Belarus: EU sanctions target key sectors, although their effectiveness is still uncertain
July 5, 2021
In late June, EU member states announced substantial sanctions on Belarussian officials and entities, in a bid to punish Lukashenko’s regime for the hijacking of a Ryanair flight that occurred on 23 May. Compared to previous sanctions, the new round is a considerable escalation and targets a number of government officials as well as key sectors of the economy, while aiming to restrict European financing channels. As such, the country’s GDP growth will be dented, its fiscal position will likely weaken somewhat and downward pressure on the currency could build. That said, the effect of the sanctions will be partially counterbalanced by Russian support, while the existence of loopholes will reduce their effectiveness.
Key sectors of the economy that will be affected include exports such as potash, tobacco and petroleum. In particular, Belarus is the world’s second biggest exporter of potash after Canada, and most of those exports go through Lithuanian ports. Total exports of potash and petrochemicals brought in USD 6.6 billion in revenues in 2020 and were a key source of international reserves, while merchandise exports to EU members totaled USD 5.4 billion last year. Meanwhile, the EU also upped pressure on Lukashenko’s regime by announcing a EUR 3.0 billion support plan for a potentially democratic Belarus, in a move to galvanize the opposition.
That said, there are some risks to the effectiveness of the measures. For example, as they stand, the sanctions will not cut access to European investment and loans for the Development Bank of Belarus—a state-owned bank. In addition, only some types of potash are covered by the new measures, while the EU takes only a small share of Belarus’ potash and petroleum exports. Moreover, Russia will likely be on hand with financial support if needed, and could help to redirect exports that would otherwise pass through the EU.
On the impact of the sanctions, Piotr Soroczynski, chief economist at the Polish Chamber of Commerce, said:
“June sector sanctions will be important for the Belarusian economy. However, they will not be critical […]. The key question is how long the sanctions will last. For the full year of the sanctions being in force, their impact can be estimated as follows: Total exports will decrease by about 5%–7%, the total export margin will decrease by 1/10 from the current level. Belarus's access to international financing, both private and institutional, will drop significantly […]. All this will reduce investors' sentiment towards Belarus and may have an impact on the currency valuation. However, the key issues will remain the mutual valuation of the currencies of Russia and Belarus and the valuation of the Russian currency to the euro and the dollar.”
Providing an additional view, Andrei Melaschenko, Russia/CIS+ economist at Renaissance Capital, said:
“We estimate the upper bound for the negative effect of the sanctions at 2% of GDP, due to a potential loss of $1.3 billion, or 4% of total exports. […] While the redemption of eurobonds for USD 800 million is scheduled only for 2023, Belarus will most likely be able to refinance its debts from its main creditors. In terms of this year's budget, in 2021 Belarus planned to attract USD 1.4 billion in foreign markets. But taking into account the current dynamics (USD 200 million was raised in May) Belarus can concentrate on internal sources, including substantial fiscal savings of c. 10% of GDP. […] A decrease in the inflow of external financing, and a deterioration of the terms of trade could drive gradual depreciation of the Belarusian ruble in the medium term.”
Author: Frederico Teixeira de Abreu, Junior Economist