Tag: Russo-Ukranian war
Trending? Social Media Attention on Russia’s War in Ukraine
Russia’s invasion of Ukraine is one of the most important geopolitical events of the 21st century. For almost two years, international news outlets have been covering the war, often providing daily or even hourly updates. But what is the level of public interest and public engagement in countries around the world? When does the war capture an international audience’s attention and what are the events that supplant it? This brief uses data on X (formerly Twitter) trends in 62 countries to address these questions.
The competition for attention is a defining feature of our information landscape. From the relentless stream of social media updates to the myriad of news articles vying for our clicks, individuals are constantly bombarded with information, each competing for a slice of their limited attention. Amidst this cacophony of voices, certain topics rise to the forefront, capturing the collective consciousness and dominating public discourse.
Russia’s war in Ukraine has, for obvious reasons, commanded significant media coverage over the past two years. It has been described as a hybrid war, where conventional military tactics are increasingly combined with non-traditional methods. This includes an information war, fought with narratives to manipulate people’s perceptions, spread falsehoods, or enlist support. To a large extent, this information war has taken place on social media. On the one hand, social media platforms have been used to spread disinformation and propaganda. For example, we’ve seen the spread of false narratives about the causes of the war, the actions of the different parties involved, and the suffering of the Ukrainian people. But on the other hand, social media has also been used to counter this disinformation, with fact-checking initiatives and grassroots efforts to promote accurate information.
This policy brief analyses the prominence of the war in social media discourse. While the content on traditional media outlets provides a snapshot of the supply of information, platforms like X/Twitter offer a unique window into the broader population’s demand for that information and how they evolve over time. Whether or not hashtags related to Russia’s war in Ukraine are trending in a given country, depends not just on the public’s interest in the war relative to other events in the news, but also on the level of interest relative to sport, music, television, and cats. By tracking the prevalence of trending hashtags, we can gain insights into the public’s engagement with Russia’s war in Ukraine, going beyond traditional media narratives and high-level governmental discussions to uncover the conversations and sentiments that shape broader public opinion.
The X/Twitter data suggest that in most countries, social media attention in the Russian war on Ukraine has been short-lived and sporadic. On February 24, 2022, Ukraine-related hashtags were trending in 100 percent of the countries in our dataset. Two weeks later, on March 9, 2022, they were trending in only 3 percent of the countries. We find that geographical proximity to the conflict is a strong predictor of social media interest. Related hashtags trend most frequently in Eastern, Central and Northern Europe. We also document spikes in interest around events that link a country to the war in Ukraine: announcements of military assistance or visits by Ukraine’s President Volodymyr Zelenskyj. Finally, we compare the hashtags trending in NATO countries to those trending in countries that either sided with Russia or abstained from voting in a critical UN resolution and show significant differences between the two groups.
Data and Methodology
The source for our dataset is archive.twitter-trending.com – a website that records trending hashtags on X/Twitter across countries and over time. We scrape this website to collect (i) the five highest volume topics in each country on each day and (ii) the five longest-trending topics in each country on each day (these two categories can overlap). Our sample consists of the 62 countries available on the website and covers the timeframe July 2021 to December 2023. From this, we construct a country-by-day panel dataset with 55,862 observations.
We identify 11 topic categories that collectively account for the overwhelming majority of trending topics related to Russia’s war in Ukraine. These topics and their relative frequency are shown in Figure 1. The three dominant categories are “Ukraine”, “Russia” and ”Putin”. We use Google’s translation software to translate non-English tweets which account for a significant fraction of the dataset.
Figure 1. Frequency of hashtags in 11 category topics.
Note: This chart shows the number of times topics assigned to our 11 war-related categories were among the top five longest trending topics (in orange) or the top five highest volume topics (in blue) in any country on any day in our dataset. The source are data scraped from archive.twitter-trending.com
Figure 1 shows that it is more common for war-related topics to be among the highest volume topics on a given day than among the longest trending topics. This suggests that these topics attract a lot of interest in a narrow timeframe (e.g. when news breaks) but are relatively less likely to remain prominent over a whole day. Despite this difference, we find that the distinction between highest-volume and longest-trending does not affect any of the patterns we observe when comparing across countries or time. For simplicity, the results shown below all use the highest-volume measure.
It is important to acknowledge the limitations of the X/Twitter data. Firstly, the population actively using X/Twitter is not representative of the overall population. Secondly, the composition of users may differ across countries which complicates cross-country comparisons. Trending hashtags provide an indicator of public interest that is informative only because we do not have high frequency, nationally representative surveys that are comparable across countries. Finally, we are only able to observe the top-five hashtags in a country on any given day. In principle, a war-related topic could increase in absolute volume from one day to the next, while still being crowded out of the top five.
Geographic Variation in Attention
Social media attention to the war in Ukraine varies greatly across countries. The map in Figure 2 shows the proportion of days when any hashtag from the considered categories was among the top-five most tweeted, for each country in the database since the start of the war. Interest has, on average, been higher in Europe as well as in Anglo-Saxon countries. In contrast, other regions of the world exhibited less sustained interest, as indicated by the lower frequency of related hashtags among the top-five most tweeted topics.
Figure 2. Prevalence of war-related hashtags.
Note: The map shows the share of days on which war-related hashtags (in our 11 categories) were among the top five highest volume topics on X/Twitter between 24/02/2022 and 18/12/2023. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com
To some extent, this heterogeneity is explained by distance. Figure 3 plots the frequency of war-related trends against geographical proximity to the conflict zone (represented by the distance from each country’s capital to the city of Kharkiv in eastern Ukraine, a major point of focus during the ongoing war). The relationship is clearly negative, suggesting that physical distance from the crisis reduces the intensity of online discourse and public interest. Unsurprisingly, the number of related trends is highest in countries directly or indirectly involved in the conflict – Ukraine, Russia, and Belarus – as well as in Latvia which borders both Russia and Belarus.
Figure 3. Frequency of war-related hashtags and distance from Kharkiv.
Note: The chart shows the log of the distance from each country’s capital city to the city of Kharkiv in km on the x-axis and the logged frequency of war-related topics among the top five highest volume topics in that country between 24/02/2022 and 18/12/2023 on the y-axis. The source are data scraped from archive.twitter-trending.com
Variation in Attention Over Time
Over the past two years, the war has sustained a relatively high intensity. By contrast, global attention on X/Twitter has been more sporadic, spiking around specific events. This is shown in Figure 4, which plots the day-to-day variation in the number of battle events as recorded by the Armed Conflict Location & Event Data Project (ACLED) (in blue) as well as the share of countries where war-related tweets are trending (in orange). Attention was highest at the time of the invasion in February 2022 and the days of the Wagner Group rebellion in June 2023. Overall, the correlation between twitter trends and conflict intensity is positive but relatively weak.
Figure 4. Frequency of war-related hashtags and intensity of conflict.
Note: The chart shows the number of daily battle events in Ukraine as classified by ACLED on the left axis (in blue) and the share of countries where war-related topics were trending on the respective day on the right axis (in orange). The sources are ACLED’s Ukraine conflict monitor and data scraped from archive.twitter-trending.com
Attention also reacts to other major global events. Figure 5 compares the number of top-five trending hashtags related to the categories of interest in each country on two specific dates: February 24, 2022, the day of Russia’s full-scale invasion of Ukraine, and October 7, 2023, the day of a Hamas terror attack on Israel. On the day of the Russian invasion, the majority of countries in our sample exhibited the highest value. In contrast, on the day of the Hamas attack, related hashtags were trending almost nowhere outside Ukraine and Russia, indicating that global attention and engagement with this new ongoing crisis significantly overshadowed the focus on the situation in Ukraine. This shift in attention demonstrates how breaking news can capture the public’s interest and divert focus from ongoing crises, affecting the level of engagement on social media and potentially influencing the global response and discourse surrounding these events.
Figure 5. Map of prevalence of war-related hashtags on two different dates.
Note: The maps show the share of the top five highest volume topics on twitter related to Russia’s war on Ukraine. The map on the left shows 24/02/2022 – the day of Russia’s invasion. The map on the right shows 07/10/2023 – the day of a Hamas terror attack on Israel. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com
While some events impact attention globally, others affect the salience of the conflict for a specific country. Figure 6 shows that people pay more attention to the war when there is a tangible connection to their own country. The panel on the left shows that war-related topics were more likely to trend in a country around the days where the country announced an aid package for Ukraine (military, financial or humanitarian). It shows an increasing trend in the preceding days and a peak on the day of the announcement. The panel on the right shows that war-related topics were more likely to trend in a country around the days of a visit from President Zelenskyj. This effect is large in magnitude but only lasts for around three days.
Figure 6. Likelihood of hashtags trending in relation to country-specific event.
Note: The charts show variation in the share of countries where at least one war-related topic was among the top five highest volume topics on days relative to a specific event. In the left chart, day 0 represents the day on which a country’s government announces an aid package for Ukraine. In the right chart, day 0 represents the day on which President Zelenskyj arrived in a country for an official visit. The source for these charts are: (i) the Kiel Institute’s Ukraine Support Tracker (Trebesch et al., 2023), (ii) Wikipedia’s list of official visits by President Zelenskyj and (iii) data scraped from archive.twitter-trending.com
While the events above act as drivers of attention, it is also interesting to consider what causes war-related topics to drop out of the top five trending topics. We distinguish between two reasons why war-related hashtags could stop trending: (i) a loss of interest that results in a reduction in the absolute number of related tweets (ii) the rise of other topics that displace war-related tweets from the top five. Figure 7 focuses on days where war-related topics dropped out and compares the volume of tweets on the last day where they were in the top five, to the threshold they would have had to surpass in order to make the top five on the subsequent day. In cases where the threshold is lower than the previously observed volume of tweets (a ratio of less than 1), the topic would have kept trending had it sustained its volumes, and one can conclude there was an absolute loss of interest. In cases where the ratio is greater than one, it is possible that the topic sustained its previous volume of tweets but was crowded-out by the rise of a new trending topic. Figure 7plots the histogram of this ratio. 73 percent of the cases are in the first category (loss of attention) and 27 percent are in the possible crowding out category. This provides further evidence to suggest that attention to the war on social media is typically fleeting.
Figure 7. Loss of attention vs crowding out.
Note: The sample are country-days where war-related topics were among the top five highest-volume topics but then dropped out of the top five the next day. The chart provides a histogram of the ratio of the threshold for making the top five on the subsequent day to the highest volume of tweets of a war-related topic. Values below 1 (in blue) indicate that the volume was above the next day’s threshold and the topic declined in absolute terms. Values above 1 (in orange) indicate that the volume was below the next day’s threshold. The source are data scraped from archive.twitter-trending.com
We also examine the content of discussions on the first day after war-related hashtags drop out of the top five. The word cloud in Figure 8 suggests that on such days, people primarily discuss entertainment topics like music and football.
Figure 8. Word cloud of hashtags trending on days war-related categories drop out.
Note: The figure provides a word cloud of trending topics on country-days where no war-related topic was among the top five highest volume topics, but at least one war-related topic had been in the top five on the previous day. The source are data scraped from archive.twitter-trending.com
Content and Context of War-Related Discourse
In addition to providing insight into the level of engagement, hashtag analysis can also reveal the content and context of popular discourse surrounding the war. By examining words trending on the same days as those from our 11 categories, we can gain a better understanding of the topics people are discussing and how the conversation varies across different regions. Figure 9 illustrates this through word clouds, showing the language used in NATO countries on the left and in countries that abstained or voted against the United Nations General Assembly Resolution ES-11/1 on the right. This resolution, dated March 2, 2022, condemned the brutal invasion of Ukraine and demanded that Russia immediately withdraw its forces and comply with international law.
This exercise allows us to compare the dominant themes and narratives in these two groups of countries and observe any differences in public perception and discourse regarding the conflict. The prevalence of cryptocurrency and NFT (non-fungible tokens) references in the word cloud on the right is suggestive of how economic interests and alternative financial systems could be relevant for the positions of countries that abstained or voted against the resolution, and how this might affect their involvement or response to the conflict. On the left, words like “NATO”, ”Biden”, and ”Trump” clearly stand out, suggesting that these topics are central to the discourse on the war in NATO countries. This could indicate a focus on geopolitical alliances, international cooperation, and the role of key political figures in shaping the response to the conflict. Interestingly, “Putin” is very prominent in the left word cloud while “Russia” and “Russian” are more prominent on the right. This could indicate that Putin is seen and discussed as the primary antagonist in NATO countries.
Figure 9. Word cloud of hashtags in NATO countries vs Russia-friendly countries.
Note: These word clouds represent topics that trend on days where at least one war-related topic is trending in the respective country. The cloud on the left shows NATO countries. The cloud on the right shows countries that either abstained or voted against United Nations General Assembly Resolution ES-11/1. The source are data scraped from archive.twitter-trending.com
Conclusion
This brief uses X/Twitter trends as a barometer of public interest in Russia’s war in Ukraine. We show how attention fluctuates over time in response to developments in the conflict, to other breaking news, and to local events that make the conflict salient for a domestic audience. We also provide descriptive evidence on the variation across geographical regions and among different groups of countries. Additionally, we analyse the instance where Ukraine-related topics stop trending and find suggestive evidence that this is typically due to a gradual loss of interest rather than crowding out by new distracting trends.
Public attention and engagement drive policy in democratic countries, and the sustained support of its democratic allies is vital for Ukraine during this critical time. Understanding the patterns and influences of public attention is crucial for developing effective strategies to sustain engagement and support. This can be achieved for example by regularly highlighting the ongoing significance and bearing of Russia’s war against Ukraine, even as other events dominate the headlines. Emphasizing the impact of the conflict on individuals and communities, as well as its broader implications for international relations and global security, can help sustain public interest and engagement.
References
- ACLED. Ukraine Conflict Monitor. https://acleddata.com/ukraine-conflict-monitor/
- Trebesch, C., Antezza, A., Bushnell, K., Bomprezzi, P., Dyussimbinov, Y., Frank, A., Frank, P., Franz, L., Kharitonov, I., Kumar, B., Rebinskaya, E., Schade, C., Schramm, S., and Weiser, L. (2023). The Ukraine Support Tracker: Which countries help Ukraine and how? Kiel Working Paper, 2218, 1-75.
- Twitter Trending Archive. Scraped on ##/12/2023. https://archive.twitter-trending.com/
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Ukrainian Refugees: Who Returns and Why?
Of the 17 million Ukrainians who have fled the country since the full-scale Russian invasion in spring 2022, over 60 percent have returned to the country. Based on survey data of Ukrainians who were previously abroad but have returned and those who have remained abroad, we look at the factors that impact their respective decisions to return or to stay. We find that having family in Ukraine is an important factor, but so is missing one’s home, a wish for children to study in Ukraine and a desire to participate in the reconstruction of Ukraine. People who emigrated with their spouse, and those who had planned to emigrate prior to the full-scale war, are more likely to stay abroad. We also find that those staying in a host country are highly involved in Ukrainian affairs and argue that the Ukrainian government should consider them a resource rather than lost human capital.
One of the major consequences of the Russian war on Ukraine has been the mass exodus of Ukrainians fleeing the war. As of February 2022, the Ukrainian statistical agency has ceased publishing population data for both technical and security reasons, so the exact number of Ukrainians that have left the country is unknown. However, on the basis of mirror statistics from other countries, data from international organizations or surveys, it can be estimated that about 17 million people have fled the country since February 2022. Out of those, over 60 percent have returned to Ukraine, while 6 million Ukrainians have remained abroad.
As people are key in the future reconstruction and development of Ukraine, it is of great importance to understand what factors drive people to return (or not to return) to Ukraine. A recent paper (Sologoub, 2024) aims at addressing this question using a representative survey implemented by the Factum Group in July-August 2023. The survey includes 1400 people who, since early 2022, have fled Ukraine. Half of the respondents had returned to Ukraine at the time of the survey while the other half remained abroad. The first group is from here on referred to as returnees and the latter as refugees.
To look at the factors that determine individual’s decisions to return or stay abroad, the paper specifically considers the factors that impact three probabilities:
- the probability that a person stays abroad;
- the probability that a person who stays abroad plans to return (64 percent of the refugees);
- and the probability that a person who returned plans to stay in Ukraine (56 percent of the returnees).
