Belarus' Economy: Impact Of Supply Forces

Belarus has a mixed, upper-middle-income economy with a large industrial sector and a dominant public sector. The state plays a massive role in the economy, controlling key industries and accounting for half of the total value-added and two-thirds of total employment. The Belarusian economy is highly dependent on Russia, with 37% of goods and services exported to Russia and 30% to the EU. This reliance on Russia has grown since the 2022 Russian invasion of Ukraine, with Belarus becoming increasingly reliant on Russia for economic, political, and military support. The country has also been subject to numerous rounds of sanctions by the US, EU, and others due to its support of Russia's invasion of Ukraine, which has resulted in a sharp decline in trade with the EU and Ukraine and a corresponding 4.7% drop in GDP.

The impact of sanctions on Belarus's ability to trade

Belarus is a small open economy with a trade openness of 133% as of 2019. In 2017, exports of goods and services contributed 45% in value to GDP, playing a particularly significant role in manufacturing, transportation, and IT services. The country has a large industrial sector (24% of GDP in 2024) and agricultural sector (8% of GDP).

The sanctions have also disrupted Belarusian exports of petrochemicals and potash fertilizers, which contributed 15.8% and 8.4% respectively to the total exports of goods in 2019. The country's exports to the EU are more concentrated in certain groups of goods, such as oil and petrochemicals (over 60% of exports to the EU in 2019), timber, and metals. Belarus is also heavily dependent on Russian supplies of oil and natural gas, with 62% of its energy produced from imported natural gas and 28% from oil in 2019.

The sanctions have further impacted Belarusian exports of services, with the EU and the US being important destinations. Belarus is a net exporter of transportation services, and ICT exports have grown rapidly since the creation of the High-Tech Park special economic zone in 2006, amounting to USD 2.4 billion in 2019. The share of the EU in the exports of services from Belarus was 45% in 2019, with another 11% going to the US.

The sanctions have also disrupted Belarusian trade with China. While imports from China (USD 3.8 billion in 2019) are significantly higher than exports (USD 0.67 billion), Belarusian exports to China are rapidly increasing, focusing on poultry, dried milk powder, whey, timber, and cellulose. However, the large distance and unfamiliarity of Belarusian producers remain obstacles to significant growth in exports to China.

Overall, the sanctions have had a notable impact on Belarus's ability to trade, particularly in the IT, transportation, and energy sectors. The country has redirected its trade towards Russia and other Central Asian countries, but the decline in its innovative IT sector and the ban on road hauliers and information technology services have disrupted its economy.

The role of the state in the economy

Belarus has an upper-middle-income mixed economy, with a large industrial sector and a dominant public sector. The state plays a massive role in the economy, accounting for half of the total value-added and two-thirds of total employment.

The Belarusian economy is a post-Soviet transition economy, and the country has rejected most privatisation efforts in favour of retaining centralised political and economic controls by the state. The highly centralised Belarusian economy emphasises full employment. It has been described as a welfare state or market socialist. Belarus is the world's 74th-largest economy by GDP and ranks 53rd out of 189 countries on the United Nations Human Development Index.

The Belarusian government has maintained control over key industries and eschewed the large-scale privatisations seen in other former Soviet republics. The state controls key industries such as manufacturing, which includes tractors, heavy trucks, oil processing, metal-cutting lathes, synthetic fibres, TV sets, semiconductors and microchips. The government also controls the agricultural sector, which produces potatoes, flax, hemp, sugar beets, rye, oats, wheat, dairy, beef, pigs, and chickens.

The Belarusian labour market is highly regulated, with important elements of the central planning system still in place. The decision to determine wages is left to firms, but the government can affect the structure of wages through the so-called tariff system, a type of centrally determined wage grid.

Belarus has a centralised banking system led by the National Bank of the Republic of Belarus, which represents the interests of the state and is the main regulator of the country's banking system. The president of Belarus appoints the chair and members of the Board of the National Bank, designates auditing organisations to examine its activities, and approves its annual report.

The government has also been supportive of China's Belt and Road Initiative, which includes the China-Belarus Industrial Park near Minsk National Airport. This is intended to be a manufacturing centre for the Eurasian Economic Union, with good transport links to the European Union.

The state has also played a role in addressing the COVID-19 pandemic, with relatively light and delayed lockdown and quarantine measures. As a result, Belarus suffered a decline in economic figures of between 1.5% and 2%, while European countries sustained drops of around 12%.

