Analytical Report: May 2013.

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If we talk about the main problem for Belarus in May, then it can be described briefly: search for financial resources. In the situation of already launched election campaign the authorities strive to maintain social and economic stability and actually abandoned the prospects for any significant reforms. Under these conditions, guaranteeing the Russian financial support is the key point. The expansion of this support is linked to the start of operation of the Eurasian Economic Union.

In addition to preserving the existing system, the Russian financial aid is actually the only factor in the preservation of national defense capabilities. At the same time the Belarusian authorities do not give up hope of engaging China in regional politics as an ally of the official Minsk. The issue of ensuring financial investments is relevant for the opposition, which will enter an electoral “marathon” of 2014-2016’s in a situation of limited resources.

At the moment it is possible to ascertain the stability of Belarusian state. However, it is not supported by the positive developments in economy or in politics or in matters of security. In such situation, the stability is very quickly turning into stagnation, which is then replaced by degradation.

The internal situation: the stability of state power.

The most important events of the month. On May 29, 2013 in Astana, after talks of the leaders of the Customs Union, Ukraine and Kyrgyzstan, President Nazarbayev once again made clear that any transfer of political functions in the supranational bodies even can’t be discussed, the Eurasian integration is purely economic in nature. Then, on May 31, 2013 in Minsk a memorandum on deepening cooperation between the Eurasian Economic Commission and Ukraine was signed. Kiev is actually getting observer status in the Customs Union (hereinafter referred to as CU).

It is difficult to speak clearly about the prospects of Ukraine’s accession to the Customs Union. However, it should be noted that the full participation of Ukraine in the Kremlin-initiated projects would have a number of implications for both the integration and for Belarus itself.

Firstly, we can expect a sharp deceleration of the integration processes in connection with the introduction of a new subject, a little susceptible to influence by the other members of the CU, with special interests. Ukraine will have every chance to play a key role in the development of Eurasian integration, since without its approval any unifying initiative will become difficult or even impossible.

Secondly, it is clear that Moscow with Ukraine will finally lose its “controlling interest” in the CU, becoming in fact only the first among equals. But there will still be only two equals — Russia and Ukraine. Other small states will be forced to focus on the position of one of the leading countries either create their own informal pool to coordinate their interests. Moreover, in fact for bargaining with Moscow and Kiev.

Thirdly, participation of Kiev in integration projects will be determined by a set of economic preferences offered by Russia. Obviously, this must be significant in scale of bonuses. It is doubtful that in the current state of the Russian economy and budget are able to satisfy the needs of Ukraine and maintain the current level of financial assistance to Belarus at the same time.

The development of the situation over the last month. In the situation of the election campaign launched, the Belarusian regime seeks to restore electoral support as far as possible. The most obvious are two ways:
-Increasing prosperity through economic development of the country;
-Creation of an enemy (as in the eyes of the people and of certain social groups) with which Alexander Lukashenko will fight for the people.

Factor of economic progress is largely dependent on external conditions. In addition, ensuring the welfare already is seen by the bulk of the electorate as a duty of the authorities. Thus, creating an image of a threat is the most appropriate and cost-effective way to enlist the support of the population in the electoral campaign in 2014-2016.

Enhancing the fight against corruption and prospects of attack on tax evaders can be considered from this point of view. The latter can be presented as the recovery of social justice and not just a routine struggle against offenses.

On May 23, 2013 Alexander Lukashenko met with State Secretary of the Security Council Leonid Maltsev. Belarusian leader said that the focus of the next meeting with the heads of law enforcement agencies must be the fight against corruption and economic crimes. Alexander Lukashenko rightly pointed out that in the law enforcement agencies (with the exception of the KGB), the active work is carried out is not enough to fight corruption, the potential of Ministry of Internal Affairs is not fully used. Regarding the fight against economic crimes, according to the statements of Alexander Lukashenko, he is more concerned about tax evasion and the stratification of society. But the Belarusian leader ignores the fact that social stratification is the natural process of market economic system, and is not always the result of criminal activity. Linking the crime to the economy and social justice only makes sense to gain sympathy from the low-income groups.