This policy brief briefly describes the survey data, summarizes the key findings and concludes with policy implications and recommendations.
Main Characteristics of the Survey Respondents
The survey data shows that out of the entire sample of people who have returned to Ukraine and who have remained abroad, over 80 percent are women, and out of these 44 percent emigrated from Ukraine with children. About a quarter of our respondents stay or have stayed in Poland or Germany, 7 percent in the Czech Republic, while other countries have accommodated up to 4 percent of the Ukrainian migrants in our sample. The main reason for emigration is safety – almost half of the respondents reported it being the main reason for leaving Ukraine (see Figure 1).
Figure 1. Stated reasons for migration choices.
Source: Factum Group survey, own calculations. Note: Blue bars are for returnees, orange bars are for refugees (i.e. individuals who have stayed in host country). A dark color denotes the main reason, and a light color denotes other reasons.
Half of the respondents who had a job in Ukraine prior to the war lost their jobs at onset of the full-scale invasion, 18 percent quit their jobs and 30 percent continued to work remotely. 53 percent of the refugees had a job at the time of the survey, and 9 percent of those who remained abroad worked online for a Ukrainian organization. Of those who worked abroad at the time of the survey, 61 percent remained on the same qualification level, while 37 percent changed their qualification level – the majority of those changed to a lower qualification level.
39 percent of all respondents had school-aged children. A quarter of them reported that their children studied only online in Ukrainian schools in 2022/23. Over 60 percent stated that their children studied in a host country, but most of these children took additional classes within the Ukrainian school program – in an online or offline environment, with tutors or on their own.
When asked to compare different aspects of their life abroad and in Ukraine, approximately equal shares of the respondents reported an improvement or a worsening of these aspects. Worsening aspects was mainly reported to concern relations with friends, psychological state, and healthcare. The respondents also stated reasons for their return to Ukraine (or willingness to return), which allowed for estimation of the significance of these reasons. Generally, we found that pull factors (factors attracting people to return to Ukraine) are much more powerful than push factors (factors that force people out of host countries).
Main Results from the Probability Models
Demographic factors (age, education, family status, or income group) are non-significant across all models with the exception of marital status. People who are single are more likely to return to Ukraine, while those who migrated together with their spouse and those who do not have children are more likely to stay abroad.
Significantly positive for the probability that a person had returned at the time of the survey were pull factors such as missing family or home, the wish for children to study in Ukraine, better job opportunities in Ukraine, having property in Ukraine, and returning friends. Some significant push factors were loneliness or integration hardship, as well as feeling humiliated for living on subsidies/state support.
Among respondents who lived abroad at the time of the survey, 64 percent planned to return to Ukraine someday, 13 percent did not plan to return to Ukraine and the rest were undecided. One should however keep in mind that peoples’ intentions can change rather quickly – in the qualitative part of the survey, some respondents explained that their decision to return was spontaneous.
The probability that a person plans to return was lower for people who had planned to emigrate prior to 2022, for people who hadn’t been to Ukraine since they fled, and for people with refugee status (in some countries, people may lose refugee protection status if they exit the host country and travel to Ukraine).
Safety improvements and better job prospects increase the probability that a refugee plans to return, as well as a wish for children to study in Ukraine and a desire to participate in Ukraine’s reconstruction. Over 70 percent of the respondents believe that their experiences from abroad will be useful for the reconstruction and over 50 percent state that the new skills they’ve gained abroad can be applied during the reconstruction of Ukraine.
Significant push factors are lacking integration into the local community and an inferior social life abroad compared to life in Ukraine. Higher levels of general well-being and life satisfaction abroad expectedly reduce the probability that a person plans to return.
Lastly, those who had returned to Ukraine at the time of the survey were asked whether or not they planned to stay in Ukraine. 56 percent said yes, 7 percent plan to emigrate again, while the rest will consider the circumstances. The main factors that keep a person in Ukraine are family, the wish for one’s children to study in Ukraine and a willingness to participate in the reconstruction of the country. Improved safety is also a significant factor – which might explain why people who are originally from the Western part of Ukraine are more likely to stay (the regional factor is significant only in this third probability model). Finally, people who planned to emigrate prior to 2022, or those whose life in Ukraine is considerably inferior to that abroad, are less likely to stay.
Ukrainians’ Liaison with Their Country
60 percent of the refugees read Ukrainian news daily, and over 90 percent read them at least several times a week. The majority of the readers spread these news in their local communities and/or in their social networks. Generally, Ukrainian refugees are quite active, over 40 percent attend rallies in support of Ukraine, almost 40 percent participate in volunteer projects, over 70 percent donate to Ukrainian organizations (and the same share help their relatives in Ukraine) and 15 percent work at a non-governmental organization.
Not surprisingly, the opinion among Ukrainian refugees on reforms in Ukraine is very similar to the opinion among returnees: anti-corruption and judicial reform have the highest priority. In line with this, the fear of corruption derailing the reconstruction of Ukraine is greater than the fear that Russia will continue with their missile attacks on Ukraine. Therefore, the determination of the Ukrainian government to fight corruption will likely not only improve life for people in Ukraine but also increase the probability that refugees return to Ukraine.
Conclusion
Most of the Ukrainians who initially fled the war have already returned to Ukraine, with the majority planning on staying in the country. For those who are still abroad, the majority wish to return when safety improves. When analysing the factors behind such wishes, it is evident that among the pull factors lie not only personal drivers, such as missing one’s home or family, but also civic factors such as a willingness to participate in the reconstruction of Ukraine or a wish for one’s children to study in Ukraine, thus contributing to preserving their identity. Moreover, Ukrainians who are living abroad are highly involved in Ukrainian affairs.
Therefore, we suggest that the Ukrainian government consider refugees as a valuable resource rather than as a loss. For example, government representatives could ask refugees to donate to Ukraine, and engage in individual or collective actions (e.g. inform their local friends about the situation in Ukraine, join rallies or flashmobs in support of Ukraine etc.). Such “people’s diplomacy” is important to ensure continued support for Ukraine.
We also recommend that the governments of host countries make it easier for refugees to stay connected with Ukraine. Specifically, refugees should be allowed to travel to Ukraine without losing their protection status.
Lastly, the strongest precondition for refugees’ return to Ukraine is supplying the country with weapons and other crucial support to win the war. A Ukrainian victory will not only bring about reconstruction and development of Ukraine but also promote and enforce global democracy.
References
- Sologoub, I. (2024). Return or stay? What factors impact the decisions of Ukrainian refugees. VoxUkraine.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
How to Undermine Russia’s War Capacity: Insights from Development Day 2023
As Russia’s full-scale invasion of Ukraine continues, the future of the country is challenged by wavering Western financial and military support and weak implementation of the sanction’s regime. At the same time, Russia fights an information war, affecting sentiments for Western powers and values across the world. With these challenges in mind, the Stockholm Institute for Transition Economics (SITE) invited researchers and stakeholders to the 2023 Development Day Conference to discuss how to undermine Russia’s capacity to wage war. This policy brief shortly summarizes the featured presentations and discussions.
Holes in the Net of Sanctions
In one of the conference’s initial presentations Aage Borchgrevink (see list at the end of the brief for all presenters’ titles and affiliations) painted a rather dark picture of the current sanctions’ situation. According to Borchgrevink, Europe continuously exports war-critical goods to Russia either via neighboring countries (through re-rerouting), or by tampering with goods’ declaration forms. This claim was supported by Benjamin Hilgenstock who not only showed that technology from multinational companies is found in Russian military equipment but also illustrated (Figure 1) the challenges to export control that come from lengthy production and logistics chains and the various jurisdictions this entails.
Figure 1. Trade flows of war-critical goods, Q1-Q3, 2023.
Source: Benjamin Hilgenstock, Kyiv School of Economics Institute.
Offering a central Asian perspective, Eric Livny highlighted how several of the region’s economies have been booming since the enforcement of sanctions against Russia. According to Livny, European exports to Central Asian countries have in many cases skyrocketed (German exports to the Kyrgyzs Republic have for instance increased by 1000 percent since the invasion), just like exports from Central Asian countries to Russia. Further, most of the export increase from central Asian countries to Russia consists of manufactured goods (such as telephones and computers), machinery and transport equipment – some of which are critical for Russia’s war efforts. Russia has evidently made a major pivot towards Asia, Livny concluded.
This narrative was seconded by Michael Koch, Director at the Swedish National Board of Trade, who pointed to data indicating that several European countries have increased their trade with Russia’s neighboring countries in the wake of the decreased direct exports to Russia. It should be noted, though, that data presented by Borchgrevink showed that the increase in trade from neighboring countries to Russia was substantially smaller than the drop in direct trade with Russia from Europe. This suggests that sanctions still have a substantial impact, albeit smaller than its potential.
According to Koch, a key question is how to make companies more responsible for their business? This was a key theme in the discussion that followed. Offering a Swedish government perspective, Håkan Jevrell emphasized the upcoming adoption of a twelfth sanctions package in the EU, and the importance of previous adopted sanctions’ packages. Jevrell also continued by highlighting the urgency of deferring sanctions circumvention – including analyzing the effect of current sanctions. In the subsequent panel Jevrell, alongside Adrian Sadikovic, Anders Leissner, and Nataliia Shapoval keyed in on sanctions circumvention. The panel discussion brought up the challenges associated with typically complicated sanctions legislation and company ownership structures, urging for more streamlined regulation. Another aspect discussed related to the importance of enforcement of sanctions regulation and the fact that we are yet to see any rulings in relation to sanctions jurisdiction. The panelists agreed that the latter is crucial to deter sanctions violations and to legitimize sanctions and reduce Russian government revenues. Although sanctions have not yet worked as well as hoped for, they still have a bite, (for instance, oil sanctions have decreased Russian oil revenues by 30 percent).
Reducing Russia’s Government Revenues
As was emphasized throughout the conference, fossil fuel export revenues form the backbone of the Russian economy, ultimately allowing for the continuation of the war. Accounting for 40 percent of the federal budget, Russian fossil fuels are currently mainly exported to China and India. However, as presented by Petras Katinas, the EU has since the invasion on the 24th of February, paid 182 billion EUR to Russia for oil and gas imports despite the sanctions. In his presentation, Katinas also highlighted the fact that Liquified Natural Gas (LNG) imports for EU have in fact increased since the invasion – due to sanctions not being in place. The EU/G7 imposed price cap on Russian oil at $60 per barrel was initially effective in reducing Russian export revenues, but its effectiveness has over time being eroded through the emergence of a Russia controlled shadow fleet of tankers and sales documentation fraud. In order to further reduce the Russian government’s income from fossil fuels, Katinas concluded that the whitewashing of Russian oil (i.e., third countries import crude oil, refine it and sell it to sanctioning countries) must be halted, and the price cap on Russian oil needs to be lowered from the current $60 to $30 per barrel.
In his research presentation, Daniel Spiro also focused on oil sanctions targeted towards Russia – what he referred to as the “Energy-economic warfare”. According to Spiro, the sanctions regime should aim at minimizing Russia’s revenues, while at the same time minimizing sanctioning countries’ own costs, keeping in mind that the enemy (i.e. Russia) will act in the exact same way. The sanctions on Russian oil pushes Russia to sell oil to China and India and the effects from this are two-fold: firstly, selling to China and India rather than to the EU implies longer shipping routes and secondly, China and India both get a stronger bargaining position for the price they pay for the Russian oil. As such, the profit margins for Russia have decreased due to the price cap and the longer routes, while India and China are winners – buying at low prices. Considering the potential countermoves, Spiro – much like Katinas – emphasized the need to take control of the tanker market, including insurance, sales and repairs. While the oil price cap has proven potential to be an effective sanction, it has to be coupled with an embargo on LNG and preferrable halted access for Russian ships into European ports – potentially shutting down the Danish strait – Spiro concluded.
Chloé Le Coq presented work on Russian nuclear energy, another energy market where Russia is a dominant player. Russia is currently supplying 12 percent of the United States’ uranium, and accounting for as much as 70 percent on the European market. On top of this, several European countries have Russian-built reactors. While the nuclear-related revenues for Russia today are quite small, the associated political and economic influence is much more prominent. The Russian nuclear energy agency, Rosatom, is building reactors in several countries, locking in technology and offering loans (e.g., Bangladesh has a 20-year commitment in which Rosatom lends 70 percent of the production cost). In this way Russia exerts political influence on the rest of the world. Le Coq argued that energy sanctions should not only be about reducing today’s revenues but also about reducing Russian political and economic influence in the long run.
The notion of choke points for Russian vessels, for instance in the Danish strait, was discussed also in the following panel comprising of Yuliia Pavytska, Iikka Korhonen, Aage Borchgrevink, and Lars Schmidt. The panelists largely agreed that while choke points are potentially a good idea, the focus should be on ensuring that existing sanctions are enforced – noting that sanctions don’t work overnight and the need to avoid sanctions fatigue. Further, the panel discussed the fact that although fossil fuels account for a large chunk of federal revenues, a substantial part of the Russian budget come from profit taxes as well as windfall taxes on select companies, and that Russian state-owned companies should in some form be targeted by sanctions in the future. In line with the previous discussion, the panelists also emphasized the importance of getting banks and companies to cooperate when it comes to sanctions and stay out of the Russian market. Aage Borchgrevink highlighted that for companies to adhere to sanctions legislation they could potentially be criminally charged if they are found violating the sanctions, as it can accrue to human rights violations. For instance, if companies’ parts are used for war crimes, these companies may also be part of such war crimes. As such, sanctions can be regarded as a human rights instrument and companies committing sanctions violations can be prosecuted under criminal law.
Frozen Assets and Disinformation
The topic of Russian influence was discussed also in the conference’s last panel, composed of Anders Ahnlid, Kata Fredheim, Torbjörn Becker, Martin Kragh, and Andrii Plakhotniuk. The panelists discussed Russia’s strong presence on social media platforms and how Russia is posting propaganda at a speed unmet by legislators and left unchecked by tech companies. The strategic narrative televised by Russia claims that Ukraine is not a democracy, and that corruption is rampant – despite the major anti-corruption reforms undertaken since 2014. If the facts are not set straight, the propaganda risks undermining popular support for Ukraine, playing into the hands of Russia. Further, the panelists also discussed the aspect of frozen assets and how the these can be used for rebuilding Ukraine. Thinking long-term, the aim is to modify international law, allowing for confiscation, as there are currently about 200 billion EUR in Russian state-owned assets and about 20 billion EUR worth of private-owned assets, currently frozen.
The panel discussion resonated also in the presentation by Vladyslav Vlasiuk who gave an account of the Ukrainian government’s perspective of the situation. Vlasiuk, much like other speakers, pointed out sanctions as one of the main avenues to stop Russia’s continued war, while also emphasizing the need for research to ensure the implications from sanctions are analyzed and subsequently presented to the public and policy makers alike. Understanding the effects of the sanctions on both Russia’s and the sanctioning countries’ economies is crucial to ensure sustained support for the sanction’s regime, Vlasiuk emphasized.
Joining on video-link from Kyiv, Tymofiy Mylovanov, rounded off the conference by again emphasizing the need for continued pressure on Russia in forms of sanctions and sanctions compliance. According to Mylovanov, the Russian narrative off Ukraine struggling must be countered as the truth is rather that Ukraine is holding up with well-trained troops and high morale. However, Mylovanov continued, future funding of Ukraine’s efforts against Russia must be ensured – reminding the audience how Russia poses a threat not only to Ukraine, but to Europe and the world.
Concluding Remarks
The Russian attack on Ukraine is military and deadly, but the wider attack on the liberal world order, through cyber-attacks, migration flows, propaganda, and disinformation, must also be combatted. As discussed throughout the conference, sanctions have the potential for success, but it hinges on the beliefs and the compliance of citizens, companies, and governments around the world. To have sanctions deliver on their long-term potential it is key to include not only more countries but also the banking sector, and to instill a principled behavior among companies – having them refrain from trading with Russia. Varying degrees of enforcement undermine sanctions compliant countries and companies, ultimately making sanctions less effective. Thus, prosecuting those who breach or purposedly evade sanctions should be a top priority, as well as imposing control over the global tanker market, to regain the initial bite of the oil price cap. Lastly, it is crucial that the global community does not forget about Ukraine in the presence of other conflicts and competing agendas. And to ensure success for Ukraine we need to restrain the Russian war effort through stronger enforcement of sanctions, and by winning the information war.
