Tag: CIS

Traces of Transition: Unfinished Business 25 Years Down the Road?

Posted on June 13, 2016 | Policy Brief

This year marks the 25-year anniversary of the breakup of the Soviet Union and the beginning of a transition period, which for some countries remains far from completed. While several Central and Eastern European countries (CEEC) made substantial progress early on and have managed to maintain that momentum until today, the countries in the Commonwealth of Independent States (CIS) remain far from the ideal of a market economy, and also lag behind on most indicators of political, judicial and social progress. This policy brief reports on a discussion on the unfinished business of transition held during a full day conference at the Stockholm School of Economics on May 27, 2016. The event was organized jointly by the Stockholm Institute of Transition Economics (SITE) and the Swedish Ministry for Foreign Affairs, and was the sixth installment of SITE Development Day – a yearly development policy conference.

A region at a crossroads?

25 years have passed since the countries of the former Soviet Union embarked on a historic transition from communism to market economy and democracy. While all transition countries went through a turbulent initial period of high inflation and large output declines, the depth and length of these recessions varied widely across the region and have resulted in income differences that remain until today. Some explanations behind these varied results include initial conditions, external factors and geographic location, but also the speed and extent to which reforms were implemented early on were critical to outcomes. Countries that took on a rapid and bold reform process were rewarded with a faster recovery and income convergence, whereas countries that postponed reforms ended up with a much longer and deeper initial recession and have seen very little income convergence with Western Europe.

The prospect of EU membership is another factor that proved to be a powerful catalyst for reform and upgrading of institutional frameworks. The 10 countries that joined the EU are today, on average, performing better than the non-EU transition countries in basically any indicator of development including GDP per capita, life expectancy, political rights and civil liberties. Even if some of the non-EU countries initially had the political will to reform and started off on an ambitious transition path, the momentum was eventually lost. In Russia, the increasing oil prices of the 2000s brought enormous government revenues that enabled the country to grow without implementing further market reforms, and have effectively led to a situation of no political competition. Ukraine, on the other hand, has changed government 17 times in the past 25 years, and even if the parliament appears to be functioning, very few of the passed laws and suggested reforms have actually been implemented.

Evidently, economic transition takes time and was harder than many initially expected. In some areas of reform, such as liberalization of prices, trade and the exchange rate, progress could be achieved relatively fast. However, in other crucial areas of reform and institution building progress has been slower and more diverse. Private sector development is perhaps the area where the transition countries differ the most. Large-scale privatization remains to be completed in many countries in the CIS. In Belarus, even small-scale privatization has been slow. For the transition countries that were early with large-scale privatization, the current challenges of private sector development are different: As production moves closer to the world technology frontier, competition intensifies and innovation and human capital development become key to survival. These transformational pressures require strong institutions, and a business environment that rewards education and risk taking. It becomes even more important that financial sectors are functioning, that the education system delivers, property rights are protected, regulations are predictable and moderated, and that corruption and crime are under control. While the scale of these challenges differ widely across the region, the need for institutional reforms that reduce inefficiencies and increase returns on private investments and savings, are shared by many.

To increase economic growth and to converge towards Western Europe, the key challenges are to both increase productivity and factor input into production. This involves raising the employment rate, achieving higher labor productivity, and increasing the capital stock per capita. The region’s changing demography, due to lower fertility rates and rebounding life expectancy rates, will increase already high pressures on pension systems, healthcare spending and social assistance. Moreover, the capital stock per capita in a typical transition country is only about a third of that in Western Europe, with particularly wide gaps in terms of investment in infrastructure.

Unlocking human potential: gender in the region

Regardless of how well a country does on average, it also matters how these achievements are distributed among the population. A relatively underexplored aspect of transition is to which extent it has affected men and women differentially. Given the socialist system’s provision of universal access to education and healthcare, and great emphasis on labor market participation for both women and men, these countries rank fairly well in gender inequality indices compared to countries at similar levels of GDP outside the region when the transition process started. Nonetheless, these societies were and have remained predominantly patriarchal. During the last 25 years, most of these countries have only seen a small reduction in the gender wage gap, some even an increase. Several countries have seen increased gender segregation on the labor market, and have implemented “protective” laws that in reality are discriminatory as they for example prohibit women from working in certain occupations, or indirectly lock out mothers from the labor market.

Furthermore, many of the obstacles experienced by small and medium-sized enterprises (SMEs) are more severe for women than for men. Female entrepreneurs in the Eastern Partnership (EaP) countries have less access to external financing, business training and affordable and qualified business support than their male counterparts. While the free trade agreements, DCFTAs, between the EU and Ukraine, Georgia, and Moldova, respectively, have the potential to bring long-term benefits especially for women, these will only be realized if the DCFTAs are fully implemented and gender inequalities are simultaneously addressed. Women constitute a large percentage of the employees in the areas that are the most likely to benefit from the DCFTAs, but stand the risk of being held back by societal attitudes and gender stereotypes. In order to better evaluate and study how these issues develop, gendered-segregated data need to be made available to academics, professionals and the general public.

Conclusion

Looking back 25 years, given the stakes involved, things could have gotten much worse. Even so, for the CIS countries progress has been uneven and disappointing and many of the countries are still struggling with the same challenges they faced in the 1990’s: weak institutions, slow productivity growth, corruption and state capture. Meanwhile, the current migration situation in Europe has revealed that even the institutional development towards democracy, free press and judicial independence in several of the CEEC countries cannot be taken for granted. The transition process is thus far from complete, and the lessons from the economics of transition literature are still highly relevant.

Participants at the conference

Irina Alkhovka, Gender Perspectives.
Bas Bakker, IMF.
Torbjörn Becker, SITE.
Erik Berglöf, Institute of Global Affairs, LSE.
Kateryna Bornukova, Belarusian Research and Outreach Center.
Anne Boschini, Stockholm University.
Irina Denisova, New Economic School.
Stefan Gullgren, Ministry for Foreign Affairs.
Elsa Håstad, Sida.
Eric Livny, International School of Economics.
Michal Myck, Centre for Economic Analysis.
Tymofiy Mylovanov, Kyiv School of Economics.
Olena Nizalova, University of Kent.
Heinz Sjögren, Swedish Chamber of Commerce for Russia and CIS.
Andrea Spear, Independent consultant.
Oscar Stenström, Ministry for Foreign Affairs.
Natalya Volchkova, Centre for Economic and Financial Research.

Does Gender Matter for the Innovativeness of SMEs?

Posted on October 5, 2015 | Policy Brief

This policy brief summarizes the results of an on-going research project on the gender aspect of companies’ innovativeness in transition countries. The aim of this work is to examine whether there is a gender gap in innovative behavior within the sector of small and medium-sized enterprises (SMEs). The results suggest that the propensity to innovate is higher among companies with a presence of a female owner. This finding preserves for 5 measures of innovativeness. Thus, female involvement in business might be beneficial for the innovative sustainable development of economy.

The role of small and medium-sized enterprises (SMEs) has increased lately and they are considered one of the main engines of economic growth (Radas and Bosic, 2009). Research on transition economies and development has emphasized the need for strong a SME sector, since it often acts as the backbone of the economy (Lukasc, 2005) and is the largest contributor of employment (Omar et al., 2009). Another important channel through which the SME sector contributes to development is through their innovative activities. Sustainable economic development requires competitive and successful industries. Being innovative is one way to achieve this goal. However, the innovativeness of sectors and industries depends not only on the actions of the largest companies, but also on the SME sector and individual entrepreneurs. Indeed, the latter are often argued to be more dynamic and more ambitious (Chalmers, 1989; Li and Rama, 2015).