In May Belarusian authorities have tried to solve a number of mutually exclusive tasks in the current conditions. The obvious need to rebuild relations with the West, faced with continuing attempts of dialogue from a position or, at least, having secured at least formal recognition of Alexander Lukashenko as a subject of international politics. So, on May 7, 2013 Belarusian Ambassador to Germany Mr. Giro curled that Minsk hopes that Belarusian leader will be invited to attend the summit of “Eastern Partnership” in the autumn of this year. Official Minsk isn’t confused by the apparent lack of realism of such expectations while there are political prisoners in the country and Belarus is at the peripheral areas in the international system (as opposed to, for example, Azerbaijan, where the oil interests make West to turn a blind eye to political repression).

At the moment the Belarusian regime can only continue to try to resume the dialogue with the EU on acceptable terms. In May, a meeting of Foreign Ministers of the Visegrad Group and the Eastern Partnership in Krakow, where Belarus was represented by the Deputy Minister of Foreign Affairs Mrs. Kupchina, was used as a negotiating platform. The position of Minsk has not changed: the Belarusian authorities are hoping for an equal dialogue and priority economic issues to political and ideological.

In the context of the Belarusian-European relations it is necessary to mention the decision of the EU Council of May 29, 2013 on exclusion from the “black list”, introduced after the events of December 19, 2010, certain defendants (one individual and two businesses). This step can be regarded as a definite sign for official Minsk of readiness to revise the EU’s restrictive measures against Belarus. However, given the high level of bureaucracy in Europe, this decision may be due to the fact that the formal basis for continued restrictions disappeared.

In May, the Belarusian authorities continued their efforts to balance the factor of Russia and the West in Belarus. Minsk was visited by the member of Politburo of the Central Committee of the Communist Party of China, vice chairman of the Central Military Commission of the PRC, Colonel General Xu Qiliang. On May 17, 2013 Prime Minister of Belarus Mikhail Myasnikovich, taking the Chinese guest expressed his confidence in deepening military-technical, social and economic partnership between the two countries. Considering the latter the reasons for optimism remain a mystery, because the direct Chinese investment in Belarus are negligibly small. Also Belarusian Prime Minister assured the Chinese general that the Belarusian government creates the necessary conditions for the implementation on time and in full, all the bilateral agreements in the military-technical sphere. The same day, the theme of defense cooperation with China was mentioned by President Lukashenko. He stated that there are a number of bilateral projects and that he is counting on deepening military-technical partnership with China in order to strengthen the defense of Belarus.

Conclusions. The prospects of Ukraine’s accession to the Customs Union is a challenge for the Belarusian foreign policy strategy (if there is any). This country is a key in the Baltic-Black Sea region, Kremlin needs Belarus as a “showcase” of the Eurasian integration for Ukraine. Its entry into the CU will mean that there is no such need any more. From the point of view of ensuring the continuation of Russia’s financial support, for the official Minsk it is essential to prevent the accession of Ukraine to the Eurasian integration. On the other hand, the emergence of new participants in the CU is politically expedient, as it blurs Russian hegemony in the organization.

In the near future we can expect that the number of operational law enforcement material will be realized in the form of criminal cases. The main target for law enforcement officers will be officials and businessmen. It is highly probable that the fight against corruption and abuses of the tax would be a way of settling accounts with disagreeable. In addition, some repressive rhetoric and actions of the authorities in this direction will help improve discipline in the medium range and large businesses. The latter would mean strengthening the control mode of the system of government and economy. For the period up to 2015 Alexander Lukashenko will largely abolish to be the guarantor of the interests of the business community and government officials because the main factor here is the political expediency. It was to be expected given the fact that the Belarusian leader is a master of improvisation rather than a systemic political actor.

It is clear that the EU invitation of President Lukashenka would mean recognition of his political victory, even if the Belarusian leader will not attend the summit because in he comes, he would face the risk of complete obstruction. Therefore, there will be no invitation. Relations with the West continue to be frozen. At least until the release of political prisoners. Especially, EU has nothing to offer Minsk not only because of the economic situation in the EU, but also in view of the low importance of Belarus for the European foreign policy.

Belarusian-European relations continue to be at an impasse. In order to leave it, drastic steps are necessary. And Belarus is not ready for them, while the EU has no special need in them.
Until the end it is not clear what caused the need for Mikhail Myasnikovich, who previously showed little interest in defense-related issues, to convince Colonel General Xu Qiliang in Belarus commitment to the agreements reached with China in the military-technical sphere. It seems that in the situation of the deepening of the Belarusian-Russian defense cooperation China could raise questions about whether the Belarusian authorities are consistent in terms of their obligations in the future. It is possible that the grounds for such doubts have been prepared in Moscow.