List of Participants
Anders Ahnlid, Director General at the National Board of Trade
Aage Borchgrevink, Senior Advisor at The Norwegian Helsinki Committee
Torbjörn Becker, Director at the Stockholm Institute of Transition Economics
Chloé Le Coq, Professor of Economics, University of Paris-Panthéon-Assas, Economics and Law Research Center (CRED)
Benjamin Hilgenstock, Senior Economist at Kyiv School of Economics Institute
Håkan Jevrell, State Secretary to the Minister for International Development Cooperation and Foreign Trade
Michael Koch, Director at Swedish National Board of Trade
Iikka Korhonen, Head of the Bank of Finland Institute for Emerging Economies (BOFIT)
Martin Kragh, Deputy Centre Director at Stockholm Centre for Eastern European Studies (SCEEUS)
Eric Livny, Lead Regional Economist for Central Asia at European Bank for Reconstruction and Development (EBRD)
Anders Leissner, Lawyer and Expert on sanctions at Advokatfirman Vinge
Tymofiy Mylovanov, President of the Kyiv School of Economics
Vladyslav Vlasiuk, Sanctions Advisor to the Office of the President of Ukraine
Nataliia Shapoval, Chairman of the Kyiv School of Economics Institute
Yuliia Pavytska, Manager of the Sanctions Programme at KSE Institute
Andrii Plakhotniuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
Daniel Spiro, Associate Professor, Uppsala University
Adrian Sadikovic, Journalist at Dagens Nyheter
Kata Fredheim, Executive Vice President of Partnership and Strategy and Associate Professor at SSE Riga
Lars Schmidt, Director and Sanctions Coordinator at the Ministry for Foreign Affairs, Sweden
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Cognitive Dissonance on Belarus: Recovery and Adaptation or Stalemate?
A closer look at the Belarusian economy over the recent year, produces two initially competing narratives. The first one emphasizes that tough sanctions have led to a deadlock for the Belarusian economy. The second one stresses that output losses have turned out to be much lower than expected, and that the economy has displayed a rather high degree of adaptability – securing an early and rapid recovery. This policy brief shows that these narratives are not mutually exclusive but rather elements of the same bigger picture. A short-term focus gives the impression that the current stance is ‘more good than bad’. This reflects the fact that output has recovered and almost reached historically high levels, made possible due to a combination of exports protection mechanisms and compensatory effects on output. However, this does not eliminate the disappointing medium- and long-term prospects for the country. On the flip side of the immediate survival of the Belarusian economy is the country’s economic and political stalemate. This includes the lack of opportunities for future sustainable growth and Belarus’ enormous and continuously growing dependence on Russia. Within this stalemate, stagnation is the best plausible scenario. At the same time, much worse scenarios, both economically and politically, are also highly likely. Ultimately, breaking the deadlock is the only way to a better future for Belarus.
The Belarusian Economy and the Changing Narratives
About 1.5 years ago, Western countries introduced tough sanctions against Belarus, punishing the Lukashenka regime for its role in Russia’s invasion of Ukraine. This gave rise to a huge uncertainty regarding Belarus’ economic prospects. A FREE policy brief published about a year ago (Kruk & Lvovskiy, 2022) presented a model-based estimate of a potential rock-bottom for the Belarusian economy in the new environment, which amounted to 20 percent of output losses. The authors however argued that actual output losses might be significantly lower given Russia’s support and policy responses, which were unaccounted for in the model. At the same time, downside risks and a lack of output consistency seem to have become permanent traits of the Belarusian economy.
Expectations of a large and prolonged recession in Belarus prevailed into mid-2023. International institutions (IMF, World Bank) and rating agencies (S&P, Fitch Ratings) mainly expected a recession in Belarus up to 10 percent 2022-2023. The reality has however turned out to be quite different with the recession being relatively contained and short-lived. The output losses between the peak (Q2-2021) trough Q3-2022 amounted to 6.8 percent. In Q4-2022 a recovery began, and in Q3-2023 the economy had almost fully recovered, reaching nearly the same levels as in Q2-2021 (see Figure 1). Further, in terms of average real wages and household consumption, the situation appears to be even more positive. The real average wage reached its pre-war level in Q1-2023 and has since displayed record high levels, and household consumption follow a similar trend (see Figure 1).
These dynamics have given rise to a new narrative. As of lately, the Belarusian economic situation is at times treated as ‘more good than bad’. Further, most international financial institutions currently forecast a continued weak recovery growth in the coming years (EBRD, 2023; IMF, 2023; Izvorski et al., 2023).
Figure 1. Real GDP, Average Real Wages, and Real Household Consumption (index, seasonally adjusted, 2018=100).
Source: Author’s estimations based on Belstat data.
Factors Behind the Recent Recovery Growth
The underlying reasons for the recovery growth can be divided into two groups: (i) export protection mechanisms under sanctions and (ii) positive shocks and compensatory effects on output.
Export protection mechanisms under sanctions are twofold. Firstly, the Belarusian regime turned out to be somewhat successful in adjusting to the new sanctions-environment. This partly due to a somewhat geographical U-turn of Belarusian exports, underpinned by new logistics and payment schemes. The best example of this turn is the re-orientation of oil product exports from the EU and Ukraine to Russia (Kharitonchik, 2023). Moreover, some exports to traditional markets, which were challenged by logistics and payment barriers rather than sanctions, were secured by crossing these barriers. The best such example is the recovery of potash fertilizer exports to China, Brazil and India. Since early 2023 these displayed a rapid recovery due to Belarus finding logistic solutions through Russian sea ports instead of EU ports, and by using railway transportation.
Secondly, the practices of sanctions evasion may also have played a significant role. The scope of sanctions evasion is however difficult to assess due to its secretive nature. Moreover, the difference between avoiding and evading sanctions is not always clear.
Export protection mechanisms allowed Belarus to cushion actual export losses, making them transitory (see Figure 2). Actual losses in exports were close to the rock-bottom scenario estimates for only a couple of months. Instead of an expected level shift in exports by roughly 40 percent (from the pre-war level), exports displayed a recovery trajectory. Hence, what was modelled as a permanent shock in Kruk & Lvovskiy (2022), turned out to be transitory.
Figure 2. Physical Volume of Exports (index, seasonally adjusted, 2018=100).
Source: Author’s estimations based on Belstat data.
One important aspect to mention is that part of this recovery is due to oil-product exports taking place already in 2022 (Kharitonchik, 2023). In Kruk & Panasevich (2023) the authors show that the oil-refinery industry is of extreme importance for the entire Belarusian economy. Due to inter-industrial linkages, the oil-refinery industry indirectly accounts for about 11 percent of Belarus’ output, despite its modest direct contribution to the GDP (slightly more than 1 percent). Hence, due to protecting these exports (and the corresponding production of oil products), a large amount of output losses was avoided. A similar situation unfolded also for potash fertilizer exports and the chemical industry producing them (although inter-industrial linkages and effects on output are much weaker for that industry).
Besides export protection mechanisms, the recovery of exports and output stem largely from various positive and compensatory effects on output Some of them arose from Belarus’ and Russia’s respective regimes responses to sanctions, and from Russia’s readiness to support Belarus. Others are classical external positive shocks (to no degree related to sanctions) while some are a combination of both. They include: (i) increasing energy (gas) subsidies from Russia, (ii) a prolonged period of extra-high price competitiveness, especially in the Russian market, (iii) expanded access to the Russian market, (iv) other forms of Russian support (debt restructuring, budget transfers, new loans), (v) favorable trade conditions and export prices (apart from on the Russian market), (vi) a (macro)economic environment that allow for more room for domestic economic policy interventions.
Taken together, these positive output drivers largely contributed to curbing the recession in 2022 and to the output recovery in 2023. A straightforward decomposition of the actual output growth path is unfeasible (due to the close interconnection of export protection mechanisms and output drivers, and the lack of available statistics). However, approximating the actual path in a model environment results in the following: between Q2-2021 and Q3-2022, about 12 percent of losses due to sanctions (taking into account the export protection mechanisms) and a deprivation of the Ukrainian market, and 5.2 percent of gains due to output shocks, resulted in actual output losses of 6.8 percent. Later in 2023, due to increasing effects from the export protection mechanisms, the sanctions-related output losses shrank to about 6.6 percent, while output shocks expanded output by roughly the same level. This allowed output losses to be zeroed out, i.e. the level of output in Q3-2023 was almost identical to Q3-2021.
An Economic Stalemate
Is the ‘more good than bad’ economic situation sustainable? Does the recent recovery mean that Belarus has overcome the major challenges to the economy? The short answer is no. Even with short-term thinking, there are still numerous downside risks. Sanctions still form a permanently challenging environment for the Belarusian economy, putting exports and output in jeopardy. The export protection mechanisms are not persistent, and they largely depend on Russia’s political will to support them. Moreover, the updated logistics and payment chains may also be vulnerable and sensitive to changes in the sanctions’ environment, and short-term trends in external prices. The aforementioned positive output effects are short-term by their nature and there are indications of them starting to fade already in 2023 (BEROC, 2023). Hence, even short-term projections for 2024 are challenging: the output growth is expected to weaken significantly or even fade away, while inflation spikes and financial destabilization risks are high (BEROC, 2023). Therefore, a return to a stagnant economic environment appears to be the most plausible short-term outlook.
The medium-term outlook seems even worse. According to Kruk (2023), the Belarusian macroeconomic balance (a) is very fragile, (b) is subject to numerous and huge downside risks, and (c) cannot be secured by macroeconomic policies because of the structural weaknesses in their design and the lack of room for maneuver. This means that even the existing weak long-term growth potential cannot be realized in the medium term, while the likelihood of recessions, inflation spikes and financial destabilization is high.
Re-shifting focus to a long-term and international perspective makes the viewpoint ‘more good than bad’ appear inconsistent. First, the long-term growth potential for Belarus, which was very weak even before the sanctions, keeps on worsening. This as adverse supply shocks and a deterioration of the productivity determinants continue eroding it (Kruk & Lvovskiy, 2022). Estimations of the growth potential (that rely on historical time series) are mainly within the range of 0-1 percent per annum. However, even such disappointing estimates might be optimistic bearing in mind the current political and sanctions-related risks and uncertainty (absent in the historical data). This makes stagnation the best possible long-term outlook, although it cannot be guaranteed.
Second, despite the milder recession and rapid recovery, the well-being gap between Belarus and its EU neighbors keeps on expanding (see Figure 3).
Figure 3. Well-being in Belarus vs the average among its EU neighbors (Latvia, Lithuania, Poland), 1990-2022, in percent.
Note: The GDP per capita PPP in 2017 constant international dollars is considered as well-being. The average well-being for EU Neighbors is the simple average in GDP in Latvia, Lithuania, and Poland.
Source: Author’s estimations based on World Bank data.
The average well-being in Belarus (measured in GDP per capita in constant international dollars) vs. that among its EU neighbors reached an (almost) historically low level in 2022. After attaining a level of well-being of roughly 75 percent of the average in Latvia, Lithuania, and Poland in the early 2010s, the well-being in Belarus has fall to about 52.5 percent, almost as low as in the mid-1990s. Given the economic stagnation as the most likely outlook, this means that the country will, in relative terms, keep on getting poorer in comparison to its EU neighbors.
A Political Stalemate
The hypothetical way out of the economic stalemate is more or less obvious. For instance, there is somewhat of a consensus among Belarusian economists about strengthening the long-term growth and securing macroeconomic stability (see Daneyko & Kruk, 2021; Kruk, 2023, for an overview of a collective view from a group of Belarusian economists). This vision, however, clashes with the views of the Lukashenka regime, which has inhibited its implementation throughout decades. Hence, democratic transition, or at least deprival of power of the Lukashenka regime has long appeared to be a highly likely precondition for moving away from the stalemate.
This, however, has changed in the last couple of years. The Belarusian economy’s dependence on Russia has moved from large to absolute. Prior to 2022, Russia was an important market for Belarusian exports (about 40 percent), the single energy supplier, and de facto the lender of last resort. To date, Russia’s role has expanded dramatically. The share of exports to Russia has increased up to about 65 percent. Moreover, the majority of the remaining 35 percent is exported with the assistance of or through Russia, using Russian infrastructure. Therefore, it would be fair to argue that Russia in some form “controls” roughly 90 percent of Belarusian exports. Further, being Belarus’ sole energy supplier, Russia has increased its significance for Belarus through expanded energy subsidies. The size of the energy subsidies reached a historical high in 2022, and the mechanism of the energy subsidies has become a cornerstone for macroeconomic stability in Belarus. Furthermore, Russia has turned out to be the only effective creditor for Belarus. Overall, Russia has accumulated a significant number of tools to undermine Belarus at any given moment.
A democratic transition or at least deprival of power of the Lukashenka regime might therefore not be sufficient preconditions for breaking the economic deadlock. Even if domestic political will to do so should emerge, the risk that Russia will successfully suppress it using the above outlined economic tools is very high. Hence, apart from a democratic transition, the way out of the economic stalemate requires a way out of the political stalemate. This seems to only be possible through either a politically weakened Russia, and/or an external political force, allied to the Belarusian democratic forces, and strong enough to suppress Russia.
Conclusions
Recently, the narrative on the Belarusian economy has changed. The prevailing expectations of a large and prolonged recession has been substituted by expectations of a gradual recovery. The narrative ‘the jig is up’ has somehow been crowded out by the ‘more good than bad’ viewpoint on the Belarusian economy. However, these narratives are not mutually exclusive. Behind the current ‘more good than bad’ viewpoint on the Belarusian economy, a severe economic and political deadlock prevails. Moreover, future economic and political deadlocks are the actual price being paid for the recent survival and recovery of the Belarusian economy.
From a positive perspective, the economic and political deadlock means that the country is likely to, at least, be bogged down in stagnation. Belarus’ total dependency on Russia makes the country hostage to Russia’s political preferences and country-specific risks. Should Russia decide to exert further economic and/or political influence over Belarus, it is likely to succeed. Consequently, any economic downturn faced by Russia would automatically impact Belarus.
From a normative perspective, breaking the economic and political deadlock might be the only solution, and for this, the order might matter. Prior to 2020 there was a widespread opinion that breaking the economic deadlock must be prioritized, and that it could – in turn – break the political deadlock. As of now, the tables have turned. The current order postulates the political deadlock comes first, as it seems to be the only way of breaking the economic stalemate. However, breaking the political deadlock appears to require external political will.
With these conclusions in mind, the recent Belarusian democratic forces’ manifest regarding Belarus’ EU membership aspiration, deserves attention (BDF, 2023). At first, such aspiration might appear schizophrenic given the actual political situation inside of the country. However, taking a Belarusian EU membership serious (within the EU and among Belarusians) might be the answer to Belarus’ political and economic deadlock. From this perspective, the task for the Belarusian society is thus to convince EU counterparts that this is not madness, but rather a feasible solution. It is rather evident why this solution is both desirable and feasible for the Belarusian society. The main question to be answered is therefore whether, and why it would be desirable and feasible for the EU.
