Belarus's Industry: Recent Economic Dependency Explained

Belarus's economy has become dependent on industry only recently due to a combination of historical, political, and economic factors.

Historically, Belarus was a relatively underdeveloped and agriculture-dependent country before the October Revolution. However, rapid economic and industrial growth occurred following the construction of railways in the late 19th century, with cities like Minsk, Vitsebsk, Hrodna, Pinsk, and Homel becoming significant industrial centres. During the post-war years, Belarus rapidly industrialized and became an important trade hub between the Soviet Union and Europe, with manufacturing, tractors, heavy trucks, oil processing, and synthetic fibres forming the pillars of its economy.

Politically, Belarus has maintained a highly centralized economy with state control over key industries, rejecting most privatisation efforts. This has resulted in a dominant public sector and full employment, leading to its characterisation as a welfare state or market socialist economy. The country's economic growth was further bolstered by its role as a producer of products made from raw materials imported from the Soviet Union, earning it the nickname the Soviet assembly shop.

Economically, Belarus has a well-developed manufacturing industry, services sector, and agriculture, with industry accounting for 25.5% of its GDP in 2020. The food industry is the most important sector, contributing 29.9% of total manufacturing output, followed by other sectors like the chemical industry, automotive industry, and machinery equipment manufacturing.

However, Belarus's economy has faced challenges in recent years due to its heavy dependence on Russia, its main trading partner. This dependence has made Belarus vulnerable to Russia's economic situation and political decisions, such as the 2020 cut in oil supplies during integration talks. Additionally, the volatility of oil prices and Russia's use of trade as a political instrument have further pressured Belarus to diversify its economy and exports.

To summarise, Belarus's economy has become dependent on industry due to its historical industrial growth, centralised political and economic controls, and the dominance of its manufacturing and agricultural sectors. However, recent events have highlighted the need for diversification away from Russia and towards other markets to ensure economic stability.

Belarus's dependence on Russia for exports and imports

The transport of Belarusian goods, mainly fuels and fertilisers, is now dependent on transit through Russian ports and railways, with Russia's share in Belarusian exports exceeding 90%. This gives Russia significant control over Belarus's external trade.

In terms of imports, Russian imports make up around 55-60% of all imports to Belarus, with energy products, including crude oil and natural gas, forming the largest part of these imports. Belarus imports over 80% of its energy resources from Russia, making it vulnerable to any shifts in Russian energy policy and prices.

Belarus's exports to Russia have also increased significantly, with periods in 2022-2023 when about 70% of Belarusian exports were directed to Russia, up from about 35-40% prior to 2022. This surge was driven by new opportunities for Belarusian firms in the Russian market following Western companies' withdrawals. Russia still accounts for around 60-65% of Belarus's total exports.

This growing dependence on Russia for both exports and imports poses significant risks and uncertainties for Belarus's economy and has led to concerns about the country's long-term growth prospects and sustainability.

The role of the private sector in Belarus's economy

Belarus has an upper-middle-income mixed economy, with a dominant public sector. As a post-Soviet transition economy, Belarus has rejected privatisation efforts in favour of retaining centralised political and economic controls. The country has a highly centralised economy that emphasises full employment.

The private sector in Belarus has been stifled by the government's reluctance to privatise. The privatisation of state-owned businesses is suspended in Belarus, with the last large privatisation deal concluded in 2011. The public sector in Belarus is the largest of all European countries, forming up to 50% of employment and added value in the economy.

The role of the private sector in Belarus is difficult to evaluate due to a lack of transparency in the country's statistics. However, it is clear that the private sector is much smaller than the public sector and faces significant challenges. The dominance of state-run major companies has negatively impacted small and medium-sized businesses, particularly in the industrial sector.

The private sector in Belarus includes small state businesses, micro-businesses, and businesses in which the state has a small share. These businesses are active in various sectors, including agriculture, industry, construction, and services. In 2020, medium and large private businesses employed an average of 1,239,000 people, or 28.7% of all employed people in the economy. They accounted for 34% of all exports of goods and 22% of all exports of services.

The efficiency of the private sector in Belarus is low compared to the public sector. Private businesses have lower income per employee, higher overdue credit and loans, and lower profits than their public counterparts. The private sector also faces challenges due to the lack of structural reforms and the government's interference in the economy.

Overall, the private sector in Belarus plays a smaller role in the economy compared to the public sector. It faces challenges due to the lack of privatisation, structural reforms, and interference from the government.

The impact of sanctions on Belarus's economy

Overview

Belarus's economy has been severely impacted by sanctions imposed in response to its role in Russia's invasion of Ukraine. The country has lost nearly all exports to Ukraine, its third-largest trading partner, and trade with the EU, its second-largest, has more than halved. Belarus's real GDP has been in decline since the start of the war, with a sharp drop during the summer months, and the economy is in recession. The government has responded with increased economic interventionism, intensifying relations with Russia, and concealing economic data.

Sanctions and Trade Distortions

In June 2021, the EU and the UK imposed sectoral sanctions prohibiting the export of key products, including oil, nitrogen, potash, synthetic materials, wood, rubber, cement, metal and machinery. These exports previously accounted for 7.3% of Belarus's GDP. While Belarus has been able to partially recover these losses due to high post-pandemic prices and increased demand for agricultural machinery, it still faces significant obstacles, including high levels of international condemnation, with companies and logistics firms avoiding the country.

The loss of Ukraine as a major trading partner has also significantly impacted Belarus. Exports to Ukraine constituted 5.5% of Belarus's GDP, and imports up to 2.5%. Most trade with Ukraine halted on the first day of the invasion, and it is unlikely to return to previous levels soon. This is particularly challenging as 70% of exports to Ukraine were oil products, which cannot easily be redirected to other markets.