The internal situation: the opposition and the protest movement.

The most important events of the month. The most significant event of the month was the initiative of the leader of the United Civil Party Anatoly Lebedko to conduct an audit of Western aid provided for Belarusian opposition and civil society. This proposal is the logical result of backroom sentiment among the opposition: despite the loud proclamations of the EU, the actual amount of support is much lower than the amounts that are declared, the “Belarusian issues” turned into a mean of earning money for a number of structures associated with European officials. In Belarus gets far smaller sums, than those claimed in Brussels.

In May another opposition campaign “popular referendum”, initiated by the Party of the Belarusian Popular Front, “Tell the Truth!” and the Movement “For Freedom”, started. “ The task of the initiative is during meetings with voters in the regions of Belarus to formulate a list of pressing issues that will be submitted to a referendum. Collecting signatures for a referendum will be held during the election campaign to the local councils.

The development of the situation over the last month. For the first time in many years, the authorities allowed the opposition to hold a May Day demonstration in the city of Brest. Despite the paucity of events, it was a demonstration of the potential opponents of the regime in the regional center. Which was much larger than it would be expected.

It is becoming clear that in the course of the upcoming 2015 presidential elections the political opposition isn’t planning a successful scenario with providing electoral victory. Currently, it is in fact only using the electoral campaigns of 2014-2016’s for resolution of tactical problems. Traditionally, election campaigns are accompanied by a significant increase in external financial support. Backed by the prospect of obtaining additional funding, opposition leaders aim to increase its own electoral base and the credibility of their organizations in the population, using the opportunities provided by the electoral law for the campaign. However, it is possible that additional funding will be provided. In the West, there is a steady tiredness of Belarusian opposition, which is not so much a consequence of its weakness, but of permanent explicit and broader unspoken conflicts among opposition leaders in an attempt to draw the attention of the external donors. The second cause of this tiredness is the actual tenure of the leaders of the majority of opposition groups. In addition, the priorities of the West increasingly shifted towards the Arab East, “Belarusian issue” is just a peripheral not only for the political elites, but also for donor agencies.

In this regard, of particular interest is the report of MEP Mr. Paleckis following his visit to Belarus in March 2013. The original version of the document contains a number of controversial findings and formulations, however, the main point of interest is the role, which, according to some Belarusian politicians, is given to MEPs in the Belarusian-European relations. The report of Mr. Paleckis can be seen not only as his position, but also as a message of the official Minsk to the West with a list of questions that the Belarusian authorities are willing to discuss. It’s necessary to admit that the success of the discussion is not guaranteed.

Obviously, part of the political opposition wants to return to the situation of autumn 2010. However, now it seems impossible. Even if the government suddenly wants to start a dialogue with its opponents, it is not clear to whom it can speak: there is no united opposition center. Just as there is no leading opposition party. Negotiations with each political are irrational. In addition, the government has repeatedly made it clear that it is interested in a dialogue with the West, rather than the domestic players, which are considered as a kind of clientele of EU and the U.S.

In May another field of potential conflict among the opponents of the regime should be admitted: the financial resources, the allocation of which is planned within the framework of the EU project “Dialogue of modernization”. It amounts to EUR 0,5 million, the distribution of which can be assigned to one of the third sector organizations in Belarus. If that happens, we can expect another wave of scandals involving the redistribution of resources within the Belarusian participants of the “Dialogue”.

Conclusions. It is unlikely that the initiative of Mr. Lebedko for the audit of external support allocated to civil society and the opposition in Belarus, leads to some result. Rather, it will be possible to observe it being killed. In fact, not too many actors are interested in the publication of the real picture of the size and structure of European aid. And in Brussels as well.
Ironically, the lack of large-scale external financial support is able to improve the situation and ultimately strengthen the opposition. Contrary to popular opinion, in the period between elections budgets of the majority of opposition organizations are extremely slim. The amounts of assistance that are announced in the West, and replicated by state propaganda, are to be taken critically. A considerable amount of money doesn’t get to Belarus and is spent for various training programs, seminars, visits, support for overseas offices, etc. Given the fact that the number of political activists of the most opposition parties is in the range of 300 to 1,000 people, their contributions in the amount of 1% of the average wage in the country would be sufficient to ensure their current level of activity. The problem of the political opposition is not the lack of funds, but the low efficiency of use of these funds and failures in dealing with their own activists.

