Analytical Report: June 2013.


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Despite a rather eventful month, the situation in Belarus has not changed significantly. Alexander Lukashenko continued noisy campaign under the slogan of fighting corruption and modernizing the economy. However, corruption and economic backwardness (more threatening to escalate into degradation) are symptoms of the disease, the causes of which are rooted in the existing socio-political system of Belarusian state. Belarusian regime hopes to save the system that can’t work effectively in the current situation.

At this rate the situation around the creation of a Russian air base in the country is even more interesting. In June, it became clear that the format of a military facility will be completely dictated by Russia. The attempts of Belarusian authorities to smooth their own weakness (which in fact is a loss on the domestic field) with the help of statements, that the air base is a joint unit, were useless. Perhaps that is why the main newsmaker on issues during the month was the Russian side. Belarusian officials would kept silence. The sources associated with the Belarusian authorities stated that Minsk was forced to agree on the establishment of a Russian air base, because Belarus faced isolation from the West. In fact such claims are the continuation of the old attempts to “sell” to the West “Russian threat” as an argument for the restoration of relations with the Belarusian regime under the conditions of official Minsk.

The hopes that the deepening of bilateral defence cooperation will remove Moscow’s demands for privatization of Belarusian state property can ruin as well. It is possible that the Kremlin will try to solve problems in Belarus without relating them with each other. In this regard, the situation around the Belarusian-Russian oil balance for the current year can be an example. In June Belarus failed to sign an agreement with Russia on the supply of oil to our country up to the end of the year. The requests of the Belarusian authorities were satisfied, but only for the current quarter. Oil contracts are one of the most striking indicators of conflict of bilateral relations.

Of course, we should not expect that Moscow will stop all financial and energetic support of the official Minsk. However, the prospects of expansion are rather negative. Moreover, in the light of the adverse trends in the Russian economy, there are doubts about the ability of Russia to maintain the level of subsidies even at current level.

The internal situation: the stability of state power.

The most important events of the month. The issue of improving the control of the country’s top political leaders of the top bureaucracy is still relevant. On June 10, 2013 Alexander Lukashenko, while appointing his assistants — chief inspectors in the regions, spoke about the need to strengthen the effectiveness of the vertical of power, focusing on the staffing issue. However, he stressed that the inspectors appointed in the Brest and Grodno regions practically are not familiar with the regions. This was done intentionally to avoid collusion with local officials to prevent the creation of “clans” in the regions. Alexander Lukashenko openly called the assistants “eyes and ears” of the head of the country.

The development of the situation over the last month. During the month President Lukashenko actively discussed the topic of strengthening the fight against corruption. There is a change in his position: if he has previously claimed that the corruption in Belarus is almost defeated, now he openly calls it a threat to the existence of the state. This characterization of the situation is close to reality.

On June 10, 2013, during the meeting with the Minister of Internal Affairs, Alexander Lukashenko ordered the MIA in cooperation with the State Control Committee and the Administration to create an interagency commission to study the situation in various areas of the economy. The role of the police in the commission is obvious: operational support and ensuring the effectiveness of the Commission in the form of criminal cases. Technically it would not be difficult: most corruptionists are known to law enforcement agencies. If there is a political solution of the issue of corruption in Belarus, at the level of the middle and lower management it can be radically and permanently settled in a few months. Regarding senior management it will be difficult for a number of reasons, two of which are the lack of quality staff to replace the corruptionists and corruption in law enforcement agencies.

Later, on June 14, 2010 President Lukashenko, speaking to the staff of the Investigative Committee, urged them to pay special attention to crimes of harming public property officials and bribery. He stated that “there is no untouchable”. Especially interesting point here is his thesis on the relationship of corruption crimes with “basically officials of high level”. Belarusian leader also spoke of the need to ensure the economic security of the country by which he meant the preservation of state control over the economy and the fight against its informal sector. The latter may be particularly relevant in view of the need to attract additional domestic financial resources. It should be noted that different researchers define the size of the informal sector of the economy of Belarus in the size of 22.3% to 34% of GDP.

