Putting a few concluding remarks around the latest Western sanctions iteration around Belarus.

First, there is some confusion around what has been done, or not, given that we are now dealing with four separate sanctions levying entities - the US, UK, Canada and the EU. Surprisingly, I guess the sanctions that have been rolled out don’t necessary overlap - sovereign debt is captured in the EU and UK sanctions, but seemingly not the US sanctions. The US sanctions on Belaruskali look pretty all encompassing, whereas the EU sanctions have lots of carve outs covering existing contracts - the US targets for these to be wound down. It does create an impression of a lack of coordination but maybe rather than overlap, the intention is that they dovetail. But if that is the objective, it would help if there was better messaging from the four actors that they are working together and there is some coordination herein.

In the end maybe it does not matter as for most Western businesses the message will be pretty clear that your governments do not want you to do business with the Lukashenko regime. Most I think will conclude doing business with Belarus is just not worth the risks of getting caught up in sanctions - too much legal effort and cost - and what about all the reputational damage if you are eventually outed for sling as such?

So net net these sanctions will work in terms of reducing Western trade and business with Belarus, and slowly crimping the economy of Belarus.

Second, there is perhaps some disappointment from the opposition that these sanctions are soft, and that much more could be done. Well yes, but sanctions are never meant to be the silver bullet, or to immediately crash an economy. They are meant to be incremental, and high on signalling that much more can be done, unless there is a change of behaviour. And, ultimately, that is what the West wants from Lukashenko, moderation.

Third, perhaps surprising to some, Eurobond prices have not moved much. The Belarus 6.375% 2031 Eurobond issued in the summer of 2020 just before elections flatlined around 88 cents, true down 12 points since issuance but still a couple of points off their lows. That’s a yield of just over 8%. Why? Well obviously the EU and UK sanctions on sovereign debt only relate to new issuance - it’s not illegal to hold existing issues. Meanwhile, there has already been a rotation by Western investors out of these bonds, but the buyers have been Russians, content that a) the West is unlikely to sanction them; b) Russia will continue to bank roll Belarus meaning it will continue to service these bonds. Arguably the fact the West has not sanctioned existing issues, means that net net Russian investors have been the winners, able to buy bonds cheaply. But the fact that most Western holders are out, and Russians have been the net beneficiaries surely should suggest that the US Treasury should take a second look at whether sanctioning existing issues make sense now.  

Fourth, and as noted above, as the West cuts off financing options for Lukashenko, he will increasingly have to rely on Russia for funding. If in the past Russia was providing something like $2bn annually in cheap financing and cut price energy to the Lukashenko regime, then that has likely doubled. That sounds a lot, but when set against Russia’s $600bn FX reserve buffer, it is small change in exchange for strategic wins delivered to Moscow, in terms of increased integration now of Belarus with Russia. You could argue well the costs of Putin’s foreign adventures are increasing, and Belarus is just adding to that, with already costs for intervention in Abkhazia, South Ossetia, Donbas, Crimea, Trans-Dniester, Libya, Syria, et al. All told these likely add up to tens of billions annually, albeit most will be absorbed into the annual defence budget. But I guess there is a risk here for Putin that he is seen to be spending cash to maintain unpopular regimes aboard when the Russian economy itself is stagnating, and living standards for Russia are falling. It will be interesting here if any political price is paid in the looming State Duma elections.

Fifth, the issue of what to do with Belarus remains, and appears as a glaring problem now at the heart of Europe, with risks to the Baltic states, Poland, Ukraine and Russia. Lukashenko seems intent on exporting migrants, perhaps even drugs and radioactive materials. He is indeed rapidly emerging as a rogue leader/state in Europe having hijacked a plane across his airspace and also allegedly killed political opponents abroad. What is Europe going to do? And what does this means for relations with Russia? His week’s sanctions actions don’t really resolve those questions.

The risk/fear here is that we see further escalation, which might being Russia directly into conflict with the EU, West and also Ukraine.  

It also begs the question as to what is Putin’s ultimate agenda with respect to Belarus. It had appeared earlier last year, around elections, that Putin might have contemplated a change from Lukashenko, if his replacement in elections was willing to bow to Moscow - arguably more than Lukashenko had a priori. And herein recent years have seen pressure from Moscow on Minsk to deepen integration between Russia and Belarus. Maybe the end game for Putin is a Union between Russia and Belarus which would get around another looming two term limit for him at home in Russia. Note his recent essay on the oneness of the Russian and Ukrainian peoples, and likely extension to Belarus. The fear here is that Putin’s plans for Belarus, deeper integration, are just a stepping stone to further intervention in Ukraine, and a Union with Russia for Belarus would give Putin the ability to open a northern front with Ukraine. The risk here is of a broader conflagration and 2021 is an important year in Putin’s calendar, marking as it does the 30th anniversary of the collapse of the USSR. Putin described that as the greatest catastrophe of the 20th century and it is difficult to see him not marking it in some significant way. Belarus and Ukraine should be nervous, and a first focal point likely will be the huge military exercises due on NATO’s borders, in Russia and Belarus, in September with Zapad 21.