Page 58 - Eastern Europe Outlook 2020

1.0 ​Politics Outlook
Belarus’ economy slowed sharply in 2019 due to uncertainties introduced by Russia’s decision to change the way it taxes oil ​and in effect end its energy subsidies to Minsk in a move that will cost the budget an estimated $2.5bn or 4% of GDP over the next five years.
Belarus and Russia were negotiating a new Union State agreement that will bring their two countries closer together into a single market that mimics the EU.
But the details were proving hard to agree on. Russia in effect ended its energy subsidies to Belarus and President Alexander Lukashenko was holding out for compensation as his neo-Soviet economic model, where the state remains the main player in the economy but offers the population the cradle to the grave care of communism, doesn't work without Russia’s subsidies.
As the year closed it remained unclear what the outcome would be. Minsk’s oil and gas contract with Russia expired on December 31, 2019 and the terms of the new contract – vital to Belarus’ budget – had yet to be agreed. ​The year got off to a dramatic start after Moscow and Minsk agreed on a new oil supply deal after Russia cut off oil supplies to Belarus for a week.
The row with Russia over energy caught the headlines but the bigger problem the country faces is the demographic trends and a government effort to boost technological industries and increase diversification.
The ageing population and a projected smooth decrease in the labour force will clearly not be growth-supportive, although demographics in Belarus are no worse than in Russia and Ukraine, or fast-growing Armenia and Georgia, and could actually justify circa 3% y/y medium-term growth. The natural decrease in the population could be partially compensated by migration inflows, which covered one-third of the natural decrease last year.
Finally 2020 is overshadowed by the presidential election in 2021 that will begin to make itself felt as the year wears on. Lukashenko has already said he will stand – and there is little doubt that he will win.
2.0 ​Macro Economy
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