Tag: Stagnation

A Highly Likely Turning Point for Belarus: Can Early Action Shape the Outcome?

Posted on January 26, 2026 | Policy Brief

Turning Point for Belarus illustrated by a Ferris wheel overlooking a Belarusian city park in autumn

This policy brief analyzes Belarus’s likely return to economic stagnation as the post-2022 growth rebound fades, and assesses the political-economy implications of this trajectory. Recent growth, primarily driven by cyclical export dynamics and favorable shocks from Russia, is shown to be unsustainable and consistent with a low equilibrium growth path constrained by weak productivity and the prevailing institutional regime. As growth slows and income dynamics deteriorate, stagnation is expected to reshape social preferences and intensify pressures on the existing political-economic status quo. The brief argues that this environment makes a future turning point increasingly likely, while path dependence strongly biases outcomes toward deeper dependence on Russia. Against this backdrop, it discusses whether early, preventive external actions focused on reshaping incentives and expanding the set of perceived strategic options can influence Belarus’s post-turning-point trajectory.

Belarus’ Economic Path: A Likely Return to Stagnation

The years 2021–2025 were dramatic, leading to significant structural changes in the Belarusian economy. However, there are increasing indications that the positive dynamics observed during this period may be reaching their limits, with 2025 potentially marking a dividing line between the short- and long-term effects of Belarus’s economic adjustment to the new environment.

After two and a half years of accelerated growth (around 4%), economic growth began to slow markedly in 2025 and is expected to end the year at 1.3–1.5%. The key reason for this sharp deceleration was the weakening of external demand. Its contraction implies that the physical volume of exports in 2025 is roughly 10% lower than in 2024: approximately two-thirds due to a decline in exports to Russia and one-third due to reduced exports to other countries (see Figure 1).

Figure 1. The Dynamics of Physical Volume of Belarusian Exports by Geographical Destinations, total exports 2022=100

Source: Own calculations based on Belstat data.

The growth in the physical volume of exports was precisely the foundation of the recovery and accelerated growth observed in 2023–2024. First, it constituted a positive demand shock that directly stimulated output growth. Second, it created a buffer for the external position (the current account balance), mitigating one of Belarus’ chronic growth constraints. This consideration has become particularly relevant in recent years, as access to external financing has been severely limited due to the war, sanctions, and the country’s status as a default borrower. Third, in 2023–2024, the accumulated buffer in the external position enabled export growth, creating additional space to stimulate domestic demand.

Export dynamics by destination indirectly indicate that the export surge in 2023–2024 was cyclical rather than a reflection of productivity improvements. Significant export growth occurred only to Russia, reflecting major disruptions to the operating environments of both the Belarusian and Russian economies amid sanctions. The gradual decline in export volumes to Russia since the second half of 2024 signals that even after these disruptions, the existing productivity base does not allow Belarusian exporters to sustain output near previously reached peaks. Exports to other countries have been excessively volatile. It again points to insufficient productivity as their underlying constraint, especially in a new environment.

Assessing likely developments in 2026–2027, the prevailing status quo implies that a slowdown in growth to 1.0-2.0% per year is the most likely scenario. This range corresponds to the growth forecasts produced by major professional forecasters for Belarus (BEROC, IMF, World Bank, WIIW, EDB). Qualitatively, nearly all forecasters converge on the same baseline scenario: the Belarusian economy remains overheated and exposed to inflationary pressures and accumulated macroeconomic imbalances (a weakening external position and a fragile financial position of firms); favorable external demand shocks from Russia have largely been exhausted (with Russia’s growth expected at 1.0-1.5%); and economic authorities will be forced to reduce domestic demand stimulus, leading growth to slow and converge toward its equilibrium level.