Despite the very strong statements of Alexander Lukashenko, the top bureaucracy leaves no hope of getting the political power. In June, once again appeared the information on the topic of introduction of proportional electoral system. A change in the law on associations, prescribing how to convert a non-political organization into a political party should also be expected. Obviously, the main beneficiary of all of these innovations (if they are implemented) is “White Rus”. It’s interesting that the officials continue to discuss the issue of creation of the “party in power” in spite of the clear and unambiguous negative opinion of Alexander Lukashenko. In fact, it is an open challenge that provokes a harsh response. The fight against corruption, as part of the campaign of President Lukashenko, also aims to cut the officials down to size. The latter, apparently, don’t have much fear about that.

It remains unclear why the representatives of the top bureaucracy are not trying to use existing pro-government parties (the Social Democratic Party of People’s consent, Agrarian, Patriotic, Republican, Social and sports ones) but sought to create a new one based on “White Rus”.

On June 24, 2013 it was announced that the Minister of Foreign Affairs of Belarus Vladimir Makey was excluded from the list of persons banned from entering EU territory. In general, this decision was expected, since the issue was discussed since the end of last year. But it should be noted that the property restrictions of the EU are still in power with respect to Mr. Makey.

Despite the beginning of summer, in June the activity of the Belarusian diplomacy in the west has not declined. The regime continues active trying to re-establish dialogue with the West.

Conclusions. The problem of the quality of personnel continues to be extremely painful for the Belarusian authorities. At the same time Alexander Lukashenko’s hopes for emergence of new leaders from the activists of pro-regime youth organizations may ruin.

The fight against corruption has become a major part of the election program of President Lukashenko. In addition, it can be used as a “lightning rod” that would shift public discontent over the state of the economy from top management officials at the middle and lower level managers.

It is also questionable, whether the anti-corruption campaign will allow to build public support for the Belarusian authorities. Opinion polls show that 19.3% of respondents believe in Alexander Lukashenko’s being dependent on corrupt officials. 18.2% don’t believe in his will to fight corruption at all. In addition, the authority of the government is low: over 44% of respondents believe that the leaders of the country are thinking only about personal well-being and more than 15% believe that the authorities are simply unable to restore order in the country, almost 14% — that those in power are incompetent leaders. Only 13.4% believe in the competence of the Belarusian leaders and correctness of their actions. Only 3.7% of respondents are of the opinion that the current Belarusian state serves the interests of the people, not the elite.

It is clear that permission to enter the EU for Mr. Makey is a kind of commodity that Belarusian regime should to “pay” for. If there are some problems with the “payment”, sanctions may be restored. And re-formulation of the question of the removal of restrictions will be much more difficult both political and financial (cost of lobbyists) points of view.

Lifting of sanctions against Mr. Makey is a technical decision and not a sign of improving relations with the West. Fundamental contradictions remain on the agenda. But we should not exaggerate the importance of the relations with Belarus for Brussels. The key country in the region is Ukraine. There is reason to believe that the Kremlin is resigned to the country’s integration into the Euro-Atlantic community. Although this integration is very slow and is accompanied by a conflict between Kiev and Brussels, a policy decision is taken.

We should also note a significant role of Lithuania in making the EU decision in favour of lifting restrictions against Mr. Makey.

The internal situation: the opposition and the protest movement.

The most important events of the month. One of the topics that may be able to consolidate the opposition may be placing a Russian air base in the city of Lida, as it became known in June. It should be noted that Belarusian society as a whole has a negative attitude to the foreign military presence in the country. And among those who are willing to put up with it, most agree to do it only in exchange for financial support for Belarus. If there is a marked decline in household income (for whatever reason), the Russian military facilities in Belarus can become a factor of irritation to the public. Of course, for this factor becoming significant, there should be an organizational work and propaganda. In addition, the Russian airbase is perceived as a provocation by a part of Western political elites. This opens the way for the expansion of financing for the Belarusian opposition. The campaign to eliminate the foreign military presence in Belarus and the country’s non-aligned course can be both politically and financially beneficial for the opposition. On the other hand, the campaign will not cause a repressive response from the authorities, as an imitation of the seriousness of the anti-Russian sentiment is favourable for the regime as an argument for bargaining with the Kremlin about Russia’s financial support. Harsh statements, which mention a threat of occupation of the country, have been already made by UCP. Overall, however, there were no attempts of the opposition parties to use the new opportunities that appeared with the creation of a Russian air base in Belarus.