References
- BEROC. (2023). Macroeconomic Forecast for Belarus—2024. BEROC. https://beroc.org/publications/view/makroprognoz-dlya-belarusi-2024-god/
- Belarusian Democratic Forces. (2023). Declaration of Future Membership of Belarus in the European Union. https://tsikhanouskaya.org/en/news/a2b6d33809a9197.html
- Daneyko, P., & Kruk, D. (2021). Which Reforms Does Belarus Need? (108; BEROC Policy Paper Series). BEROC. https://beroc.org/publications/policy_papers/kakie-reformy-nuzhny-belarusi-/?sphrase_id=6882
- EBRD. (2023). The EBRD in Belarus: Overview. https://www.ebrd.com/where-we-are/belarus/overview.html
- IMF. (2023). World Economic Outlook, October 2023: Navigating Global Divergences. IMF. https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023
- Izvorski, I., Kasyanenko, S., & Singer, D. (2023). Europe and Central Asia Economic Update, Fall 2023: Sluggish Growth, Rising Risks. Washington, DC: World Bank. https://doi.org/10.1596/40389
- Kharitonchik, A. (2023). The Return of Oil Rent. BEROC. https://beroc.org/publications/view/vozvrashchenie-neftyanoy-renty/
- Kruk, D. (2023). What is needed to reinforce macroeconomic stability in Belarus? (85; BEROC Working Paper Series). BEROC. https://beroc.org/publications/working_papers/chto-nuzhno-dlya-ukrepleniya-makroekonomicheskoy-stabilnosti-v-belarusi/
- Kruk, D., & Lvovskiy, L. (2022). Belarus Under War Sanctions (Policy Brief Series). FREE Network. https://freepolicybriefs.org/2022/10/17/belarus-under-sanctions/
- Kruk, D., & Panasevich, V. (2023). Industrial linkages in the Belarusian economy and their role in the macroeconomic landscape (86; BEROC Working Paper Series). BEROC. https://beroc.org/publications/working_papers/mezhotraslevye-vzaimosvyazi-v-belarusi/
- National Statistical Committee of the Republic of Belarus (Belstat). https://www.belstat.gov.by/en/
- The World Bank. https://databank.worldbank.org/source/world-development-indicators
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Risks of Russian Business Ownership in Georgia
This policy brief addresses risks tied to Russian business ownership in Georgia. The concentration of this ownership in critical sectors such as electricity and communications makes Georgia vulnerable to risks of political influence, corruption, economic manipulation, espionage, sabotage, and sanctions evasion. To minimize these risks, it is recommended to establish a Foreign Direct Investment (FDI) screening mechanism for Russia-originating investments, acknowledge the risks in national security documents, and implement a critical infrastructure reform.
Russia exerts substantial influence over Georgia. First and foremost, Russia has annexed 20 percent of Georgia’s internationally recognized territories of Abkhazia and South Ossetia. Further, it employs a variety of hybrid methods to disrupt the Georgian society including disinformation, support for pro-Russian parties and media, trade restrictions, transportation blockades, sabotage incidents, and countless more. These tactics aim to hinder Georgia’s development, weaken the country’s statehood, and negatively affect pro-Western public sentiments (Seskuria, 2021 and Kavtaradze, 2023).
Factors that may also increase Georgia’s economic dependency on Russia concern trade relationships, remittances, increased economic activity driven by the most recent influx of Russian migrants, and private business ownership by Russian entities or citizens (Babych, 2023 and Transparency International Georgia, 2023). This policy brief assesses and systematizes the risks associated with Russian private business ownership in Georgia.
Sectoral Overview of Russian Business Ovnership
Russian business ownership is significant in Georgia. Recent research from the Institute for Development of Freedom of Information (IDFI) has addressed Russian capital accumulation across eight sectors of the Georgian economy: electricity, oil and gas, communications, banking, mining and mineral waters, construction, tourism, and transportation. Of the eight sectors considered by IDFI, Russian business ownership is most visible in Georgia’s electricity sector, followed by oil and natural gas, communications, and mining and mineral waters industries. In the remaining four sectors considered by IDFI, a low to non-existent level of influence was observed (IDFI, 2023).
Figure 1. Overview of Russian Ownership in the Georgian Economy as of June 2023.
Source: IDFI, 2023.
There are several reasons for concern regarding the concentration and distribution of Russian business ownership in the Georgian economy.
First, it is crucial to keep Russia’s history as a hostile state actor in mind. Foreign business ownership is not a threat in itself; However, it may pose a threat if businesses are under control or influence of a state that is hostile to the country in question (see Larson and Marchik, 2006). Business ownership has been a powerful tool for the Kremlin, allowing Russia to influence various countries and raising concerns that such type of foreign ownership might negatively affect national security of the host country (Conley et al., 2016). Similar concerns have become imperative amidst Russia’s full-scale war in Ukraine (as, for instance, reflected in Guidance of the European Commission to member states concerning Russian foreign acquisitions).
Further, Russian business ownership in Georgia is particularly threatening due to the ownership concentration within sectors of critical significance for the overall security and economic resilience of the country. While there is no definition of critical infrastructure or related sectors in Georgia, at least two sectors (energy and communications) correspond to critical sectors, according to international standards (see for instance the list of critical infrastructure sectors for the European Union, Germany, Canada and Australia). Such sectors are inherently susceptible to a range of internal and external threats (a description of threats related to critical infrastructure can be found here). Intentional disruptions to critical infrastructure operations might initiate a chain reaction and paralyze the supply of essential services. This can, in turn, trigger major threats to the social, economic, and ecological security and the defense capacity of a state.
Georgia’s Exposure to Risks
Identifying and assessing the specific dimensions of Georgia’s exposure to risks related to Russian business ownership provides a useful foundation for designing policy responses. This brief identifies six distinct threats in this regard.
Political Influence
Russia’s business and political interests are closely intertwined, making it challenging to differentiate their respective motives. This interconnectedness can act as a channel for exerting political influence in Georgia. Russians that have ownership stakes in Georgian industries (e.g. within electricity, communications, oil and gas, mining and mineral waters) have political ties with the Russian ruling elite facing Western sanctions, or are facing sanctions themselves. For instance, Mikhail Fridman, who owns up to 50 percent of the mineral water company IDS Borjomi, is sanctioned for supporting Russia’s war in Ukraine. Such interlacing raises concerns about indirect Russian influence in Georgia, potentially undermining Georgia’s Western aspirations.
Export of Corrupt Practices
The presence of notable Russian businesses in Georgia poses a significant threat in terms of it nurturing corrupt practices. Concerns include “revolving door” incidents (movement of upper-level public officials into high-level private-sector jobs, or vice versa), tax evasion, and exploitation of the public procurement system. For instance, Transparency International Georgia (2023) identified a “revolving door” incident concerning the Russian company Inter RAO Georgia LLC, involved in electricity trading, and its regulator, the Georgian state-owned Electricity Market Operator JSC (ESCO). One day after Inter RAO Georgia LLC was registered, the director of ESCO took a managerial position within Inter RAO Georgia LLC. Furthermore, tax evasion inquiries involving Russian-owned companies have been documented in the region, particularly in Armenia, further highlighting corruption risks. We argue that such corrupt practices might harm the business environment and deter future international investments.
Economic Manipulation
A heavy concentration of foreign ownership in critical sectors like energy and telecommunications, also poses a risk of manipulation of economic instruments such as prices. The significant Russian ownership in Armenia’s gas distribution network exemplifies this threat. In fact, Russia utilized a price manipulation strategy for gas prices when Armenia declared its EU aspirations. Prices were then reduced after Armenia joined the Eurasian Economic Union (Terzyan, 2018).
Espionage
Russian-owned businesses within Georgia’s critical sectors also pose espionage risks, including economic and cyber espionage. Owners of such businesses may transfer sensitive information to Russian intelligence agencies, potentially undermining critical infrastructure operations. As an example, in 2022, a Swedish business owner in electronic trading and former Russian resident, was indicted with transferring secret economic information to Russia. Russian cyber-espionage is also known to be used for worldwide disinformation campaigns impacting public opinion and election results, compromising democratic processes.
Sabotage
The presence of Russian-owned businesses in Georgia raises the risk of sabotage and incapacitation of critical assets. Russia has a history of using sabotage to harm other countries, such as when they disrupted Georgia’s energy supply in 2006 and the recent Kakhovka Dam destruction in Ukraine (which had far-reaching consequences, incurring environmental damages, and posing a threat to nuclear plants). These incidents demonstrate the risk of cascading effects, potentially affecting power supply, businesses, and locations strategically important to Georgia’s security.
Sanctions and Sanction Evasion
Russian-owned businesses in Georgia face risks due to Western sanctions as they could be targeted by sanctions or used to evade them. Recent cases, like with IDS Borjomi (as previously outlined) and VTB Bank Georgia – companies affected by Western sanctions given their Russian connections – highlight Georgia’s economic vulnerability in this regard. Industries where these businesses operate play a significant role in Georgia’s economy and job market, and instabilities within such sectors could entail social and political concerns. There’s also a risk that these businesses could help Russia bypass sanctions and gain access to sensitive goods and technologies, going against Georgia’s support for international sanctions against Russia. It is crucial to prevent such sanctions-associated risks for the Georgian economy.
Assessing the Risks
To operationalize the above detailed risks, we conducted interviews with Georgian field experts within security, economics, and energy. The risk assessment highlights political influence through Russian ownership in Georgian businesses as the foremost concern, followed by risks of corruption, risks related to sanctions, espionage, economic manipulation, and sabotage. We asked the experts to assess the severity level for each identified risk and notably, all identified risks carry a high severity level.
Recommendations
Considering the concerns detailed in the previous sections, we argue that Russia poses a threat in the Georgian context. Given the scale and concentration of Russian ownership within critical sectors and infrastructure, a dedicated policy regime might be required to improve regulation and minimize the associated risks. Three recommendations could be efficient in this regard, as outlined below.
Study the Impact of Adopting a Foreign Direct Investment Screening Mechanism
To effectively address ownership-related threats, it’s essential to modify existing investment policies. One approach is to introduce a FDI screening mechanism with specific functionalities. Several jurisdictions implement mechanisms with similar features (see a recent report by UNCTAD for further details). Usually, such mechanisms target FDI’s that have security implications. A dedicated screening authority overviews investment that might be of concern for national security and after assessment, an investment might be approved or suspended. In Georgia, a key consideration for designing such tool includes whether it should selectively target investments from countries like Russia or apply to all incoming FDI. Additionally, there’s a choice between screening all investments or focusing on those concerning critical sectors and infrastructure. Evaluating the investment volume, possibly screening only FDI’s exceeding a predefined monetary value, is also a vital aspect to consider. However, it’s important to acknowledge that FDI screening mechanisms are costly. Therefore, this brief suggests a thorough cost and benefit analysis prior to implementing a FDI screening regime in Georgia.
Consider Russian Ownership-related Threats in the National Security Documents
Several national-level documents address security policy in Georgia, with the National Security Concept – outlining security directions – being a foundational one. Currently, these concepts do not specifically address Russian business ownership-related threats. When designing an FDI screening mechanism, however, acknowledging various risks related to Russian business ownership must be aligned with fundamental national security documents.
Foster the Adoption of a Critical Infrastructural Reform
To successfully implement a FDI screening mechanism unified, nationwide agreement on the legal foundations for identifying and safeguarding critical infrastructure is needed. The current concept for critical infrastructure reform in Georgia envisages a definition of critical infrastructure and an implementation of an FDI screening mechanism. We therefore recommend implementing this reform in the country.
Conclusion
This policy brief has identified six distinct risks related to Russian business ownership in several sectors of the Georgian economy, such as energy, communications, oil and natural gas, and mining and mineral waters. Even though Georgia does not have a unified definition of critical infrastructure, assets concentrated in these sectors are regarded as critical according to international standards. Considering Russia’s track record of hostility and bearing in mind threats related to foreign business ownership by malign states, this brief suggests regulating Russian business ownership in Georgia by introducing a FDI screening instrument. To operationalize this recommendation, it is further recommended to consider Russian business ownership-related threats in Georgia’s fundamental security documents and to foster critical infrastructural reform in the country.
References
- Babych, Y. (2023). The Georgian Economy after One Year of Russia’s War in Ukraine: Trends and Risks. ISET Policy Institute. https://iset-pi.ge/storage/media/other/2023-03-13/6982ed30-c1ad-11ed-896a-efa0ef78cee7.pdff
- Conley, H. A., Mina, J., Stefanov, R., & Vladimirov, M. (2016). The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe. Center for Strategic and International Studies. https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/1601017_Conley_KremlinPlaybook_Web.pdf
- Institute for Development of Freedom of Information (IDFI). (2023, June). Russian Capital and Russian Connections in Georgian Business. https://idfi.ge/public/upload/Analysis/Russian%20capital%20and%20Russian%
20connections%20in%20Georgian%20business.pdf - Kavtaradze, N. (2023). Hybrid Warfare and Russia’s Modern Warfare. Georgian Foundation for Strategic and International Studies (GFSIS). https://gfsis.org.ge/files/library/opinion-papers/201-expert-opinion-eng.pdf
- Larson, A. P., & Marchik, D. M. (2006). Foreign Investment and National Security. ETH Zurich. https://www.files.ethz.ch/isn/20513/2006-07_ForeignInvestmentCSR.pdf
- Seskuria, N. (2021). Russia’s “Hybrid Agression” against Georgia: The Use of Local and External Tools. Center for Strategic and International Studies. https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/210921_Seskuria_Russia_Georgia.pdf?VersionId=__d9rw2TtaDba9xaHASf6lCEmJ.oqhA7
- Terzyan, A. (2018). The anatomy of Russia’s grip on Armenia: Bound to Persist? https://www.econstor.eu/bitstream/10419/198543/1/ceswp-v10-i2-p234-250.pdf
- Transparency International Georgia. (2023). Georgia’s Economic Dependence on Russia: Impact of the Russia-Ukraine War. Transparency International Georgia. https://transparency.ge/en/post/georgias-economic-dependence-russia-impact-russia-ukraine-war-1
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Belarusian Business in Turbulent Times
In the past three years, the Belarusian private sector appears to have been caught between a hammer and an anvil, experiencing domestic repressions and de-liberalization as well as collateral damage from sanctions and a deterioration of the country’s image. This policy brief discusses the challenges that Belarusian businesses have been facing since the onset of the Covid-19 pandemic and argues that the private sector may be the last hope for sovereignty and transformation of the country.
The years that have passed since the onset of the Covid-19 pandemic and the subsequent economic shocks have significantly altered the entrepreneurial landscape in Belarus. This period has seen the emergence of private businesses’ social and political activation during the pandemic, as well as during the 2020 election campaign and post-election protests (Bornukova & Friedrich, 2021). Businesses have also had to adapt to reactionary government policies, cope with sanctions against Belarus and deal with issues related to the Russian invasion of Ukraine. In the face of these challenges, the reactions and responses from small and medium-sized businesses signals that the private sector still has the potential to remain a driving force for socio-economic development in Belarus – despite the current political forces in power.
Private Sector Development; Liberalization and Regulation
The liberalization of the business environment, which lasted more than a decade and ended in 2020, allowed the private sector (enterprises without any state ownership share) to become the most dynamic part of the economy (see Figure 1).
From 2012 through 2020, the share of the private sector in employment increased by 7.7 percentage points. Similarly, the contribution from the private sector to the export of goods and services, as well as to GDP, exceeded the contribution from state-owned commercial enterprises. Moreover, even in the absence of significant privatization and restructuring of state-owned enterprises, the private sector took over the “social” function as an “employer of last resort”, absorbing workers released from the public sector (including from fully and partly state-owned enterprises) (IPM Research Center, 2020).
In addition, the development of the private sector increased the diversification of Belarus’ foreign trade. Private companies in the IT sector, advanced instrument manufacturing, electronics, and other high-value-added industries shifted their focus to developed countries’ markets, which reduced the dependency on Russian resources and markets. This increased Belarus’ economic sovereignty and its resilience to political tensions and other external shocks. The year 2020 however marked the end of the liberalization of entrepreneurial activities, as private businesses and private capital started to be seen as a threat to the political system (Bornukova & Friedrich, 2021).
Figure 1. Contributions from the Belarusian private sector to main economic indicators.
Source: Own elaboration based on Chubrik (2021) and IPM Research Center (2020).
Although there are no uncontestable figures describing business’ attitudes and activities during the political crisis in 2020, several non-academic projects documented that 58 percent of people protesting the fraud elections in 2020 worked within the private business sector (Devby.io, 2020). Dozens of businesses also openly supported the anti-regime strikes (The Village Belarus, 2020). As a consequence, legislation and law enforcement have since been steadily tightened, the tax burden has increased, and the possibility for using simplified taxation and accounting systems by small-scale businesses, in particular for sole proprietors, have been substantially reduced.
Against this backdrop, the government has also suppressed the publication of detailed statistical data including those on entrepreneurial activity. Since 2020, the Belarusian Research and Outreach Center (BEROC)’s quarterly enterprise surveys have become the main source of information and analysis on the business development situation.