The decision to follow an innovative strategy often depends on the company’s leader, their experience and other managerial characteristics. However, the experience of the leader is not the only factor affecting managerial actions – gender also appears to matter (Daunfeldt and Rudholm, 2012). In the absence of clear answers and knowledge about female managerial characteristics, including their innovativeness (Alsos et al., 2013), it is difficult to evaluate their role in modernizing the business society and to distinguish their competitive advantages or disadvantages over male managers and business owners.

The role becomes even more ambiguous for the transition, post-communist economies. The labor market under USSR officially provided equal rights to women. However, in practice women were treated differently than men. While women often had to do the same work as men, the patriarchal society remained with men being regarded as the main decision makers, and women being fully responsible for housework and childcare. This can explain the low presence of women in top-managerial positions and women’s weaker business ties and networks (Welter et al., 2004).

The question of gender and innovation in entrepreneurship has recently starting to attract attention. Earlier, innovativeness was strongly connected and associated with high-tech companies. Thus, innovation research mostly focused on technology-based and capital-intensive industries (Dauzenberg, 2012; Marlow and McAdam, 2012). As a result, innovation behavior in less capital-intensive SMEs was almost entirely overlooked. This can also explain the lack of focus on gender, as men usually dominated the capital-intensive industries (Ljunggren et al., 2010). In an ongoing research project, I am trying to expand the understanding of gender differences in innovation and SME entrepreneurship with a focus on transition economies and the CIS block in particular.

The idea is to estimate owners’ and CEOs propensity to implement innovations in the organization. The specification of the model follows the literature and uses a probit technique that allows for an estimation of these propensities while taking into account other influencing factors and individual characteristics of firms, their owners and CEOs, which likely affect innovative decisions. The data I use come from the 5th wave of the Business Environment and Enterprise Performance Survey (BEEPS) conducted in 2012-2013. The final dataset covered 5254 SMEs from 30 European and East Asia countries.

The main variable of interest is the innovativeness of the enterprise, proxied by 5 different indicators. The measures of implemented innovative activities are: 1) whether the firms introduced a new product or service during the last 3 years; 2) whether there was any new production process implemented; 3) whether there were any spending on research and development; 4) whether were was an introduction of a new marketing strategy and method; and 5) whether an enterprise implemented new methods in operational management. The usage of 5 indicators instead of one allows me to see whether there is any specific feature of innovativeness that differs by gender.

The list of control variables covers information on the gender of the CEO and owners, number of years of experience of the CEO, age of the firm, type of ownership, focus on internal and external markets, as well as the usage of foreign technologies and certification. I also have information on the share of skilled labor force, the share of females in the organization, and whether the organization bears additional costs on external consulting services and training of employees. Information on industry, country, size of the organization and type of residence is also available.

Unfortunately, the data lacks information on the number of owners, which will prohibit me from estimating the clear gender effects and limits the analysis to the effect of gender diversity among owners.

The obtained results (see Table 1) show that having a female as the only, or one of the, owner(s) increases the propensity of going into uncertainty and implementation of a new good/service by 4.5% in the CIS region and 6.7% in the non-CIS block. However, the effect of having a female CEO is insignificant. This finding contradicts the literature on gender differences in the willingness to take on risk (Wagner, 2001; He et al., 2007; Eckel et al., 2008; Croson and Gneezy, 2009) that mostly demonstrates that women, on average, are more risk-averse than men.

A similar effect is observed for the implementation of a new business process or marketing strategy. The only insignificant difference is the spending on R&D in CIS countries and new managerial methods in non-CIS block. However, these measures of innovativeness raise doubts regarding its applicability for SME sector. A shift from high-intense productions towards services makes it less useful to spend enormous sums of money on technological research. Instead, other innovative actions like the development of human capital are of greater importance.

Table 1. Propensity to innovate

Source: Author’s own estimation.

Conclusion

The results show that having a female owner or gender diversity in the ownership structure positively affects the propensity of the organization to follow innovative behaviors and strategies. Therefore, promoting female entrepreneurship and gender equality in ownership seem positive for increasing the innovativeness of companies, and the economy in general, in both the CIS and non-CIS block.

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References

Alsos, G.A., Hytti, U., and Ljunggren, E. 2013.Gender and Innovation: State of the Art and a Research Agenda.International Journal of Gender and Entrepreneurship, 5(3):236-256.
Chalmers, N. 1989. Industrial Relations in Japan: The Peripheral Workforce. London: Routledge.
Croson, R. and Gneezy, U. 2009. “Gender Differences in Preferences”.Journal of Economic Literature.Volume 47, #2.
Daunfeldt, S., O., and Rudholm, N., (2012). Does gender diversity in the boardroom improve firm performance? Department of Economics, Dalarna University, SE-781 88 Borlänge, Sweden; and HUI Research, SE-103 29 Stockholm, Sweden.
Dautzenberg, K. 2012. Gender differences of business owners in technology-based firms.International Journal of Gender & Entrepreneurship,4:79–98.
Eckel, C. and Grossman, P. 2008. “Men, Women and Risk Aversion: Experimental Evidence”. Handbook of Experimental Economic Results.Elsevier.Volume 1, #7.
He, X., Inman, J.J. and Mittal, V. (2007), “Gender jeopardy in financial risk taking”, Journal of Marketing Research, 44: 414-24.
Li, Y., and Rama, M. 2015. Firm Dynamics, Productivity Growth, and Job Creation in Developing Countries: The Role of Micro- and Small Enterprises. The World Bank Research Observer, 30: 3-38.
Ljundggren, E., Alsos, G.A., Amble, N., Ervik, R., Kvidal, T., Wiik, R. 2010. Gender and innovation: Learning from regional VRI projects. Nordland Research Institute, Norway.
Lukacs, E. 2005. The economic role of SMEs in world economy, especially in Europe. European Integration Studies, 4(1): 3-12.
McAdam, M. and Marlow, S. 2008.The Business Incubator and the Female High-Technology Entrepreneur: A Perfect Match? Paper presented at the 2008 International Council for Small Business World Confrence, recipient of the 2008 Best Paper Award for Women Entrepreneurship.
Omar, S. S., Arokiasamy, L., & Ismail, M. 2009. The background and challenges faced by the small and medium enterprises. A human resources development perspectives. International Journal of Business and Management, 4(10): 95-102.
Radas, S., and Božić, Lj. 2009.The Antecedents of SME Innovativeness in an Emerging Transition Economy. Technovation, 29: 438-450.
Wagner, M.K. (2001), “Behavioral characteristics related to substance abuse and risk-taking, sensation-seeking, anxiety sensitivity and self-reinforcement”, Addictive Behaviors , Vol. 26, pp. 115-20.
Welter, F., Smallbone, D., Isakova, N., Aculai, E. and Schakirova, N. 2004. Social Capital and Women Entrepreneurship in Fragile Environments: Does Networking Matter? Paper presented at Babson College-Kauffman Foundation Entrepreneurship Research Conference, University of Strathclyde.

