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An article published in Kommersant newspaper on September 16 about the impending economic merger between Belarus and Russia created quite a stir in both countries. Yet the agreements that have apparently already been reached are not accomplishable in the short timeframe laid out, if they are even feasible at all.
According to Kommersant, the two countries are preparing to establish a unified tax system; unite their customs services; and introduce a unified foreign trade regime, banking watchdog, and energy market regulator, while retaining separate central banks and currencies.
The two governments should reportedly have the details in place by December, when Russian President Vladimir Putin and Belarusian President Alexander Lukashenko are due to meet. So far, the only things to have been approved are a framework action plan and a list of 31 road maps. A close look at the plans for three area—taxes, customs, and energy—shows that the plan is utopian.
The claim that a unified tax system is due to be approved by April 1, 2021, was met with skepticism by Belarusian economists. Since Russia’s economy is nearly 30 times the size of Belarus’s, it’s clear that Belarus would have to rewrite its tax system to bring it in line with Russia’s, and not the other way around.
This would be a colossal job. The countries have different systems for collecting and allocating local and central taxes, as well as different tax breaks and deductions. Unifying rates of excise duty would mean severe losses for Belarusian producers of alcohol, tobacco, and gasoline: losses that in some cases would be insurmountable.
Belarus has several key free economic zones: the Hi-Tech Park, which has facilitated the country’s IT boom, and the Great Stone Industrial Park, a joint project with China. Closing the former would be a blow to the most effective sector of the economy and the jewel in Lukashenko’s crown. It would mean a brain drain of tens of thousands of educated professionals from the country. Closing the second park would dent the relationship with China, which is important to Belarus.
Even without these issues, making major changes to the country’s 1,000-page tax code would cause huge upheaval to Belarusian businesses and tax organs. The country’s already beleaguered investment climate would be decimated.
The economic damage from this reform would exceed Belarus’s losses from the gradual transition to paying global prices for oil following Russia’s “tax maneuver.” That maneuver, which is expected to cost Belarus 0.3 percent of GDP per year, is the whole reason behind the conversation about integration. Solving the problems caused by the tax maneuver with a shock of this kind for the economy is tantamount to curing a migraine with a guillotine.
As for the plan to create a unified regulator for the energy market—the most sensitive sector of the economy for both countries—it looks set to run aground on the old trap of rivalry.
Moscow—and Russia’s fuel giants—surely will not agree to the two countries having equal weight in decisionmaking, since that would give Minsk a veto right. Yet if Russia makes the decisions as the bigger country, then what’s in it for Minsk? Why create a new structure without gaining new opportunities to influence decisions? At most, the two sides can create a coordinating council between their energy ministers, but it’s not clear how that would differ from simple talks between the two states.
The creation of a unified oil and gas market would be a victory for Minsk, which has always insisted that it should pay Russian domestic prices for crude products. The question is whether Russia is prepared to make such a major concession.
The customs situation is a little different, since the two nations already form a customs union with shared rules and tariffs. So what more could be added to this? According to Kommersant, the unified customs policy would include “joint customs raids, shared information systems, and a more or less single customs service.”
The two countries’ customs services already exchange information, and the appearance of Russian customs officers on Belarus’s western or southern borders could be perceived aggressively by Poland, Ukraine, Latvia, and Lithuania. Even symbolically, allowing Russian security service officials to be present at the Belarusian border would be a blow to the image of a neutral peacemaker that Lukashenko has cultivated during the last five years. Finally, a unified customs service, like the energy regulator, would encounter the same insurmountable problem of sharing authority.
In addition, if Belarus joins Russian countersanctions on Western food imports, it will incur the ire of the Belarusian people and void years of thawing relations between Minsk and the EU, and all prospects of continuing that process. It would mean risking hundreds of millions of dollars over the coming years in the form of European help and investment from European banks that has started trickling into the country. Again, this is too great a price for Minsk to pay.
All the other talk of harmonizing agriculture markets, trade, transport, and so on does not really mean integration as such, or even the adoption of shared laws. The countries are simply declaring their desire to bring their laws closer.
In the history of integration between Russia and Belarus, many far firmer agreements and deadlines have fallen through, not least plans to introduce a single currency by 2005. It’s difficult, therefore, to talk about the prospects of such airy plans as “harmonization” and “developing shared principles.”
Minsk considers the mere fact of negotiations on integration to be a concession on its part: it is meeting Moscow’s conditions for issuing compensation for its tax maneuver, and for ensuring a favorable outcome to talks on gas prices from 2020.
If Lukashenko sees during the upcoming months of talks that he will not get what he wants, then even signed documents could be torn up in December, never mind attempts to implement them in 2020. The trouble is, Moscow also realizes how difficult it will be for Minsk to digest the road maps’ implementation, and that previous integration agreements have fallen through many times. It would be naive of Russia to give Lukashenko what he asks for in advance in exchange for his word that Belarus will implement a plan that is not particularly feasible.
Moscow’s position by December will likely be something along the lines of readiness to take things step by step: returning certain tariff preferences to Belarus if and when it sees that integration is going to plan. If Lukashenko signs the paperwork in exchange for such flimsy guarantees, we can expect years and years of bureaucratic ping-pong over who has done what, and whose turn it is to make a move.
Right now, there’s no desperation or desire from the Belarusian side to obtain concessions from Moscow at any price. The Belarusian budget for next year has been drawn up on the basis that there will be no compensation for Russia’s “tax maneuver.” The damage from it is serious, but not fatal. The cumulation of these losses will only anger Lukashenko and make him less prepared to compromise, rather than leaving him more amenable.
As the years go by, the Belarusian economy will adapt to the new reality of increased fuel prices. But implementing these road maps will still be very painful in some areas for Minsk, and downright unsustainable in others. The last twenty years have shown that as far as relations between Belarus and Russia are concerned, serious efforts are required to believe what is written in the paperwork. The current haggling over integration is no exception.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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