For many years now, the West has dealt with Belarus in a way that implies that using carrots will eventually eliminate the need for sticks. It is time to abandon this false hope and deal with the reality of a failed dictatorial regime.

By virtue of a treaty which Belarus and Russia signed and ratified in 1999-2000, the two countries should have already laid the foundations of a union state, a confederation with common institutions, currency, and customs. Citizens should have been permitted to freely move, settle, and work in each country. However, when Russia’s Prime Minister Vladimir Putin suggested earlier this month that the unification of Belarus and Russia in a single state is “possible” and “very desirable,” the speaker of Belarus’ Ministry of Foreign Affairs saw no need to comment. Earlier, Belarusian President Lukashenko had said that “Belarus does not want to join either Russia or the EU.”

The idiosyncratic relationship of the two countries is probably best illustrated by their acrimonious rapport in the energy sector. The latest spat, in June, was about electricity while earlier disputes have been related to oil and gas. Beyond that, the quarrel evolved in a familiar fashion: Russia exported energy to Belarus, Belarus was late with payments, Russia threatened to cut supplies and eventually made good on the threat, Belarus eventually paid up, and energy supplies resumed.

The intriguing parts of the latest energy row between Belarus and Russia are in its implications for stability in Belarus and for regional security. Belarus’ economy is exceedingly energy intensive. The country does not have significant indigenous energy resources and about 90 percent of primary energy (mostly oil and gas) is imported from Russia. Russia also supplies about 10 percent of electricity consumed in Belarus. Belarus has used two levers to help settle the Russian energy import bill: fees charged for transit of Russian oil and gas, and tax breaks on oil processed at refineries in Belarus by Russian companies which then re-export the products to more lucrative markets. Negotiated by top government officials and requiring long-term commitments, energy import, transit, processing, re-export, price setting, and tax agreements constitute a tangled web of opacity and hidden risks that break out to the surface with a vengeance.

There is a problem in Belarus that is worse than its dependence on imports of energy. Many countries, including some of Belarus’s neighbors like Finland and Lithuania, are also dependent on energy imports, but do not live in a state of perpetual crisis. The weakest spot of Belarus’ economy is its reliance on markets that are neither competitive nor bringing in convertible currency. Almost 40 percent of exports are to Russia and about 20 percent are to CIS countries, but energy has to be paid in real foreign exchange. Consequently, Belarus is in a state of everlasting financial crisis.

The government itself points out that trade in energy resources and raw materials is the main reason for the trade deficit, which is only partially offset by export of services. Since factor income and transfer payments are also relatively weak. Belarus’ current account is steadily in the red. The usual tools to offset the deficit, such as attracting foreign investment and increased domestic savings, are also weak or unavailable. Private participation in the energy sector has been an anathema. Foreigners tend to avoid Belarus because of the extraordinary political risk and tremendous barriers to private enterprise. Savings are weak for the same reasons. On top of that, the exchange rate is heavily manipulated. The depth of the financial abyss into which Belarus is staring was grotesquely articulated by a top manager of Belenergo, the power monopoly: “We have money but cannot exchange Belarus rubles for currency”.

The most serious problem, however, is not economic, but political. One of the easiest ways to identify a dangerous political crisis in any country is to check whether those who reside in it prefer the money of the land or foreign currency. In Belarus, lines of foreign currency buyers formed in front of banks and money changers’ offices already in the spring, long before the official devaluation of the Belarus ruble by 56 percent on May 24th. World Bank sources noted that the devaluation was the steepest one observed anywhere on the planet during the last twenty years, worse than Belarus’ own earlier record (37 percent) dating back to 1999. Still, there are few forex sellers. Shops have been raided for anything durable, with expensive household items such as TVs and refrigerators flying off the shelves first, soon followed by anything that would not rot: salt, matches, wine and spirits, and so on. In anticipation of inflation, motorists hoarded up gas. Finally, anything – food, clothing – was purchased and stocked en masse, in an attempt to get rid of the ever worthless Belarus rubles, aka “zaychik” (hare). Run, rabbit. A banner hanging from a bridge asked: “Sasha, where’s the money?”

Already in 2006, Lukashenko’s oppressive regime was sanctioned by the United States and the EU for fraudulent elections, persecution of opposition activists, and other human rights violations. Recent financial turmoil changed nothing in Lukashenko’s policies. Anyone thought to be protesting in any imaginable way, including just standing in the street near the so-called “silent protests”, could be napped by plain-cloth riot police that would not identify themselves, explain the reason for the detention, or bother to read any rights. Protesters who clapped hands or stomped their feet got 15 days in jail.

The energy disputes with Russia are steadily eroding the one economic prop that Lukashenko’s regime still has, the financial support extended by Moscow in return for greater control over Belarus’ energy sector. Helping Lukashenko stay in power by extending breaks on energy could arguably be justified from Russia’s viewpoint, as long as he was willing to pretend that a union state is in the making. Today, only 3 percent of Belarus’ citizens support the idea. Moreover, major energy projects with Russian participation in Belarus, such as the proposed nuclear power plant near the border with Lithuania, are likely to push the country further down the financial hole and also cause a wave of protests in the country’s Baltic neighbors.

Most scenarios of Belarus’ immediate future are bleak. A few financial lifelines have been thrown in by an implausible cast of creditors ranging from the IMF to the Russian government to the anti-crisis fund of Eurasian Economic Community. And yet Belarus needs at least $9 billion from the IMF to barely stay afloat in 2011. An IMF mission visited Minsk to assess the government’s economic policies and look at reforms that could justify a new bailout, just two years after a similar one.

This is not what Belarus needs. It is better to listen to the citizens of the country rather than continue offering financial aid to Europe’s last dictator. The powers that be in Belarus have failed thoroughly – politically, economically, financially, in the energy sector – in the polity at large. Propping up the untenable can only lead to worse consequences as Belarus spirals down the hole.

Dr. Boyko Nitzov is Director of Programs for the Dinu Patriciu Eurasia Center at the Atlantic Council.