Analytical Report: January 2013.

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The first month of the new year has brought significant changes. The threats to the sustainability of Belarusian State remain actual: the poor quality of public administration, human resources crisis in the government, the negative trends in foreign trade, the burden of servicing the public debt, limited funding of national security and defense. Overall, the authorities continue to control the situation in the country while neutralizing external threats. However, without changing the system of government, stability of the state will be under threat.

At the moment the Belarusian authorities don’t have the intention to carry out a deep and real reform of the political system, and just are performing steps to optimize the existing one. In fact, the regime is trying to make the most of the existing mechanism of power with the use of available personnel. Meanwhile, personnel problem is so obvious that to it can’t be ignored. If in May 2012 Alexander Lukashenko flatly denied the possibility of a significant growth of wages of civil servants, in January 2013 for the first time in many years he acknowledged the fact of low salaries of officials and promised to correct the situation and to raise the prestige of the civil service. But in the future.

Against this background, the ability to resume the dialogue with the West, neutralizing the threat of real intervention of Brussels and Washington in the “Belarusian issue” is really important. Probable dialogue with the West can be accompanied by informal promises of the official Minsk and willingness to proceed with their implementation after 2015. In an attempt to normalize relations with the West and facing a rather tough position of the EU, the Belarusian regime is trying to establish a dialogue with the U.S.. It is doubtful that this idea could be successful: Washington’s position against the Belarusian authorities is tougher and more principled than one of the EU.

January was remarkable because of almost complete silence among the opposition. In general, the situation in the camp of the opponents of the regime can be described as a struggle with the regime and with each other. There are no reasons to expect fundamental change in the situation among opposition groups.

The negative balance of payments and foreign debt creates big pressure on the national economy. Belarusian authorities are trying to solve these problems with the use of new loans on worse terms.

Certain hope is in the growth of exports of defense products. Development of military-industrial complex is not only seen in the context of attracting additional funds to the country, but also as part of a strategy to modernize the national industry, the transition to the production of high-tech products with low costs of raw materials and high surplus component in the price. However, for a qualitative improvement, Belarusian defense industry requires substantial investment, which can’t be attracted at the moment.

The internal situation: the stability of state power.

The most important events of the month. The most notable event in January was the public return of Viktor Sheiman to the team of President Lukashenka. On January 8, 2013 Viktor Sheyman was appointed personal assistant of Alexander Lukashenko. And on January 21, 2013 he was appointed the head the Office of the President. This structure is a powerful multisectoral holding with special status.

Mr. Sheiman is one of the most experienced public administrators. His political career continued without interruption from 1990 to July 2008. Being a member of the Supreme Council of XII convocation he supported national-democratic forces that led to the restoration of the independence of the country. Being in senior positions in the national security system, he conducted special personnel policy known as the “Sheiman line”. The core of it is that only ethnic Belarusians should be appointed to all high positions in law enforcement agencies.

Appointment of Mr. Sheiman to the post of personal assistant of Alexander Lukashenko, given his experience and the situation, can be linked to the need to strengthen the monitoring of the law enforcement agencies. Especially during their reform. However, in recent years, there were significant changes in security agencies, their configuration has changed, there are new “heavyweight” there. In this situation, the conflict between Mr. Sheiman, in case he tried to regain his former influence, and current influential figures was predetermined. Which necessitated moving of Viktor Sheiman to another status post.

The development of the situation over the last month. In January, there were two meetings (on 3rd and 11th of January), dedicated to the improvement of public administration in Belarus. Both of them were headed by President Lukashenko. According to their results it can be concluded that the government understands the critical situation in the staffing of the public administration and plans to take action to improve the situation by raising the prestige of public service. Thus the authorities demonstrated an understanding of the need to optimize not only the quantity characteristic of powerful apparatus, but also its structure and function.

In January, the Russian party didn’t raise the question of compensation for budget losses due to re-export of Russian oil by Belarus. Previously, the size of Russian losses was estimated at about USD 1.5 billion. The reason for the smoothing of the Russian position may be the presence of some mutually acceptable agreement of the parties (for example, the prospect of a major privatization deal on some assets) or a clear need for Russia to secure the support of regional integration in the CIS. In this case, the fundamental issues, affecting the sovereignty of Belarus, are not touched. Mr. Lukashenko avoids radical integration, which is promoted by Russia. And in this matter the positions of Minsk and Astana agree.