This leads to an important conclusion for the medium-term outlook: the elevated growth observed in 2023–2024 was the result of cyclical factors, while Belarus’s long-term equilibrium growth rate remains weak, likely in the range of 1.0–2.0% (which aligns with the estimates based on statistical filtering methods). Estimates of equilibrium growth were in the same range in 2020, prior to the economy entering a period of large-scale shocks (Kruk, 2020). From a long-run growth perspective, the period of 2023–2024 should therefore be interpreted either as a one-off positive level shift in equilibrium output or purely as a cyclical shock. Accordingly, all key considerations regarding Belarus’ weak long-term growth environment (Kruk, 2020) and the lack of productivity growth drivers remain fully relevant today.

It is therefore not surprising that long-term growth models produce a similar picture: growth in the range of 1.0–2.0% per year, under two basic assumptions: (i) productivity growth remains weak and does not exceed its average over the previous 20 years; and (ii) demographic dynamics follow long-term UN projections. Figure 2 presents simulations based on the World Bank’s Long-Term Growth Model (Loayza & Pennings, 2022) under three scenarios: (1) an inertial scenario, in which key exogenous variables (except demography) are extrapolated from historical data; (2) an optimistic scenario, assuming somewhat stronger productivity and human capital growth till 2050; and (3) a pessimistic scenario, assuming slower productivity and human capital growth till 2050 combined with a higher current account deficit.

Average growth over 2026–2100 ranges from 0.9 to 1.5% per year across these scenarios. The core constraint on long-term growth remains insufficient productivity growth (Kruk & Bornukova, 2013), largely driven by the current political regime’s unwillingness and inability to remove existing barriers to productivity growth (Kruk, 2018; Kruk, 2020). In other words, this is not a technologically predetermined growth ceiling, but a political economy equilibrium shaped by the prevailing system of institutions, incentives, and constraints, compounded by demographic trends.

Figure 2. Belarus: Long-term Per Capita GDP Growth Projections, % per annum

Source: Own calculations based on WB LTGM Model (Loayza & Pennings, 2022.

Any of these scenarios implies a highly disappointing future for Belarus. By domestic standards, such sluggish growth effectively amounts to stagnation for a middle-income country. In the worst-case scenario, incomes double over the next 75 years compared to 2025. Essentially, with such a growth path, it will take Belarus 75 years to reach income levels already attained by the world’s richest countries today.

However, given that other countries will also continue to grow, this trajectory implies that Belarus will keep falling behind in relative terms. For instance, compared with Poland (the baseline LTGM simulations), Belarus will become increasingly poorer (see Figure 3). The only question is how fast and by how much.

Figure 3. GDP per capita (PPP, int$, 2024): Belarus as % of Poland, % per annum, projections

Source: Own calculations based on WB LTGM Model (Loayza & Pennings, 2022) and World Development Indicators Database.

The Political Economy of Stagnation and a Likely Turning Point

A return to stagnation will inevitably generate new social effects. The political economy literature documents a wide range of consequences associated with prolonged stagnation in income and economic performance. For example, persistent negative economic patterns are often associated with political anomalies such as polarization and households’ increased openness to political experimentation – such as voting for non-traditional/extremist parties as well as other forms of political backlash (Funke et al., 2016; Rodrik, 2018). These effects are largely driven by shifts in the political preferences of the middle class, which are more sensitive to relative decline and loss of social status than to absolute income levels (Gidron & Hall, 2017). Stagnation can also reduce the likelihood of gradual institutional reform while increasing the risk of abrupt political shifts (Acemoglu & Robinson, 2006; Guriev & Treisman, 2022). Which combination of these effects ultimately materializes, and in what sequence, is highly context-dependent.

As early as 2026, Belarusian households are likely to begin feeling the constraints to economic growth in their incomes. During 2022–2025, real wages and incomes grew much faster than the economy as a whole: by 2025, GDP was roughly 5% higher than in the pre-war, pre-sanctions year of 2021, while average real wages rose by approximately 37%. This huge gap was driven by labor supply shortages amplified by adverse demographic trends and mass emigration. Much of the adjustment burden was absorbed by a deterioration in corporate sector financial health. By 2026, the corporate sector will have limited capacity to continue sustaining such a divergence between economic growth and labor costs, while overall growth will slow. Consequently, already in 2026, income growth and consumer optimism are likely to weaken. As the economy settles into stagnation, this pattern is expected to intensify.

