Belarus gains short-term benefits by joining Eurasian Economic Community
By the time Lukashenko signed the Eurasian Economic Community founding Treaty, he had only partially upheld his position. Belarus will gain short-term benefits from the Eurasian integration – to hold the 2015 presidential campaign and up until 2016. However, Belarus’ long-term dependence from the Kremlin’s policy will increase significantly without any guarantees of integration benefits.
On May 29th, in Astana the presidents of Russia, Belarus and Kazakhstan signed the Eurasian Economic Community (EEC) founding treaty.
The EEC founding treaty, signed by the presidents of Belarus, Kazakhstan and Russia, does not contain new provisions compared with the Customs Union and the Common Economic Space Treaties. The parties have agreed to complete the creation of common markets for electricity, gas, and oil products – the most sensitive commodities for Belarus – only by 2025. As anticipated, the Belarus’ authorities have managed to win some concessions from the Kremlin concerning oil and financial aid, but only short-term and limited.
The bilateral agreement between presidents Lukashenko and Putin regarding oil export duties was signed on May 29th too. According to the agreement, in 2015, the Belarusian budget will gain USD 1.5 billion from export duties on oil products. With this money, President Luakshenko will hold the 2015 presidential campaign in a relatively comfortable environment.
President Lukashenko hopes to get 100% proceeds from oil export duties by 2016. After his visit to Moscow on May 8th, he said, “we’ll come back to this issue in 2016 and within two years we’ll remove these duties and will trade in a civilised way”.
The Kremlin has consciously excluded the Russo-Belarusian Energy Agreement from the trilateral treaty in order to weaken Minsk’s positions. The flexible mechanism for reviewing the oil export duties’ distribution, to which both parties have referred, is not envisaged by any document and allows for liberal interpretations by Moscow. Belarus has attempted to minimise her risks by insisting on signing the annex to the EEC treaty, which would include the Energy Agreement. Yet Russia has not supported this Belarusian initiative.
Minsk and Moscow also agreed about a constant volume of oil supply to Belarusian refineries up until 2025, which previously had often been the subject of controversy and pressure from the Kremlin. In 2015, 23 million tons of oil will be shipped to Belarus, and in the following years, this volume will be increased to 24 million tonnes. However, the Russian government is pondering about a ‘grand tax manouevre’, which implies at as of 2016, Russia might gradually reduce export duties on oil and increase tax on mineral extraction. As a result, Belarus’ revenues from oil refining could reduce considerably.
The Belarusian government also awaits a USD 1 billion bridge loan to be allocated by Russia’s VTB-Bank, which should arrive “in 10-14 days” in order to ensure the national currency’s stability in anticipation of the USD 2 billion interstate loan.
Currently Belarus receives sufficient support from the Kremlin to maintain Lukashenko’s socio-economic model until the end of the election campaign in 2015. However, in the long-term, the Kremlin reserves levers of pressure on the Belarusian authorities.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.