The initiative “popular referendum” is highly controversial. Therefore, there is clear need to identify a list of the most pressing issues for society, when there is already relevant data of sociological surveys. In addition, the collection of signatures in support of the referendum would require the mobilization of human resources and financial support of about USD 0.5 million. Taking into consideration the unequivocal opposition of the authorities, it is unlikely that donor agencies will provide such a significant amount for the expectedly failed initiative. Most likely the real aim of the initiators of the “popular referendum” is to obtain additional financing for working in the regions and in local elections. Their ability to collect the required number of signatures for a referendum is even more doubtful is we mention the fact, that opposition activists are reluctant even to take part in local elections. This is because the authorities do not tend to allow public opposition even in fine local councils.

Economic situation.

The most important events of the month. In May the government continued to increase the domestic debt, and in addition to the placement of bonds for individuals sold foreign currency bonds to “Belarusbank” for the amount of EUR 275 million. At the same time the loan is remarkable because of rather low rate on coupon income — total 6.4% per annum (previous placements on the domestic market were made at rates in the range of 7-7.5%, and only once at 6.9%). Obviously, the relatively low cost of borrowing is possible because of the fact that this is a state bank. So, this amount will be used to maintain the level of gold currency reserves (hereinafter GCR) against the background of the next peak of repayment of external liabilities, which falls on June 2013 (only the payment on the obligations to the IMF would be around USD 270 million).

The development of the situation over the last month. The situation for attracting resources in the European market is quite good. Eurobonds of Belarus’ quotations set a new record in May (for example, the quotes on seven-year bonds exceeded the level of 110.7% of par value), and fell a little bit only at the end of the month against the background of growing fears of investors about the bond market getting too high in developing countries. Thus, the current yield at the peak of quotations was 6.27% for seven-year bonds, and only 5.87% in five years. Of course, new placements should offer higher returns to investors, but the size of the return is likely to be in a quite acceptable range of 7-8%. The continued delay of the Government of Belarus in the issue of placement of new Eurobonds demonstrates a desire to minimize the cost of the next placement (for example, by ensuring the co-operation of large investment agents previously refused to cooperate with the Belarusian authorities for political reasons), as well as confidence in the adequacy of reserves to service debt and to ensure stability in the foreign exchange market.

In this case, it can be stated that the currency risk started to increase as a result of the deterioration of the external trade and the continued easing of monetary policy by the authorities. So, in April, the merchandise trade deficit rose to USD 401,5 million from the USD 157,5 million in March. It is largely due to a significant increase in imports of investment in the program of modernization of industry, as well as the build-up of stocks of industrial products, in the production of which the imported resources are used. The decision on stimulating domestic demand for partial withdrawal of the problem of excess inventory in the machine-building plants only worsens the prospects of trade. The negative consequences of such a policy are realized by a part of the economic elite, which is evidenced by the statement of a representative of the National Bank criticizing investing in stocks and economic growth at the expense of domestic demand. The situation on the potash market, which to a large extent helped to improve the statistics of foreign trade in the first half of 2013, is not great as well. In particular, the situation with the signing of a contract for the supply of potash to China in the second half of 2013 is still not clear. A number of experts expressed the opinion that the Celestial Empire could temporarily refrain from importing such products.

The continued easing of monetary policy (in May the refinancing rate was reduced immediately by 2 percentage points to 25% per annum) also poses a threat of a sharp rise in demand for foreign currency resources from the population and economic entities. The reduction of interest rates on term deposits denominated in most of the banks to the level of 25-27% annual increases relative attractiveness of investments in foreign currency assets (bank deposits, bonds of the Ministry of Finance or the separate legal entities, the yield on which is 10% per annum). Negative news on the macroeconomic situation (for example, a sharp decline in international reserves), or reckless actions of the authorities may trigger devaluation expectations and encourage the flow of ruble-denominated assets into foreign currency. Similar events have already occurred in August and September 2012, and then the authorities were forced to drastically tighten monetary policy in order to preserve macroeconomic stability.