Exhausted income growth and declining consumer optimism, coupled with an increasingly tangible sense of relative impoverishment compared to Western neighbors, will almost certainly alter the social climate and household preferences in Belarus. But in what direction? And which political anomalies are most likely under Belarusian conditions?

An obvious analogy is the period of 2012–2020. Economic stagnation during that time generated public demand for expanded economic and political freedoms, culminating in the attempted democratic revolution of 2020. The internal state of Belarusian society and its prevailing attitudes (Chatham House, 2024) support such an analogy for future perspective. However, that period was characterized by fundamentally different domestic and external conditions. Domestically, policy was framed around gradual quasi-liberalization across social spheres. In foreign policy, authorities pursued a ‘multi-vector’ strategy, seeking to balance relations with several external partners. Economically, the state refrained from encroaching on the private sector’s autonomy and occasionally even created incentives for its development, alongside strengthening macroeconomic policy frameworks. Today, the situation across all these dimensions is almost the exact opposite. The Belarusian authorities have eliminated virtually all space for civic activity (Center for New Ideas, 2025), isolated the country from the developed world, and chosen total dependence on Russia (Kruk, 2024) as the lesser evil. While the private sector remains significant in scale (BEROC, 2025), its dependence on and subordination to political authorities has increased substantially.

The Belarusian case is too complex and context-specific to confidently identify a single dominant scenario. What can be stated with high probability is that the current political-economic status quo predetermines the search for a new steady state. Economic stagnation will make the environment more malleable and prone to change. Moreover, aware of this, key actors are likely to increasingly attempt to shape developments preemptively in order to strengthen their positions. From this perspective, there is a high likelihood that Belarus will pass through a new turning point in the foreseeable future. The key strategic question is which development trajectory will prevail afterward.

Policy Implications for the Future

In the tradition of modern political economy, a development trajectory depends on the balance of interests among key actors and the behavioral patterns they generate. From this view, following a new turning point, the most realistic scenarios for Belarus involve a continued drift toward deeper dependence on Russia. The already intensified de facto dependence on Russia (Kruk, 2024) strengthens actors whose interests align with such a trajectory. The interests of the Belarusian and Russian political regimes, as well as those of a broad range of Belarusian businesses, are largely tied to Russia. Society, whose dissatisfaction is likely to grow amid stagnation, has a limited set of instruments to influence outcomes. Those segments of society that oppose this drift may simply be ignored. Moreover, in the current environment—marked by modern authoritarian tools such as propaganda and manipulation (Guriev & Treisman, 2022) and reinforced by large-scale repression (Center for New Ideas, 2025)—there are signs that the range of publicly expressed demands in Belarusian society is narrowing (Chatham House, 2025). Taken together, this suggests a strong path-dependence dynamic in which stagnation is likely to deepen Belarus’s entrenchment within Russia’s orbit of influence. Within this paradigm, the only way to influence Belarus’s future development trajectory today is to preemptively shift the spectrum of interests. The desired strategic direction would be to constrain Russia’s capacity to provide patronage to Belarusian interest groups, while simultaneously strengthening Belarus’s institutional capacity as a country, rather than as the property of the current political regime.

Rodrik (2014) highlights a key shortcoming of contemporary political economy models: insufficient attention to ideas. In that context, ideas refer to actors’ perceptions of (i) their optimization specifications, (ii) how the external environment functions, and (iii) which instruments are at their disposal. Standard political economy approaches tend to assign actors a fixed, predefined set of such perceptions. In reality, however, this set is contextual, shaped by numerous factors, and subject to change.

This insight complements the desired strategic shift outlined above. Escaping the emerging political path will require new ideas – a new mental map through which actors can reinterpret their interests. At present, this ideation space, at least for actors within Belarus, is almost entirely monopolized by the concept of development within Russia’s orbit.