The development of the situation over the last month. Belarusian opposition, in spite of the holiday season and the traditional political slackening, is making efforts to build capacity in the regions. And both camps of the regime opponents are engaged in this.

Belarusian Popular Front, Movement “For Freedom” and the campaign “Tell the Truth” continue to promote joint program “National Referendum”. They were joined by Belarusian Social Democratic Party. In the framework of the “National Referendum” proponents plan to meet in the regions not only with political activists, but also with ordinary citizens. However, the ability to organize mass meetings with voters is limited: the opposition has no big places for that, and local authorities are not interested in ensuring that such meetings involved many people. Especially since the initiators of the “National Referendum” openly express their hope to achieve the politicization of the population by discussing non-political issues.

The second camp of the opposition is active as well. So, BCD plans to develop its activities in the framework of the campaign “People’s Deputy”. UCP plans to work on the party’s youth to participate in the elections to the local councils in 2014. Both parties continue their training programs for their activists.

In June, resonant criminal case against opposition activist of Novopolotsk and Vitebsk Mr. Gaidukov entered its final stage. He was originally accused of treason. Later — of the attempt to establish contacts with foreign intelligence agencies. The situation surrounding the criminal case was initially politicized, in this regard, Gaidukov’s getting the status of a political prisoner is quite natural.

Conclusions. Achieving the politicization of voters with the campaign “National Referendum” is now unlikely for several reasons:
— poor infrastructure of opposition parties and their small size;
— absence among Belarusian opposition of middle managers responsible for political affairs as well as for organizational and technical support activities of their organizations;
— authorities are able to maintain a relatively high standard of living, despite the fact that the negative trends increase, which reduces the potential of active protest of the population.

The value of “National Referendum” may consist in the fact that in the course of the campaign some more effective methods of communication with the opposition voters could be worked our, organizational slogans and programs towards their more populist could be adjusted, the connection of party leaders in Minsk with activists on the ground will be restored. Thus, although the declared objectives of the campaign will likely not be met, one can count on positive results in the increase of the capacity of opposition, connection of its agenda with public expectations, which, admittedly, are far from democratic and pro-European ones.

Prospects for consolidation of third opposition camp — the left, remain unclear. Judging by the actions of the biggest of four major social democratic parties in Belarus — Belarusian Social Democratic Party, the prospects for the United Left, as we expected, are quite vague.

The fact that the UCP views the elections to the local councils as a “training” for the party youth indicates the absence of the party plans for a major struggle for parliamentary seats. That is logical, since the provision of places in the local Councils for the opposition is not in the plans of the authorities. In this regard, the position of the UCP seems reasonable because of the following facts:
— it helps to raise the level of competence of the young party activists, which is a positive factor for the capacity of the party;
— it will demonstrate the people an alternative to the existing government;
— the extension in the policy of “new people” will be welcomed by foreign donors.

Currently, there is competition between the two camps of the opposition. This is certainly a positive factor contributing to the revitalization of opponents of the regime in whole.
Giving to Mr. Gaidukov the status of prisoner of conscience will not affect the prospects for the normalization of relations between the official Minsk and the West.

Economic situation.

The most important events of the month. By the end of June the deterioration of the entire financial stability and economic development of the country may be noted.