Belarusian authorities continue to try to renew relations with the West. There are several reasons not to reduce the activity in this area. Including the situation with the balance of payments in the country, which requires urgent restoration of dialogue with international financial institutions. Obviously, not everything’s good in the relations with Russia. It’s necessary to note the statements of President Lukashenka addressed to the Russian Ambassador to Belarus, which border on charges of incompetence and personal insult.

It should be noted that this time, the Belarusian authorities are actively trying to normalize relations not only with the EU, but also with the USA, which were previously neglected. And for this purpose they are willing to try to influence Washington’s position by forming the necessary expert opinion in the American media. It’s necessary to admit, however, that without starting a dialogue between the senior officials the relations building between the U.S. and Belarus is actually impossible. The conditions for resuming the dialogue were stated by Washington. Some of them are unacceptable for the official Minsk, as it has been repeatedly stated. However, the opinion of Belarusian authorities is of little interest to the U.S. at least due to a peripheral status in Belarus for U.S. foreign policy. Minsk has nothing to offer or “sell” to the Americans. The American presence is not so much connected with the presence of important interests, but rather with the superpower status, which requires to be involved in the events and processes in all regions of the world.

The need to renew relations with the United States is connected with the appointment of Vladimir Rybakov, who is one of the leading experts in the United States in Belarus, to the post of Deputy Foreign Minister on January 9, 2013. In addition, his previous occupation as assistant of Alexander Lukashenko shows sufficient trust to him of Belarusian leader and the importance of the issue of the U.S. for Belarusian foreign policy. In fact, Mr. Rybakov (also because of previous relations with Alexander Lukashenko) has become the second person in the Ministry after Mr. Makey, who is more specialized in European affairs.

Belarusian authorities are trying to restore the lost control over the information space of the country. This can be stated according to the creation of the holding of state newspapers. An attempt to unite a number of papers and magazines, the circulations of which have been declining for several years, despite the support of the state, is to some extent an attempt to change the strategy of controlling the national information field. Instead of the principle of “many state newspapers” there are plans to implement the principle of “the most influential newspaper is the state one”.

On January 31, 2013 a meeting, chaired by President Lukashenko, on the issue of making changes in the electoral law, was held. Some cosmetic changes and those ones, aimed at simplifying procedures for the authorities of the elections, were adopted. At the same time Alexander Lukashenko has criticized the idea of ​​nominating candidates from the national associations of over 1,000 people. This criticism should be seen as a very specific order to the officials and influential circles of business community not to intervene even in simulations of political processes, not to mention the real politics. In addition, the innovations that will complicate the possible campaigns to boycott elections in the future were approved.

Conclusions. The appointment of Mr. Sheiman indicates staffing crisis of power. This is why Alexander Lukashenko is forced to rely on the few “old guard”, which is older and has problems with their health. In the event of another financial crisis, a return to form of mobilization of government and a series of repressions can not be excluded. However, if these steps will be effective, only for a short term: the existing system of power has become obsolete and in the long term has no future. As a possible positive side of Mr. Sheiman’s return to power we can admit the strengthening the position of supporters of state nationalism.

The Office of the President has considerable assets, which were often used not in the public interests. One reason for the appointment of Mr. Sheiman could be a need to bring the order there. In addition, the experience of his previous work and a wide network of informal contacts abroad can be used to organize the military build-up of exports of Belarus. This topic was the focus of attention during the meeting, chaired by Alexander Lukashenko on the prospects of development of national military-industrial complex on January 24, 2013. The importance of the problem demonstrates the urgent implementation of the government’s proposal of the State Military-Industrial Committee on the establishment of the Institute of General Designers.

The public administration reform is getting more or less logical, including not only reducing the number of officials, but also optimizing their functions. But it is not clear how the issue of reducing the level of public participation even in small matters can be implemented in a personalist regime. Rather, in parallel with the reduction of the number of officials the duplication of functions of state bodies will be eliminated. Thus, it will be possible to provide the same level of control with fewer officials. But it is not about any liberalization or modernization of public administration. The basic principles of its formation and functioning, established after the constitutional reform of 1996, remain unchanged. This is just a regular optimization of the existing system. The results of this optimization will be quite limited.

The restoration of relations with the West is a necessary part of the return to a policy of geopolitical “swing”. The attempt to involve China into “Belarusian issue” failed. As we have previously indicated, a deterrent to start a productive dialogue to restore relations between Belarus and the EU is a legal requirement of the rehabilitation of convicts of the December 19, 2010 events. The best for the official Minsk is a dialogue without preconditions, or at least not obviously unacceptable conditions. In any case, Alexander Lukashenko must accept the fact that his reputation would not allow him to have contact with the most influential western politicians. The end of international isolation of Belarus as a country does not mean the end of the isolation of President Lukashenko. At the moment, the official Minsk should at least release all political prisoners, extend the field for action of the opposition, civil society and the media. Only then our relations with the West will start to improve. So far, the activity of Belarusian Foreign Ministry is quite good, but gives no result.

