Belarusian Commodities in Common Free Market Zone: Dumping, Devaluation and Oil in Exchange for Loyalty

By Dzmitry Bruhavetski

Having joined the Customs Union (CU) and the Common Free Market Zone (CFMZ), Belarus will not only enjoy the new opportunities, but also face the new challenges. Many of the experts point out that the country was not prepared for the accession into the CFMZ and that the existing problems only be getting worse in the future. The analysis of the current situation as regards the Belarusian trade within the CFMZ, enabling us to make the certain short and medium term predictions, shows that the “quality and affordable” Belarusian goods are almost exclusively sold due to the dumping, the currency devaluation, the cheap energy, the public subsidies and the direct support from the partners of Belarus within the CFMZ, especially from Russia. In many ways, the CFMZ is becoming the space of non-realizable advantages and inevitable problems for Belarus.

Belarus-Russia and Belarus-Kazakhstan Trade: Negative Balance and “Moving Forward” to 2008

The official Belarusian media are constantly stressing the benefits of the accession into the CU and CFMZ for Belarus. However, the entire list of these benefits includes the only two points:

1) the special conditions for the export of the Russian energy commodities to Belarus;

2) the expansion of the markets for the Belarusian goods in Russia and Kazakhstan.

The latter argument is really questionable. Previously, Belarus and Russia created the Union State and, even according to the Belarusian part, settled down 95% of all the issues related to the bilateral trade. The Belarusian-Kazakh relations have also experienced a dynamic growth. Therefore, in order to test the thesis of a major expansion of the markets for the Belarusian goods within the CFMZ, it is necessary to analyze the trade dynamics between Belarus and Russia and between Belarus and Kazakhstan, as well as the trade structure and the changes in the trade regulatory framework within the CFMZ. It appears that the certain conclusions, as regards the prospects of the Belarusian goods in the markets of Kazakhstan and Russia after the launch of the CFMZ, can be done on the basis of a study of the trade trends between Belarus and these countries, observed in 2001 – 2010. Such a study enables us to identify the major trends in the trade between Belarus and these countries and to assess the impact (either positive or negative) of the launch of the CU and CFMZ mechanisms.

Table 1: Trade Dynamics between Russia and Belarus in 2001-2010 ($US, mln.):

Table 2: Dynamics of Trade Turnover between Kazakhstan and Belarus in 2001-2010 ($US, mln.):

Table 3: Trade Turnover between Belarus and the Russia, Belarus and Kazakhstan in 2011 ($US, mln.):

The tables above show that in 2010, when the Customs Union was launched (and Belarus gained the preferential terms and conditions for the oil and gas supplies from Russia), the export to Russia and Kazakhstan increased on average by 36%. The import from Kazakhstan was significantly reduced, although the growth rate of the import form Russian to Belarus was almost in line with the growth rate of the export form Belarus to Russia. The growth rates remain the same as regards the chronically negative balance in the trade with Russia, although the positive balance in the trade with Kazakhstan increased by 7 times. It appears that, although the CFMZ is a form of a deeper economic integration if compared with the CU, we can make accurate predictions as regards the freedom of the commodities traffic on the basis of the CU operation results.

However, we must admit that if we ignore the energy factor, the early progress of Belarus, after the accession into the Customs Union, appear to be quite modest. The negative balance in the trade with Russia increased by more than $ 3 bln; the growing trade surplus with Kazakhstan is due to the sharp fall in the import from this country, but not to the colossal growth of the Belarusian export. However, in order to better understand the situation, it is necessary to analyze the basic pattern of the trade between Belarus and Kazakhstan and between Belarus and Russia.

