Belarus is often described as having the last Soviet-era economy. A strong state-owned industrial and agriculture sector, inherited from the USSR, has allowed the country to almost eradicate poverty.

According to World Bank figures, between 2000 and 2013 the poverty rate fell from 60 to just 5%, compared with an average of 14% for Europe and the Central Asian region. It may not be wealthy, but income inequality in Belarus is lower than in Russia and Ukraine.

“This economic model is, however, outdated and inefficient,” economist Klaus-Jürgen Gern from the Kiel Institute for the World Economy, told DW. He stresses that deep reforms are required to modernize the world’s 72nd-largest economy and further improve living standards. At the same time, he doubts whether a major remodeling would occur under President Alexander Lukashenko’s leadership.

Russian reliance laid bare

Belarus’ dependence on energy-rich Russia is ever more evident as the country’s worst-ever political crisis unfolds in the wake of Lukashenko’s disputed August 9 election win.

Relations are so entwined that Moscow has already offered to help bolster security to quell a groundswell of public anger during more than two weeks of protests. Some have questioned how Belarus has remained an independent country until now, especially as Moscow and Minsk signed an agreement two decades ago to form a unified state.

More than 46% of Belarusian goods are exported to Russia, compared with 24% to the European Union. Russia is also Belarus’ main import partner, responsible for more than half the goods and services that enter the country each year, while Belarus’ imports from the EU total 20%. Russia is also the largest creditor and holds almost 38% of its neighbor’s national debt.

Weißrussland MAZ Autohersteller (Alexey Gromov/AFP/Getty Images)

State-owned company MAZ is manufacturing trucks for more than seven decades, but probably wouldn’t survive competition in free markets

At the heart of the economic relationship is Moscow’s huge energy-subsidy scheme, which allows Belarus to import Russian crude oil at below-market prices, which is then refined and sold internationally. A similar deal exists for gas, which is delivered through Soviet-era pipelines and then resold.

Russian President Vladimir Putin has ordered the arrangement be slowly phased out by 2024 — a bargaining chip to force Minsk into a deeper political and economic union. Lukashenko has, so far, resisted, but at the beginning of the year, Moscow temporarily halted crude oil supplies to Minsk, leading to a 16% drop in Belarusian oil output. 

“The energy subsidy is a constant Russian tool to put pressure on Belarus,” Gern says, adding that objections from Minsk has led to Russia promising to compensate for some of the losses as the deal is wound down.

Huge challenges for any new leadership

The threat of losing €11 billion ($13 billion) in annual oil export revenues is a huge carrot for any new government formed if Lukashenko is forced from office by the protest movement. 

Reuters news agency has estimated that Russia’s support to the Belarusian economy has, at times, been worth around 12% of GDP annually. The new leadership would have to walk a tight rope to build new relations with the European Union while keeping Russia onside. 

“If there was a change in government, the energy subsidies could be a very efficient lever for Russia to make it difficult for the new leaders to deliver [change],” Gern told DW.

“But without change, the economy will probably stagnate and decline in relative terms over the next decade because the incentives — like modernization and new investment — won’t be in place.”

Opposition calls for Belarus to withdraw from the Eurasian Economic Union — a single market with Russia and other ex-Soviet states — have so far drawn an angry response from the Minsk government, which insists it would lead to economic calamity.

Economic and currency crises loom

Belarus’ economy is already set to contract by 2% this year due to the temporary oil blockade and the coronavirus pandemic, according to the World Bank. The country’s most important trading partner, Russia, was the fourth-hardest-hit globally, after the United States, Brazil and India. Other estimates before the huge protest movement and widespread strikes erupted predicted a 4% decline. 

The Belarusian rouble has fallen 30% against the euro since the beginning of the year due to the energy row, but is likely to fall further while the political instability ensues. On Tuesday alone, it lost between 1.2% and 1.5% against the dollar and the euro.

Reuters news agency reported that the country’s central bank says it will not introduce capital controls to prevent the depreciation of the rouble. Central bank board member Dmitry Murin said the move would be counterproductive, despite growing concerns that Belarusians are hedging their bets to avoid losing their savings.

“There’s been an outflow of deposits over the past two weeks which is causing a huge problem for the banks,” Dzmitry Kruk, an associate at the Minsk-based IPM Research Center, told DW. He says the risk of financial turmoil is “rising” and although a series of strikes by protesters have, for now, had a “neutral” effect on the economy, any long-term walkout from the country’s huge factories would be detrimental.

 A worker of the Semiconductor Devices Factory controls manufacturing operations for the production of electronic components in Minsk, Belarus

At a semiconductor plant in Minsk, Belarus’ holding company JSC Integral produces more then 2,200 types of integrated circuits

Dynamic tech sector lights the way

Although archaic state-owned firms are still the mainstay of the Belarusian economy, a burgeoning technology sector is emerging in the 2-million-strong capital. A technology and industrial park on the edge of Minsk known as Hi-Tech Park (HTP) has 450 startups working on software development and outsourcing.

The park boasts that much of the development of the popular messaging app Viber was done at HTP. Its existence is helping the creation of a new Belarusian middle class who are tempted by careers in services rather than manufacturing. Outside of Minsk, however, average salaries remain below €200 a month.

Andreas Rostek-Buetti contributed to this report.