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Aug 10, 2014 | 11:59 GMT

5 mins read

As Sanctions Hit Russia, Belarus and Kazakhstan Share Potential Economic Risks

Sanctions on Russia Affect Belarus and Kazakhstan
(YURI KADOBNOV/AFP/Getty Images)
Summary

Western sanctions on Russia over the crisis in Ukraine have placed greater pressure on the Russian economy, but Russia is not the only country to be affected. Given Russia's large economic presence in the broader Eurasian region, many countries within the former Soviet Union and Europe have started to see the impact of growing U.S. and EU economic measures against Russia.

Belarus and Kazakhstan, two of the countries most economically integrated with Russia, expect the effects of sanctions to reach their own economies. Both countries have already started to adjust to try to mitigate these effects.

Stratfor has chronicled the impact of greater EU and U.S. sanctions on Russia and their parallel economic effects, including shrinking investment and growing capital flight. But given the size and reach of Russia's economy, which could see zero or even negative growth this year, the effect of sanctions and further economic isolation will be felt beyond Russia's borders. Countries such as Poland, Lithuania and Finland have warned against the negative effect of sanctions on their own economies, while the impact of Russia's own trade restrictions against pro-EU countries such as Ukraine, Moldova and Georgia has already been seen. Two countries that could be particularly affected are Belarus and Kazakhstan. Both are tightly integrated into the Russian economy via the Customs Union and, in 2015, the Eurasian Union. Below is an assessment of their dependence on Russia and the responses both countries are considering.

Belarus

Russia is Belarus' largest export market, accounting for $16.7 billion in 2013, or 45 percent of the country's total exports. Belarus' top exports to Russia are vehicles ($2.5 billion), dairy products ($2.2 billion) and machinery ($1.5 billion). Beyond trade, Belarus is heavily dependent on Russia for its energy supplies; Russia provides nearly all of Belarus' imported crude oil and natural gas. Belarus also depends on Russia for financial assistance via loans from the Russian-dominated Eurasian Economic Community, while Russia's Gazprombank, a target of Western sanctions, has operations in Belarus through its subsidiary Belgazprombank. As a result, a recent International Monetary Fund report ranked Belarus as the country facing the most overall risk because of Russian economic weakening and the effect of Western sanctions.

Custom Union Members

Custom Union Members

Areas that are particularly at risk as a result of a slowdown of the Russian economy are Russia's imports of Belarusian industrial and consumer goods, namely, tractors and agricultural equipment. Machine-building companies such as Minsk Automobile Plant, one of the largest firms in Belarus and a firm with significant exports to Russia, would likely be affected. In some ways, however, Belarus could stand to benefit from Russia's economic isolation. For example, Russia could import more Belarusian dairy products after it banned dairy imports from the United States, the European Union and pro-EU countries such as Ukraine and Moldova. Other areas, such as Belarus' imports of Russian oil and natural gas and the Belarusian ruble, will probably not see immediate effects from the sanctions. But depending on how much Russia's overall economy suffers, this could have a significant impact on Belarus' exports to Russia and therefore on the Belarusian economy itself.

It is not easy for Belarus to diversify its export market beyond Russia. Minsk is itself isolated from the West, with leading Belarusian officials facing EU and U.S. travel bans and asset freezes. However, Belarus has re-evaluated its own trade restrictions on Ukraine. Focused on goods such as beef and dairy products, the restrictions were enacted as a temporary measure in solidarity with Russia. Belarus lifted a ban on the import of potatoes from Ukraine on Aug. 1, and Belarusian President Aleksandr Lukashenko said Aug. 4 that Belarus was ready to supply Ukraine with oil products if needed.

Customs Union Trade

Customs Union Trade

Belarus has also offered to mediate the Ukraine-Russia conflict in an attempt to hedge its own position, to relieve pressure from pro-Western opposition groups and to rebuild small-scale economic cooperation with EU countries such as Lithuania. But Belarus is still strategically aligned with Russia, and the country's economic situation will be directly tied to the performance of Russia's economy, leaving Minsk with significant exposure to Moscow.

Kazakhstan

Kazakhstan is not as dependent on Russia for trade as Belarus, with exports to Russia accounting for only 7 percent of its total exports. Kazakhstan's main exports to Russia are ores ($1.5 billion), mineral fuels ($785 million) and iron and steel ($773 million). Kazakhstan also does not depend on Russia for energy (except in limited regional exchanges), instead producing and exporting its own crude oil and natural gas. However, Kazakhstan is heavily tied into Russia's financial and banking sector. Russian banks such as Sberbank and VTB Bank are investors in large industrial projects in Kazakhstan, and Russia provides 12.6 percent of Kazakhstan's credit market.

Unlike Belarus' ruble, the Kazakh tenge is directly tied to the Russian ruble. A weakening of Russia's currency would therefore directly weaken the tenge, a potentially damaging event given that Kazakhstan already had a 20 percent devaluation of the tenge earlier this year. And although Kazakhstan does not import energy from Russia, 30 percent of Kazakhstan's energy exports transit through Russia, putting Kazakh exports at risk in the extreme event that Russia completely cuts off energy supplies to Europe. Similarly, while Kazakhstan does not export heavily to Russia, a weakening of the Russian economy would still directly affect its economy and the economies of other Central Asian states that depend on both countries.

Kazakhstan has several alternative outlets for its oil exports in the event of energy disruptions in Russia, including through the Baku-Tbilisi-Ceyhan pipeline via the Caspian Sea, via the port of Aktau (currently using only half its annual capacity of 12 million tons) or via the Central Asia or Eastern Siberia-Pacific Ocean pipeline to China. In terms of its exposure to the ruble, Kazakhstan's central bank has pledged to intervene on behalf of the tenge using the country's sizable foreign currency reserves. However, the sustainability of this approach will depend on how much the ruble weakens and how much the Russian economy contracts.

Given that Kazakhstan is not as directly involved or affected by the fighting in Ukraine, Astana is not as politically involved in the Ukraine crisis as Minsk. Kazakhstan's response is instead mostly limited to monetary and financial sectors and its own domestic political restructuring, particularly with the looming succession of longtime leader Nursultan Nazarbayev. Therefore, Kazakhstan will also be significantly affected to the extent that the Russian economy weakens, albeit in very different ways from Belarus.

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