In general, BEROC’s surveys demonstrate that, despite a reduced safety cushion and the lack of substantial state support during the pandemic, Belarusian businesses had, by the end of 2021, adapted to the shocks from the post-election crisis and harsh de-liberalization, by realizing their ability to cope, and finding creative solutions in the turbulent environment (Marozau, Akulava and Panasevich, 2021). Before Russia’s aggression against Ukraine, Belarusian entrepreneurs’ optimism about overcoming external barriers – i.e., factors that are out of a firm’s control such as macroeconomic instability, etc. – was the highest since 2015. However, increased uncertainty forced Belarusian businesses to focus primarily on maintaining the achieved scale of activity, halting investments (Kastrychnicki Economic Forum (KEF) & BEROC, 2022).
Optimism In Challenging Times
In general, the institutional environment for doing business in Belarus has deteriorated in recent years, both due to actions such as changes in tax legislation, price regulation and pressure on disloyal businesses, and due to negligence from the state, such as lack of significant support measures for private business, an outflow of businesses due to sanctions and an increasingly negative image of the country (KEF & BEROC, 2022). The Business Confidence Index (BCI, ranging from 0 – “extremely negative” to 100 – “extremely positive”), developed by BEROC and the Kastrychnicki Economic Forum based on OECD methodology, documented that at the end of 2020, the confidence level of business representatives regarding future developments was in the negative zone – arguably due to the political unrest and the Covid-19 pandemic. As firms accepted a new normality and adjusted their businesses, the BCI steadily grew before comfortably settling in the neutral zone at the end of 2021 (see Figure 2).
In March-April 2022, however, macroeconomic instability, disruption of supply chains, and shortages of raw materials and/or components following the Russian war on Ukraine became serious external barriers for Belarusian businesses. This lowered the BCI and businesses’ perception of their economic situation.
Quite surprisingly, the risks of doing business in Belarus in the second half of 2022, until early 2023, were estimated to be lower than in 2021 (see Figure 3). This may be explained by the fact that (for companies remaining in Belarus) many of the potential risks (inflation, exchange rate instability, sanctions, counter-sanctions, disruption of supply chains, tightening of price regulation, etc.) had already realized (BEROC, 2023).
Figure 2. Business Confidence Index and GDP growth rate, October 2020-March 2023.
Source: KEF & BEROC (2023) and the National Statistical Committee of the Republic of Belarus.
Figure 3. Risk perception by Belarusian Businesses.
Source: BEROC (2023).
Note: Risks were scored on a five-point scale, 1-5, where 1 denotes “very low” and 5 “very high”. Dotted lines denote the 95 percent confidence intervals.
The New Reality
The reaction from most Belarusian businesses to both pandemic- and war-related challenges has manifested in their search for new business models, an introduction of new products/services, and the entry into new export markets. Despite a bundle of powerful shocks to the economy stemming from the Russian war on Ukraine and related sanctions, some factors have dampened the anticipated drop in the economy: in particular, the increase in Russian support, export re-orientation to Russia and developing markets, alongside monetary stimuli, and interference with the activity of state-owned enterprises as well as artificial price controls (Kruk & Lvovskiy, 2022). As a result, the standard of living has remained at pre-war levels: in January-April 2023, real household disposable income and real salary grew by 1.6 percent and 3.8 percent respectively. With sanctions on Belarus being comparatively softer than those on Russian businesses, Belarusian businesses may have gained a comparative advantage and additional opportunities in both the domestic and Russian markets (BEROC, 2022). This caused optimism among entrepreneurs and in March 2023 – for the first time in the considered period – the composite BCI turned out to substantially exceed the neutral zone (see Figure 2). These positive spillovers are however likely to be bound in time – they will end both if the state of the Russian economy worsens (as this would reduce Russian support and decrease export revenues for Belarusian firms), and in the unlikely scenario that Russia’s current isolation is reduced. Whether Belarusian businesses will withstand the current protracted crisis depends on the ability of state authorities (current or new) to restore a constructive dialogue with the business community, return to the rule of law and create a business environment conducive to entrepreneurship.
According to business, the key factor needed to expand business activity is a reduction of external barriers (such as disruptions to supply chains, shortages of raw materials and/or components), rather than government support (e.g., financial, informational, etc.) (KEF & BEROC, 2022). Thus, “We do not need state support, but need the state not to worsen legal conditions for doing business” has become a motto of Belarusian entrepreneurs. Even in the context of war and political instability in the region, it allows looking at the prospects of the private sector in Belarus with some positive expectations.
At the same time, factors such as political repressions, sanctions against Belarus, problems with logistics, and the refusal of business partners to work with Belarusian companies due to the Russian aggression towards Ukraine have forced many Belarusian businesses, especially in high-tech sectors, to relocate. While the scale and direction of Belarusian business emigration is still difficult to assess (Krasko & Daneyko, 2022), these processes devastate entrepreneurship capital in Belarus and jeopardize the prospect of entire sectors such as the IT sector. In addition, the popular opinion about the lack of business opportunities implies that, unless conditions improve in terms of state policy and public confidence in the future, the socio-economic effects (employment, value added, tax revenue, innovations) from entrepreneurial activity in Belarus will diminish (GEM-Belarus 2021/2022). With operations severely affected by external barriers and restrictive legislation, halted investments and limited, if any, commercial contacts with Western countries and individual businesses, Belarusian private enterprises can hardly be seen as a source of stability for the current regime.
Conclusion
To promote an increased role of the private sector in the Belarusian economy, and to ensure high-quality and sustainable growth of the same, two prerequisites are critically necessary.
Firstly, a resolution of the political crisis and a restoration of authorities’ and state institutions’ legitimacy will significantly increase the populations’ confidence in state policy on business and economics. The principle of rule of law must be recognized and public and private actors must be treated equally in all spheres. It is also necessary to ensure the stability of tax legislation and economic law and the mitigation of excessive state control of business activities. All the above would lower external barriers and create stimuli for long-term business investments that, in turn, would facilitate economic transformation.
Although the sanctions’ packages imposed on Belarus by most developed countries due to domestic repressions, and complicity in the aggression against Ukraine, were directed towards the public sector, the private business suffered substantial macroeconomic and reputational consequences in their wake. The refusal of many foreign partners (suppliers, customers, banks, transport companies etc.) to work with Belarusian businesses – regardless of their affiliation with the state and attitude towards Lukashenko’s regime as well as towards the war on Ukraine – also substantially undermine businesses’ potential and Western soft power in Belarus. Such refusal is often driven by the argument that, by paying taxes, private businesses in Belarus support the current regime, when they should instead undermine the regime by halting operations (and thus tax revenues). At the same time, with the complete liquidation of civil society organizations and the termination of international projects and initiatives, the Belarusian private business may serve as the last resort in the hope of achieving independent, decentralized, and autonomous decision-making – all cornerstones of modern democracy (Audretsch & Moog, 2022).
From this perspective, the preservation of the private sector in Belarus may be of decisive importance in the future political processes, necessary to take into account by policymakers and business elites alike in developed countries.
In addition, relocated Belarusian businesses can play an important role in transforming the country by developing social ties between entrepreneurs and civil society, by providing support when solving problems related to doing business outside of Belarus and by investing in the Belarusian economy in the future. In this regard, establishing non-partisan Belarusian business associations abroad creates preconditions for consolidation of the most active part of the Belarusian community and its involvement in the envisaged economic transformation of the country.
References
- Audretsch, D. B., & Moog, P. (2022). Democracy and Entrepreneurship. Entrepreneurship Theory and Practice, 46(2), 368–392.
- BEROC. (2022). “Will Entrepreneurs Be Able to Reactivate the Belarusian Economy?”. FREE Policy Brief.
- BEROC. (2023). Bulletin “Small- and Medium-sized Business”. March 2023 (in Russian).
- Bornukova, K. & Friedrich, D. (2021). “Private Sector in Belarus and Political Crisis”. Policy Brief | December 2021
- Chubrik, А. (2021). “Back to the Future or a Short Historical note on the Belarusian Private Sector”. Discussion paper #2021/03 (in Russian).
- GEM-Belarus 2021/2022. (2022). “Global Entrepreneurship Monitor. Belarus Country Report”.
- IPM Research Center. (2020). “Graph of the Month, Table of the Week: Employer of Last Resort”. #6-7, June 2020 (in Russian).
- Kastrychnicki Economic Forum & BEROC. (2022). “Small and Medium-sized Business of Belarus: Situation and Plans on the Eve of Shocks” (in Russian).
- Krasko, N. & Daneyko P. (2022). “Belarusian Business Abroad: Needs, Problems and Potential of Interaction within National Business Communities”. BEROC Working Paper Series, WP no. 80 (in Russian).
- Kruk, D. & Lvovskiy L. (2022). “Belarus Under War Sanctions”. FREE Policy Brief.
- Marozau R., Akulava M., & Panasevich V. (2021). “Did the Government Help Belarusian SMEs to Survive in 2020?”. FREE Policy Brief.
- National Statistical Committee of the Republic of Belarus. https://president.gov.by/en/statebodies/national-statistical-committee
- Devby.io (2020). “10,000 Days of Arrest. Portrait of a Protester from 23.34” (in Russian).
- The Village Belarus. (2020). “Which Companies Supported the Strike and Are not Working” (in Russian).
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Choosing Latvia: Understanding the Decision-Making Factors of Displaced Ukrainians
This policy brief is based on an empirical examination of the early-stage migration of Ukrainian war asylum seekers to Latvia in 2022, following the Russian invasion. The study highlights the urgent nature of their displacement and identifies the pivotal role of kinship in Latvia in the decision-making. Three categories of refugees emerge based on kinship ties, employment opportunities, and cultural affinity. The study also reveals the substantial influence of the pre-existing Ukrainian diaspora and underlines the significance of network effects in refugees’ location decisions. Contrary to previous studies, refugees didn’t necessarily settle for the first country available. The research underscores the strategy of seeking support from personal networks in acute displacement scenarios, which appears to be the most influential factor for the choice of location in the decision-making process.
Ukrainian Displaced People in Latvia
The Russian invasion of Ukraine in 2022 triggered a geopolitical upheaval in Europe and resulted in a mass exodus that had not been witnessed since World War II. With the war showing no signs of cessation, return for many of these displaced people appears difficult in the near future. Latvia, although not a bordering country, have become a haven for 36 000 Ukrainian refugees.
This brief seeks insight into Ukrainian displaced people’s preference for Latvia, using interviews conducted in March 2022, a month after the war began. With no common border between Ukraine and Latvia these refugees had to transit through other countries, making the question about the choice of Latvia as their ultimate destination particularly relevant.
Unlike during the migration crisis in 2015 and during the recent influx of Syrians and other groups, the Ukrainian refugees found themselves being welcomed with open arms, belying Latvia’s typically guarded stance towards immigrants. This unexpected warmth is influenced by a multifaceted kinship rooted in historical connections from the Soviet era, a pre-existing Ukrainian diaspora in Latvia, labor migration, and shared cultural elements.
These factors can also play a role in Ukrainian refugees’ choice of Latvia as their ultimate destination. The study underlying this policy brief seeks to explore these facets and unravel the reasons behind the Ukrainian refugees’ choice to seek safety in Latvia.
Migration Decisions
Two aspects are crucial in the analysis of migration decisions: the factors that influence refugees’ choice of destination and the process underlying this decision.
Traditional assumptions surrounding asylum-seeker migration, as emphasized by Böcker and Havinga (1997), suggest that when people are forced to flee, their primary focus is safety – not destination. However, more nuanced perspectives have evolved in recent studies (see Robinson and Sergott, 2002; Brekke and Aarset, 2009). They highlight the calculated and adaptable nature of refugee destination choices throughout the asylum-seeking migration journey, demonstrating that circumstances and journey stage significantly influence destination choices.
Research indicates that host country policies and economic conditions can both enhance and limit refugee flows (Czaika and de Haas, 2017; Ortega and Peri, 2013; Brekke and Aarset, 2009; Diop-Christensen and Diop, 2021; Kang, 2021; Suzuki,2020; Collyer, 2005). However, another line of research emphasizes that policy and economic factors are secondary to networks, cultural affinity, language, and perceptions in determining destination choices (Robinson and Sergott, 2002). Factors such as social networks (Koser and Pinkerton, 2002; Tucker 2018), kinship (Havinga and Böcker, 1999; Neumayer, 2005; Mallett and Hagen-Zanker, 2018), financial resources (Mallett and Hagen-Zanker, 2018), geography (Neumayer, 2005; Kang, 2021), destination country image (Benzer and Zetter, 2014), culture (Suzuki, 2020), and colonial links (Havinga and Böcker, 1999) have been established to be significant at various stages of migration. Economic and education opportunities are also found to have a marginal influence on destination decision-making compared to the possibility of resolving statelessness (Tucker, 2018).
These varying determinants of destination may also be contingent on the refugee journey stage. Policies may not dominate in acute cases of forced migration (Diop-Christensen and Diop, 2021). For individuals with time to prepare for migration, a cost-benefit analysis often informs their decisions. In contrast, those in urgent circumstances, such as during the Russian invasion of Ukraine, may have to take immediate refuge and put less emphasis on benefits and policies (Robinson and Sergott, 2002). Destination determinants differ by both origin and destination countries (Havinga and Böcker, 1999, Tucker, 2018, Gilbert and Koser, 2006). Thus, research on underexplored regions and countries is valuable for a comprehensive understanding of migration patterns.
Migration, voluntary or forced, involves intricate decision-making. As Mallett and Hagen-Zanker (2018) aptly state, the dynamic experiences ‘on the road’ shape refugees’ journey and destination choices. Robinson and Sergott (2002) and Brekke and Aarset, 2009 have pioneered models for asylum seekers’ decision-making, suggesting that factors such as networks, language, cultural affinity, and perceptions evolve across different stages of the asylum journey. Others, like Gonsalves (1992) and Shultz et al. (2020), have constructed models delineating stages of refugee passage and displacement, highlighting the changing needs and preferences of refugees.
While existing literature mainly focuses on the later stages of forced migration journeys, limited empirical evidence exists on the migration moves during acute displacement. Additionally, further understanding on migration induced by the war on Ukraine is needed. There is also incomplete coverage of asylum seeker and refugee topics in the Baltic countries, making such research particularly relevant. To address these gaps, this brief aims to provide qualitative findings on the decision-making and experiences of Ukrainian displaced people in Latvia.
Understanding the Decision
The research underlying this brief explored the reasons behind Ukrainian displaced people’s choice of Latvia as their migration destination during the early part of the invasion. The study is based on 34 semi-structured, in-depth interviews with displaced people conducted in March 2022. The dataset is part of a larger study that includes continuous interviews to understand Ukrainian displaced people’s lives, plans and needs in Latvia.
From the interviews, it was apparent that the predominant factor in respondents’ decision-making was the presence of kin or acquaintances in Latvia.
All but one participant had some connection to Latvia, whether through distant relatives, friends, or professional contacts. The one participant without such connections arrived from Russia and not from Ukraine, working on a contract. A minority of our participants considered staying in Ukraine. One example is Lidiia, who initially planned to move near Lviv, but redirected to Riga during the journey.
“She found a family that would host us, 100 km from Lviv… We agreed, but then our friends… called us on the way, we were leaving Kyiv under bombardment. Our train was delayed because of the air alarm. When we just arrived there, a shell exploded above the railway station… And on the way, friends from Riga called us and invited us: ‘Come, everyone will help here’. Therefore, everything changed while we were on the train, we decided everything“ (Lidiia).
Proximity of kin was not the primary concern for the interviewees; the mere fact that they had a relative in Latvia appeared more influential in their narratives. Indeed, the majority of participants had distant rather than close kin, though a few had close family in Latvia (grandparents, parents, common-law husband, and sister). As Olena explained, the presence of even distant relatives influenced her choice: “there are distant relatives, very distant… That’s why we came” (Olena). However, ties in Latvia were not the only determinants as many of the participants also had family connections in other parts of Europe.
The speed of decision-making was also striking – most decisions to migrate were not a matter of long-term planning but a reaction to the sudden crisis, often influenced by incoming offers of assistance. Nataliia remembered: “My mother said, ‘You have to leave because everything is so fatally bad. Take the children and leave.’ And literally overnight I packed up, bought the tickets. But first I went to Poland, to my brother” (Nataliia).