The favourable situation can be observed in the public sector: the budget of government agencies in January-April 2013 was again executed with a surplus in the amount of Br 6,4 bln., or 3.8% of GDP. At the same time the tax revenues due to lower profit organizations have been replaced by consumption taxes and personal income taxes.

Some stabilization can be also observed the real sector of the economy, causing the greatest alarm in recent months. Thus, although the April stocks rose again (this time on the 1st of May they were already 82.4% of the average monthly output), the very growth has slowed significantly. The profitability also stabilized, though at a low level (return on sales in January-April was 6.8%).

Conclusions. In general we can say that the period of economic growth due to external demand, which was observed in 2012, is over, and the current GDP growth (amounting to 2.5% since the beginning of the year) is entirely connected with the stimulation of domestic demand, both consumer and investment. Thus, according to the National Bank the contribution of domestic demand to GDP growth since the beginning of the year was 12.4 percentage points, while net exports fell by 6.7 percentage points. In turn, the growth of domestic demand has been made possible by a substantial increase in household income (for example, in the structure of GDP last year rose from 58.4% to 75.5%, approaching the level of early 2011), as well as the growth of predominantly public investment (+ 12.5% compared to the same level of the previous year). Preservation of such model of development in the medium term will require an increase of external debt and the abandonment of the policy of floating rate or finding debt-free sources of financing balance of payments deficits. The latter hasn’t been traditionally considered by the authorities to be acquired through income from privatizations, but from all sorts of bonuses related to participation in integration projects in the former Soviet Union under the auspices of Russia. At the moment, the main emphasis is made on the advertised Eurasian Economic Union, which is scheduled to start operating from 01.01.2015. Only the expected cancellation of exemptions from customs legislation, which would remove the obligation to transfer export duties on oil and oil products from Belarus to the Russian budget will reduce the outgoing financial transfers amounting to about USD 3,5-4 billion a year.

Authorities still have all the necessary levers to maintain macroeconomic stability in the country: the size of gold reserves is maintained at an acceptable level, there are opportunities to attract foreign and domestic borrowings. However, politically motivated refusal from structural change as well as achieving economic growth at the expense of domestic demand poses serious risks of accumulation of imbalances in the economy in the coming years. Simply put, there are signs that the authorities have decided to concentrate on solving the problems of economic growth ahead of the next presidential elections at the expense of the maintenance of macroeconomic stability after them.

National Security and Defence.

The most important events of the month. The main topic of the month was the prospect of arms supplies to Belarus from Russia. First of all, we are talking about airplanes and Air Defense. Although the Belarusian authorities all the time are talking about the new weapon, it should be taken with some scepticism. Russia doesn’t have enough new weapon systems for their own needs. It appears that much of the supply will come from existing reserves, as has already happened with the S-300. New weapons will be supplied as well, but rather in small batches. In this connection, the capacity of the national defense capabilities can’t be discussed. Rather, we can talk about the attempts of the regime to stop its further degradation at the expense of Russia.

The development of the situation over the last month. In May the issue of creating a Russian air base in Belarus, which was announced on April 23, 2013 by Russian Defense Minister Sergei Shoigu, was seriously discussed. Subsequent statements by President Lukashenka gave reason to think about some “game” of Belarusian authorities. Which put Mr. Shoigu in a very uncomfortable position. His current status and prospects of moving up the Russian power vertical demanded official Minsk to take steps to restore confidence. An invitation of Sergei Shoigu to an informal meeting in Minsk on June 4, 2013 should be considered as an attempt of reconciliation. Apparently, the meeting “without ties” didn’t happen: in any case, the Belarusian official media didn’t mention this fact.

Belarus continues to promote international cooperation in the military-technical field.

On May 16, 2013 Minsk hosted the 13th meeting of the Belarusian-Vietnamese Joint Commission on Military-Technical Cooperation. The results of implementation of the program of cooperation between the State Military-Industrial Committee (hereinafter referred to as SMIC) of the Republic of Belarus and the Ministry of National Defence of Vietnam for the period 2011-2015 and the plan of joint activities of military-technical cooperation for 2011-2012 were discussed. Belarusian side has to move from export-import operations to transfer technology of manufacturing military products, the joint involvement in Belarus and Vietnam innovative new technologies and development, joint production of arms and military equipment, including for export to third countries.