Table 4: Export form Belarus to Kazakhstan in 2009 – 2011 (Positions with Trade Turnover Exceeding US$ 15 mln.) (US$, tsd.) (Source: Foreign Trade of Republic of Belarus, 2011):

Table 5: Export form Belarus to Russia in 2009 – 2011 (Positions with Trade Turnover Exceeding US$ 150 mln.) (US$, tsd.):

Dumping and Devaluation: Endless Circle

Analysing the Belarus-Russia and Belarus-Kazakhstan trade pattern by product groups, we can preliminarily conclude that our country has not experienced any tangible positive effects, after the launch of the CU, as regards the commodity markets expansion in Russia and Kazakhstan. Indeed, many of the positions failed to have reached even the level of 2008. Besides, there are reasons to believe that the increase in the sales of these products in 2011 was rather due to the gradual recovery of Russia and Kazakhstan from the effects of the crisis of 2008, than to the launch of the Customs Union. The growth of the industrial goods export is apparently explained primarily by the devaluation of the Belarusian rouble, and the agricultural products export was growing because of a huge disparity in the prices prevailing due to the price control over the so-called “socially important products” implemented by the authorities in Belarus.

But the most important thing is that in 2011 there emerged no new product groups in the foreign trade, in which the sales would have increased dramatically due to the launch of the CU. The only exception was the “Passenger Cars” category – the trade category due to the massive importation in which, according to the Belarusian Government, the national currency collapsed in 2011. As you can see, the official re-sales only brought more than $ 600 mln. into the country.

The tables above show that all the significant export from Belarus to Russia and Kazakhstan can be, for the purposes of discussion, subdivided into two large groups: 1) the agricultural products 2) the automotive industry products.

The export of the Belarusian agricultural products has a number of its specific features. Apart from the partial re-export (sugar), for example, in the Belarus-Russia trade, the problem persists as regards dumping on the part of the Belarusian producers, including the agricultural producers. Naturally, the dumping in the foreign markets is offset through rising of the domestic prices, causing the Belarusian consumer to pay twice: first for the Belarusian village revival programme, and then for the agricultural products dumping.

The following tables illustrate the dumping of the Belarusian agricultural production:

Table 6: Volumes of Export of Major Agricultural Products to Russia and Average Price per 1 kg (January – September 2011):

Table 7: Volume of Export of Major Agricultural Products to Russia and Average Price per 1 kg (January – March 2012):

The very fact of dumping is obvious when comparing these prices with the prices for the same products in the Belarusian stores. To better understand the situation, we can cite the prices for the usual products for an ordinary Belarusian consumer: 1 kg. of butter was exported to Kazakhstan and Russia in 2011 for BYR 40,000 (BYR 14,500 before the devaluation in 2011) and for BYR 29,000 in 2012; 1 kg. of cheese was sold for BYR 42,000 to Kazakhstan and for BYR 38,000 to Russia (14,000-15,300), and the price dropped slightly in 2012; a dozen of eggs cost about BYR 5,000 (1,800), with a tendency to a decrease in the price; 1 kg. of sugar cost BYR 5,500 for Russia and BYR 6,200 for Kazakhstan. As you can see, these prices or much lower than the prices in the Belarusian stores, or are at about the same level. It is more difficult to assess the category of “milk and cream concentrated and dehydrated”, as it includes the products, the prices for which differ notably.

There is another alarming fact: the prices for all the commodity categories were dropping throughout the January – March of 2012, when compared to the January – September of 2011. Apparently, this happened due to the saturation of the Russian market with the cheap Belarusian agricultural products, which made the Belarusian producers to continue cutting down their prices. Characteristically, the prices for the same products, exported to Kazakhstan, are a little higher.

The success of the automotive industry production export is also highly questionable. It is obvious that the devaluation of the Belarusian rouble and the cheap energy, increasing the competitiveness of the Belarusian products, contributed to the export growth in this category. The target loans, allocated by Russia for the purchase of the Belarusian agricultural equipment, also play a certain part. The main danger here is the increasing dependence of the Belarusian economy on the political relations between Belarus and Russia. It is these relations, but not the terms and conditions of the CU or CFMZ, that are crucial for the growth of the Belarusian export to Russia. Besides, for the Belarusian economy this means even a stronger lock-in in the Russian economy (and to a lesser extent in the Kazakh market.)