Integration Formations in the Monetary Sphere: the Possibility and the Necessity for Monetary Integration in the Post-Soviet Region

Posted on November 25, 2013 | Policy Brief

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This policy brief addresses the possibility of monetary integration in the post-Soviet region. It provides a short overview of the literature devoted to the formation and development of the monetary unions, and argues that, based on this literature and real-world experiences, monetary integration can be of substantial value for the CIS states. However, such monetary union is not feasible in the near future due to weak economic integration of the national economies of the CIS countries, significant difference in their development level, and imbalances in allocation of bargaining power between the states. This policy brief suggests that a first step towards monetary integration could be an adoption of a supranational unit of account on the territory of the Customs Union between Russia, Belarus and Kazakhstan.

The modern world has observed formation of a number of economic and monetary integration communities. Their performance varies greatly: some of them are developing successfully, others, on the contrary, are stagnating. Questions concerning the possibility of economic and monetary integration in the post-Soviet space are constantly addressed both by policymakers and by academic economists. Taking into account theoretical concepts and international experience, this brief addresses the possibility and desirability of the integration of the monetary sphere of the post-Soviet region. Based on Luzgina (2013a,b), this brief proposes a form of representation of monetary integration on the early stages of its development. In this case, an early form of monetary integration may be achieved via adoption of a single supranational unit of account on the territory of (a subset of) countries; the national currencies would continue to coexist with the new supranational currency. This approach to integration would allow preserving the independence of economic policy for the involved member states. At the same time, countries would benefit from a reduction in transaction costs and increasing convergence of national economies.

Background: Theoretical Concepts and World Experience of Monetary Integration

Ideally, the monetary union should have the form of an optimum currency area (OCA), a territory of one-currency domination with high level of integration and unification in different economic spheres. Modern economic science provides two main approaches considering the possibility of constructing an optimal currency zone on the territory of several states. The first suggests that optimality should be determined on the basis of implementing a specific group of criteria by countries. Among the main criteria, freedom of goods movement, labor and capital, openness and diversification of the economy, the synchronization inflation rates as well as integration in the financial sector can be mentioned. The second approach is based on a comparison of the benefits and costs in terms of the monetary union formation of the country with the highest economic potential. In practice, when studying the effectiveness of monetary integration, a synthesized approach is used. It includes evaluating by criteria, as well as taking into account costs and benefits that a country accrues in case of entering a particular monetary group. The main benefits of a monetary union include a reduction of transaction costs, trade relations enlargement, improving the discipline in the monetary sphere, and a reduction of the rate of international reserve sufficiency for every country-member. At the same time, there are some negative aspects of deep integration, such as loss of monetary policy independence, economic imbalances in case of weak convergence of national economies, loss of (part of) seigniorage income, and a possible negative public reaction to the adoption of a single currency.

When discussing the concept of monetary integration, it is important to understand the distinction between a monetary union and an optimum currency area. A monetary union is one of the most developed forms of a currency area, which implies a rigid anchor of national currencies to each other with a possible further transformation into the currency of the leading country, or to a single supranational currency (as in the case of the European Union). In this case, a monetary union can be formed of asymmetrical economies. Instead, the optimum currency area requires mandatory implementation of the main convergence criteria, and thereby, more symmetry/alignment among the members. Thus, a monetary union does not necessarily have to be an optimum currency area, while the optimum currency area has every opportunity to be transformed into a full-fledged monetary union [1].

Historically, there have been several examples of monetary union formations. The Italian monetary union (1862-1905), which was formed through the merger of disparate Italian lands, is among them. We can also identify the Scandinavian Monetary Union, which united Norway, Denmark and Sweden (1875-1917). The Austro-Hungarian monetary union existed in the period from 1867 to 1914. Currently, we observe formations of monetary unions in Africa, Latin America and the Arab states.

Despite the implementation of a number of integration projects within the various groups of countries over the past century, only the European states were able to achieve the highest form of monetary integration. It took them more than 50 years to do this, and the integration processes in the economic and monetary fields are continuing with new Member States joining the European Union. However, despite the detailed development plans for the implementation of a monetary union, the Eurozone countries face a number of difficulties and obstacles on the path of economic development. European monetary integration brings not only benefits, but also some costs. For example, the loss of independence of monetary policy creates obstacles in regulations of economic processes.

This discussion suggests that an assessment of the potential formation of a monetary union – that is, of desirability, feasibility and level of monetary integration within a particular group of countries – should be based on relating theoretical concepts and features of the countries in question, as well as a in-depth research of the experience of other currency unions.

Integration Processes in the Post-Soviet Space

At the territory of the former Soviet Union, integration projects have been implemented for more than 20 years. After the collapse of the Soviet Union, such integration formations as the Commonwealth of Independent States and the Eurasian Economic Community were created. Belarus, Kazakhstan and Russia have built a Customs Union (CU) and a Common Economic Space (CES). There is also a possibility of making a transition to the highest form of integration – a monetary union. However, this raises a number of questions: which CIS countries should join a monetary union, when should this be done, and what is the optimal form of monetary union for integrating countries.

Luzgina (2013b) shows that, within the framework of the CIS countries, that there are significant differences in many of the macroeconomic indicators. Countries differ in terms of GDP and the growth rates of investment and prices. For example, Belarus has the highest inflation in the post-Soviet region. The source of growth also differs: for example, a number of countries, such as Azerbaijan, Russia and Kazakhstan, owe a significant part of their economic growth to the availability of natural resources, but this is not universally true within the CIS. Dynamics of population income is also significantly different among the countries. Here, Russia occupies the leading position with its average wage at the beginning of 2012 reaching 780 USD. At the same time, in Tajikistan, the average wage amounts to only 110 USD.

Another concern is that the formation of an economic and monetary union implies free movement of labor and capital. However, at this stage of development, it can lead to some negative consequences. Free movement of labor could involve a massive flow of labor from depressed areas to regions where incomes are much higher. This may create pressure on health and social services in the latter regions. In turn, free movement of capital may cause speculative attacks on the financial markets. At the same time, the CIS countries, except Russia, Kazakhstan and Ukraine, do not have large gold reserves. Therefore, the free movement of capital flows without additional support may cause a crisis within the national financial systems. Out of all the gold reserves of the CIS countries, more than 85% of the total volume is owned by Russia. In the case of an abolition of restrictions on capital flows, countries that are exposed to speculative attacks are likely to ask Russia for help. Such a situation would require Russia to use its own financial resources, which would create an additional pressure on its international reserves.

Table 1. International reserves in the CIS countries, (million US dollars)

Country	2008	2010	2012
Azerbaijan	6467,2	6409,1	11277,3
Armenia	1406,8	1865,8	1799,4
Belarus	3063,2	5025,4	8095
Kazakhstan	19883,1	28264,7	28299,4
Kirgizstan	1225,1	1720,4	2066,7
Moldova	1672,4	1717,7	2515
Russia	426278,8	479222,3	537816,4
Tajikistan	163,5	403,1	630,7
Ukraine	31543,3	34571,3	24552,8

Note: The author’s own calculation based on data from the World Bank

Russia is leading among the CIS countries in terms of population and territory, with other countries lagging substantially behind. For example, Belarus owns less than 1% of the total territory of the CIS countries and less than 4% of the population.

