What Russia Wins If Drops the Dead Weight in the Form of Lukashenka’s Regime

The usurper is costing the eastern neighbour too much.

The Russian BBC Service has estimated the financial dependence of the Lukashenka regime on Russia using open data and statements.

The year 2020, which was not only a pandemic but also a protest year for Belarus, witnessed a 29% increase in the country's public debt compared to the previous year. Late last year, the Belarusian authorities reported the reasons: not only the weakening of the Belarusian ruble but also over-planned borrowings contributed to the growth. Thus, the authorities created a reserve to finance public debt in 2021.

According to the Belarusian Ministry of Finance, the total debt of Belarus - both external and internal - reached Br57.4 billion ($22.8 billion) by early August 2021. By the end of this year, Belarus will have to pay creditors about $1 billion.

Russia's losses from energy subsidies

Belarus buys gas from Russia at preferential prices, and oil and petroleum products with zero duties. Such hidden subsidies are the most significant part of Russia's financial support to Belarus.

However, energy subsidies have declined in recent years because of the tax manoeuvre in the Russian oil sector, S&P analysts note.

In 2018, Russia began to change its taxation system for oil companies. Starting in 2019, oil export duties in Russia have been gradually reduced and should reach zero by 2024. Meanwhile, the mineral extraction tax is being raised.

Belarus used to receive Russian oil without export duties. As the duties nullify, the country loses its discount on Russian oil. In 2024, it will receive it at world prices. The Belarusian Finance Ministry estimated losses from the tax manoeuvre in 2019-2020 worth $800 million.

In February 2020, the countries reached a compromise. Moscow offered Minsk to compensate some of the losses due to the tax manoeuvre by reducing the premiums ($1-2 per ton) that Belarus has been paying to Russian oil companies since 2007 because supplies to Belarus (compared to Europe) are less attractive for Russian companies due to small volumes and sanctions risks.

According to analysts at the Russian Institute of Energy and Finance, Russian energy subsidies will drop to a minimum of 0.9% of GDP in 2020 due to a decrease in physical volumes of supplies and falling global oil and natural gas prices. However, the number of export duties returned to 5.7% of GDP in 2021 due to an increase in the price differential between cheaper Russian gas for Belarus and the cost of gas in Europe.

As a result, the number of energy subsidies for Belarus in 2021 will amount to $3.5 billion, according to Sergei Kondratyev, deputy head of the economic department of the Institute of Energy and Finance. Altogether energy subsidies for Belarus have exceeded $50 billion since 2012.

Since this May, it will be difficult to estimate the volume of energy subsidies provided by Russia because the Belarusian government ceased to publish data on the import and export of oil, oil products and natural gas. Kondratyev assumes it is related to the sanctions imposed by the US on the Belarusian energy sector.

Losses for the Russian budget

Russia's financial support has been declining in recent years due to a reduction in energy subsidies, S&P analysts say.

With sanctions and closed foreign markets, Russian loans remain one of the few sources of external financing for Belarus, said Dmitry Polevoy from Locko-Invest.

"It's hard to say how much they will compensate for the damage from the Western sanctions, given that the sanctions have yet to be fully evaluated. We don't have an exact understanding of the volume of loans from Russia," Polevoy says.

For Russia, the $1.5 billion loans it issues to Belarus is non-critical money, believes Katerina Bornukova, an expert with the BEROC Centre for Economic Research (Kiev). Russian economist Evgeny Gontmakher agrees with Bornukova. "This 1.5 billion helps Belarus close many of the holes Lukashenka has. It's not much money for Russia," says Gontmakher.

However, there are big risks for Russia in such financial assistance, because Aliaksandr Lukashenka is an illegitimate president in the world community, Gontmakher explains. The economist believes all current economic deals are formally illegitimate.

"They are non-repayable loans. If there is a change of power in Belarus, the new leadership of Belarus may say to Russia and the Eurasian Fund: "Friends, you gave money to the illegitimate president, we will not give it back". This is a very big risk for Russia. We probably already have that money written off," says Gontmakher.