**3.5 The "conflict neighbors trap"**

*Public Sector Crisis Management*

*3.4.2 The Russian factor*

raw materials came to 78%.

trade channels.

of institutional reform.

dramatically than the Russian ruble in 2014–2015.

Falling global potassium prices in 2013–2014 and oil prices in 2014–2015 (a trend

that will most likely be deep and protracted) coupled with a lesser fall in prices for petroleum products necessitates a new economic structure for Belarus. A fast bounce-back of global oil prices and a return to the old national economic structure are an unlikelihood not borne out by knowledge of history. The average historical oil price (in terms of the dollar's value in 2000) from 1880 to 2004 was 19.61 USD per barrel [23]. The historic highs enjoyed by the global economy have been a recent phenomenon: in 2010–2014, Brent crude averaged 102 dollars per barrel, creating an unsustainable bubble in the economies of a number of countries. The dramatic drop in oil prices has also had an impact on both production quantities and the financial wellbeing of oil refineries that are Belarus' largest exports and taxpayers and in the middle of modernization. In 2013, the share of exports taken up by goods and

On the other hand, the impact dropping crude oil prices have had on the Belarusian oil refinery sector should not be overstated. Prices on crude are correlated with prices on oil refinery goods, so the net profit brought in by oil refineries should remain more or less the same. Efficiency, rather than price changes, is a much heftier driver of profits, and decreased export customs duties have been the biggest difference the oil price drop has had on the Belarusian refining sector.

Russia's oil-based economic structure, the formation of the Eurasian Economic Space, and the orientation of 43% as of 2019 Belarusian exports toward the Russian market make the Russian factor a critical piece of the puzzle. In 2019, oil was responsible for 48% of import from Russia to Belarus, adding gas pushes that number to 68%, and adding metals means that the overall share of

Given the Russian ruble's floating rate, the global collapses of oil prices in 2014–2015, and early 2020 were mirrored almost exactly by the exchange rate. The Russian ruble has been de facto pegged to the price of oil. Certainly, the plummeting price of oil has not been the only factor exerting downward pressure on the Russian ruble. Countries like Angola, Algeria, Kuwait, Iran, Iraq, and Nigeria, all with a higher oil exports to GDP ratio than Russia, saw their currencies devalue less

The weakening Russian ruble has a corresponding effect on the competitiveness of Belarusian exports to Russia. Not only that, but given the floating Belarusian ruble rate, the fact that the Russian ruble is in the Belarusian currency basket, and the close economic relationship between Belarus and Russia, changing global oil prices affect the value of the Belarusian ruble as well via currency and

All in all, the Belarusian economy's post-Soviet structure, its overbearing focus on the raw materials of the petrochemical and potassium sector, and its close ties to the raw materials-based Russian economy creates the framework for a fall into the "resource curse trap." Norway is a textbook example of how to get out of that trap, as the oil and gas sector there is responsible for more than 50% of the country's export revenue. Even so, it has maintained stable economic growth—while raw materials and the role they play in exports is an important factor in the country's economic growth, they are not the determining factor. The main difference is that institutions were built in Norway before raw materials were developed on an industrial scale (before the 1970s), making it immune to external shocks today. The way out of the resource curse pitfall, ultimately, means going back to the necessity

services provided by Mozyr Oil Refinery and Naftan was 16%.

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The "conflict neighbors trap" term was coined by Paul Collier to describe how countries surrounded by neighbors in conflict fall into the long-term trap of inhibited economic growth [24]. His study showed that, on average, countries benefit from the economic growth of their neighbors: each point of growth adds 0.4% to the GDP of neighboring countries, though for African countries that number is 0.2% and for non-African countries it is 0.7%. Political crisis in a country also results in economic losses both for it and for its neighbors totaling an average of 100 billion dollars. The origin of political conflict was also proven to be slow economic growth or contraction in many instances. For example, 5 years of non-existent economic growth leads to political crisis and civil war in 14% of cases. Each point of growth or contraction improves or lowers the odds of a political crisis occurring. If an economy contracts by 3%, for instance, the likelihood of a crisis happening rises to more than 16%. It was also shown that the longer an economy contracts, the longer it takes to dig itself out of the resulting political crisis. A crisis that culminates in civil war lasts an average of around 5 years, and countries that go through a civil war have a 50% chance of experiencing another one within the next decade. Economies suffering from civil war contract by an average of 2.3% per year, pulling their neighbors down with them.