Relying on the above quantitative indicators it is natural to expect that in case of a formation of a monetary union with a single emission center, the distribution of votes in the decision-making of the development and implementation of monetary policy is likely to be unequal. The leading role would likely belong to Russia, which has the largest economic potential. However, other countries in this case may be in a less advantageous position as Russia’s decisions may lead to undesirable consequences for the economies of other countries, given the lack of a sufficient degree of synchronization of national economic systems.

Thus, a weak degree of economic integration of the national economies of the CIS countries, different levels of development, as well as the superiority of the economic potential of Russia over the other states gives reason to argue for a non-feasibility of monetary integration within the CIS countries in the short term.

On the other hand, it may be reasonable to consider the possibility of integration in the monetary sphere on the basis of the most economically integrated countries, namely Russia, Belarus and Kazakhstan. These countries have created a Customs Union and are implementing a project of forming a Common Economic Space. There are plans of creating the Eurasian Economic Union. In addition, based on the experience of European countries, it might be easier to start the integration within a limited number of participants, which satisfy the required convergence criteria. Later, more countries may enter the monetary union.

Prospects for Monetary Integration of Belarus, Kazakhstan and Russia

Taking into account the experience of the European Union, we note the need for close trade and technological relations, as well as a market type of economy, and unification of the legislation in the economic sphere. Some of these elements of monetary integration are observed within the CU. After the collapse of the Soviet Union, economies of the former Soviet states switched to paths of market reforms. In addition, the CU countries have rather close trade relations; they have restored the old and created new means of communication. At the same time, there is a weak degree of diversification of exports and imports. A large part of export and import are represented by raw materials.

The second important point of the monetary integration is the comparability by size of the emerging economies. In the framework of the Customs Union, Russia is the only leader. Harmonization of relations between the alliance partners would be easier in the case of smaller countries coordinating their efforts, which would allow them to defend their interests along with the large member-states.

Finally, obligatory condition of monetary integration is the fulfillment of convergence indicators (certain values of macroeconomic indicators) by all association members. In Luzgina (2013b), we compare a range of such indicators, as based on the experience of the European Union. We use indicators such as the inflation rate, public debt, budget deficit, and the dynamics of exchange rates for comparison. The study reveals that the main differences lie in the monetary indicators, namely the rate of inflation and exchange rate. In addition, there are certain differences in the structure of the economy and the share of private ownership in GDP.

Figure 1. Exchange Rate (average for a year), as % of the previous year

Figure 2. Industrial Producer Price Index (average for a year), as % of the previous year

Source: Data of the Interstate Statistical Committee of the Commonwealth of the Independent State

The persistence of significant differences in the values of convergence indicators at the macro level makes a full-fledged monetary union highly unlikely in the short term, even within the framework of the three most economically integrated states. At the same time, it is appropriate to consider the option of monetary integration in its mild form, i.e. in the form of monetary integration on the basis of a single unit of account. A single unit of account is usually calculated on the basis of the basket of national currencies, and is mostly used for international payments and credits.

The attractiveness of monetary integration in the form of monetary union on the basis of a supranational unit of account is motivated; first of all, by the preservation of the economic sovereignty of all countries. Circulation of the unit of account would take place in parallel with national currencies. Member states would retain the possibility of implementation of independent monetary and fiscal policies. Furthermore, the unit of account may fulfill the role of a training tool. The supranational payment unit can be used on the national level. Using this unit of account, legal entities may carry out transactions and individuals may hold their savings. It can also be actively implemented in the inter-state calculations. A part of gold and forex reserves of member countries can be held in the supranational unit of account. Inter-state loans can be issued in this unit as well. This type of monetary union would reveal the feasibility of further deepening of integration in the monetary sphere and determine the timing of the formation of a full-fledged monetary union. In case of serious problems, the dismantling of the currency union will not cause major adverse changes in national economies, unlike in the case of a collapse of a monetary union with a single currency. In addition, the operation of a single unit of account allows for the anticipation of potential problems associated with the functioning of economies under a single monetary system, and a solution before the introduction of a supranational currency.

Last, but not least, this form of integration seems to be a relatively feasible option as the process of convergence on the territory of the CU countries in the monetary sphere has already begun. There is an increased use of national currencies in bilateral trade, harmonization of national legislation is taking place in the monetary sphere, and international agreements in the monetary sphere are ratified. These activities are gradually building a base for the realization of the monetary integration project of the union countries.

Conclusions

Economic and monetary integration allows the countries to get the maximum benefit from mutual cooperation. However, the deepening of the integration process is usually accompanied by certain difficulties. Convergence of economic systems requires transformation of economic institutions, changes in legislation and principles of management, all of which are costly to achieve. The better the preliminary harmonization is performed, the easier the process of adaptation of national economies to function within a particular economic and monetary union will be.

The post-Soviet countries are implementing several projects of economic integration. However, their economies have major differences according to a number of macroeconomic indicators. The greatest degree of convergence is reached only by three CIS states, namely Belarus, Russia and Kazakhstan. Rather high level of economic integration, as well as a continuation of the process of unification and harmonization of national economies allows us to study the feasibility of realizing the lightweight form of a monetary integration based on a single supranational unit of account on the territories of Belarus, Kazakhstan and Russia.

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References

Butorina O.V. International currencies: integration and competition / O.V. Butorina.- Мoscow.: Publishing house “Delovaia literatura”, 2003.- 368 p.
Chapligin V.G. Theory and methodology of currency alliance formation/ V.G. Chapligin – St. Petersburg.: Publishing house SPbGUAF, 2003.- 193 p.
Drobishevski S.M., Polevoi D.E. The problems of creating a single monetary zone in the CIS countries / S.M Drobishevski, D. I. Polevoi – Мoscow.: EAPP,- 2004. – 152 p.
Euro – a baby of Mandell? The theory of optimum currency areas: collection of papers: translation from English.- Мoscow.: Delo, 2002.- 368 p.
European monetary union: transition, international impact and policy options/ edited by Paul J.J. Welfens.- Berlin.- Springer.- 1997.-470 p.
Eurasian Economic Community on-line database [Electronic resource]- Moscow.- 2005.- Mode of access: www.evrazes.com.- Date of access: 17.02.2012
Evstigneev V.R. Currency and finance integration in EU and CIS. Comparative semantic analysis. /V.R. Evstigneev -М.: Наука.- 1997.—271 p.
International monetary fund on-line database [Electronic resource] – Washington.- Mode of access: www.imf.org.- Date of access: 07.11.2012
Kondratov D.I. Finantial integration: international experience and perspectives of CIS countries development/D.I. Kondratov// Economic Journal of HSE.- 2012.- №1.- p. 105-142.
Luzgina A.N. Prospects of economic and monetary integration of the CIS member states/ A.N. Luzgina // Bank Bulletin Magazine. – 2013a.-№ 19 (600).- p. 21-26.
Luzgina A.N. Model of monetary integration involving the Republic of Belarus / A.N. Luzgina // Bank Bulletin Magazine. – 2013b.-№ 20 (601).- p. 39-46.
Mandell R. A theory of optimum currency areas/ R. Mundell// Interntional economics [Electronic resource].- New York: Macmillan.- 1968.- Mode of access: http://www.columbia.edu/~ram15/ie/ie-12.html. – Date of access: 23.05.2013.
Monetary unions: theory, history, public choice/ edited by Forrest H. Capie and Geoffrey E. Wood.- London: Routledge, 2003.- 198 p.
Statistical Committee of CIS on-line database [Electronic resource] – Мoscow, 2013.- Mode of access: www.cisstat.com.- Date of access: 03.09.2012
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[1] Chapligin V.G. Theory and methodology of currency alliance formation/ V.G. Chapligin – St. Petersburg.: Publishing house SPbGUAF, 2003.- 193 p.

