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What the Belarus-Russia Border Tiff Means for China

 
 

In the latest fight between Minsk and Moscow, Belarusian President Aleksandr Lukashenko is threatening to introduce border controls. Doing so would further undermine the trade value of the two country’s existing customs union and membership in the Eurasian Economic Union (EAEU). Lukashenko’s standoff with his bigger neighbor has implications for Trans-Eurasian rail routes linking China and Europe, a useful example of how China’s expanding economic interests will inevitably give it a greater stake in the resolution of such political conflicts.

Russia first expressed concerns over border control despite the two states’ shared customs union and trade zone after the imposition of its own counter-sanctions on the import of certain Western goods. Admittedly, most of Moscow’s attention was fixed on its border with Ukraine, where the contraband trade and problems of control created by the war in the Donbass posed security risks. But Belarus became a hub for the re-export of sanctioned Western goods. Russia’s consumers came to know the joys of Belarusian salmon and Camembert. Russia also banned the transit of Ukrainian goods through its territory in 2016, another reason to strengthen oversight at the border.

These initial concerns escalated when Belarus introduced a five-day visa-free travel regime for 80 countries in January 2017. Because of Belarus’ existing agreements with Russia, that could theoretically allow Westerners to enter Russian territory without a customs check. Alarm bells went off in Moscow. Russia moved to exert greater control over the border using the rhetoric of national security and threats from imagined terrorists as a softer compromise was sought.  

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Sick Transit Gloria

The escalation of customs concerns overlaps with recurring fights over Belarus’ transit options for its petrochemical exports. Belarus annually exports 15-16 million tons of products from its oil refineries, which are almost entirely dependent on oil imports from Russia. Minsk has resisted attempts by Moscow to redirect the transit of its production through Baltic ports to Russian ports for a long time.

Russian Railways offered up to 50 percent discounts on transit shipments through Russian ports for months. Prices per ton are double or more for Russian routes than ports in Latvia and Lithuania, but Belarus finally agreed in principle to Russia’s demands in late 2017, presumably in exchange for discounts on imported Russian oil. Prices have risen and with them costs for Belarus’ refining operations.

Rail transit via Belarus has grown considerably in the last few years. Over a third of its rail freight turnover consisted of transit cargoes for January-April 2018, a 22.9 percent year-on-year increase from the same period last year. That rise is largely driven by increasing trade volumes between Europe and China.

But Poland tightened oversight on its borders with Belarus, Ukraine, and Russia’s Kaliningrad region this year over concerns about the flow of people. Russia has approached China offering to replace transit routes through Belarus and Poland by shipping Chinese goods through the port of St. Petersburg and into Kaliningrad thanks to delays on the Polish border. Poland is more committed to improving connectivity with Baltic ports for north-south transit within Europe, a problem since it will soak up funds that could be spent on rail capacity for Belarusian transit.

State of the Union State

Lukashenko’s threat to introduce border controls responds to a threat to Belarus’ sovereignty: Russia is hoping to force Belarus to unify its migration laws and controls with Russia. Doing so would deal with Moscow’s concerns about entry via Minsk and, more importantly, signal a step toward Russia’s functional control of yet more of Belarus’ sovereignty.

In his latest threats, Lukashenko threatened to close the border. Undoubtedly this would spill over into trade since he’s essentially calling for the reimposition of a degree of scrutiny for anything crossing the border that would likely violate expectations established by agreements with Russia bilaterally and the EAEU. Given the lack of details – par for the course in overly personalist fights between Belarus and Russia – it’s unclear how any such decision would interact with Russia-China trade.

Russia and China are moving to unify their respective markets for truck deliveries, a first step towards similar regulatory changes for rail. Rail is far more important for turnover, and is attractive for Chinese shippers, in part, because cargo should be able to reach the Polish border without need for customs clearance. Russia’s Customs Service is aiming to finish making all customs declarations and payments of duties digital by 2020. Institutional reforms within Russia will encourage more transshipment via Russian territory if delays stack up on either the Polish or Belarusian border.

Lukashenko’s threat is a common tactic to extract concessions among Russia’s neighbors, but adds further credence to Moscow’s concerns that a growing logistical bottleneck on Belarus’ Polish border make transit through St. Petersburg and Kaliningrad a more attractive option. His willingness to escalate has been linked to the potential to build a Russian military base in Belarus in response to Poland’s attempts to get the United States to station troops permanently.

Per Lukashenko’s words, Russia doesn’t know what it wants of him. That’s actually quite believable given recent policy turnover in Moscow and shifting priorities for the Kremlin. However, the deeper flashpoints in the relationship for the border and the potential for lost China-Europe transit volumes touch on a unilateral shift in Russia: a tax maneuver for its oil and gas firms.  

Divide and Fuel

Russian Finance Minister Anton Siluanov’s team has spearheaded a maneuver to raise taxes on the extraction of oil and gas in exchange for gradually ending export duties on oil by 2024. Russia taxes oil in such a way that it raises more revenues when prices are higher, a structural problem for those trying to reduce the budget’s oil dependence. Taxing production avoids the problem but lowering export duties may hurt Russia’s refiners.

Belarus ostensibly benefits as lower export duties lower the costs of imports. But by raising tax rates on the extraction of oil and gas, the cost of production will rise some as will the cost of unrefined oil. Further, companies forced to accept losses by discounting exports of oil to Belarus’ refineries will be taking a larger loss in relative terms once export duties are ended. That means they’ll likely lobby more aggressively in Moscow whenever a political fight erupts with Minsk.

Lukashenko’s refusal to undertake any meaningful economic reform overexposes Belarus’ economy to oil prices. Higher prices net increased earnings for exports, but hurt the country’s consumers without significant price subsidies from Russia. Russia’s been trying to force Belarus to align its fuel prices with those on the Russian market, which are higher. Prices are higher in Russia now and spilling over onto Belarus’ market. While not explicitly about fuel, Lukashenko’s escalation of threats to trade and transit offer another means of pressuring for a policy outcome that will provide subsidies for Belarus’ economy.

Swords into Dow Shares

Putin’s fourth term is going to be more domestically-focused than his third, evidenced by the large commitments for social spending and plans to increase infrastructure investment. Plans are in the works to build a river port in St. Petersburg in the next three to four years as well as to increase investments into the existing port’s warehouse complex. But Moscow’s proposal for China’s transit routes won’t be serious until the construction of needed capacity takes off.

Lukashenko’s willingness to throw down a gauntlet over the border should serve as a reminder that China’s rail rhetoric comes with strings attached — not just for those receiving Chinese investment, but for Beijing as well. It’s very much in China’s interest that the EAEU and its customs zone function well for the sake of its own shippers and export-oriented producers. But that would require giving Moscow greater control over policy in functional terms, a threat for China’s trade interests in Central Asia.

China’s ultimate ambivalence about how to best engage the EAEU – a trade deal may one day materialize but will likely be quite limited in scope – means that Lukashenko’s play doesn’t offer much leverage. Russia holds the cards even though rail transit volumes have been growing steadily since 2016. Nevertheless, Minsk is ready to rattle cages to the detriment of China-Europe trade – and itself – as it loses bargaining power over Russian policy.

Nicholas Trickett holds an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy. He is a columnist and contributor for the Bear Market Brief, a blog and daily news brief on Russia’s politics and economy, and contributes to other outlets like Global Risk Insights, Oilprice, and Newsbase.

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