Maryana ended up choosing her destination only after leaving home. “At first, we thought to go to Poland, but it is completely crowded, and then we called to whoever we could. There are no relatives in other countries. No, there are relatives in other cities, but these are Luhansk, Donetsk, we are from Slobozhanska Ukraine, so all our relatives are from the side where very heavy fighting is going on now“ (Maryana). Such testimonies illuminate how, owing to the immediacy of the situation, the eventual destination of some displaced Ukrainians was not predetermined but evolved during their respective journeys.
From the interviews with the participants who knew someone in Latvia, one can identify three groups based on the main factor that determined their decision.
Network, First of All
For respondents who did not have family in Latvia, friends, acquaintances, and professional contacts in Latvia acted as anchors. Like family members, such acquaintances often reached out, offering assistance and lodging as soon as they heard the news of the war. The influx of supportive communication from Latvian acquaintances influenced the decision for many participants.
Olha decided to flee with her friend, who had a distant cousin residing in Latvia. Upon the onset of the conflict, the cousin reached out and urged them to come to Latvia. As Olha recalls: “As soon as she heard that there was a bombing in Kharkiv, she said, ‘Come’. My friend, with whom I came, Lesya, does not have a car, so she immediately told me… let’s run away’” (Olha).
Lidiia received an invitation from a Latvian friend she had met through her church, even as she was already in the process of fleeing Ukraine. Similarly, Andrii, who was vacationing abroad at the time of the war’s outbreak, remembered: “On the 25th our best friend wrote to us that, ‘There is housing, come here’ and we began to negotiate with the embassy to fly here” (Andrii).
Even in the absence of explicit messages, displaced individuals recalled having friends and family in Latvia and chose to make their way to Riga. Olena, like Lidiia, initially set off without a clear destination in mind. It wasn’t until she reached the border that she decided to head to Latvia: “Just at the border that you decided where to go?” (Olena).
Existing friendships and ongoing communication also influenced some people’s choice to opt for Latvia. Olha (2) was encouraged by her daughter to relocate to Riga due to her daughter’s friendships with Latvians that she had formed at a camp in Estonia: “Friends appeared, with whom she was in close contact for six months. That’s why for her there was no choice at all ‘Where?’. She immediately said: ‘To Riga’” (Olha (2)).
Opportunities and Realities
The turning point for many respondents was their arrival in Poland as, initially, Latvia was not the principal or only choice of destination. These respondents emphasized that, besides having friends and relatives in Latvia, they also contemplated where they might find better opportunities. Their narratives provide a contrasting perspective of Poland and Latvia. While traversing Poland, their general impression was that the country was already ‘overfilled’, which in turn kindled the notion that Latvia might harbor more possibilities. For this group of displaced individuals, the importance of employment prospects was paramount.
Nataliia took the decision to head for Latvia, choosing to stay with remote kin there rather than with her sibling in Poland, as she believed Poland lacked opportunities for her. In Myroslava’s case, a friend helped secure a job in Latvia: “We didn’t choose Latvia for any particular reason – better or worse, we didn’t care. We needed somewhere to stay, somewhere to work in order to live. Well, that’s why when a job turned up through acquaintances, they said that a person was needed here, we immediately gathered. Could not be found in Poland. In Poland, there was simply no work, no housing” (Myroslava).
Bohdan, too, mentioned the crowdedness and the high cost of living in Poland, hence deciding to move further north to Latvia: “We didn’t have a specific plan because we weren’t at all sure we would succeed. In general, my wife benefits from going to Poland, she works for an IT company operating in Poland. And we thought about getting there at first, but when we got to Poland, everything was already full. There were such expensive options, $1600 a month, we were shocked” (Bohdan).
Anastasiia echoed similar concerns: “We arrived in Warsaw, reunited there and tried to stay in Warsaw and look for a place, but there are a lot of people there, and there is no place to live, very… food, maybe cheaper than in Latvia, but there is no place to live… no place to work. And I would like to work somehow… not to be dependent” (Anastasiia).
These stories illuminate another stratum of decision-making, that beyond familial ties, participants also considered the opportunities available at their chosen destination. They accumulate information on their journey and recalibrate their destination accordingly.
Cultural Kinship, Language, Diaspora
Not all participants had prior personal experience with Latvia, even if they had relatives there. A lot of their understanding about the country stemmed from stories they’d heard or news they’d come across. This third group of participants decided on Latvia not only because they knew someone in the country, but also because they saw value in shared language, culture, and history.
Political and cultural connections played a significant role in their choice. Being able to communicate in Russian and Ukrainian in Latvia was a crucial factor, as it was associated with a smoother integration process and increased job opportunities. Nadiia, who traveled to Latvia via Poland and Budapest, elaborated on this: “And I was in Latvia and here there is an opportunity to communicate in Ukrainian, in Russian” (Nadiia).
The possibility of being accepted and integrated into the local community was also mentioned as a decision-driver. Oksana shared that her father, who had previously worked in Riga, advised her to go to Latvia: “you guys, probably go to Riga, well, because you will be accepted there, accommodated” (Oksana).
Nonetheless, choosing Latvia because of the possibility to communicate in Russian does not come without complications. Nataliia B., for instance, found the topic of language stirring up strong emotions and confessed that she doesn’t wish to speak Russian anymore: “I had such a psychological reaction – I didn’t speak Ukrainian for many years, and when all these events began, I read, I remember well how I woke up in the morning and began to speak Ukrainian. My thoughts have become Ukrainian” (Nataliia B.).
Moreover, having knowledge of the Ukrainian diaspora in the country also proved an important factor. “I also found out that there is a Ukrainian diaspora in Latvia of about 50 000 people, as I heard in the Latvian news. And this also encouraged me, I realised that I could find help from my compatriots” (Nadiia). This observation underlines the role of cultural kinship in the decision-making process regarding destination, and it can indeed be seen as a decisive factor. As the diaspora expands with the influx of more displaced people, this rationale for choosing Latvia may become increasingly common.
Conclusion
The study underlying this brief provided empirical insight into the initial phases of Ukrainian war asylum seekers’ journey to Latvia in 2022, enhancing our understanding of the factors that influenced the choice of Latvia over other destinations.
Ukrainians fleeing the early stage of the 2022 Russian invasion were compelled to make swift and difficult decisions due to the pressing crisis. Leaving behind their familiar lives, properties, and dear ones – often the very individuals facilitating their exodus for safety reasons – was a harrowing reality. The support from kin and acquaintances in Latvia was crucial in endorsing their decision to seek refuge in the country.
Three groups emerged among the Ukrainian refugees in Latvia, all connected by personal relationships to some degree. The factors influencing their migration ranged from the presence of kin and considerations of employment prospects, to shared language, culture, and history. The fact that the initial outreach usually originated from the Latvian side underscores the profound solidarity and active support provided by Latvians to their Ukrainian counterparts. This likely also played a significant role in the refugees’ decisions. The pre-existing Ukrainian diaspora in Latvia, estimated at around 50 000 before the invasion, also significantly influenced the choice of Latvia as a refuge.
Financially-related factors such as seeking benefits were largely absent from the narratives, likely due to the geographic proximity, relatively low costs, and the urgent nature of the displacement. The most significant determinant in choosing Latvia as the destination appeared to be the network effect, contrasting with Robinson and Sergott (2002) findings that acute asylum seekers often settle for the first country available.
Given the emergency nature of the displacement, no unambiguous pattern in the location decision could be established. The narrative varied considerably among respondents with decisions often being made, or altered, on the fly. However, in most cases, personal relationships played a primary role in shaping the choices among Ukrainian refugees in Latvia.
For policy-makers planning and responding to acute migration crises, the study highlights the importance of mapping and understanding multifaceted kinships, as well as culture and history. The mapping can be used to plan support and allocate resources to give displaced people an opportunity of a place where they feel welcomed and connected, with hopes of greater integration.
References
- Böcker, A. and Havinga, T. (1997). Asylum Migration to the European Union: Patterns of Origin and Destination, Luxembourg: Office for Official Publications of the European Communities.
- Brekke, J. P. and Aarset, M. F. (2009). Why Norway? Understanding Asylum Destinations, Institute for Social Research, Oslo.
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- Kang, Y. D. (2021). Refugee crisis in Europe: determinants of asylum seeking in European countries from 2008–2014. Journal of European Integration, 43(1), 33-48.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Russia’s Data Warfare
After Russia’s invasion of Ukraine in February 2022, a broad spectrum of previously publicly available statistics on economic indicators has been removed from the public eye. This reduced transparency affects any analysis of the state of the Russian economy and assessments of the effects of sanctions. The strategy is also part of a larger disinformation campaign that has become an integral part of Russia’s war on Ukraine. In this brief we provide a short overview of the main indicators on economic activity that have been masked in various forms by Russia’s data producing institutions. We also touch upon some alternative strategies, employed to gain a better understanding of the actual state of the Russian economy while official data is unavailable or unreliable.
Following Russia’s war on Ukraine, Russia has ceased to publish large amounts of previously publicly available statistics on economic indicators. This reduced transparency affects any attempts to analyze the Russian economy with regular data and models, and is an integral part of the information war that has followed Russia’s aggression. In particular, it aims to reduce or obscure the analysis of the effects of sanctions that have been imposed on Russia by Ukraine’s partners. The reduced precision of this analysis is then used in various propaganda channels to claim that sanctions are useless and that they are, instead of hurting Russia, harming the EU, the US and other sanctions implementing countries.
In this brief we present a short overview of some of the most important statistics on Russia’s economic performance no longer publicly available (with a detailed list to be found in the Online Appendix). We also discuss some alternative measures to track the Russian economy which can be used to provide more accurate assessments of the effect of sanctions and thus reduce the impact of Russia’s data warfare.
What Data is Being Masked?
Russia’s cessation of statistical publications has occurred across several dimensions including foreign trade, budget, and finance. Most notably, data has been masked by the Central Bank of the Russian Federation (CBR), the Ministry of Finance of the Russian Federation (Ministry of Finance), the Federal State Statistics Service (Rosstat) and the Federal Customs Service of Russia.
Budget Data
Data on federal and consolidated budgets in Russia was previously easily accessible on the Ministry of Finance’s and Rosstat’s webpages.
The Ministry of Finance has however, as of January 2022, ceased publishing data on budget expenditures. This includes monthly data for a wide range of budget expenditure categories such as spending for public administration, national defense and law enforcement, environmental protection, education, healthcare, social politics, mass media and culture. This data is no longer available despite the webpage for budget expenditures being updated as late as March 17th 2023.
Data on certain budget indicators is also missing on Rosstat’s webpage. While statistics on taxes, fees and other mandatory payments are available for 2022, budget expenditures are available only for 2021. This is however not surprising given that Rosstat receives its figures on the financial sector, including figures on public finances partly from the Ministry of Finance.
Foreign Trade Data
Foreign trade statistics is normally published by the Federal Customs Service of Russia, CBR and Rosstat.
Since the invasion, the Federal Customs Service of Russia has however stopped publishing statistics on foreign trade and commodity structure. The latest available monthly data on Russian foreign trade with its main partners (the EU, Commonwealth of Independent States countries and others), and the commodity structure of exports and imports – including processed goods and oil and gas – is from January 2022 (as of April 3rd 2023).
Foreign trade data from CBR has been withheld throughout 2022. CBR has however recently resumed parts of their publications and, as of April 3rd 2023, monthly data on total export and import is available for all of 2022 as well as for January 2023. Still, these figures display total exports and imports only and are not broken down by trade partner or commodity.
Similar to CBR’s publishing pattern, figures on export and import as part of GDP by use were unavailable on Rosstat’s webpage from February 2022 and throughout the year. As of April 7th 2023, quarterly aggregated data is however available for all of 2022. Monthly data on export and import by country is nonetheless still available only for 2021, despite the webpage being updated in November 2022.
Financial Data
To provide information on the national finance system and its dynamics is a main tasks of any country’s central bank, with Russia being no exception. Despite this there are about 40 financial indicators that, since the beginning of 2022, are no longer available on CBR’s webpage (as of April 3rd 2023). This contravenes CBR’s calendar, which states that statistics are supposed to be published in the next reporting period, i.e. the next quarter/month for quarterly and monthly data respectively.
The most deferred data (more than 20 indicators) can be found, or rather can’t be found, in the so-called External Sector Statistics category. For example, monthly data on balance of payments, remittances and financial transactions in the private sector, and international investment position of the banking sector is missing as of January 2022. Similarly, quarterly data on foreign investments, foreign assets and liabilities in the banking sector has been unavailable since January 2022. The same goes for data on external debt of the corporate sector of the Russian Federation in the form of loans, credits and deposits raised as a result of non-resident placement of Eurobonds and other debt securities.
In the so-called Banking Sector Statistics category, data on indicators such as assets, risks, operational data, international reserves and volume of FX operations is no longer available. Furthermore, figures on turnover of the interbank spot and forward markets have also been unavailable since February 2022.
Two comments are due considering the ease of access to above mentioned data/data sources. Firstly, in order to access the CBR’s and the Federal Customs Service of Russia’s webpages, one at times needs make use of a Virtual Private Network (VPN). Secondly, there are, for all sources mentioned, large discrepancies between the Russian language and the English language webpages, with the latter being severely patchier in its information.
Hiding Data: Reasons and Implications
What drives the authorities to mask seemingly relevant figures? Alexandra Prokopenko, an expert on Russian economic policy, argues that Russian authorities mask certain numbers related to the sanctions to impede evaluations of the effect of sanctions (Prokopenko 2023). Making the data less transparent and accessible in order to hide sanctions’ effect across various sectors to try and paint a better picture of the economic activity has also been a Russian policy goals. The head of the Federal Customs Services, Vladimir Bulavin, in April 2022 announced trade statistics were masked partly to “avoid […] speculation and discrepancies in import deliveries” (Uvarchev, 2022).
In this context, it is worth mentioning that Russia is obliged to report to the International Monetary Fund (IMF) on several of the previously discussed indicators since the country is subscribing to the Special Data Dissemination Standard (SDDS) as of 2005. SDDS aims at providing transparent economic and financial data to the public and according to the IMF “Serious and persistent nonobservance of the SDDS, therefore, will be cause for action” (IMF, 2023). If Russia does not publish data according to the SDSS commitments, it could be excluded from the list of countries that subscribe to the SDSS. This affects how the country is viewed by investors and others and will further increase the risk premia that is applied to dealing with Russia.
Further, in its efforts to restrict insight into how the Russian economy is faring following the sanctions, the authorities have however created a large uncertainty also for Russian domestic markets, adding to the sanction’s effects. For instance, Elvira Nabiullina, Russia’s Central Bank Governor, has been arguing to revoke the decision to classify large amounts of data saying that investors, analysts and researchers simply need the data to do their work properly (CBR News, 2023).
Alternative Ways of Understanding the Real State of the Russian Economy
How can we learn about the state of affairs in Russia without the previously discussed data? While deducing Russia’s budget expenditures and many financial indicators may be cumbersome, more can be done when it comes to trade data. Specifically, a BOFIT Policy Brief by Simola (2022) proxied Russia’s imports and exports by tracking the imports of Russia’s main trading partners (17 economies) between March and June 2022. Similar proxying efforts have been made by Darvas, Martins and McCaffrey (2023), who tracked Russia’s foreign trade by considering detailed trade data from China, the United States, South Korea, Japan, India, the United Kingdom, Turkey and the EU, putting together publicly available datasets which span from January 2019 to January 2023.
Proxying trade data by considering trade partner’s statistics is emphasized by Sonnenfeld et al. (2022), who not only considers such data but rather a wide variety of available and reliable data sources – emphasizing the need to also crosscheck data from official Russian statical sources with more reliable ones (for a full overview of the methodologies used, the estimated indicators on the Russian economy and the implications from this, see Sonnenfeld et al. 2022).
Other efforts to map out Russia’s economic activity consider more creative methods such as using satellite data and/or ship location (AIS) data. Examples of such efforts include a recent Bruegel dataset which tracks Russian crude oil trade (Heusaff et al., 2023) and CREA’s “Russia Fossil Tracker”. For both examples, the authors utilize the location data for individual crude oil tankers, and (for Heusaff et al. 2023) combine it with data from OPEC, BP and Eurostat, to assess monthly crude oil exports from Russia to a set of major destinations (mainly the EU, China and CIS countries).