The Customs Union Between Russia, Belarus and Kazakhstan: Some Evidence from the New Tariff Rates and Trade Flows

Posted on October 7, 2013 | Policy Brief

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Author: Arevik Mkrtchyan, European University Institute.

This brief addresses the Customs Union between Russia, Belarus and Kazakhstan that was established in 2010. It argues that the external tariff schedule reflects a compromise between the interests of its members rather than simple expansion of Russian influence on the CU partners, and that the reduction in trade costs due to elimination of internal borders, benefits both the members of the CU and their external trade partners. Moreover, the impact of alleviated non-tariff trade costs on trade flows is strong and significant, while the tariff impact is insignificant for all members.

The Eurasian Customs Union among Russia, Belarus and Kazakhstan: Can It Succeed Where Its Predecessor Failed?

Posted on November 5, 2012 | Policy Brief

In 2010, Russia, Belarus and Kazakhstan formed the Eurasian Customs Union and imposed the Russian tariff as the common external tariff of the Customs Union. This resulted in almost doubling the external average tariff of the more liberal Kazakhstan. Russia has benefited from additional exports to Kazakhstan under the protection of the higher tariffs in Kazakhstan. However, estimates reveal that the tariff changes have resulted in substantial transfers from Kazakhstan to Russia since importers in Kazakhstan now purchase lower quality or higher priced Russian imports which are protected under the tariff umbrella of the common external tariff. Transfers from the Central Asian countries to Russia were the reason the Eurasian Economic Community (known as EurAsEC) failed, so this bodes badly for the ultimate success of the Eurasian Customs Union. What is different, however, is that the Eurasian Customs Union and its associated Common Economic Space aim to reduce non-tariff barriers and improve trade facilitation, and also to allow the free movement of capital and labor, liberalize services, and harmonize some regulations. Estimates by my colleagues and I show that if substantial progress could be made in trade facilitation and reducing non-tariff barriers, this could make the Customs Union positive for Kazakhstan and other potential Central Asian members. Unfortunately, so far the Customs Union has made these matters worse. On the other hand, Russia’s accession to the World Trade Organization will eventually substantially reduce the transfers from Kazakhstan to Russia, but this will need a strong political commitment from Russia which we have not yet seen. If that Russian political leadership is forthcoming, the Eurasian Customs Union could nonetheless succeed where its predecessor has failed.

In January 2010, Russia, Belarus and Kazakhstan formed the Eurasian Customs Union. Two years later, the three countries agreed to even closer economic ties, by signing the agreement to form a “common economic space.” Regarding tariffs, the key change was that the three countries agreed to apply the tariff schedule of the Customs Union as their common external tariff for third countries. With few exceptions, the initial common external tariff schedule was the Russian tariff schedule. Kazakhstan negotiated exceptions from the common external tariffs for slightly more than 400 tariff lines, but was scheduled to phase out the exceptions over a period of five years (World Bank, 2012). In addition, the members agreed to have the Customs Union determine the rules regarding sanitary and phyto-sanitary standards (SPS) and standards on good. Fearing transshipment of goods from China through Kazakhstan and from the European Union through Belarus, Russia negotiated and achieved agreement on stricter controls on the origin of imports from countries outside of the Customs Union. The common economic space (CES) stipulates that, in principle, there will be free movement of labor and capital among the countries, there will be liberalization of services on the CES and coordination of some regulatory policies such as competition policy.

In February 2012, the Eurasian Economic Commission began functioning. It is intended to act as the regulatory authority for the Customs Union in a manner similar to the European Commission for the European Union.

The Economics of Tariff Changes — Gains for Russia and Losses for Kazakhstan

Some proponents of the Eurasian Customs Union have argued that as a result of the Customs Union firms in the three countries will have improved market access through having tariff free access to the markets in all three countries. Prior to 2010, however, along with other countries in the Commonwealth of Independent States (CIS), the three countries had agreements in place that stipulated free trade in goods among them. Thus, the Customs Union could not provide improved market access due to reducing tariffs on goods circulating among the three countries.

Since the common external tariff was essentially the Russian tariff, there was little change in incentives regarding tariffs in Russia. The big change occurred in Kazakhstan, who had a much lower tariff structure than Russia prior to implementing the Customs Union tariff. Despite the exemptions, Kazakhstan almost doubled its tariffs in the first year of the Customs Union (see World Bank, 2012). The increase in tariffs on many items which were not produced in Kazakhstan but produced in Russia, led to a substantial increase in imports from Russia and displacement of imports from Europe. Many of Russia’s manufacturing firms, which were not competitive in Kazakhstan prior to the Customs Union, were now able to expand sales to the Kazakhstani market. This represents gains for Russian industry. Given the deeper manufacturing base in Russia compared with most of the CIS countries and the resulting uneven benefits of the common external tariff in favor of Russia, acceptance of the common external tariff has been a fundamental negotiating position of Russia regarding acceptance of members in the Customs Union.

Some cite the expanded Russian exports in Kazakhstan as evidence of success of the Customs Union. But the displacement of European imports, to higher priced or lower quality imports from Russia, represents a substantial transfer of income from Kazakhstan to Russia and is an example of what economists call “trade diversion”. Moreover, it is the reason the World Bank (2012) has evaluated the tariff changes of the Customs Union as a loss of real income for Kazakhstan.

Furthermore, the three countries together (and even a broader collection of CIS countries) constitute too small a market to erect tariff walls against external competition. They would lose the benefits of importing technology from advanced countries and would rely on high priced production from within the Customs Union. Some would argue that there are political benefits of trade to be taken into account, but experience has shown that when a customs union is inefficient and the benefits and the costs of the customs union are very unequal, the customs union can inflame conflicts (see Schiff and Winters, 2003, 194-195).

Non-Tariff Barriers — Extremely Costly Methods of Regulating Standards Worsened by the Customs Union

Non-tariff barriers, in the form of sanitary and phyto-sanitary (SPS) conditions on food and agricultural products and technical barriers to trade (TBTs) on goods, are a very significant problem of the Customs Union. There are standards based trade disputes between Belarus and Russia on several products, including milk, meat, buses, pipes and beer (see Petrovskaya, 2012). Anecdotal evidence indicates that Kazakhstani exporters complain bitterly regarding the use by the Russian authorities of SPS and TBTs measures, either to extract payments or for protection.

If the Customs Union could make substantial progress on reducing these barriers, it would be a significant accomplishment. My colleagues and I have estimated that progress on the non-tariff barriers and trade facilitation could outweigh the negative impact of the tariff changes for Kazakhstan (see World Bank, 2012). Unfortunately, so far the Customs Union has taken a step backward on both non-tariff barriers and trade facilitation.