Efforts to distance Belarus from Russia (at least to some extent) and, more importantly, to construct a new mental map can already be undertaken today. Their primary temporal reference point, however, is the future turning point. The work by Bushilo et al. (2025) can be viewed as an example of translating these principles into practical policy terms today.

It argues for a calibrated adjustment of the international community’s approach toward Belarus within clearly defined limits, while fully acknowledging the Lukashenka regime’s complicity in Russia’s aggression against Ukraine. Central to this approach is a distinction between the regime and the country of Belarus itself—a distinction that remains analytically and strategically relevant.

This perspective has at times been mischaracterized as an effort to normalize relations with the Belarusian regime. However, the approach does not question the security rationale of sanctions or the responsibility of the regime; rather, it situates them within a broader strategic framework that seeks to avoid conflating pressure on the regime with the long-term prospects of Belarusian statehood.

Above all, it is about shaping a new strategic position, developing new ideas, and redefining the mental map regarding Belarus. Beyond the regime, it is important to recognize something more fundamental: the country of Belarus itself. A country whose future is not predetermined, and which retains the potential to alter its development trajectory beyond the lifespan of the current political regime. This is not about an immediate shift in actors’ preferences, but about reducing the rigidity of the dominant path dependence by expanding the set of strategies perceived as feasible, above all in the long-term perspective following a turning point. For international actors who recognize this potential and are interested in its realization, preventive action is already warranted today.

References

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.

What Does Modern Political Economics Tell Us About the Fate of Russia’s Reforms?

Posted on September 5, 2011 | Policy Brief

20110905 Policy Brief Image Russia Kremlin Saint Basil Cathedral

After the 2008-09 crisis, Russia is facing a new set of challenges. The pre-crisis sources of growth have been exhausted. In order to implement its growth potential and catch up with OECD countries, Russia must improve its investment and business climate. Although the reform agenda has been repeatedly discussed, it is not being implemented. The explanation is provided by modern political economics: what is good policy (in terms of social welfare and growth) is not necessarily good politics (for a country’s rulers). In this sense, modern Russia is a perfect example of the non-existence of a political Coase theorem. Although everybody understands that the status quo is suboptimal, the most likely outcome is further postponement of reforms.

Whither Russia?

In 2009, the New Economic School joined the Russia Balance Sheet project launched by two DC-based think tanks: the Center for Strategic and International Studies and the Peterson Institute for International Economics. The aim of the project was to assess Russia’s assets and liabilities. Similarly to compiling a company’s balance sheet, the project estimated the potential for long-term development and growth, and the problems that could prevent Russia from realizing this potential.

The main output of the project in 2009-10 was the book “Russia after the Global Economic Crisis”, which was published in English in the Spring 2010 and in Russian in the fall of the same year. The book looked at a broad range of issues that could be classified as Russia’s “assets” and “liabilities”, extending from economic, political and social issues to energy, foreign relations, climate change, innovation and military reform. Interestingly, despite the breadth of the analysis, the authors of the book’s different chapters arrived at similar conclusions, which might be summarized as follows: while Russia came out of the crisis in a reasonably good shape and has nothing to fear in the near term, it has serious long-term problems that need to be addressed as soon as possible; however, it is, unfortunately, the case that Russia is unlikely to implement the required reforms, since they go against the interests of the ruling elite.

This argument is especially clear with respect to Russia’s economic problems – that Aleh Tsyvinski and I analyzed in the first chapter of the book. In the short run the Russian economy is certainly doing quite well. So long as oil prices stay high, the budget remains balanced, the economy grows, and sovereign debt is virtually non-existent (in marked contrast with debt burdens of OECD countries). Contrary to what is claimed by many critics of the government, pre-crisis growth did trickle down to all parts of Russian society, and that has ensured that the government enjoys sufficient political support.

However, in the long run, the situation is very different. The pre-crisis sources of economic growth (rising oil prices, low capacity utilization and an underemployed labor force) have all been exhausted. Oil prices are high, but are unlikely to rise much further. Production capacity and infrastructure are over-utilized. The labor market is very tight. In order to grow at the rates, which Korea and other fast-growing countries achieved when they were at Russia’s level of development, Russia needs new investment. Hence, Russia has to improve the business climate and the investment climate. This, in turn, depends on reducing corruption, improving protection of property rights, building an effective and independent judiciary, and opening the economy to competition (both domestic and international).