An attempt to increase the level of influence of state print media through their institutional reform has little chance for success just because of declining trust of the population to the authorities. In addition, the active part of the society receives information mainly from the Internet, which is dominated by non-state and foreign information resources.

Speaking about the plans of the regime to reform Belarusian electoral legislation , it is necessary to pay attention to the intention to move to a system of relative majority in the parliamentary elections and to bring election boycott campaigns out of the Electoral Code. Implementation of the first initiative is an attempt to simplify the problem for the legal retention of power in a low level of trust among the population. According to the latest actions of the authorities it can be stated that even with the weakness of its political opponents, the regime does not feel confident in the ability to build its own electoral support. Thus, the possibility of the holding government’s populist policies before the elections may already be lost. In this connection, the probability of a successful boycott campaign increases (unless, of course, it will be organized and carried out at the appropriate level). The authorities show the intention to complicate the organization of election boycott by establishing a system of administrative obstacles (for example, to equate a campaign for the boycott to “mass event”, which are de facto prohibited in Belarus). All this gives reason to expect that the regime will face the elections of 2015 in a much more weak state than the elections of 2010 or even of 2012.

The internal situation: the opposition and the protest movement.

The most important events of the month. January 2013 is notable for a small number of events: the month did not bring any change to the environment of the regime’s opponents. The small number of events is surprising, even against the background of low activity of political opposition.

The most important event of January 2013 was the consultation on joint action of UCP and BCD. Both parties plan to create a system with multiple levels of interaction and to coordinate their work at both national and local levels. It’s also necessary to admit the intention of the BCD to intensify its campaign “The council of people’s deputies”, which is planned to be enhanced by social campaigns of UCP. In fact, it is about creating competitive organizations in relation to the regional offices of members of the “Civil contract” managed by “Tell the Truth!”. In the case the regional offices of “The council of people’s deputies” achieve the level of capacity of ones managed by “Tell the truth!”, new activist groups will be involved by the opposition. Furthermore, the presence of a competitive environment won’t allow (at least in theory) each campaign to degenerate into another profanation, aimed at appropriation of financial resources allocated for its activities. In this regard, the ability of the BCD and the UCP to create the appropriate resource base for constant activity of professionals and involving new specialists is critically important. While there is reason to believe that the amount of funds available to both parties, is less than necessary for the implementation of all plans of UCP and BCD.

The development of the situation over the last month. At the same time, the opposing group of opposition organizations – BPF Party, Movement “For Freedom” and “Tell the Truth!” continued discussing the issue of nominating a single candidate in the presidential election of 2015. While the leaders of the opposition understand, they have plenty of time, a quick result of such discussions shouldn’t be expected.

In January the authorities predictably refused to register the organizations of BCD. At the moment the procedure of legitimation of “Young Christian Democrats” is suspended. However, the chances of a youth wing of the BCD to get the official status is extremely small.

Conclusions. Our earlier findings on the formation of two working groups or blocks or opposition organizations are confirmed by the latest events. And the probability of the union of these two blocks without any external interference is minimal. It is even more improbable, because the debates on the possible format of interaction are touching personal relations between the leaders of organizations.

Obviously, the donors should abandon the policy of union of opposition rival blocks. It is better to focus on building the capacity of each organization individually, and strengthen the control over the results and spending of the funds.

Economic situation.

The most important events of the month. In the beginning of 2013 the authorities continued to increase domestic debt: for example, the authorities announced the next placement of foreign currency bonds in the amount of USD 50 million for the population (the 90% of the previous ones were purchased by the end of January).

The Eurobond market is being seriously considered as one of the external financing sources for the needs of the country. Thus, a series of presentations of planned placement of Belarusian bonds in the major financial centers of Europe is planned to be held in the beginning of February. Environment for such accommodation has improved in January 2013, and quotes of Belarusian bonds once again broke record highs, providing a yield of 6.15% for the five-year and 7% for the seven-year bonds. The total capacity of the European and Asian markets for Belarusian bonds can be estimated at USD 1-1.2 billion, and the coming months (and maybe a month) can be considered as the best time for them.