A big problem in reducing standards as a non-tariff barrier is that standards regulation, in all three countries, is still primarily based on the Soviet system. As a holdover from the Soviet era, mandatory technical regulations are employed where market economies allow voluntary standards to apply. This regulatory system makes innovation and adaption to the needs of the market very costly as firms must negotiate with regulators when they want to change a product or how it is produced. Legislation in both Russia and Kazakhstan calls for conversion to a system of voluntary standards, but this is happening too slowly in all three countries. The problem is that the Customs Union has worsened the situation. Technical regulations are now decided at the level of the Customs Union, so firms that previously negotiated with their national standards authority, have had to now get agreement from the Customs Union. This has reportedly caused further delays, impeding innovation and the ability of firms to meet the demands of the market.

A second problem with efforts to reduce the non-tariff barriers is that the Customs Union is trying to harmonize standards of the three countries by producing mandatory technical regulations. The alternative is to use Mutual Recognition Agreements (MRAs). Experience has shown that no customs union has been able to broadly harmonize standards based on mandatory technical regulations, with the exception of the European Union. In fact, even in the European Union, they have had to use MRAs and only harmonized technical regulations after decades of work. While each member of the Customs Union is expected to create a system of mutual recognition of certificates of conformity, these certificates are not presently recognized in the other countries of the Customs Union. There is little hope for a significant reduction in standards of non-tariff barriers unless the system of mutual recognition is more widely recognized and adopted.

Trade Facilitation —Participation in International Production Chains Made More Difficult by the Customs Union

Customs posts between the member countries have been removed and this has reduced trade costs for both exporters and importers in the three countries. Russia’s concerns regarding transshipment have, however, led to an opposite impact on trade with third countries, i.e., the costs of trading with countries outside the Customs Union have increased. Participation in international production chains has become a key feature of modern international production and trade. If goods cannot move easily in and out of the country, multinational firms will look to other countries to make their foreign direct investment and for international production sharing. Addressing this significant problem will take a change of emphasis on the part of Russia.

Russian WTO Accession —Liberalization That Will Significantly Reduce Transfers to Russia

It has apparently been agreed by the Customs Union members that the common external tariff of the Customs Union will change to accommodate Russia’s WTO commitments. As a result, the applied un-weighted average tariff will fall in stages from 10.9 percent in 2012 to 7.9 percent by the year 2020 (see Shepotylo and Tarr, forthcoming).[1] This will have the effect of lowering the trade diversion costs of Kazakhstan. In addition, the Customs Union will be expected to adapt its rules on standards to conform to commitments Russia made as part of its WTO accession commitments. In the case of Belarus, it remains to be seen if it will implement the changes, as this will increase competition for its industries.

Conclusion — the Need to Russia to Exercise Political Leadership for Standards and Trade Facilitation Reform for Success of the Customs Union

In 1996, the same three countries formed a customs union. Later the same year, they were joined by Kyrgyzstan, then by Tajikistan and in 2005 by Uzbekistan. As Michalopoulos and I (1997) anticipated, the earlier Customs Union failed because it imposed large costs on the Central Asian countries, which had to buy either lower quality (including lower tech goods) or higher priced Russian manufactured goods under the tariff umbrella. The present Customs Union also started with the Russian tariff, which protects Russian industry and suffers from the same problem that led to the failure of the earlier Customs Union. Nonetheless, the present Customs Union could succeed. Crucially, due to Russia’s accession to the WTO, the tariff of the Customs Union will fall by about 40 to 50 percent.[2] This will make the Customs Union a more open Customs Union, very significantly reduce the transfers from Kazakhstan to Russia, and thereby reduce the pressures from producers and consumers in Kazakhstan on their government to depart from enforcement of the tariffs of the Customs Union. Further, the present Customs Union aims to reduce non-tariff barriers and improve trade facilitation, as well as it has “deep integration” on its agenda, i.e., services liberalization, the free movement of labor and capital and some regulatory harmonization. Although, to date, the Customs Union has moved backwards on non-tariff barriers and trade facilitation, one could optimistically hope for substantial progress. In the important area of non-tariff barriers, given the common history of Soviet mandatory standards, Russia will have to take the lead in moving the Customs Union toward a system of voluntary standards where no health and safety issue are involved, and toward a system of mutual recognition agreements and away from commonly negotiated technical regulations. On trade facilitation, Russia will have to reverse its pressure and find a way to allow the freer movement of goods with third countries while addressing its transshipment concerns.

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References

Michalopoulos, Constantine and David G. Tarr (1997), “The Economics of Customs Unions in the Commonwealth of Independent States,” Post-Soviet Geography and Economics, Vol. 38, No. 3, 125-143.
Petrovskaya, Galina (2012), “Belarus, Rossia, Ukraina. Obrechennye na torgovye konflikty” (Belarus, Russia, Ukraine. Doomed for trade conflicts), Deutsche Welle, June 14. www.dw.de/dw/article/0,,16023176,00.html.
Schiff, Maurice and L. Alan Winters (2003), Regional Integration and Development, Washington DC: World Bank and Oxford University Press.
Shepotylo, Oleksandr, and David G. Tarr (2008), “Specific tariffs, tariff simplification and the structure of import tariffs in Russia: 2001–2005,” Eastern European Economics, 46(5):49–58.
Shepotylo, Oleksandr, and David G. Tarr (forthcoming), “Impact of WTO Accession on the Bound and Applied Tariff Rates of Russia,” Eastern European Economics.
Shymulo-Tapiola, Olga (2012), “The Eurasian Customs Union: Friend or Foe of the EU?” The Carnegie Papers, Carnegie Endowment for International Peace, October. Available at: www.CarnegieEurope.eu,
World Bank (2012), Assessment of Costs and Benefits of the Customs Union for Kazakhstan, Report Number 65977-KZ, Washington DC, January 3, 2012. Available at: http://documents.worldbank.org/curated/en/2012/01/15647043/assessment-costs-benefits-customs-union-kazakhstan

[1] The final “bound rate” of Russia is higher at 8.6 percent on an un-weighted average basis; but there are about 1,500 tariff lines where the applied rate of Russia is below the bound rate. The applied weighted average tariff will fall from 9.3 percent in 2012 to 5.8 percent in 2020.

[2] Russian tariffs fall more on an un-weighted average basis than they do on a weighted average basis. See Shepotylo and Tarr (forthcoming).

Political Instability in Fragile Democracies: Political Cycles Kyrgyz Style

Posted on September 24, 2012 | Policy Brief

Democratization is rarely a straight and predictable process. Freedom House data from the Central and Eastern European Countries (CEEC) and the countries of the Commonwealth of Independent States (CIS) since 1991 reveals two distinct patterns. In one set of countries, democratization took root quite quickly and the transformation of political institutions seems quite deep and sustainable. In the other countries, the road to democratization, if ever started, has been much more partial and full of reversals. Among the CIS countries, none is regarded as free by Freedom House in 2012, four are regarded as partly free (Armenia, Kyrgyz Republic, Moldova and Ukraine), while the remaining seven countries (Azerbaijan, Belarus, Kazakhstan, Russia, Tajikistan, Turkmenistan, and Uzbekistan) are regarded as non-free. There has also been volatility over time within countries. Russia and Belarus have seen their score steadily deteriorating, while countries on the Balkan and south-east Europe have seen gradual improvements. With the lack of consolidated democratic institutions has also typically followed much political instability. Frequent changes in power, civil unrest, popular revolutions and military conflicts have pervaded countries like Ukraine, Georgia, and the Kyrgyz Republic. In other nations, repressive leaders have put a lid on visible instability, but at the cost of political rights and a fair judiciary system. In both cases, the economy has suffered as instability has deterred investors looking for a predictable environment guided by transparent rules of the game implemented equally for all. Corruption has flourished and political connections and nepotism has determined the opportunities for economic success.