Good Policy, Bad Policy

The changes that are needed in order to ensure strong growth are obvious, but they are unlikely to happen. The reason is very simple: the political equilibrium is such that Russia’s political elite is not interested in change. There is nothing unusual about this. As Bueno de Mesquita et al. (2003) have argued: good policy may be bad politics and vice versa. If achievement of economic growth depends on surrendering control over the commanding heights of the economy (through privatization, strengthening the rule of law, deregulation, and encouragement of competition), the ruling elite may fear a weakening of its hold on power and ultimate loss of power as the price of achieving growth. In this case, the ruling elite will prefer to stay in charge of a stagnating economy (and enjoy a big piece of a small cake) rather than risk losing power (and having no piece of a bigger cake).

Can society somehow buy out the vested interests of the rulers? One of the most powerful theoretical results in economics, the Coase theorem, would suggest that the answer is yes. However, the conditions of the Coase theorem are not met in the instance of political economy, which we are considering. In our case the ruling elite does not merely trade goods or even assets: by allowing reforms it would lose the power to expropriate and protection from being expropriated. Unsurprisingly, there is no “political Coase theorem” (see Acemoglu, 2003).

As we discuss in Guriev et al. (2009), this problem is particularly acute in resource-rich transition economies without established political and legal institutions. In such economies, the lack of institutions means that the rulers are less accountable and can therefore appropriate a large share of the resource rents. The resource rents increase the incentives to hold on to power and provide the rulers with the resources which they need in order to maintain the status quo.

In the opening chapter of “Russia After the Global Economic Crisis”, Aleh Tsyvinski and myself argued that this is precisely Russia’s problem. We punningly defined the status quo as a “70-80 scenario”: if the oil price stayed fairly high ($70-80 per barrel) then Russia would be likely to follow the 1970-80s experience of the Soviet Union, when reforms were shelved and the economy stagnated. That period ended with the bankruptcy and disintegration of the Soviet Union.

Certainly, the differences between modern Russia and the 1970-80s Soviet Union are substantial. Although the government controls the commanding heights of the modern Russian economy, the nature of the latter is capitalist and not command. Also, Russian economic policymakers are much more competent and, unlike their Soviet predecessors, they can easily believe that if a country runs out of cash, the government is removed from office: they have seen it happen to those same Soviet predecessors.

This brings us to a conundrum: if it is clear that the status quo is a dead-end, what is the ruling elite hoping for? On the one hand, the elite understands all too well that reforms are risky – everybody remembers the last Soviet government, which initiated change and lost power as a result of that change. On the other hand, it is clear that in order to remain in power the government needs growth and that growth can only come from reforms.

Rational Overconfidence

The solution to this conundrum is to be found, not in modern political economics, but in the realm of behavioral economics and studies of leadership. In recent years, economists have been keen to integrate insights from psychology into their models of markets and organizations.

Psychologists know very well that human beings want to be happy, and are therefore disposed to forget bad news and remember only good news. They also like to persuade themselves that they are good (or at least better than others). This explains why investors always want to believe in more optimistic scenarios (hence bubbles, see Akerlof and Shiller, 2009). Furthermore, a certain degree of over-optimism on the part of leaders is actually “rational” or “optimal” (see Van den Steen, 2005, and Guriev and Suvorov, 2010). Over-optimistic leaders are more resolute, and they attract more capable and enthusiastic followers. In this sense, in an environment with weak political institutions, over-optimistic political leaders always crowd out more realistic leaders (who do not promise as much). Where there are strong political institutions that ensure political accountability (e.g. via political parties), this behavior is not sustainable. But if there is no accountability, over-optimism almost inevitably prevails as a result of political selection.