The Belarusian automotive industry production constitute only a small share of the total machinery and equipment import to Russia (in 2011 it made US$ 146,594 mln. and increased by 144.1% when compared to 2010; in the 1^st quarter of 2012 it made US$ 34,038 mln., which means an increase by 127.2% against the 1^st quarter of 2011). The above tables show that the actual export growth occurred only in the “Trucks” category. The rest of the export categories either showed the alignment with the level of 2008, or the growth in the export was much lower than the increase in the import to Russia in the respective product categories.

Russia’s Accession to WTO and Belarus: Geopolitical Loyalty as Only Belarusian Competitive Commodity?

All of the above leads to the conclusion that no significant market expansion has been observed for the Belarusian products after the launch of the CU and the CFMZ. It would have been difficult even to predict such an expansion, given the legal framework for the bilateral trade that existed between Belarus, Kazakhstan and Russia before. The growth in the export of the traditional Belarusian goods is due to the dumping, devaluation, cheap energy, and the direct support from Russia. The Kazakh market is underdeveloped and again won primarily by the export of the traditional products, the specifities of which are described above. The positive impact of the CFMZ is considered rather in the context of the notorious falling prices for the energy commodities, which allows the Belarusian producers retaining, and even increasing to a certain extent, their positions in the markets of Kazakhstan and Russia through maintaining the dumped prices.

The prospects of the Belarusian goods in the markets within the CFMZ are seriously threatened by Russia’s accession to the WTO, as well as by the intended accession of Belarus and Kazakhstan to the WTO.

The following commodity categories should be noted, which are the most important for Belarus and within which the competition will inevitably increase due to the cancellation or reduction of the import duties:

Tires – import duties reduced by 33-50%;

Metallurgical industry products – a significant duties reduction;

Household refrigerators – an average reduction of duties by 40%;

Electrical machinery and equipment – a cancellation or a significant reduction of the duties for many items within the category;

Tractors – import duties reduced by 33%, cancelled for the EU countries, and for some items for other countries (especially for China and the U.S.A.);

Vehicles – import duties reduced by 25-50% and cancelled for the EU countries;

Beef – import duties reduced by 25% and cancelled for the EU and the U.S.A.;

Dairy products – import duties reduced by 25-40% and cancelled for the EU and the U.S.A.

It should be mentioned, though, that, to a large extent, this will only happen after the transition period (for a number of positions – after 3-5 years).

It should be also noted that the duties for many other commodities will be cancelled for the EU, U.S. and China, which will increase the risk for the Belarusian producers.

The perspectives for the Belarusian producers in these markets are rather disturbing. The dumping, the reliance on the cheap energy, the growing political and economic dependence on Russia, the threat posed by the WTO regime, the relatively small export to Kazakhstan are not at all the factors that would ensure bright long-term prospects for the Belarusian goods in Russia and Kazakhstan.

In a situation like that, it is very difficult to suggest, within a single review, a more or less adequate strategy for addressing this problem. Obviously, this problem is associated with the specific features of the Belarusian development model, the lack of the reforms in the Belarusian economy. Another alarming fact is that, having accessed the WTO, Belarus will have to continue dumping in the markets of Russia and Kazakhstan, which will result either in curtailing of the already modest enough social programmes, or in an increase of the burden on the state budget, with all the ensuing consequences.

The problem also, lies in the fact that the present situation is beneficial for the agricultural and industrial lobbies, enjoying the stable support from the state and the foreign currency inflow. As a result, it is not surprising that a 29-year-old chief manager of an unprofitable collective farm claims that every Belarusian can afford keeping 60 thousand U.S. dollars at home[1]. Apparently, the Belarusian authorities have not elaborated any long-term strategy as regards the participation in the CFMZ, preferring to solve the current problems by means of the notorious “manual control”. Unfortunately, all of the actions taken by Belarus show that our country relies on the selective execution of the CFMZ and WTO rules, so to speak, on “hugs and kisses” as the only asset. In the coming months we will be able to judge whether this strategy justifies itself.

[1] We are talking about the news, which galvanized the Belarusian segment of the Internet, referring to the theft of about 60 thousand dollars from the chairman of a collective farm in Dyatlovsky District. When asked where he had this money from, the chairman said that every Belarusian possesses such an amount.