Belarus, one of the few remaining autocratic regimes in the post-Soviet space, is in the middle of an acute political crisis. Acting President Alexander Lukashenko, who has been in power since 1994, could be on his way out. His support among the population of Minsk and other cities waned due to his denial of the threat posed by the coronavirus and the inadequate response of the authorities to the epidemic. On the other hand, the opposition gained popularity following its grassroots campaign to fight the spread of the coronavirus.
Still, the official results of the presidential elections held on 9 August gave the incumbent 80% of the vote, which seems unrealistic. The primary opposition candidate, Svetlana Tikhanovskaya, apparently mustered only 10% of the vote, despite the anecdotal evidence of her winning in large constituencies in Minsk and other cities.
Since its founding in 1991, Belarus has never had free and independent elections. Yet this time, the violations of human rights ahead of the elections (such as imprisonment of other presidential candidates) and the blatant vote count rigging reported by the opposition turned out to be the last straw. After the preliminary election results were announced, hundreds of thousands of Belarussians took to the streets to protest against the rigged election. During the peaceful rallies that have continued into this week, the demonstrators continued to demand cancellation of the election result.
The regime responded with a brutal crackdown on the protesters. More than 6,000 people were arrested, many of them beaten and tortured. Although most of the detained have been released, more than a hundred people remain unaccounted for. As of today, three protesters have died of their injuries.
Tikhanovskaya was forced to leave the country shortly after the announcement of the election results, following intimidation by senior security officials. From her exile in neighbouring Lithuania, she later announced that she was prepared to become the country’s interim leader in the run-up to the new elections. This week, the opposition announced it was forming a Coordination Council to lead the process of the peaceful transition of power via new democratic elections with the participation of international observers.
In the last few days, workers at several key factories went on strike. Earlier this week, miners of Belaruskali (one of the leading global producers of potash) and the Minsk Tractor Plant announced industrial action. The state TV and radio company has also gone on strike, which is indicative of the current regime gradually losing its grip. Meanwhile, the law enforcement apparatus and the army remain loyal to the government.
President Lukashenko has recently allowed for the possibility of new elections, but only after a new constitution is approved. Lukashenko seems to be biding his time, hoping that the protests will fizzle out. Drafting a new constitution and preparing for a national referendum could take more than a year. However, Lukashenko’s time is running out.
Whenever one of the ex-USSR republics embarks on a transition of power, the elephant in the room is Russia’s reaction. In the case of Belarus, the elephant is looming larger than ever: Russia’s response to a possible leadership change in Belarus is undoubtedly Issue No. 1. The markets are aware of its importance and are following Russia’s reaction.
Among the ex-Soviet states, Belarus is locked in the closest political and economic relationship with Russia. Belarus is also one of the founding members of the Eurasian Economic Union initially proclaimed between Russia, Belarus and Kazakhstan in 2014. Back in 1996, Russia and Belarus formed a Union State and entered the Collective Defence Treaty. One of the reasons why the relations between Putin and Lukashenko, which have never been particularly cordial, soured over time is that Lukashenko resisted the more active integration of Belarus into the Union State.
Russia accounts for 45% of the country’s total exports and about three-fourths of its non-commodity exports, exposing Belarus to disruptions in foreign trade with its neighbour. While the country’s total public debt is relatively low (approx. 27% of GDP), it is the high proportion of external public debt (82%) that makes the country particularly vulnerable to currency shocks and sudden stops in external financing. A loss of access to Eurobond markets or an inability to refinance debts owed to Russia and its banks could significantly affect the country’s creditworthiness.
Last weekend, Lukashenko had two phone conversations with Russian President Putin. After the calls, Lukashenko declared that Russia had reaffirmed its commitment to ‘defending Belarus if an external threat arises’. The Kremlin’s words were more restrained: Russia has ‘confirmed its readiness to assist in resolving the resent problems based on the principles of the Union State or, if necessary, under the Collective Defence Treaty’.
So far, Russia has not rushed to help Lukashenko’s regime suppress the protests. It is no secret that Putin dislikes Lukashenko; now that the latter’s legitimacy as national leader has all but disappeared, Russia would probably prefer someone else in the position. It would set an important condition, though; whoever replaces Lukashenko should not try to weaken the geopolitical and economic ties between the two countries and attempt to re-orient Belarus towards the EU. This condition stems from the geostrategic importance of Belarus for Russia: it is sandwiched between Russia and Europe. Historically, Belorussian lands have been the point of invasion from the West (for example, during WWII).
For now, Russian leadership prefers to treat the difficulties encountered by Lukashenko’s regime as the latter’s internal problems. Among the Russian ‘siloviki’, there must be some who would prefer Russia to prop up Lukashenko’s regime by military means; but for now, Putin does not seem to be heeding their advice. Perhaps the Russian leader has drawn lessons from Ukraine. Following the Crimea annexation and the military intervention in Eastern Ukraine in 2014-2015, Ukraine pivoted away from Russia and became much more pro-EU and pro-NATO. The Belorussian population, which is currently mostly friendly towards Russia, would likely resist Russia’s attempts to keep Lukashenko or his replacement in power by force.
The threat of new Western sanctions must also be influencing Russia’s decisions. Although the EU has not lifted any of the sanctions imposed in 2014, relations between Russia and the EU’s largest states (Germany, France, Italy) have gradually improved. The economic ties are being mended, and new ones are emerging. Remarkably, Russia is on the same side as Germany in the geopolitical dispute with the US regarding the fate of the Nord Stream II gas pipeline. If Russia interfered with the internal political process in Belarus, the EU could respond with new sanctions, squandering all this recent political goodwill.
The EU leaders seem to have a correct appraisal of geopolitical risks related to the domestic political crisis in Belarus and are aware of the importance of Russia’s reaction. This week, both German Chancellor Angela Merkel and French President Francois Macron telephoned President Putin. In both conversations, the parties affirmed that no interference into Minsk’s internal affairs should be permitted.
The markets reacted very favourably to what they perceived as Russia’s pledge to avoid military intervention. Z-spread on Belarus 31’s, which had widened by more than 100bps in the week following the election, contracted by 40bps. The news was beneficial for Russian assets too: both Eurobond and OFZ yields shrunk by several basis points.
However, risks relevant for holders of Belorussian debt remain elevated. The economy has been severely hit by the coronavirus epidemic and will likely contract by 5-6% this year. The Belorussian ruble has come under pressure as demand for the country’s exports plummeted: it has depreciated by around 20% vs the euro since January. The National Bank’s gross reserves have shrunk by 30% in the year to date, to only $4.3bn. In these circumstances, the political crisis needs to be resolved to avoid a deep and protracted recession.
Belarus is at a crossroads, and there are multiple scenarios for the near future. If mass peaceful protests and industrial action continue, which seems likely, Lukashenko could eventually concede to the election re-run. It is perhaps too early to speculate who might emerge as the new leader of Belarus. The new leadership may follow the path chosen by Ukraine in 2014, which resulted in the country becoming closer to the West at the cost of a severe recession and a debt restructuring. Alternatively, they could try to move to a more democratic form of government while retaining economic ties with Russia to avoid an economic crisis. Armenia, where a peaceful transfer of power occurred in 2018 following mass protests, serves as a proof that this is hard but not impossible.
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