Thus, in May-June gold currency reserves (hereinafter GCR) decreased by 2.9%, coming close to the level of USD 8 billion. In this case, by the end of June there was a high probability that this psychological mark would generally be achieved. It had to happen for several reasons. On one hand, current debt service, as well as the continued decline in the value of gold, about a quarter of the country’s reserves, leads to a decrease in reserves (more than USD 160 million was spent only for “stand-by” loans of the IMF in June). On the other hand, buying up excess currency at the exchange, which is an important source of revenue reserves, having brought about USD 1 billion from the beginning of the year, is now exhausted, and there was no serious debt in June. The current state of foreign trade and balance of payments (balance of trade in goods stabilized at minus USD 350-400 million, while the current account deficit in the first quarter of 2013 was 17.1% of GDP), as well as the decline in real interest rates of ruble savings doesn’t leave hopes for a return to a situation of excess supply in the foreign exchange market. The only way to keep the rate of gold reserves at a level higher than USD 8 billion was the conversion of the high-risk reserves according to international standards (for example, provisions in Russian rubles) into a different form, following the relevant regulations of IMF. According to the statistics of reduction of reserves in the national definition such methodological “source” of the authorities brought additional USD 400 million in June.

The development of the situation over the last month. There’s no progress with capital sources of financing the deficit of the balance of payments of the country. Projects of receiving resources from major creditors — the IMF and the EurAsEC Anti-Crisis Fund – are currently not even being worked out. According to the Chairman of the National Bank Mrs. Ermakova, economic and political demands made by the IMF as a condition for the start of the new financing are unacceptable for our country, and the previously announced program of cooperation with the EurAsEC Anti-Crisis Fund will likely not be realized due to a lack of resources of the latter.

The situation in the global securities market developed negatively for Belarus as well. Quotes of Belarusian Eurobonds fell down, and some days in June traded below par even with the current yield of over 9.5%. Only in the beginning of July, the value of bonds rose slightly and topped the ratings. The reasons for such a development began as a general drop in investment attractiveness of bonds of developing countries, as well as quite negative news about the economy of Belarus. So, the IMF country profile of Belarus was published in June, which predicts a decrease in the financial stability of the economy if the existing system of development preserves. EurAsEC Anti-Crisis Fund specialists have similar view.
Complete calm is observed in the fields of privatization of state property. At the moment there is no potential buyers for the only large object the authorities are ready to sell (the government’s stake in mobile phone company MTS) at the price of USD 1 billion.

Direct foreign investment, having showed good stats since the beginning of the year, have slowed down dramatically. In May they grew by only USD 39.4 million, once again confirming that the determining influence on their growth had reinvested profits of foreign companies, formally implementation according to the results of the fiscal year.

It is significant that the deterioration of financial stability happens against the background of the ongoing slowdown of economic growth, which by the end of January-May was only 1.1%. At the same time, this growth was possible only because of the sharp increase of both consumer and investment domestic demand, as well as an increase in stocks. The size of the latter in May and June stabilized and even showed a slight decline (from 82.4% to 81% of the average monthly production).

The situation on the world market is unfavourable to the adoption of an economic government plans for easing of monetary policy. Against the background of voiced plans to phase out programs to stimulate the U.S. economy USD showed steady growth to most world currencies, while the Russian ruble, in turn, significantly weakened against the dollar (more than 7.7% since the beginning of the year) and the euro. Belarusian rubles in June also weakened somewhat against the dollar (by more than 1%), but the rate relative to multi-currency basket didn’t change. So, since the beginning of the year, the national currency has significantly strengthened against the Russian one, which worsens the position of Belarusian exporters in their traditional market. It is obvious that in order to stabilize the foreign trade the relative parity with Russian ruble should to be restored, but for now it will result in a 5-6% rise of the dollar and reduction of attractiveness of Belarusian ruble savings. The reduction in deposit rates and the growth of devaluation expectations on the weakening of the Russian ruble makes the risks of panic outflow of ruble deposits (that exceed the equivalent of USD 4,5 billion) the highest ever. As a result, the National Bank began to gently insinuate that the planned rate cut by the end of the year to the level of 15% might not take place in the absence of the necessary conditions. This position was supported by Vice-Premier Piotr Prokopovich with special authority in the Government. Obviously, the authorities are aware of the risks of the situation and they will continuously monitor the situation to prevent possible panic. It is likely that the money regulator will have to start tightening of monetary policy and provoke liquidity crisis in the banking system to keep real interest rates on ruble instruments at a relatively higher level relative to the dollar. It is true that such a turn of rates can cause opposition from Prime Minister Mikhail Myasnikovich, who is trying to force the reduction of interest rates on the money market.