The results of Collier's study have an analogy in the Russian-Ukrainian conflict, the civil war in Ukraine, the 2014–2015 recession, the 2016–2019 slow recovery in Russia, and their impact on the Belarusian economy. Given the territorial losses suffered by Ukraine as well as the human cost of the conflict, a fast resolution to the bilateral conflict looks anything but likely. Taking into the account the consequences of 2020's coronavirus, it is hard to make predictions when Russia will return to growth. While prognoses differ, they share a similar trend: for each point Russian GDP contracts, estimates concur that Belarusian GDP will lose 0.6% of growth thanks to the net-export effect [25].

Before moving on it is important to note that Russia and Ukraine are not simply neighbors of Belarus; they are its primary trade and investment partners. And they stay like this through the years, despite their economic recessions or recoveries. In 2019, the share of Belarusian exports of goods to Russian market of total was 43%, and to Ukrainian market—11%. The share of import from Russian of total in Belarus was 62%, and from Ukraine—5%. The share of foreign direct investments from Russia of total to Belarus was 69%, and from Ukraine—1%.

There are two ways out of this trap for the Belarusian economy: reorientation toward the domestic market or diversifying into other foreign markets.

1.Reorienting the economy from foreign markets to the domestic market

While this may be a tempting solution, from January to March 2015 the share of Belarusian sales in the domestic retail market came to 68.9%. For foodstuffs, that number was higher, at 81.6%, and for non-foodstuffs, it was 50.9%. The domestic market is simply not capable of completely replacing the volume of sales lost in foreign markets without increasing capacity.

Generally speaking, a reorientation toward domestic markets is generally part of a temporary import substitution strategy geared toward protecting from external competition.

The main argument in favor of import substitution is the need to temporarily shelter high-potential industries or companies from competition. However, in that case the sheltered industry has to use that opportunity to outpace the development of its foreign competitors (by cutting production costs faster, for example), coming out the other side having made up most of the ground separating them. Developing countries often point to examples where developed countries employed import substitution (the US, Germany, and Japan in the nineteenth and twentieth centuries) to, in their opinion, distance themselves from developing countries over the long term [26] .

Opponents of import substitution bring up the difficulty of deciding which prioritized industries should be protected [27]. Often the obvious choice for the government is looked at askance by private businesses that have invested elsewhere. At that point, the industry is prioritized by the administration and a temporary import substitution policy becomes permanent. Inflation is also a result of import substitution, as prices for both imported (thanks to new protective measures) and domestic goods rise. When that happens, national manufacturers often lower the prices they charge in foreign markets and compensate for the lost revenue by boosting them domestically.

### 2.Diversification of foreign markets

The focus Belarusian exports have fixed in the last few years on Russia and Ukraine has less to do with left-over post-Soviet relationships and more to do with their lack of competitiveness and lagging technological development. Belarus' concentration on its largest export Russian market has grown in recent years: from 37% of total exports in 2011 to 39% in 2015, and to 43% in 2019. Import is even more concentrated on Russia. During last decade, import from Russia to Belarus stayed more or less at the same level: 64% of total imports in 2011, 62% in 2015, and 62% in 2019.

The problems Russia and Ukraine experienced in 2014–2015 have limited Belarus' export options. That would logically encourage a switch to other markets, but there Belarusian exports are less competitive. The situation is exacerbated by the lack of innovation in Belarusian exports. For example, the country's exporters (the Minsk Automobile Plant and the Minsk Tractor Works) do not have research centers abroad they can lean on for market analysis and forecasts, to learn about customer needs, and to tweak technology and manufacturing. Competitors like John Deer and MAN have R&D centers in Germany (100 employees), France (120 employees), China, India, and the US. A systemic solution to the problem would be to move from a resource-based economic model to an investment-based model by attracting foreign direct investment, and from there creating a domestic culture of innovation.