On May 18, 2013, during his visit to Minsk a member of the Political Bureau of the Central Committee of the Communist Party of China, vice chairman of the Central Military Commission of the PRC, Colonel General Xu Qiliang held talks at SMIC.

On May 20, 2013 Alexander Lukashenko made a number of appointments in the security services. The most interesting one is the resignation of the Deputy Minister of Internal Affairs — Chief of Staff (Secretary of State) Anatoly Kurilets. The text of the decree doesn’t make clear the reasons for the resignation of police chief. The reasons can include some abuses of power or, for example, the attainment of retirement age or health status. It should be noted that in the present structure of the Ministry of Internal Affairs the ideological “vertical” is established — General Directorate of Ideological Work.

On May 27, 2013 Bishkek hosted a meeting of the Council of Defense Ministers of the Organization of the Collective Security Treaty (hereinafter CSTO). At the same time, on the same day in the Kyrgyz capital a meeting of the Ministers of Foreign Affairs and the Committee of Secretaries of Security Councils (CSSC) of the CSTO was held. The main topic was the prospect of destabilizing the situation in Afghanistan after the withdrawal of ISAF troops next year. The debate on Afghanistan officials held behind closed doors. Report on the subject of CSTO Secretary General Nikolai Bordyuzha also was closed, the officer refused to answer the questions of journalists.

During the events in Bishkek a number of documents were signed. The most important of them are the following:
— Regulations on the procedure for responding to crisis situations (defines a mechanism for implementing the principles of collective defense and counter threats to collective security);
— The list of weapons and military equipment and forces of the collective security system of the (sets the requirements for the parameters and the numerical characteristics of weapons and military equipment that will ensure interoperability and optimize the system of logistics by identifying the common nomenclature of ammunition, fuel and lubricants);
— Collection of fixed-form documents on joint operational and combat training (for the activity commands and headquarters).

Also the issues of training, low-cost supplies of defense products (through Russia), combat international crime were discussed.

On May 30, 2013 Chairman of the KGB of Belarus Vladimir Vakulchik stated the relevance of the terrorist threat to our country. At the same time, according to the statement of the head of the secret service, the most probable is committing acts of terrorism by single criminals. KGB is concerned that on the Internet the information about the procedures of making explosives in makeshift conditions is publicly available. It is necessary to admit the statement of Mr. Vakulchik that the KGB failed to prevent the commission of some terrorist attacks by anarchists. It seems, that the Belarusian secret service chose a new enemy. It should be noted that they believe the National Bolshevik Party, which is rather a sect with political slogans and minimal intellectual potential, to be anarchists.

Conclusions. Creation of General Directorate of Ideological Work means that the head of the Interior Ministry Mr. Shunevich got redundant structure for control and providing information on the status of s police teams in the field. Previously, these issues were monitored by a private security agency. Creation of General Directorate of Ideological Work can be connected with an unsatisfactory level of the private security agency. It is necessary to admit, that in March 2013, the head of the service Lieutenant Colonel Krotov was arrested. And there is no official information about his fate.

Speaking about the threats of terrorism in Belarus, it should be noted that the majority of those involved in home-made explosives are teenagers who use explosives for hooliganism purposes or pyrotechnic devices. There is no ideological component in this case. KGB attention to the anarchists may be due to the fact that they are still beyond the control of the security services. At the same time left-wing extremism is characterized by a high level of internationalization, the presence of an extensive system of financial, information and legal support for the radical Left in Europe.

Interest of Vietnam and China in cooperation with Belarus in the military-technical field is connected with the fact that our country doesn’t have geopolitical interests in Indochina and Asia. Accordingly, it ensures high quality of supplied defense products and the absence of so-called “put ins” (hardware and software capabilities for deactivation of weapons systems by the manufacturer.)

In recent months, there is increased attention of the Kremlin to the Afghan issue. In connection with the prospects of a possible destabilization of the situation in Afghanistan, which threatens to spill over into neighboring countries in Central Asia, there is a plan of large-scale aid from Russia to equip the national units of CSTO collective forces almost for free. Much of the arms will be supplied from Russian arsenals, that is, will not be new. Judging by the actions of Russia and the closed nature of the assessments of the prospects of development of the situation in Afghanistan, the Russian leaders are pessimistic about this issue.

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