Conclusions. In general we can say that the economic problems, noted previously and associated with the lack of structural reforms, are accompanied with the external ones. Possible minimization of the program of quantitative easing in the U.S., according to experts, will adversely affect the financial stability of the emerging economies of Eastern Europe and in particular the cost of borrowing for them. The stagnation in the Russian government and its plans to mitigate the monetary policy only increase the risks to the economy of Belarus. In this situation, the actions of the authorities still lack the complexity and strategic consideration. Plan for GDP growth of 9.6% in 2014 and the emerging differences between the National Bank and the Government characterize the current economic policy of the authorities.

National Security and Defence.

The most important events of the month. In June, the situation with the creation of a Russian air base in Belarus cleared. The base will be dislocation at the airfield in Lida, where there attack aircraft and a training center is already based. The Russian party admitted their will to create a joint database, which assumes that at one airport each country will have its own military units. Creating a Russian air base is a political step, as we wrote earlier here and here. It is worth noting that Lida is situated only 38 km from the border with Lithuania. In the case of a hypothetical conflict with NATO air base position will be extremely vulnerable. In addition, one of the factors for the Russians’ choosing already existing airfield was the absence of the need to invest in the infrastructure of the object. The fact that Russia does not want to invest additional funds, is no evidence in favour of the military-strategic importance for future air base. It can be assumed that the Russian would be willing to withdraw its planes as fast as they plan to enter. Confirmation of the nullity of the military air base in Lida was the official reaction of the Ministry of Defence of Lithuania. The military department of the neighbouring state regards the placement of Russian military facility in Belarus as a political act, not a military threat.

The development of the situation over the last month. On June 7, 2013 Alexander Lukashenko visited the Operational and Analytical Center (hereinafter referred to as the OAC). Belarusian leader said that many perceive OAC “as last resort in search of the truth”. The latter is not entirely clear, as the OAC is not a supervisor and isn’t solving specific problems. In addition to those functions of the agency, that have been well known (state regulation in the field of technical protection of information and information and communication technology, information security) Alexander Lukashenko mentioned another ones: the fight against corruption, the monitoring of the situation in the economy (“certain strategic Industries”), the analytical and predictive activities. In this case, the OAC should struggle not against corruption in general, but in the higher echelons of power.

Being far from the “old” law enforcement agencies, the OAC has become an alternative source of both operational information and forecasts for future periods. According to President Lukashenko, the OAC is a regular body providing internal security of the regime with a specialization in information security and control over the Belarusian head of loyalty at the highest levels. Especially Alexander Lukashenko noted the role of the OAC in bringing to justice “a number of leaders” — officials and managers of state companies.

The details of the scenario “West-2013” military exercises, which will be held September 20-26 in Belarus, were announced. Our hypothesis, that it will be based on the events in Libya, confirmed. Thus, it is suggested to work out ways to fight against illegal armed formations, blocking their areas of activity and actions of the Air Force and Air Defence in order to avoid the use of air strikes to support the insurgents.

Belarus continues efforts to empower their own defence industry by improving the quality of management, production of new products, technological breakthrough.

On June 10, 2013 Alexander Lukashenko appointed former Deputy Chief of the General Staff of the Armed Forces and Chief of the Main Operations Directorate Major General Sulimov to the post of First Deputy Chairman of the State Military-Industrial Committee (hereinafter referred to as SMIC). Mr. Sulimov has extensive contacts in the capitals of the CIS. For three years he headed the secretariat of the Security Council of Belarus.

On June 12, 2013 a meeting of the board of SMIC was held. The event focused on the modernization of scientific and industrial organizations in the system office. During the meeting a number of important statements was made.