However, the state's role in the economy has also been characterised by poor governance, including dictatorship, high levels of corruption, a weak legal system, and institutional rigidity. The judicial system is not independent and is largely unable to adjudicate cases objectively. Courts act under the influence and direction of the central government.

The state has also been accused of violating human rights and cracking down on political opponents, which has led to numerous rounds of sanctions by the United States, the EU, and others. These sanctions have impacted the country's ability to attract foreign investment and do business with international partners.

The effect of Russia's economy on Belarus

Belarus has a highly centralised, upper-middle-income, mixed economy. It is often described as a welfare state or market socialist. The country has retained centralised political and economic controls by the state, with the government controlling key industries. Belarus is the world's 74th-largest economy by GDP and has a very low infant mortality rate, a high rate of doctors per capita, and a high literacy rate.

Russia has been a major trading partner for Belarus since the latter gained independence. Belarus was often referred to as the "assembly shop" of the USSR, and restoring economic ties with Russia was key to the quick rebound of the Belarusian economy at the end of the 1990s. The share of the Russian market for Belarusian exports of goods remained relatively constant at 45% from 1995 to 2020. Imports from Russia are critical and are concentrated in energy goods.

Russia is a natural destination for Belarusian exports—trade in goods is largely unrestricted as the countries are in an economic union, and a long history of economic ties, common tastes, and culture make marketing easier. The relatively small distance and good logistics also lower costs. All of these factors determine Russia's major role, aided by political preferences.

However, several factors have pressured Belarus to diversify away from Russia. Firstly, the dependence on the Russian market has ceased to deliver growth as the Russian economy is stagnating. Moreover, the volatility of oil prices also implies the volatility of the Belarusian economy through the Russian trade channel. For example, in 2015, the Russian economic crisis resulted in a significant export decline that cost Belarus at least 2.4% of its GDP. Secondly, Russia has often used trade as a political instrument. Minor trade wars were common, with Russia using food safety concerns as a pretext for temporarily banning Belarusian food exports. In 2020, failed integration talks culminated in a cut in oil supplies from Russia during the first quarter.

As a result of these issues and tensions, Belarus adopted a 30/30/30 export strategy aiming to diversify exports equally between Russia, the EU, and other markets, mostly Asia. While the EU is another natural trading partner for Belarus geographically, several impediments exist when it comes to successfully increasing exports. One is the low efficiency of Belarusian state-owned enterprises (SOEs) that dominate the manufacturing industry. These SOEs also have very low incentives to diversify away from the comfortable Russian market. Another reason is the existence of significant trade barriers. While Belarusian agriculture and food processing could potentially be competitive on EU markets, access is restricted by EU trade protection measures. Finally, the ongoing political crisis and the possibility of EU sanctions are new impediments.

Belarus is highly dependent on Russian supplies of oil and natural gas. Oil supplies could be diversified to some extent—in 2020, Belarus imported only 90% of mineral fuels from Russia because of the oil supply conflict during the first quarter. Diversifying the supplies of natural gas would be more problematic, as the only supply route is the Gazprom-owned pipeline, and 100% of natural gas supplies come from Russia.

In 2022, Belarus's GDP contracted by 0.4%—the first GDP decline since the end of 2020. Being Russia's closest military ally, Belarus has made its territory available to the Russian Armed Forces, thereby joining Russia's invasion of Ukraine, which resulted in it being targeted by Western sanctions. The sanctions imposed in March 2022, mainly those covering the export of timber, as well as wood, metal, and steel products, have not only upheld but also expanded previous sanction packages. As a consequence, under increasing isolation by the West in recent weeks, Minsk has lost almost all of its most profitable export categories to both EU member states and Ukraine. Moreover, Belarus's present situation is prompting foreign investors and Belarusian companies' business partners, which continue to operate there, to leave the Belarusian market.

At present, Belarus is unable to refinance its foreign debt, which has not only resulted in a decline in foreign currency reserves but also exacerbated solvency problems. The introduced mitigation measures are provisional, and the only external source of support Belarus can count on is Russia, which itself has been affected by tough sanctions and, therefore, is reluctant to provide the assistance Minsk needs. As a consequence, 2022 will most likely see a profound recession in the Belarusian economy—the country's GDP may shrink by as much as 6% or even 15%.

