and discontent. A lack of development in Belarus’ highly centralised economic system is one of the driving forces behind the ongoing protests. The World Bank had already projected severe economic consequences as a result of COVID-19 in May last year, and now the country’s financial system is under further pressure, illustrated by bank runs on foreign currencies and the National Bank’s attempts to prevent the collapse of the Belarusian rouble. An inflation rate of 9.8% and deposit interest rates at a staggering 19.7% per year paint a picture of a highly unstable economy in which real incomes are falling. As a result of economic malaise and mass repression, many ordinary Belarusians have left the country. The Belarusian tech sector is bleeding dry, resulting in a massive brain drain; many in this branch moved west or south to places like Lithuania, Poland, and Ukraine. Poland’s President Andrzej Duda recently stated that 150,000 Belarusians have recently received asylum in Poland and are working there. 

While the West’s half-hearted sanctions are not effective enough to cause Lukashenko’s demise, they are destabilising the Belarusian economy and are forcing Lukashenko to stop his balancing act between Moscow and Brussels. If he is to stay in power, the ‘ultimate dealmaker’ is left with no choice but to implement the Union State treaty. Moscow can support him in his efforts to reinstate a social contract with the Belarusian population, but Lukashenko may be forced to sign away his country’s sovereignty in the process.

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