Another important area of the Belarusian economy negatively affected is its exports of services, particularly transportation services and IT, which were previously worth around 6% and 7.5% of GDP, respectively. The EU banned Belarusian cargo trucks from entering its territory in April 2022, and Belarus responded with a ban on European carriers. The IT sector, which used to generate 0.5% GDP growth annually, has also shrunk due to the mass exodus of IT companies from the country.

The Economy Under Sanctions

The sharpest decline in real GDP was during the summer of 2022, before the economy slowly began to adjust. In July 2022, real GDP was down by 10.6% relative to July 2021, with an overall decline of around 4.7% for the year. The IT sector, which had grown at an average rate of 8% per year over the past decade, stopped growing in June and started to contract in the latter half of the year. Unlike other sectors, IT was never targeted by sanctions. The main reason for the decline was the international toxicity of Belarus, with clients and investors avoiding the country. The sector has seen a significant loss of employees, with medium-sized and large Information Services companies losing more than 14,300 workers since the start of 2022.

Policy Response by the Government

The Belarusian government has implemented three general strategies to address the economic crisis:

• Concealing information and manipulating economic expectations: Politicians and officials initially denied that the war and sanctions were impacting the economy, attributing any difficulties to external factors. They suggested that the situation could provide opportunities for Belarusian goods to fill niches in the Russian market. This appears to be part of a strategy to manage economic expectations. Hiding socially significant information has been a longstanding practice in Belarus, with the most recent phase beginning with the concealment of COVID-19 mortality data.
• Increasing Russian economic support and export reorientation to Russia: At the outbreak of the war, Lukashenka expressed support for Russia and his readiness to assist. Belarus is currently the only post-Soviet state openly supporting Russia's invasion. Before the war, Lukashenka repeatedly requested financial support from Russia to help withstand sanctions. While Russian support has been limited, Belarus has secured an agreement to delay debt payments until 2027-2028 and will receive low-price energy and payments in rubles.
• Increased government involvement and greater mobilisation of internal resources: A traditional Belarusian crisis management strategy is to increase the government's role in the economy. The government has tightened fiscal discipline, raised taxes, and resumed detaining prominent businessmen and professionals on charges of corruption or tax fraud. The government has also become more active in controlling prices, accusing private retailers of inflating prices. On 6 October 2022, Lukashenka ordered a ban on any price increases, but this was replaced by a new state regulation system after officials recognised the dangers of this measure.

The sanctions imposed on Belarus have caused the steepest economic downturn since 1995 and an annual decline in real GDP of 4.7%. The government has responded with information concealment, greater economic interventionism, and closer ties with Russia. While these measures may partially stabilise the economy in the short term, they are unlikely to help in the medium to long term.

The role of the state in the economy and its effect on foreign investment

Belarus's economy is a highly centralized, upper-middle-income, mixed economy, with a dominant public sector. It has been described as a welfare state or market socialist. The country has a well-developed manufacturing industry, services sector, and agriculture, with industry accounting for 25.5% of GDP in 2020. The Belarusian state retains control over key industries and has eschewed the large-scale privatizations seen in other former Soviet republics. The government has stakes of up to 100% in major industrial companies, with 2.1% of industrial organizations directly owned by the state in 2019, employing 19% of industrial workers and producing 13.4% of industrial output. The dominance of state-run major companies has negatively affected small and medium businesses in the industry.

The role of the state in the economy has had an impact on foreign investment. Belarus has been subject to trade sanctions by the EU, US, and other countries following the 2020 election, which has restricted foreign investment. The country has also faced challenges in diversifying its oil imports, with a heavy reliance on Russian oil, and has experienced financial distress due to its economic ties with Russia, such as during the 1998 Russian financial crisis. However, Belarus has been able to attract foreign investment through the establishment of Free Economic Zones, which offer substantial benefits to foreign organizations, including tax-free profits and exemptions from certain taxes. The country has also been a partner in the EU's INOGATE energy program, which aims to attract investment for energy projects.

The state's role in the economy has also impacted the business environment and the ease of doing business in Belarus. The country has a highly regulated labor market, with important elements of the central planning system still in place. The private sector, which accounts for a small share of employment, has limited autonomy. The banking system is also heavily influenced by the state, with many commercial banks subject to direct and personal influence from the government.

Overall, the role of the state in the Belarusian economy has had a mixed effect on foreign investment. While the country has faced challenges due to sanctions and its economic ties with Russia, it has also been able to attract foreign investment through Free Economic Zones and energy partnerships. The state's dominance in key industries has impacted the business environment and the ease of doing business, which may influence foreign investment decisions.

The impact of the political crisis on Belarus's economy

Belarus's economy has been impacted by the political crisis in several ways. The country has faced sanctions from the EU, US, UK, and other countries, which have targeted various state-owned industries, including automotive, defence, chemical, and tobacco. The sanctions have led to efforts by the Belarusian authorities to circumvent them, such as hiding statistics and restricting access to data on production and exports. The political crisis has also impacted the country's ability to attract foreign direct investment (FDI), with flows from China stopping after the crisis erupted.

The crisis has also affected the country's transit sector and IT industry, with many tech specialists fleeing the country. The repression of opposition groups and the imprisonment or exile of their leaders have further contributed to the economic impact of the political crisis. Additionally, the EU has halted electricity imports from Belarus, and the country faces challenges in exporting electricity to other neighbouring countries.

The Belarusian economy is highly dependent on Russia, which is a major trading partner and a source of FDI. Russia has provided economic support to Belarus during the political crisis, but their relationship has also been strained due to oil disputes and Russia's use of trade as a political instrument. Belarus has attempted to diversify its exports away from Russia, but these efforts have been met with limited success due to various factors, including the dominance of state-owned enterprises in the manufacturing industry and trade barriers imposed by the EU.

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