Similarly, satellite data has been previously used to estimate carbon emissions from flaring (Böttcher et al., 2021). While there is an ongoing debate on whether flaring can be trusted to give insight into gas and oil production (World Bank, 2023), one could potentially make use of such data to get a better view of the productivity within the Russian oil and gas sector following the imposed price cap mechanism and sanctions.
The struggle of creating reliable estimates for an economy polishing or masking information did not arise with the withdrawal of certain Russian statistics. The actual status of the North Korean economy remains much of a mystery to analysts (see The Economist) as the country, in 2017, was yet to publish a Statistical Yearbook. While Russia is far from North Korea in several aspects, the reality is that the alternative measures used to estimate North Korea’s economic activity (such as making use of Chinese trade data etc.) are partly the ones now being undertaken by analysts looking beyond the figures from Kremlin.
Conclusion
Russia’s decision to stop publishing regular economic data is part of the disinformation and propaganda efforts that are integral parts of its war on Ukraine, with the purpose being to complicate any analysis of what is going on in the Russian economy. While being partially successful in this regard, the data withholding likely creates further negative implications for Russia’s external economic relations and undermines the functioning of its domestic markets.
Given the lack of data following Russia’s disinformation efforts it is essential that any analyst concerned with mapping the Russian economy not only considers alternative but also multiple sources and consult experts with a plethora of competencies. Already today, new creative ways of getting hold of relevant data is providing increasing insight into the state of the Russian economy. With continued efforts, these measures will progress over time, improving our understanding of how sanctions affect the Russian economy.
Online Appendix
An overview of all indicators discussed in this brief can be found in the Online Appendix. The information in the Appendix is valid as of April 7th 2023.
References
- Böttcher, K., & Paunu, V-V., Kupiainen, K., Zhizhin, M., Matveev, A., Savolahti, M., Klimont, Z., Väätäinen, S., Lamberg, H., Karvosenoja, N. (2021). Black carbon emissions from flaring in Russia in the period 2012-2017. Atmospheric Environment. 254. 118390. 10.1016/j.atmosenv.2021.118390.
- CBR News. (2023, March 17). Statement by Governor of the Bank of Russia Elvira Nabiullina following the meeting of the Board of Directors of the Bank of Russia on March 17, 2023. https://www.cbr.ru/press/event/?id=14629
- The Central Bank of the Russian Federation. (2023). https://www.cbr.ru/
- CREA. https://www.russiafossiltracker.com
- Darvas, Martins and McCaffrey (2023, March 23). Russian foreign trade tracker. Bruegel datasets. https://www.bruegel.org/dataset/russian-foreign-trade-tracker
- The Economist. (2017, February 9). How to measure North Koreas economy. https://www.economist.com/finance-and-economics/2017/02/09/how-to-measure-north-koreas-economy?
utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=18151738051&ppcadID=&utm
_campaign=a.22brand_pmax&utm_content=conversion.direct-response.anonymous&gclidh - The Federal Customs Service of Russia. (2023). https://customs.gov.ru/
- The Federal State Statistics Service. (2023). https://rosstat.gov.ru/
- Heusaff, Guetta-Jeanrenaud, McWilliams and Zachmann. (2023). Russian crude oil tracker. Bruegel datasets. https://www.bruegel.org/dataset/russian-crude-oil-tracker
- International Monetary Fund. (2023). Special Data Dissemination Standard. https://dsbb.imf.org/
- The Ministry of Finance of the Russian Federation. (2023). https://minfin.gov.ru/ru/
- Prokopenko, A. (2023, January 20). How can you analyze the Russian economy amid data censorship? A guide. The Bell. https://thebell.io/en/your-guide-to-the-russian-economy/
- Simola, H. (2022). Russian foreign trade after four months of war in Ukraine. BOFIT Policy Paper No.5. BOFIT.
- Sonnenfeld, J., Tian, S., Sokolowski, F., Wyrebkowski, M. and Kasprowicz, M. (2022). Business Retreats and Sanctions Are Crippling the Russian Economy. https://ssrn.com/abstract=4167193
- Uvarchev, L. (2022, April 21). FCS suspends publication of export and import statistics. Kommersant. https://www.kommersant.ru/doc/5318414
- The World Bank. (2023). Global Gas Flaring Tracker Report. https://thedocs.worldbank.org/en/doc/5d5c5c8b0f451b472e858ceb97624a18-0400072023/original/2023-Global-Gas-Flaring-Tracker-Report.pdf
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
How to Sustain Support for Ukraine and Overcome Financial and Political Challenges | SITE Development Day 2022
The Russian war on Ukraine has turmoiled Europe into its first war in decades and while the effects of the war are harshly felt in Ukraine with lives lost and damages amounting, Europe and the rest of the world are also being severely affected. This policy brief shortly summarizes the presentations and discussions at the SITE Development Day Conference, held on December 6, 2022. The main focus of the conference was how to maintain and organize support for Ukraine in the short and long run, with the current situation in Belarus and the region and the ongoing energy crisis in Europe, also being addressed.
War in Ukraine, Oppression in Belarus
Starting off the conference, Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces, delivered a powerful speech on the necessity of understanding the role of Belarus in the ongoing war in Ukraine. Tsikhanouskaya argued that Putin’s war on Ukraine was partly a result of the failed Belarusian revolution of 2020. The following oppression, torture, and mass arrestations of Belarusians is a consequence of Lukashenka’s and Putin’s fear of a free Belarus, a Belarus that is no longer in the hands of Putin – who sees not only Belarus but also Ukraine as colonies in his Russian empire. Amidst the fight for Ukraine, we must also fight for a free Belarus, Tsikhanouskaya added. Not only Belarusians fighting alongside Ukrainians against Russia in Ukraine, but also other parts of the Belarusian opposition need support from the free and democratic world and the EU. The massive crackdowns on opponents of the Belarusian regime today and the war on Ukraine are not only acts of violence, but they are also acts against democracy and freedom. The world must therefore continue to give support to those fighting in both Belarus and Ukraine. Ukraine will never be free unless Belarus is free, Tsikhanouskaya concluded.
Johan Forssell, Minister of Foreign Trade and International Development Cooperation continued Tsikhanouskaya’s words on how the Russian attack must be seen and treated as a war on democracy and the free world. Belarus, Moldova and especially Ukraine will receive further support from Sweden, Forssell continued, adding that the Swedish support to Ukraine has more than doubled since the invasion in February 2022. Support must however not be given only in economic terms and consequently Sweden fully supports Ukraine on its path to EU-membership, which will be especially emphasized during Sweden’s upcoming EU-presidency. Support for the rule of law, democracy and freedom will continue to be essential and, in the forthcoming reconstruction of Ukraine, these aspects – alongside long term sustainable and green solutions – must be integrated, Forssell continued. Forssell also mentioned the importance of reducing the global spillover effects from the war. In particular, Forssell mentioned how the war has struck countries on the African continent, already hit with drought, especially hard with increased food prices and increased inflation, displaying the vital role Ukrainian grain exports play.
Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden, further talked about the need for rebuilding a better Ukraine, emphasizing the importance of involvement from Kiyv School of Economics (KSE) and other intellectuals and businesses in this process. Plachotnjuk also pinpointed what many others would come to repeat during the day; that resources, time and efforts devoted to supporting Ukraine must be maintained and persevered in the longer perspective.
Economic Impacts From the War and How the EU and Sweden Can Provide Support
During the first half of the conference, the Ukrainian economy and how it can be supported by the European Union was also discussed. On link from Kiyv, Tymofiy Mylovanov, President of the Kyiv School of Economics, shared the experiences of the University during wartime and presented the work KSE has undertaken so far – and how this contributes to an understanding of the damages and associated costs. Since the invasion, KSE has supported the government in three key areas; 1) Monitoring the Russian economy, 2) Analyzing what sanctions are relevant and effective, and 3) Estimating the cost of damages from the war. For the latter, KSE is collaborating with the World Bank using established methods of damage assessment including crowd sourced information on damages complemented with images taken by satellites and drones. According to Mylovanov, the damage assessment is crucial in order to counter Russia’s claims of a small conflict and to remind the international community of the high price Ukraine is paying to hold off Russia.
The economic impact from the war was further accentuated during the presentation by Yulia Markuts, Head of the Centre of Public Finance and Governance Analysis at the Kyiv School of Economics. Markuts explained how the Ukrainian national budget as of today is a “wartime budget”. Since February 2022, the budget has been reoriented with defense and security spending having increased 9 times compared to 2021, whereas only the most pressing social expenditures have been implemented. This in a situation where the Ukrainian GDP has simultaneously decreased by 30 percent. Although there has been a substantial inflow of foreign aid, in the form of grants and loans, the Ukrainian budget deficit for 2023 is estimated to 21 percent. Part of the uncertainty surrounding the Ukrainian budget stems from the fact that the inflow from the donor community is irregular, prompting the government to cover budget deficits through the National Bank which fuels inflation and undermines the exchange rate. Apart from the large budget posts concerning military spending, major infrastructural damages are putting further pressure on the Ukrainian budget in the year to come, Markuts continued. As of November 2022, the damages caused by Russia to infrastructure in Ukraine amounted to 135,9 billion US Dollars, with the largest damages having occurred in the Kiyv and Donetsk regions, as depicted in Figure 1.
Figure 1. Ukrainian regions most affected by war damages, as of November 2022.
Source: Kiyv School of Economics
The infrastructural damages constitute a large part of the estimated needed recovery support for Ukraine, together with losses to the state and businesses amounting to over one trillion US Dollars. However, such estimates do not cover the suffering the Ukrainian people have encountered from the war.
The large need for steady support was discussed by Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS), who argued the money needs to be seen as an investment rather than a cost, and that we at all times need to keep in mind what the consequences would be if the support for Ukraine were to fizzle out. Löjdquist, together with Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden, also emphasized how the reconstruction should be tailored to fit the standards within the European Union, given Ukraine’s candidacy status. Thorfinn further stressed that the reconstruction must be a collective effort from the international community, although led by Ukraine. The EU is today to a large extent providing their financial support to Ukraine through the European Investment Bank (EIB). Jean-Erik de Zagon, Head of the Representation to Ukraine at the EIB, briefly presented their efforts thus far in Ukraine, efforts that have mainly been aimed at rebuilding key infrastructure. Since the war, the EIB has deployed an emergency package of 668 million Euro and 1,59 billion for the infrastructure financing gap. While all member states need to come together to ensure continued support for Ukraine, the EIB is ready to continue playing a key role in the rebuilding of Ukraine and to provide technical assistance in the upcoming reconstruction, de Zagon said. This can be especially fruitful as the EIB already has ample knowledge on how to carry out projects in Ukraine.
During a panel discussion on how Swedish support has, can and should continuously be deployed, Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida, explained Sida’s engagement in Ukraine and the agency’s ambition to implement a solid waste management project. The project, in line with the need for a green and environmentally friendly rebuild, is today especially urgent given the massive destructions to Ukrainian buildings which has generated large amounts of construction waste. Karin Kronhöffer, Director of Strategy and Communication at Swedfund, also accentuated the need for sustainability in the rebuild. Swedfund invests within the three sectors of energy and climate, financial inclusion, and sustainable enterprises, and hash previously invested within the energy sector in Ukraine. Swedfund is also currently engaged in a pre-feasibility study in Ukraine which would allow for a national emergency response mechanism. Representing the business side, Andreas Flodström, CEO and founder of Beetroot, shared some experiences from founding and operating a tech company in Ukraine for the last 10 years. According to Flodström there will, apart from a huge need in investments in infrastructure, also be a large need for technical skills in the rebuild. Keeping this in mind, bootcamp style educations are a necessity as they provide Ukrainians with essential skills to rebuild their country.
A recurring theme in both panel discussions was how the reconstruction requires both public and private foreign investments. Early on, as the war continues, public investments will play the dominant part, but when the situation becomes more stable, initiatives to encourage private investments will be important. The potential of using public resources to facilitate private investments through credit guarantees and other risk mitigation strategies was brought up both at the European and the Swedish level, something which has also been emphasized by the new Swedish government.
Impacts From the War Outside of Ukraine – Energy Crisis and Other Consequences in the Region
The conference also covered the effects of the war outside of Ukraine, initially keying in on the consequences from the war on energy supply and prices in Europe. Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE, gave a presentation of the current situation and the short- and long-term implications. Le Coq explained that while the energy market is in fact functioning – displaying price increases in times of scarcity – the high prices might lead to some consumers being unable to pay while some energy producers are making unprecedented profits. The EU has successfully undertaken measures such as filling its gas storage to about 95 percent (goal of 80 percent), reducing electricity usage in its member countries, and by capping market revenues and introducing a windfall tax. While the EU is thus appearing to fare well in the short run, the reality is that EU has increased its coal dependency and paid eight times more in 2022 to fill its gas storage (primarily due to the imports of more costly Liquified Natural Gas, LNG). In the long run, these trends are concerning given the negative environmental externalities from coal usage and the market uncertainty when it comes to the accessibility and pricing of LNG. Uncertainties and new regulation also hinder investments signals into new low-carbon technologies, Le Coq concluded. Bringing an industrial perspective to the topic, Pär Hermerèn, Senior advisor at Jernkontoret, highlighted how the energy crisis is amplified by the increased electricity demand due to the green transition. Given the double or triple upcoming demand for electricity, Hermerèn, referred back to the investment signals, saying Sweden might run the risk of losing market shares or even seeing investment opportunities leave Sweden. This aspect was also highlighted by Lars Andersson, Senior advisor at Swedenergy, who, like Hermerèn, also saw the Swedish government’s shift towards nuclear energy solutions. Andersson stated the short-term solution, from a Swedish perspective, to be investments into wind power, urging policy makers to be clear on their intentions in the wind power market.
Other major impacts from the war relate to migration, a deteriorating Belarusian economy and security concerns in Georgia. Regarding the latter, Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia, shared the major developments in Georgia post the invasion. While the Georgian economic growth is very strong at 12 percent, it is mainly driven by the influx of Russian money following the migration of about 80 000 Russians to Georgia. This has led to a surge in living costs and an appreciation of the local currency (the Lari) of 12,6 percent which may negatively affect Georgian exports. Additionally, it may trigger tensions given the recent history between the countries and the generally negative attitudes towards Russians in Georgia. Michal Myck, Director at CenEa, Poland, also presented migration as a key challenge. While the in- and outflow of Ukrainian refugees to Poland is today balanced, the majority of those seeking refuge in Poland are women and children and typically not included in the workforce. To ensure successful integration and to avoid massive human capital losses for Ukraine, Myck argued education is key, pointing to the lower school enrollment rates among refugee children living closer to the Ukrainian border. Apart from the challenges posed by the large influx of Ukrainian in the last year, the Polish economy is also hit by high energy prices, fuel shortages and increasing inflation. Lev Lvovskiy, Research fellow at BEROC, Belarus, painted a similar but grimmer picture of the current economic situation in Belarus. Following the invasion, all trade with Ukraine has been cut off, while trade with Russia has increased. Belarus is facing sanctions not only following the war, but also from 2020, and the country is in recession with GDP levels dropping every month since the invasion. Given the political and economic situation, the IT sector has shrunk, companies oriented towards the EU has left the country and real salaries have decreased by 5 percent. At the same time, the policy response is to introduce price controls and press banknotes.
Consequences of War: An Academic Perspective
The later part of the afternoon was kicked off by a brief overview of the FREE Network’s research initiatives on the links between war and certain development indicators. Pamela Campa, Associate Professor at SITE, presented current knowledge on the connection between war and gender, with a focus on gender-based violence. Sexual violence is highly prevalent in armed conflict and has been reported from both sides in the Donetsk and Luhansk regions since 2014 and during the ongoing war, with nearly only Russian soldiers as perpetrators. Apart from the direct threats of sexual violence during ongoing conflict and fleeing women and children risking falling victims to trafficking, intimate partner violence (IPV) has been found to increase post conflict, following increased levels of trauma and post-traumatic stress disorder (PTSD). While Ukrainian policy reforms have so far strengthened the response to domestic violence there is still a need for more effective criminalization of domestic violence, as the current limit for prosecution is 6 months from the date crime is committed. An effective transitional justice system and expertise on how to support victims of sexual violence in conflict, alongside economic safety measures undertaken to support women and children fleeing, are key policy concepts Campa argued. Coming back to the broader topic of gender and war, Campa highlighted the need for involvement of women in peace talks and negotiations, something research suggests matter for both equality, representativeness, and efficiency.
