Doing business in Belarus: Beware of hostage-takers

This has heightened tensions far beyond the many disagreements over oil and gas, milk and meat which have erupted between the two countries over the last years. The responsibility for this latest escalation falls squarely on Belarus President Alexander Lukashenko, a.k.a. "Europe’s last dictator."

Potash is effectively Belarus’ only natural resource. In order to market it globally, its state-owned producer Belaruskali and Russian private firm Uralkali formed a cartel in 2005 that controls over two-fifths of world supply and guarantees that prices remain far above market rates.

The resulting revenues represent some 10 percent of export income and 12 percent of the budget of Belarus’ chronically cash-strapped regime. This makes potash Belarus’ third-largest export commodity, after oil products and agricultural produce.

Late last year, Lukashenko decreed that Belarus would pursue potash sales independently, in addition to those pursued through the cartel.

This move was prompted by the loss of lucrative oil product exports, in an effort to compensate for some of the foregone revenues. Effectively, this broke the potash cartel with the Russians, and it was only a matter of time until Uralkali would formally leave the arrangement. It did so in late July 2013, taking with it all major contracts and customer contacts of the joint operation.

World potash prices subsequently plummeted by some 25 percent.

Left with lots of potash and no one to sell it to, Belarus scrambled to find new trade partners. When those efforts came to no avail, it decided to retaliate.

Under the pretext of official talks with Belarusian Prime Minister Mikhail Myasnikovich, Uralkali’s leadership was invited to Minsk.

Immediately after those reportedly fruitless talks last week, Uralkali CEO Vladislav Baumgertner was detained and has since been in the custody of the Belarusian state security, the KGB. He is, plainly, Lukashenko’s hostage.

Needless to say, this unprecedented move has drawn the ire of the Kremlin.

Besides demanding the immediate release of its citizen, Russia has threatened Minsk with a whole lot of sanctions.

Agricultural imports are to be halted, with pork now banned and dairy products likely following. Oil imports will be reduced by a quarter, and a loan of $440 million may not be paid out in autumn as planned.

These and possible other measures, if fully deployed, could drive Belarus to the brink of collapse economically and politically.

But so far, the Belarusian leader has not budged. Instead, he has added insult to injury by initiating criminal proceedings against a key Uralkali shareholder, oligarch and Kremlin protege, Suleyman Kerimov, and by lashing out against Russian leader Vladimir Putin via his propaganda machine.

Whatever rage these humiliations may cause, Russia is unlikely to deal a fatal, or even serious, blow to Lukashenko’s regime, however.

The centerpiece of Putin’s current political agenda is integration in the "Eurasian Union," an ambitious project to restore Russian hegemony in most of the post-Soviet space and to counter Western influence in what it calls its “near abroad."

Key to the success of this project is Ukrainian membership, and the Kremlin is investing considerable energy in preventing Ukraine from moving closer to the EU.

But an open conflict with Belarus, one of the founding members of the Eurasian Union, would also put a spanner in the works.

An so, Moscow has every reason to play down the new dispute and will likely meet Minsk halfway, even if only for the time being.

Whatever its further evolution and perhaps resolution, this conflict bears several important lessons.

First, it clearly indicates how desperate the Lukashenko regime has become. Its coffers are empty at a time when considerable external debt requires repayment and internal pillars of power require investment: an outsized security apparatus, an ever-greedier elite, and a population that expects handouts in exchange for acquiescence to his rule.

New income is hard to come by, as Belarus' unreformed economy produces stocks rather than sales, privatisation has been resolutely rejected, and international lenders shy away from Belarus’ odious ruler.

Lukashenko is cornered, and in response he has decided to go for broke.

Second, Russia is being shown more clearly than ever that its relationship with the Belarusian regime is a strategic dead end - whichever form it takes, whether bilateral, through the defunct State Union, or regional through the Eurasian Union-in-the-making.

Two decades of political support for Lukashenko, and tens of billions of dollars in subsidies have only served to create a ravenous parasite, not a reliable partner.

Even worse, if the Kremlin allows Lukashenko to get away with his gambit, Ukraine’s leader Viktor Yanukovich, Kazakhstan’s Nazarbayev and other autocrats courted by Russia might well start playing the same game.

The big question is whether Russia is willing or able to afford this group of erratic and expensive allies in order to pursue its Eurasian ambitions.

Meanwhile, Europe may also want to draw some conclusions from this conflict.

Appeasement only emboldens dictators, as Europe knows all too well from history.

The latest Belarusian reminder comes at a time when European policy-makers are again considering whether to engage in political dialogue with Lukashenko.

If he is happy to humiliate and anger his primary sponsor, the Kremlin, it should be obvious to Europe that its ideas on getting Minsk into the Eastern Partnership or into a "modernisation" pact for the sake of political reform are doomed to fail.

Instead, the EU should uphold its policy strict political isolation. It should even reinforce it with economic sanctions to put real pressure on the criminal regime in Minsk.

The main counter-argument, that such a policy will only drive Belarus further into Russia’s sphere of influence, has just been proven wrong.

The writer directs the Fund for Belarus Democracy at the German Marshall Fund of the United States, a Berlin-based foundation