The development of the situation over the last month. At the end of December, there was a rather substantial (almost 5%) increase in the total debt of Belarus. This increase happened entirely due to growth in domestic debt against the background of fall in external debt.

Only in the last day of January the transfer of the EurAsEC Anti-Crisis Fund next credit tranche to the accounts of the Ministry of Finance of Belarus in the amount of USD 440 million, agreed in early December 2012, was finally completed. According to official data, the transfer was detained solely for technical reasons, but many analysts considered this as an attempt of Russia to pressure Belarus in backroom negotiations on the privatization of large Belarusian companies. So, on January 31, 2013 Belarus received the tranche, and its admission to the Belarusian reserves will mitigate the expected decline of gold and foreign currency reserves (hereinafter GCR) in January.

GCR is expected to fall against the background of substantial payments to service the external debt in January. In the situation of recent foreign trade deficit, currency exchange can not be a source of replenishment of gold reserves, and as the real sources of balancing the balance of payments can only be got from the external borrowings and profit from privatization.

In December the international reserves of the Republic of Belarus in the definition of the IMF SDDS decreased by USD 112.6 million and January 1, 2013 were USD 8095 million in the equivalent. In the national definition the international reserves declined by USD 134.3 million and amounted to USD 8763.1 million in equivalent.

The situation in the money market can be characterized by two processes: a significant increase in the ruble money supply by the end of December and the growing shortage of ruble liquidity in January.

Thus, in December ruble money supply increased by more than 8%, and for the full 2012 it increased by as much as 57%, which is well above the annual target limit (21-25%). This significant increase in the money supply, along with a significant increase in income (real incomes for the year increased by 20% instead of the planned 3-3.5%) definitely puts pressure on the external sector and inflation, which has already led to the negative trade balance in recent months. As a result, in January, there was quite a substantial weakening of the ruble against the multi-currency basket (by 2.29%).

From the point of view of the observer, the situation in the banking sector is rather paradoxical — despite the significant increase in the ruble money supply and size of ruble deposits as its component, in January the deficit of ruble liquidity in the banking system increased. Most likely this situation can be explained by problems in certain banks involved in the financing of state programs (this may be connected with including the transfer of the assets of these banks to the Development Bank), and the predominance of short-term deposits in banks’ liabilities, which creates difficulties in performing prudential regulations of the National Bank.

In 2012, despite a significant deviation from plans for the economic growth (only 1.5% instead of 5-5.5% planned), the central government budget was executed with slight surplus. The principle of a balanced budget was the basis for the plan in 2013 as well.

Another reason for muted optimism is the expansion of the Development Bank’s and transfer of funding for most state programmes, for many years forming a substantial quasi-fiscal deficit, to its responsibility. As part of this process the principles of the allocation of funds for state programs are planned to be improved (to control targets on the basis of the implementation of the project or its phase, to provide the ability to obtain financing to private companies). Besides the Government funds the Development Bank plans to raise funds for funding government programs by issuing bonds and obtaining loans for the domestic and foreign markets (it is planned to attract USD 200 million from the foreign market in 2013). The important point is the fact that the head of the Development Bank Mr. Rumas is known as an opponent of the emission heating of the economy, which in 2010-11 was carried right through the funding of state programs.

Conclusions. It can be stated, that in January the economic situation in Belarus has not changed. The authorities have continued to pursue a deterrent policy that is controversial to the plans for economic growth in 2013. At the same the statements about the importance of achieving the stated growth slightly changed, and President Lukashenko claimed modernization of industry to be a top priority for 2013. The task of modernizing the industry (at the beginning stated to be a total re-equipment of existing enterprises) has been reduced to the implementation of 12-15 projects that can ensure the economic growth. Also, authorities speak about the preservation of the principle of determining the exchange rate through the balance of supply and demand, which involves the removal of external imbalances through gradual devaluation of the ruble. In other words, among the stated objectives of preserving financial stability and serious economic growth, the first one remains a priority.

At the moment the planned external borrowings are clearly not enough to service the debt in the coming years and maintain a safe level of gold reserves. In such circumstances, large privatization deals are almost inevitable, which is already reflected in the statements of Belarusian authorities. It is obvious that the best option for the authorities would be to sell minority stakes in major Belarusian enterprises (“Belaruskali”, BMZ, “Naftan”, etc.). According to the State Committee on Property, in 2013 the sales of minority stakes only in “Belaruskali” and “Naftan” would allow to get USD 2.5 billion.

National Security and Defence.

The most important events of the month. Overall, in January there weren’t any changes in the situation in the field of national security and defence. At the same time there weren’t anything concrete about the reform of some law enforcement agencies (MIA and KGB).