Providing insights into the relationship between the environment and war, Julius Andersson, Assistant Professor at SITE, initially summarized how climate change may cause conflict along four channels: political instability and crime rates increasing as a consequence of higher temperatures, scarcity of natural resources and environmental migration. Conflict might however also cause environmental degradation in the form of loss of biodiversity, pollution and making land uninhabitable. As for the negative impact from the war in Ukraine, Andersson highlighted how fires from the war has caused deforestation affecting the ecosystems, that rivers in conflict struck areas in Ukraine and the Sea of Azov are being polluted from wrecked industries (including the Azovstal steelworks) and lastly that there is a real threat of radiation given the four major nuclear plants in Ukraine being targeted by Russian forces. Coming back to a topic mentioned earlier during the day, Andersson also emphasized potential conflict spillovers into other parts of the world due to the war’s impact on food and fertilizer prices.
Concluding the session, Jonathan Lehne, Assistant Professor at SITE, reviewed how war and democracy is tied to one another, highlighting that while studies have found that democracies per se are not necessarily less conflict prone, it is still the case that democratic countries almost never fight each other. As for the microlevel takeaways from previous research, it appears as if individuals and communities having experienced violence and casualties actually reap a democratic dividend in some respects, such as greater voting participation. On the other hand, while areas with a large refugee influx also experience an increased voter turnout, voting for right-wing parties also increase with politicians exploiting this in their communication.
Book Launch – Reconstruction of Ukraine: Principles and Policies
The Development Day was also guested by Ilona Sologoub, Scientific Editor at VoxUkraine, Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign, and Torbjörn Becker, Director of SITE, who presented their newly released book “Reconstruction of Ukraine: Principles and policies”. Sologoub started off by giving an overview of the mainly economic topics covered in the book and pointing out that the main purpose of the book is to inform policy makers about the present situation and to suggest needed reforms and investments. Becker outlined the four key principles recommended to stem corruption during reconstruction; 1) Remove opportunities for corruption and rent extraction, 2) Focus on transparency and monitoring of the whole reconstruction effort, 3) Make information and education an integral part of the anti-corruption effort, and 4) Set up legal institutions that are trusted when corruption does occur. Deryugina focused on the energy sector and related back to what had previously been discussed throughout the day, the need to “build-back-better”. Deryugina mentioned that Ukraine, previously heavily reliant on coal and gas imports from Russia, now have the opportunity to steer away from low energy efficiency and bottleneck issues, towards becoming a European natural gas hub. The book is available for free here. There will also be a book launch on the 11th of January 2023 at Handelshögskolan.
Concluding Remarks
Via link from Kiyv, Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics closed the conference by emphasizing the urgency of continued education of Ukrainians in Ukraine and elsewhere to avoid loss of Ukrainian human capital. Shapoval also stressed how universities can act as thinktanks, support policy makers in Ukraine and Europe to come up with effective sanctions against Russia and provide a deeper understanding of the current situation – a situation which will linger and in which Ukraine needs continued full support.
This year’s SITE Development Day conference gave an opportunity to discuss the need for continued support for Ukraine and the implications from the war in a global, European, and Swedish perspective. Representatives from the political, public, private and academic sectors contributed with their insights into the challenges and possibilities at hand, providing greater understanding of how the support can be sustained, with the goal of a soon end to the war and a successful rebuild of Ukraine.
List of Participants in Order of Appearance
- Anders Olofsgård, Deputy Director at SITE
- Sviatlana Tsikhanouskaya, Leader of the Belarusian Democratic Forces
- Johan Forssell, Minister of Foreign Trade and International Development Cooperation
- Andrij Plachotnjuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
- Tymofiy Mylovanov, President of the Kyiv School of Economics (on link from Kyiv)
- Yuliya Markuts, Head of the Centre of Public Finance and Governance Analysis, Kyiv School of Economics
- Jean-Erik de Zagon, Head of the Representation to Ukraine at the European Investment Bank
- Cecilia Thorfinn, Team leader of the Communications Unit at the Representation of the European Commission in Sweden
- Fredrik Löjdquist, Centre Director of the Stockholm Centre for Eastern European Studies (SCEEUS)
- Jan Ruth, Deputy Head of the Unit for Europe and Latin America at Sida
- Karin Kronhöffer, Director of Strategy and Communication at Swedfund
- Andreas Flodström, CEO and founder of Beetroot
- Chloé Le Coq, Professor of Economics, University Paris-Pantheon-Assas (CRED) & SITE
- Lars Andersson, Senior advisor at Swedenergy
- Pär Hermerèn, Senior advisor at Jernkontoret
- Ilona Sologoub, VoxUkraine scientific editor (on link)
- Tatyana Deryugina, Associate Professor of Finance at the University of Illinois at Urbana-Champaign (on link)
- Torbjörn Becker, Director at SITE
- Michal Myck, Director at CenEa, Poland
- Yaroslava Babych, Lead economist at ISET Policy Institute, Georgia
- Lev Lvovskiy, Research fellow at BEROC, Belarus
- Pamela Campa, Associate Professor at SITE
- Julius Andersson, Assistant Professor at SITE
- Jonathan Lehne, Assistant Professor at SITE
- Nataliia Shapoval, Head of KSE Institute and Vice President for Policy Research at Kyiv School of Economics (on link)
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
The Belarusian Currency Market During War in Ukraine: Hidden Problems and New Trends
Belarus has faced unprecedented sanctions during the last year and the new economic conditions have led to a GDP decline and inflation growth. At the same time, the situation on the currency market has been stable since April 2022. The Belarusian Ruble demonstrated a gradual appreciation to the US Dollar and the Euro and a decline to the Russian Ruble. The appreciation of the Belarusian Ruble against the US Dollar has given households the illusion that the economic situation is not that bad. This brief analyses the main factors of the current situation on the currency market as well as describes the challenges which might destabilise the market. The importance of changing selected currencies in the currency basket and the start of a reorientation of the Belarusian economy from Western to Eastern partnerships, are also described.
The National Bank of the Republic of Belarus’ Policy on the Currency Market
In Belarus, currency has always played an important role as an indicator of economic stability. Household’s reactions to sharp fluctuations of the Belarusian Ruble have been expressed in an immediate demand growth for foreign currency (US Dollar and Euro mostly). After the war in Ukraine started and the exchange rate of the Belarusian Ruble began declining, people tried to make currency deposits from banks and buy foreign currency. In contrast to the Central Bank of Russia, the National Bank of the Republic of Belarus (NBRB) introduced no restrictions on the currency market. However, Belarusian financial institutions imposed their own limits on carrying out non-cash exchange operations, cash withdrawals from ATMs and from bank accounts. Financial institutions also limited the availability of currencies in exchange offices and imposed limits on payment transactions by credit card outside of Belarus. All these processes took place under the condition of a sharp devaluation of the Russian Ruble.
The dynamics in the Russian Ruble have affected the Belarusian Ruble fluctuation (see Figure 1). The correlation between the currencies was strong even before the war, given that the Russian Federation is a dominant economic partner for Belarus, and has since become stronger.
The share of Russian Ruble in the Belarusian currency basket is at 50 percent. Moreover, in Q1-Q3 2022 the Belarusian dependency on the Russian economy increased in the aftermath of losing the Ukrainian market and facing European export shortages. Between January and August 2022, the share of export of goods to CIS countries (where the main share of exports goes to Russia) was 65,7 percent, as compared to 58,4 percent for the corresponding months in 2021. The same tendencies are apparent when considering the import of goods. The share of import from CIS countries reached 64,7 percent between January and August in 2022, as compared to 61,3 percent for January-August in 2021 (BSCBR, 2022).
Figure 1. The weighted average exchange rate of the Belarusian Ruble, in Belarusian Rubles.
Source: Statistical Bulletin #9 (279) 2022.
Sanctions and the Russian Central Bank’s policy have led to a stabilisation on the Russian currency market. The Central Bank of Russia has introduced restrictions on capital outflow from the country, limited cash withdrawals from bank accounts and foreign currency purchases in exchange offices (Tinkoff, 2022). The cancelation of budget rule has further supported the Russian Ruble exchange rate. But the main reason for the Russian currency exchange rate reversal post March 2022, relates to the situation regarding foreign trade. Due to sanctions, imports had significantly decreased. At the same time, high energy prices allowed for export growth. Between January and June 2022 Russia displayed a high positive trade balance (169,62 billion USD), the largest in the last 7 years (CBR, 2022). As a result of sanctions, the Central Bank of Russia started to prepare the market to work with currencies of friendly countries.
Similar tendencies can be seen in Belarus. NBRB has changed the composition of the foreign currency trade to turn the Belarusian economy from a Western to an Eastern direction regarding economic cooperation. In July 2022 the Chinese Yen was included in the currency basket. At the same time the share of Russian Ruble was at 50 percent, the US Dollar at 30 percent, the Euro at 10 percent and the Chinese Yen at 10 percent. In August 2022, the NBRB began to define daily exchange rates for the Vietnamese Dong, Brazilian Real, Indian Rupee and UAE Dirham. Finally, since October 2022, the exchange rate for the Qatari Riyal has been defined on a monthly basis (The National Bank of Belarus, 2022). These changes are indicators of ongoing and planned structural changes to the economy to accommodate increased cooperation with the Eastern economies.
Currency Market Stabilisation and Current Risks
The Belarusian Ruble has not repeated the fluctuation of the Russian currency. It did however copy its tendency to appreciate to the US Dollar and the Euro, as of April 2022. Besides the appreciation of the Russian Ruble and personal bank’s restrictions on national currency markets, the stabilisation of the Belarusian Ruble can be explained by the positive trade balance. In contrast to Russia, the growth of net export in Belarus was due to a faster decline of imports than exports. There are several reasons why this can be a problem for currency market stabilisation in the future.
First, Belarus’ foreign trade has become more and more oriented toward the Russian market. If the main trade partner experiences difficulties (for example, oil price caps) this could lead to a devaluation of the Russian Ruble and, as a result, declining competitiveness of Belarusian goods on the Russian market.
Second, reorientation of Belarusian exports from Western to Eastern countries require time and additional financial resources and exports are not always profitable due to high logistical costs. Any additional sanctions may further limit such opportunities.
Third, main export-oriented services, such as the Transport and ICT sectors, are affected by sanctions and their consequences. In Q3 2022, the transport turnover was equal to 68,3 percent, as compared to the same period 2021. The ICT sector is still having a positive impact on GDP growth. However, in January-September 2021 the positive contribution from this sector to the Belarusian GDP was 0,9 percent, while it between January and September 2022 was only 0,2 percent.
Recent success in foreign trade is mostly due to the continuation of selling potash, nitrogen fertilisers and other products on the global market, a strong Russian Ruble and Russian market openness towards Belarusian companies, low levels of Belarusian imports, and cheap Russian gas (the special price for Belarus is 128 US Dollars for 1000 cubic meters). If the terms of trade with Russia worsen and key export-oriented industries suffer from sanctions and reputational risks, the currency market could however be destabilised.
Another problem for the Belarusian Ruble stability in the middle and long term is related to household behaviour. In January-August 2022 Belarusians sold more foreign currency than they bought. Despite the Ruble fluctuation, the high levels of net sales in March was due to bank restrictions. In June, the net purchase was related to seasonal factors (see Figure 2). For the other months of the period the net selling can be explained by a stable situation on the currency market and real incomes declining. People sold currency in an attempt to maintain their previous standards of living.
Figure 2. Balance of purchase and sale of foreign currency by households (+ “net purchase”, – “net sale”), mln. USD.
Source: Based on data from the National Bank of Belarus.
In September-October 2022 Belarusian households bought more than (an equivalent of) 300 mln. USD on net basis, primarily in USD or Euro, which is very unusual for the Belarusian market situation. There are several possible explanations for such behaviour:
- Despite difficulties with obtaining visas Belarusians are going to Poland and other European countries to shop. Because of sanctions, retaliatory sanctions as well as a high price control on the domestic market, the range of goods has shrunk, and prices have risen. In European countries Belarusians can purchase much cheaper goods both for personal use and for resale.
- Partial mobilisation in Russia has increased the uncertainty of further political steps in Belarus. Households thus purchase foreign currency to establish an extra safety cushion.
- In Q3 2022 there was a net cash outflow on international remittances, for the first time since 2017. Traditionally, Belarus has seen a net inflow of foreign remittances. In 2022 Belarusian banks were switched off from the SWIFT system which incurred problems with operations in foreign currencies for banks under sanctions. As a result, cash inflow has declined (see Figure 3). Cash outflows however remained on the same level as in previous years. This can be explained by high-level specialists and people employed within ICT leaving the country. During relocation people have sold apartments and cars and exchanged accumulated incomes from Belarusian Rubles to US Dollars or Euros and sent to foreign bank accounts (even under the conditions of facing difficulties with conducting money transfers).
Figure 3. Net cash inflow (+)/ outflow (-) for international remittances, USD mln.
Source: Based on data from the National Bank of Belarus.
Maintaining the trend of net currency purchase together with possible trade balance deterioration may exacerbate the situation on the domestic currency market. Another risk to the currency market stability is posed by the insufficient size of FX reserves (in the amount of less than 3 months of import). Moreover, the 900 mln. US Dollars in reserves, given by the IMF in 2021 as support to fight Covid-19, can’t be used as this financial support is given in the form of SDR (Special Drawing Rights), and the exchange of SDR to US Dollars or other currencies is challenging due to sanctions (Congress, 2022).
At the same time, the Government’s decision to make external debt payments in Belarusian Rubles supports the FX reserves level. It has also been decided that payments on Eurobonds to the Nordic Investment Bank, the European Bank of Reconstruction and Development and the International Bank of Reconstruction and Development are to be paid in Rubles. These decisions have decreased the country’s long-term rating on foreign liabilities to the Restricted Default level. In that sense, short-term gains can lead to significant financial losses in the long term. In the future it will be necessary not only to pay outstanding debts but also to improve Belarus’ reputation on the international financial market. Today, the Russian Federation is the main investor in the Belarusian economy. But since its support is limited, it is likely to be insufficient for the safe functioning of the Belarusian economy.
Conclusion
The stability of the Belarusian currency market is not the result of economic success, but rather a reflection of the tightening of the economy. The appreciation of the Belarusian Ruble to the US Dollar and Euro has taken place during an accelerated reduction in Belarusian imports. At the same time the weakness of the Belarusian currency to the Russian Ruble entails competitiveness of Belarusian products on the Russian market. Foreign exchange reserves, although insufficient, have maintained in size due to the low demand for foreign currency and foreign debt payments in Belarusian Rubles. Disruptions to economic and political relations with Western countries stimulates the Belarusian authorities to reorient the economy towards Eastern partners, which has led to a modification of the currency basket composition. In the long run, the current stability of the Belarusian currency can quickly disappear in case one or several risks are realised. If the Russian Ruble devaluates or trade balance deteriorates and demand for foreign currency increases, the stability of the Belarusian Ruble exchange rate can be ruined.
References
- Belarusian State Committee of the Republic of Belarus (BSCRB). (2022). Socio- Economic Situation of the Republic of Belarus in January- September 2022. https://www.belstat.gov.by/ofitsialnaya-statistika/publications/izdania/public_bulletin/index_58794/
- The National Bank of the Republic of Belarus. (2022). Statistical Bulletin #9 (279) 2022.
- The National Bank of the Republic of Belarus. (2022). https:// www.nbrb.by
- Tinkoff. (2022). The Central Bank has extended the currency restrictions for six months. https://secrets.tinkoff.ru/novosti/czentrobank-prodlil-valyutnye-ogranicheniya-na-polgoda/
- CBR. (2022). Balance of payments, international investment position and external debt of the Russian Federation in the first half of 2022. http://www.cbr.ru/statistics/macro_itm/svs/p_balance/
- Congress. (2022). H.R. 6899- Russia and Belarus SDR Exchange Prohibition Act of 2022. Public Law No: 117-185 (10/04/2022). https://www.congress.gov/bill/117th-congress/house-bill/6899.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.