Belarus: Harsh EU sanctions affecting potash and petroleum products

Event

The EU imposed broad economic sanctions on Belarus after the unlawful forced landing of an intra-EU Ryanair flight in Minsk on 23 May 2021. The sanctions go beyond the ‘symbolic’ sanctions targeting persons and entities responsible for serious violations of human rights or the repression of civil society and democratic opposition (such as assets freeze, a ban on dual-use goods and equipment used for internal repression). Indeed, the EU sanctions include trade and financial sanctions. The EU introduced “trade restrictions concerning petroleum products, potassium chloride ('potash') and goods used for the production or manufacturing of tobacco products”. In addition, the EU imposed “restrictions on access to Union capital markets in relation to the Belarusian Government as well as Belarusian state-owned financial institutions and entities”, “a prohibition on providing insurance and reinsurance to the Belarusian Government and Belarusian public bodies and agencies” and “certain prohibitions on the European Investment Bank in relation to projects in the public sector”.  The move follows the coordinated imposition of sanctions earlier this month by the UK, the US, the EU and Canada.

Impact

The impact of trade sanctions on the Belarusian economy – that prohibited the purchase, import and transfer from Belarus of some petroleum products, potash and goods used for the production or manufacturing of tobacco products – is expected to be large and progressive. The large impact of sanctions on potash and petroleum products is explained by the fact that they represent a large share of Belarusian exports to the EU. Moreover, the sanctions banned EU companies from transporting potash. This means that Belarus will have to find other ports to ship its exports of potash worldwide. According to some reports, Russia does not have enough port capacity to handle Belarusian potash and its own productions. The progressive impact is explained by the fact that contracts concluded before 25 June 2021 can be executed. The restrictions on access to financial markets will further cut an already very limited market access.

In this context, the risks for the Belarusian economy are clearly on the downside. To alleviate the sharp but gradual impact of the trade sanctions, Belarus is likely to rely more and more on its Russian ally. The business environment risk is already classified in the worst category (G/G), hence no modification is expected even if sanctions would dampen the already poor growth perspective. The short-term political risk (in category 5/7) – which reflects the country’s liquidity position – is under pressure but still supported by the backing from Russia.

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com