The "conflict neighbor trap" often centers on the medium term with a likelihood of repeat occurrences in the long term, given that long periods of poor economic growth can lead to social unrest. The best way out of this trap for Belarus is to attract foreign direct investments in export companies focusing on highly competitive and high-tech markets.

#### **3.6 "The forceful pressure trap"**

This trap means that due to the state capitalism management system in Belarus, government and control agencies are deeply involved in business activities of business enterprises. Year by year, this administrative burden becomes forceful pressure on business and the barrier for economic growth. Being the part of the system, control agencies cannot stop the pressure by themselves. So they bring economy to almost complete stop as the enterprises try to avoid making mistakes in following norms and legislature and being punished. The state forceful pressure takes the forms of meetings, inspections, and court cases against business.

**77**

*State Capitalism in Belarus: Behind Economic Anemia DOI: http://dx.doi.org/10.5772/intechopen.93606*

A survey of 800 directors of Belarusian firms run in 2013 by the Economy Research Institute of the Ministry of Economy found that 71% of those surveyed spend at least 20% of each week (one working day) on meetings with state agencies, the main topic of which, 91% say, is discussing their revenues, profits, and other indicators. With that in mind, private firms more and more prefer to avoid contact with the government in an effort to avoid that administrative pressure.

According to the Association of Retail Networks, in 2014–2015, there has been an uptick in the number of inspections conducted by the Ministry of Trade. Traded goods themselves are also subject to inspection by the State Control Committee, several departments in the Ministry of Internal Affairs, the Ministry for Emergency Situations, the Ministry for Taxes and Levies, the Ministry of Labour and Social Protection, the Ministry of Natural Resources and Environmental Protection, the State Committee for Standardization, local authorities, and other monitoring and law enforcement agencies. Although the process is legally regulated, the administrative burden pushes operational costs higher for businesses.

In 2015, some evident coercive pressure on the economy emerged in the form of an increased number of court cases dealing with administrative offenses in the economic sphere. According to the Supreme Court, the number of cases increased from 9792 in 2014 to 13,361 in 2015. Along with that, the major contributors to the coercive pressure on the national economy in 2014 and 2015 were the Ministry of Taxes and Duties—correspondingly 6804 and 9060 cases, the State Customs Committee—466 and 651 cases, the Ministry of Internal Affairs—446 and 415

In addition, there has been a rise in the percentage of cases resulting in administrative penalties to the overall number of cases filed in court: a total of 88% in 2014 and 90% in 2015, including cases related to the Ministry of Taxes and Duties—91 and 92%, the State Control Committee—85 and 88%, the State Customs Committee—47 and 73%, and the Ministry of Internal Affairs—69 and 66%. Only a few appeals were satisfied in whole or in part against the action or inaction of officials and verification of legality. Moreover, the number of appeals has been decreasing since 2013. A total of 102 decisions were challenged in court as appeals against actions of officials of the Ministry of Taxes and Duties in 2013; 12 claims were satisfied in whole or in part. In 2015, the corresponding figures were 78 and 6. Regarding the State Customs Committee, the numbers were 168 and 78

A year-long comparison of the overall quantity of initiated criminal cases related to economic offenses shows a steady increase in the number: 2129 cases in 2012, 2639 in 2013, 2867 in 2014, and 3580 in 2015. The number of administrative cases related to economic offenses has also been growing: 111,421 cases in 2012,

For Belarus, getting out of this trap means decentralizing state regulation of the economy as well as strengthening and promoting independence and material incentives for state institutions to bring in result-oriented professionals. Better information in addition to more openness and transparency are critical, as are keeping

cases, and the State Control Committee—357 and 398 cases.

121,052 in 2013, 121,371 in 2014, and 128,005 in 2015.

1.Meetings

2.Inspections

3.Court cases

in 2013, and 112 and 6 in 2015.