This may explain why the Russian political leadership hopes for the better. So far the model “whenever we are in trouble, the oil price goes up and saves us” has worked, and it will keep working until the oil price goes down and undermines both macroeconomic and political stability. Once again, resource abundance is important as it helps to feed the over-optimism: the fortunate leaders that rule during the period of high oil prices can easily believe that their luck is permanent and their belief (or, as the leadership literature calls it, “vision”) will be consistent with the evidence – but only until the oil price plunge.

The 70-80 Scenario: Two Years On

We started to write the 70-80 chapter in the fall of 2009, when the oil price was already back from $40 per barrel to the fiscally comfortable range of $70-80 dollars. What has happened since then to the likelihood and sustainability of our scenario?

What we find is that, although the 70-80 pun no longer works, our main argument has been reinforced. First, the oil price is no longer in the range of $70-80 per barrel, but has risen higher due to events in the Middle East and Japan, as well as increased demand for oil as a store of value reflecting diminished confidence in dollar and euro assets. Second, the Arab Spring has made the Russian government suspect that its hold on power is more tenuous than it previously believed, and it has started to spend even more aggressively. Russia’s budget is no longer in surplus at $70 per barrel: it can now only be balanced if the oil price is at $125 per barrel (!). In this sense, $70-80 per barrel is no longer a “high” price – it is both below the current market’s expectations and below the Russian government’s fiscal benchmarks.

However, our main argument has been reconfirmed. High oil prices have encouraged the Russian government to become further entrenched in the status quo scenario. While there has been a substantial increase in rhetoric about privatization, deregulation, competition, rule of law etc., actual change has been lacking. On the contrary, there is increasing reliance on government ownership and increasing probability that Russia will move further down the road to stagnation after the presidential elections of 2012.

Can There Be An Alternative to Stagnation?

In “Russia After the Global Economic Crisis” we also charted an alternative scenario based on reforms that help to realize Russia’s substantial growth potential. Is this scenario feasible? Certainly, the laws of political economy are not deterministic. Even though the status quo path is preferable for the country’s rulers, a leader (or a sub-group in the elite) may emerge who is long-term-oriented and is not over-optimistic. If this leader or group manages to create a critical mass of stakeholders for reforms, there may be a “run” on the status quo. For example, if the oil price decreases and there is fiscal pressure to privatize, then a critical mass of private owners may emerge who are interested in protection of property rights and the rule-of-law.

However, even though a positive scenario is possible, it is not very likely. Investors have already reached this conclusion: Russia has been experiencing large capital flight since the fall of 2010 (net capital outflow is about of 5% of GDP). Investors are not yet ready to bet their money on the good scenario. Nor would political economists recommend them to do so.

References

  • Acemoglu, Daron (2003). “Why Not A Political Coase Theorem? Social Conflict, Commitment, And Politics,” Journal of Comparative Economics, 31: 620-652.
  • Akerlof, George A., and Robert J. Shiller (2009). “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”. Princeton University Press.
  • Åslund, Anders, Sergei Guriev and Andrew Kuchins (2010). Russia after the Global Economic Crisis. Peterson Institute for International Economics. Washington, D.C.
  • Bueno de Mesquita, Bruce, Alastair Smith, Randolph M. Siverson, and James D. Morrow (2003). “Logic of Political Survival”. MIT Press.
  • Gilbert, Daniel (2006). “Stumbling on Happiness”. Knopf.
  • Guriev, Sergei, Alexander Plekhanov, and Konstantin Sonin (2009). “Development Based on Commodity Revenues.” European Bank for Reconstruction and Development Working Paper No. 108. Available at SSRN: http://ssrn.com/abstract=1520630 (Also available as Chapter 4 in the Transition Report 2009).
  • Guriev, Sergei, and Anton Suvorov (2010). “Why Less Informed Managers May Be Better Leaders.” Available at SSRN: http://ssrn.com/abstract=1596673
  • Van den Steen, Eric J. (2005). “Organizational Beliefs and Managerial Vision.” Journal of Law, Economics, and Organization, 21: 256-283.

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.