The most important event was the meeting on the development of the military-industrial complex, held under the chairmanship of Alexander Lukashenko on January 24, 2013. It was to access the results, achieved in 2012. Also at the meeting the plan to increasethe  exports of defense products of Belarusian producers was announced. President Lukashenko spoke about the demand in the international market for Belarusian command and control systems, systems of protection against high-precision weapons, radar and air defense systems. At the moment more than 70% of the total production is exported, 90% of the exported product samples were originally developed in Belarus. However, in whole Belarusian military export volume is small and almost invisible against the background of GDP-forming export industries (petrochemical, iron and steel, and food ones). According to the tradition of the latest months, Belarusian President spoke about the rational use of public funds. He announced, that the public resources should be provided only to those projects and developments, the results of which are guaranteed to be in demand in the arms market.

The development of the situation over the last month. In January, President Lukashenko spoke about the need to optimize the structure of the public prosecution bodies and the Investigative Committee (hereinafter referred to as IC). It is about combining IC departments and prosecutors’ offices in cities, having the regional IC departments (all regional centers and Bobruisk), and in regional cities. In the latter the merge of city IC departments and prosecutors offices with the relevant IC bodies in surrounding rural areas.

In January 2013 there was a presentation of layout of special mobile robot system platform “Salamander”. The project is developed by “Agate — Electromechanical Plant”. It is planned that the platform can be equipped with different modules for different purposes depending on the needs of the customer. “Salamander” is interesting for Belarusian security services (at their request the project will be adjusted). At the moment, it is the third known project associated with the production of multi-purpose robotic platform (earlier there were “Adunok-M” and “Scarab”). Given the limited resources of Belarusian defense industry, it is not clear what caused the need for such a allocation of financial resources, especially taking into consideration the high characteristics of projects “Adunok-M” and “Scarab”. In addition, it should be noted that there is no reliable information on the purchase of these systems for Belarusian Army or requests in international arms market.

On January 16, 2013 a meeting of the Military Committee of the Euro-Atlantic Partnership at the level of chiefs of general staffs of the armed forces of NATO member states and partner countries was held in Brussels. Belarus was represented by the Chief of General Staff of the Armed Forces — First Deputy Minister of Defence, Major General Tikhonovsky. The event was dedicated to the strengthening of international and regional security. Despite tensions with the West, Belarusian authorities does not reduce the intensity of contacts with NATO. The claims of the official Minsk about NATO are also quite inconsistent: the aggressive rejection of cooperation can easily turn into offer of partnership between NATO and CSTO.

On January 30, 2013 preliminary staff talks on training exercises with the collective rapid reaction forces of the Collective Security Treaty (hereinafter CSTO) “Interaction-2013” (to be held in the country this fall) were held in Minsk. The exercise scenario is not yet known, but with high probability we can assume that the events of the last war in Libya will be span style=»color: #000000;»take into account within the framework of the exercises: an armed rebellion in a CSTO country, supported by foreign military intervention.

Conclusions. In general, an initiative to unite a number of prosecutors’ offices and IC departments is adequate. However, the mere merge of the bodies would not result in significant budget savings, which is the main purpose of transformation. Everything will depend on the new organizational structure of the agencies.

An example of the development of Belarusian robotic platforms is significant. The situation is quite strange: against the background of the limited resources of Belarusian military-industrial complex, the authorities decide not to concentrate the resources, but to manage several developments of the same kind. Just notice, that the projects of unmanned aircraft systems (hereinafter UAS) are developed by three state organizations at the same time. Obviously, the purchases of the all models of UAS for domestic use are currently impossible. And the access of Belarusian UAS to the international market will take time and more resources to promote them, while the chances for success are small because of high competition.

In general, the military cooperation between Belarus and the West in the existing formats and programs can serve as a kind of replacing the contacts at the highest political level and provide a possibility for official Minsk’s attempts to impose its own conditions in the dialogue with the West. As a theoretical background of this a threat to the EU’s security due to the destabilization of Afghanistan and the countries of Central Asia can be used by Belarus. However, this threat will get real only after the religious extremists return to power in Afghanistan. Currently, the eastern borders of the EU are not in danger, and the factor of regional security can not be the basis for building a dialogue of Belarusian regime and the West. The attempts to use the risk of uncontrolled influx of illegal migrants from Belarus failed last year. Belarusian authorities managed neither to get any financial support from the Europeans nor to impose their format of a dialogue with the EU.

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