By Andrei Makhovsky

MINSK (Reuters) - Lawmakers loyal to hardline Belarussian President Alexander Lukashenko look set to retain power in an election on Sunday, but the easing of restrictions on opposition candidates could help the ex-Soviet nation further improve ties with the West.

The opposition, which has not been represented in the 110-seat parliament since 1996, is not expected to win any seats, but in a concession to Western calls for greater transparency its contenders have been able to register more easily. External monitors will also be given access to the vote count.

Relations between Minsk and the West have warmed since recession-hit Belarus held a peaceful presidential election last October.

The release of political prisoners and Lukashenko's role in hosting Ukraine-Russia peace talks also eased international criticism of the veteran leader, who the United States once said ran Europe's last dictatorship.

The European Union ended five years of sanctions against Belarus in February, while the United States has relaxed some of its restrictions on Minsk and said the authorities' handling of Sunday's vote will factor into an upcoming sanctions review.

"For the Belarussian authorities, this election is more an issue of foreign than domestic policy," said Denis Melyantsov, senior analyst at the Belarusian Institute for Strategic Studies.

"I think we'll get an absolutely sterile parliament, made up of carefully selected lawmakers," he added.

Lukashenko, who has been in power since 1994, has kept the country in a close strategic alliance with Moscow. However, some cracks appeared in the relationship following Russia's annexation of Crimea from Ukraine in 2014, since when Minsk has made overtures to the West.

An economic crisis in Russia linked to falling energy prices and sanctions has hit neighboring former Soviet countries including Belarus, where the economy shrank 3.9 percent in 2015.

DEMOCRATIC CHANGE

Opposition groups are not planning a mass boycott or protests like those held over previous elections. Instead they have decided to take part in the hope of boosting their support.

"The voice can be stolen, but the support we receive cannot be taken away," the head of opposition group 'Tell the Truth', Andrei Dmitriev, told Reuters.

The West has pushed for democratic change in Belarus but has been shifting its approach to engage rather than isolate, as well as to counter what it sees as a newly aggressive Russia.

The Organization for Security and Cooperation in Europe, which is monitoring Sunday's vote, will present a report on its findings on Monday.

The easing of Western sanctions is necessary for Belarus's plans to improve trade and commercial ties with the EU and lessen its dependence on the crisis-hit Russian market, which currently accounts for 40 percent of Belarussian exports.

Seeking loans from international lenders, including $3 billion from the International Monetary Fund, Belarus has implemented cautious economic reforms such as raising the retirement age and relaxing foreign currency rules.

(Writing by Alessandra Prentice; Editing by Matthias Williams and Helen Popper)