A Multidimensional Approach to Energy Security in Belarus

Posted on September 5, 2011 | Policy Brief

20110905 Policy Brief Energy Security in Belarus Image 01

Energy security is a complex phenomenon incorporating a variety of economic, social and environmental aspects. This brief outlines fundamental aspects of energy security in Belarus that decision makers, policy analysts and the general public should be aware of when trying to understand the consequences for energy security of existing and suggested policies as well as other domestic and external factors. This brief will pay special attention to the economic dimension of energy security (such as energy intensity of the economy and diversification of energy sources), international and geopolitical dimension (diversification of energy suppliers and use of the hydrocarbon pipeline system), as well as environmental considerations (actual and prospective environmental impact of the energy consumption and production).

Energy security is an issue of primary concern for decision-makers worldwide. This is especially true in many post-Soviet countries, where the current dependency on Russian energy imports is being reinforced by the high energy intensity of these economies – a legacy of the energy inefficient Soviet technologies coupled with a lack of technological modernization over the past two decades. Belarus, a landlocked country with a population of 10 million people, is one of the countries struggling to solve an energy security puzzle in the midst of perturbations of the energy markets and important changes in regional geopolitics.

Belarus’ economy has been growing steadily in the early 2000s with an impressive 7.7% average annual GDP growth – a figure surpassing the economic performance of its closest post-Soviet neighbors, Ukraine (7.6%) and Russia (7.5%). The 2010 economic crisis resulting in substantial downturns in Ukraine (-15.0%) and Russia (-7.9%), had very mild impact on the Belarusian economy, which grew 0.2% in 2010.

Despite the apparent robustness of the Belarusian economy as compared to its neighbors, the crisis revealed a major weakness of the Belarusian economic model, the country’s utmost dependence on economic and political relations with Russia. Belarus is trying to move away from the Russia-centered economic model, in an attempt to diversify the sources of its economic growth. Not surprisingly, Russia is using a number of economic and political levers, of which oil and natural gas are the most important ones, in an attempt to tame a rebellious ex-vassal.

As a result, Belarus recently faced a variety of new energy challenges that must be successfully tackled for the country to preserve its political and economic independence.

The Belarusian Economic Growth Drivers

Belarusian economic growth in the late 1990s-early 2000s was primarily driven by the combination of three main factors: (i) privileged access to Russian markets for Belarusian industrial and agricultural exporters and energy importers; (ii) preferential support of the enterprises and sectors with a large state share, especially those producing for export, and (iii) governmental policies on wage and price control, which resulted in temporary cost advantages for traditional exports (WB 2005). These factors were reinforced by the low capacity utilization that experienced a sudden drop in the early 1990s as the Soviet Union collapsed.

Immediately prior to the 2010 economic downturn, productivity growth was the main driving force of the industrial growth in Belarus (WB 2010a). For most economies in transition, productivity growth is driven by (i) productivity increases within the firms and (ii) labor reallocation. In Belarus, most of the productivity increase occurred due to the former driving force. Recent data show that productivity growth is slowing down – a sign that productivity improvements has so far been gained through “low hanging fruit” type of investments, but these are now coming to an end. (WB 2010a).

Productivity growth in 2004-2008 was reinforced by increasing capacity utilization from approximately 45% in 1996 to 57% in 2004 to almost 70% in 2009. Yet, it is commonly perceived that most of the underused capacities are outdated and need rehabilitation or replacement. Thus, the actual figures of the unused capacities may be well inflated. Therefore, the years of reclaiming unused capacities will soon become history, and Belarus is gradually approaching a point at which output growth would require either costly capacity expansion or increase of capacity-usage efficiency. Of these two alternatives, improvements in energy efficiency are the one that does not show signs of being exhausted in the near future.

Belarusian energy efficiency increased by nearly 50% between 1996 and 2008 as the government began designing and enforcing a comprehensive energy efficiency policy. The measures included among others (i) establishing a Committee for Energy Efficiency in 1993, which evolved into Energy Efficiency Department of the Committee for Standardization with a mandate to develop and implement the energy efficiency improvement strategy; (ii) substantial financing, amounting to USD 4.2 billion in 1996-2008 and USD 1.2 billion in 2008 alone ; (iii) political commitment to energy efficiency, as illustrated by two National Energy Savings Programs approved in 1996 and 2001 respectively and the 1998 Law on Energy Savings (WB 2010b).

Currently, Belarus’ energy intensity is the lowest compared to the neighboring CIS countries (see Figure 1). Specifically, in 2008 Belarus used 1.17 tons of oil equivalents (toe) to produce USD 1,000 of its GDP – a substantial advantage compared to Ukraine’s 2.55, Russia’s 1.60 and Moldova’s 1.50 toe/USD 1,000. Yet, despite substantial recent progress and good standing in its regional sub-group, Belarus is still far from its energy efficiency potential, as showed by comparison with the closest Western neighbors: Poland and Lithuania use respectively 0.41 and 0.46 toe/USD1,000 (IEA 2010). Economic modeling suggests that a baseline scenario of 50% decline in energy intensity within the next decade would be a source of an additional annual GDP growth by 3.5-7%.

Currently, as implicit subsidies from Russia in the form of cheap oil, natural gas and electricity diminish, economic growth induced by the productivity increase, and capacity reclaiming is being exhausted, it becomes apparent that the search for new sources of economic growth must incorporate energy security considerations.

Overview of the Energy Security Dimensions in Belarus

Energy security is a multidimensional issue, which requires considerations with respect to:

Primary energy sources distribution
International trade and the geopolitical context
Impact of energy on the environment

I will review them in turn.

1. Primary Energy Security Dimensions in Belarus

A reasonable diversification of energy sources results in a more sustainable energy model of the economy.
Currently, Belarus’ primary energy source is natural gas, which accounts for 63% of its energy supply (see Figure 2). Natural gas is primarily used for heat production (55% of the total natural gas supply) and electricity production (20%). Over 80% of Belarusian centralized heating stations use natural gas and nearly 95% of electric energy in the country is produced with natural gas as a primary fuel.

Notes to figure 2:

The percentage scores may not add up to unity due to independent rounding, other omitted uses and secondary supply sources.
Net of exports.
Combustible renewables and waste.
Combined heat and power plants.

The second biggest share (29%) is crude oil and petroleum products, mainly used in the transport sector as well as the residential, commercial and public services sectors. All other primary energy sources account for less than 10% of the total primary energy supply. Renewable sources of energy are virtually unused in Belarus.

In sum, the analysis of the Belarusian energy balance reveals a disproportionately large share of natural gas use, especially in electricity and heat generation. It is therefore clear that, in the context of emerging tensions over the imported Russian natural gas, substantial changes in the electricity and heat generation sector will be needed.