Belarus's reliance on natural resources from Russia

Belarus is heavily reliant on Russia for natural resources, particularly fossil fuels. In 2018, only 15% of the country's energy demand was met by domestic production, making Belarus one of the least energy self-sufficient countries globally. The country relies on imports from Russia to meet most of its energy needs, with nearly all electricity generated at thermal power stations using piped oil and natural gas. Belarus is also an important part of Russia's gas transit corridor to Western Europe.

The dependence on Russian energy supplies has had significant economic implications for Belarus. The volatility of oil prices has directly impacted the Belarusian economy, as demonstrated by the 2015 Russian economic crisis, which resulted in a significant export decline that cost Belarus at least 2.4% of its GDP. Additionally, Russia has often used trade as a political instrument, with minor trade wars and temporary bans on Belarusian food exports.

To reduce its dependence on Russian energy, Belarus has explored alternative sources and suppliers. In 2011, Belarus signed a USD 10 billion loan agreement with Russia to secure funding for the construction of the Astravets Nuclear Power Plant (NPP). The NPP was intended to reduce Belarus's dependency on Russian energy imports. However, Belarus still needs significant infrastructure investment to switch from oil and gas-based energy to electricity.

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Belarus's reliance on Russian natural resources extends beyond the energy sector. Russia has been a major trading partner and a source of economic support for Belarus. The share of the Russian market for Belarusian exports remained relatively constant at 45% from 1995 to 2020, with imports from Russia concentrated in energy goods. Belarus is also dependent on Russia for loans and subsidies, which prop up its economy. Russia has provided intergovernmental loans, credits from the Eurasian Economic Community, and resources from Sberbank and the Russian stock exchange.

The economic relationship between the two countries is characterized by gross imbalances, with Russia having significant leverage over Belarus due to its control of energy supplies and financial assistance. Belarus's attempts to diversify its economy and reduce its dependence on Russia have been challenging due to technical supply issues and the political and economic integration between the two countries.

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In conclusion, Belarus's economy is heavily reliant on natural resources from Russia, particularly in the energy and trade sectors. This reliance has had both positive and negative impacts on the Belarusian economy, with Russia providing favourable terms for energy supplies and economic support but also using its position to exert political influence. Belarus's efforts to reduce this reliance have been met with challenges, and it remains to be seen if the country can successfully diversify its economy and reduce its dependence on its eastern neighbour.

The impact of the IT sector on the economy

The IT sector has been one of the driving forces of the Belarusian economy, with its share in the country's GDP being among the largest in Europe. The industry is strongly export-oriented, with over 90% of ICT exports going to the West, mainly the USA and EU. In 2021, Belarus exported ICT goods and services worth USD 3.8 billion, accounting for 7.5% of total exports and 5.5% of the country's GDP. The revenues from ICT services exports more than tripled between 2015 and 2021, reaching USD 3.2 billion in 2021.

The IT sector in Belarus has benefited from a special regulatory and tax regime, with IT companies enjoying significant tax and social security benefits, little to no administrative control, free movement of capital, visa benefits, and simplified residence permits for foreign employees and founders. Wages in the IT industry are also up to four times higher than the country's average, attracting highly qualified employees.

The main hub of the Belarusian IT industry is the Hi-Tech Park (HTP), established in 2005 by the President of Belarus. HTP offers its resident companies a range of benefits, including tax exemptions and a simplified business environment. In 2019, the HTP exported products worth $2.2 billion, with the number of resident companies growing fourfold in two years. The park contributes to regional development, with 82 companies employing about 4,000 people operating outside of Minsk. Additionally, more than 40% of HTP resident companies are enterprises with foreign participation, attracting foreign direct investment of $263.2 million in 2019.

The success of the IT sector has had a positive impact on Belarus's international standing. The country has established itself as Eastern Europe's IT hub, ranking 13th out of 20 leading countries in IT outsourcing and high-tech services. The sector has boosted Belarus's reputation as a high-quality, reliable, and good-value business partner, with companies like EPAM Systems, IBA Group, and Intetics Co putting the country on the map in global IT circles. The development of the IT industry in Belarus has also contributed to the growth of international interest in the region.

However, recent political developments, including the 2020 presidential elections and the war in Ukraine, have led to an outflow of IT specialists and the relocation of successful IT companies to neighbouring countries. This has resulted in a decline in the IT sector, with a loss of almost 20% of employees between March and December 2022. The future of the industry depends on the internal political situation in Belarus and its position towards the war in Ukraine.

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