SMIC Head Mr. Gurulyov asked to concentrate efforts and maximize results on the production of competitive goods for military use. He accused some leaders of military-industrial complex of considering announced modernization not seriously.

SMIC head spoke of the need to focus investment on the development and production of innovative products. The agency got some support from the government that made the decision on the redistribution of national innovation funds, as the result of which SMIC would receive an additional Br 71.7 billion (approximately USD 7,000,000), the National Academy of Sciences of Belarus — Br 86.85 billion (about USD 10 million). These funds will be used for the implementation of high-tech projects in the field of defence, space research and biotechnology. It can be expected that additional funding will go primarily to those programs that could be the breakthrough for the domestic military-industrial complex (radar, components, geographic information systems, electronic warfare, Robotics).

SMIC leaders are concerned about the growing role of main designers in creation of modern military equipment. In the current year it is planned eventually to form a system of main designers’ work. This will concentrate the potential of the defence industry in creating a competitive technology.

It is interesting to note that during the event, the head of the SMIC Mr. Gurulyov ordered to develop instruments to deal with issues in the area of the state defence order relating to pricing, to specify the responsibility of state customers and performers for the proper performance of the state defence order. Apparently, despite the official optimism of Belarusian officials, there is some friction between the representative of the military-industrial complex and the Army. There is no reliable information regarding the specific conflict situations, but previously Belarusian military voiced complaints about the quality of domestically produced vehicles, and especially about their maintenance by the manufacturer. In turn, representatives of the military-industrial complex claimed the inadequacy of methods of pricing of defence products for domestic use and mentioned cases of late payment for goods and services by the Ministry of Defence. However, there was no information about high-scale mutual claims of military officials and defense industry representatives. Apparently, the situation has worsened, as it was necessary to resolve problematic issues at a high level.

In June the tentative plans to build production of components for Russian aircraft (both military and civilian) at the facilities of Minsk Aircraft Repair Plant (hereinafter referred to as ARP) were announced. The company has plans to start production of components for Russian combat aircraft of “Su” series. At the moment ARP has the capacity to manufacture parts of fuselage, some of the power components and equipment for civil aircraft. The initiator of the new production is the Russian party. This may be indirect evidence that the Russian military-industrial complex is not physically able to continue production of equipment without involving external partners. If it is true, it must be admitted that the Kremlin is not able to stop the degradation of their own defence industry, which continues to use the “Soviet legacy”.

Conclusions. Placement of the Russian air base at one airport with Belarusian units may have important psychological and domestic consequences. The difference in the level of payment for military officers of the two countries against the background of persistent allegations of officials that the defence of our country is paid much attention, will be a factor to discredit the Belarusian regime.

Provision of the OAC with functions of analysis and forecast the for the country’s leaders actually means distrust of Alexander Lukashenko to the other agencies. The reasons for this are unclear.

The scenario of the “West 2013” military exercise should be seen more as a political signal to the West in the light of the events in Syria (Russia’s readiness to support the regimes allied to it, including by military means). But actually, “West 2013” has nothing to do with the potential forms of conflict in our region. The actual armed conflict on the borders of Belarus is more likely to take the form of a local / regional war, in which the parties will be states or even military organizations and their units, but not mythical “militants”.

The appointment of Mr. Sulimov to the post of first deputy chairman of the SMIC is a good decision. Through personal contacts of the general in military circles of CIS it is theoretically possible to obtain insider information. This may contribute to the promotion of Belarusian military products in the markets of former Soviet countries.

The government’s decision to increase funding of developments in the field of defence is certainly a positive thing. However, one must understand that the allocated funds won’t be enough to significantly increase the capacity of the domestic defence industry. In comparison, the budget of the Ministry of Defence Industry of Azerbaijan totalled USD 1,3 billion. But Azerbaijan is not among the leading countries in military production. Obviously, it’s not necessary to expect a resounding breakthrough to USD 7,000,000.

The proposal for the production of aircraft components for Russia in Belarus can be welcomed. This is a new, innovative production for Belarus, and the market for such products is guaranteed over the next 30-40 years (of course, if the products are of proper quality)