2. International Trade Considerations and Geopolitical Context

Belarus produces only 14% (4 Mtoe per year) of its total primary energy demand and nearly 15% of its oil and gas consumption, thus being totally dependent on fossil fuels imports from Russia. Prior to the escalation of the conflict with Russia, almost the entire demand for natural gas and oil was satisfied by Russian imports at discounted prices, which was often viewed as an implicit subsidy of the Belarusian economy. Currently, Russia is reducing these implicit subsidies by narrowing the gap between prices charged to Belarus and to the EU.

An important difference between natural gas imports and oil imports is that while natural gas imports are entirely consumed by the Belarusian domestic market, a large share of crude oil imports is processed and exported as petroleum products (see Table 1). Therefore, while reducing dependency on Russian gas imports may be achieved, to a large extent, by a transition to alternative energy sources and improvements in energy, the same approach is unlikely to work for oil imports, since no transition to other sources of energy is possible for oil refineries and efficiency increase is limited to losses minimization. Thus, the only alternative to reduce dependency on Russian oil imports is diversification of oil suppliers.

In early 2010, the Belarusian government has signed an agreement with Venezuela on continuous supply of crude oil to Belarus. The first delivery was made by a railroad transfer from the Ukrainian sea port of Odessa; the following deliveries were made through the Estonian Muuga seaport and the Lithuanian Klaipeda seaport by railroad. Belarusian government has announced that it expects nearly 4 million tons of Venezuelan oil to be delivered in 2010, and the quantity is expected to grow to 10 million tons (i.e., 42.5% of the current oil imports) in 2011 and onwards. The average price for Venezuelan crude in 2010 was USD645 per ton (compared to USD 402 per ton of Russian oil), according to the national statistics committee.

Land transport of Venezuelan oil from seaports remains the most questionable issue. While railroad transfer proved to be a reasonable intermediate solution, a sustainable and cost-efficient transportation of Venezuelan oil is possible only through pipelines. Although the Lithuanian and Latvian legs of the former Soviet Druzhba pipeline system can be used, they require major investments to allow for reverse transfer from Baltic seaports to Belarus. The Ukrainian Odessa-Brody oil pipeline, in reverse direction, is the most likely route for a large share of Venezuelan oil, as Ukrainian government signed an agreement with Belarus for transfer of 9 million tons of Venezuelan crude in 2011. Yet, the deal is heavily threatened by Russia which was using the Odessa-Brody pipeline in the opposite direction until 2010 and is losing an important lever of influence over Belarus as the country diversifies its oil imports.

Another crucial energy security consideration from the geopolitical perspective for Belarus is its own pipeline systems (see Figure 3 below).

In 2009, nearly 62.2 billion cubic meters of Russian natural gas (36.9% of total Russian natural gas exports to the non-CIS countries) and 89.6 million ton of Russian oil (36.2% of total Russian crude exports) went through Belarusian pipelines. For comparison, Ukraine, another major transfer route for Russian hydrocarbons, transports 95.8 billion cubic meters of Russian gas (56.9% of Russian exports) and nearly 30 million tons of Russian crude (12.1% of Russian exports). Thus, almost the entire (93.8%) Russian natural gas exports as well as a substantial share of Russian oil exports (48.3%) are transported via Ukrainian and Belarusian pipeline systems.

Until recently, Belarusian oil and gas transit capacity has been a powerful lever in its relationships with Moscow. In an attempt to diversify its hydrocarbon export routes, however, Russia has announced the construction of an alternative Nord Stream pipeline system (see Figure 4) in 2005. The two-legged 1,200 km pipeline system will transport natural gas from Russian Vyborg to German Greifswald under the Baltic Sea, thus making it the longest sub-sea pipeline in the world. Each leg has a projected capacity of 27.5 billion cubic meters per year (55 billion cubic meters for the entire system). The first leg is projected to be in full operation by late 2011, the second by late 2012.

Although the Nord Stream transfer capacity is below the annual transfer of natural gas through Belarus, it represents an important strategic instrument in Russian foreign policy to manipulate Belarus and Ukraine as they compete for a residual share of the Russian natural gas transfer. Recent trends in European energy security policy headed towards increase of energy efficiency, diversification of hydrocarbons importers and shale gas revolution will undoubtedly lead to a decrease in the European demand for Russian gas, which, in the worst case scenario, may completely eliminate Belarus from the Russian gas transfer system, as Belarusian and most of the Ukrainian gas pipeline capacity become redundant.

3. Impact of Energy on the Environment

Belarus lies around the average, both in Europe and in the Eastern European region, when it comes to pollution intensity of its energy use, (see Figure 4 below). While there is room for improvements in terms of the impact of energy on the environment, this concern is of second order as compared to the above discussion on energy intensity. Moreover, it is believed that improvement of energy efficiency of the economy through implementation of modern technologies will bring along reduction of pollution intensity as well.

Despite the fact that current environmental implications of energy use are not especially worrisome, Belarus still remains one of the countries that suffered the most severe consequences of the 1986 Chernobyl nuclear power plant accident.

About 20% of Belarusian territory was affected by the accident and nearly 17% of its agricultural land. Costs to the economy are estimated in the order of 32 to 35 times the Belarus state budget in 1985. Nearly 22% of the national budget was spent in 1991 on remediation measures, although the figure has contracted to 6% in 2002 and 3% in 2006%. The total spending of Belarus due to consequences of the Chernobyl disaster over the period 1991-2003 exceeded USD 13 billion.

Besides the direct impacts on health, several social problems followed the worst civil nuclear accident, including the loss of rural livelihoods and outward migration of qualified workforce accompanied by inward migration of unqualified workforce and people who have economic difficulties elsewhere. A significant amount of agricultural land in the area of the radioactive fallout is still unavailable for cultivation. Development of the area remains a challenge, especially in small towns accommodating migrants from outside Eastern Europe, predominantly from Central Asia. Radioactive pollution is still a concern in the affected areas.

Not surprisingly, Belarusian population remains cautious about plans to construct the first nuclear power plant in Astravets, in the Hrodna Voblast, as nuclear power is still considered a source of substantial risks, despite extensive media campaigns and policy assurances on the exceptional nature of the Chernobyl accident.

Concluding remarks

A changing geopolitical context and gradually shifting priorities in the Belarusian foreign policy will undoubtedly affect various dimensions of the energy security of this transitional Eastern European country.

When evaluating consequences of external or internal factors for energy security, it is necessary to keep in mind that this is a complex, multifaceted issue. The main concerns to be considered about Belarusian energy security include primary energy source distribution (diversification of energy sources, especially away from natural gas, and reduction of the economy’s energy intensity), international trade and geopolitical context (with a special focus on diversification of energy suppliers and an optimal use of the country’s gas- and oil- transporting systems) and environmental considerations of the energy use (related to both actual and prospective impact of the energy production and consumption on the environment). Other dimensions of relevance include social impacts of the energy production and consumption, sustainability of the energy use another important elements beyond the scope of this brief.

The main trends that will alter energy security in Belarus within the coming decade most likely will include the shale gas and liquefied natural gas (LNG) revolution, the launch of the Nord Stream, possibly the construction of the Astravets nuclear plant as well as the effort of Belarus to diversify hydrocarbon suppliers.

In the next part of the analysis forthcoming in the FREE policy brief series I will analyze in detail these and other existing trends and will discuss their potential positive effects and challenges as well as potential measures for addressing the adverse effects in the context of energy security of Belarus.