Belarusian External Debt: State Gains, People Pay

There are less than three months left until 2013, the year when Belarus will have to pay out $3.1bn of its external debt. Whether the government will manage to handle this challenge is still unclear.

The Belarusian economy has not yet recovered from the last year’s economic crisis. This year’s GDP growth, mostly attained thanks to export of solvents, is slowing down due to Russia's accusations of this business' illegality. The Belarusian rouble continues to fall.

Aware of the insignificant chances of covering the debt with Belarus' own assets, the authorities hope to refinance a considerable part of it. In any case, the Belarusian National Bank has Belarusians i.e. the everlasting source of assets, and a well-tested mechanism for the assets’ attraction i.e. devaluation of Belarusian rouble.

Simple Solutions

For years, low external debt was a peculiarity of the Belarusian economy. Before 2007 it never made up more than $7bn or 27 per cent of the country’s GDP. People mainly ignored economists’ claims that the main reason for the success was cheap Russian energy resources. They continued to live in a dream of Belarusian economic wonder.

In 2007 prices for gas imported from Russia increased two times and trouble started. As the realistic minority of experts had predicted, the country’s trade balance became negative.

By 2008, external debt had almost doubled and continued to grow afterwards. The huge borrowed assets, however, appeared to be insufficient for stabilisation of the Belarusian economy: the National Bank resorted to its citizens’ funds. The Belarusian rouble devaluated by 20 per cent.

Apparently, the government liked both means of solving economic difficulties. What is the point of holding economic reforms and waiting for their long-term dividends? Debts and devaluation work much more easily! Why attract foreign capital? 

After the 2011 economic crisis, Belarus experienced such government preferences in full:  about $34bn of external debt and almost 200 per cent devaluation of the Belarusian rouble. The state stepped over the safe threshold of a 60 per cent ratio between external debt and GDP, as well as over its people’s trust.

Scylla and Charybdis of Debts’ Refinancing

The bad side of external debt is already appearing in front of Belarusian decision-makers. They need payments. With interest. According to a recent statement from the Belarus Minister of Finance Andrei Harkovets, "next year Belarus enters into the period of culmination repayments of its e external debt".

He added that the state is going to refinance half of the debt. Clearly, he did not add that this was because the government did not manage to use the loans properly.

In 2013 the state will have to pay out $3.1bn. Harkovets hopes to get $0.9bn from the Anticrisis Fund of the Eurasian Economic Community and issue Eurobonds once again.  In the current situation, both options are quite alarming. The first is loaded with more dependence on Russia, the second with a heavier debt burden.

Cordial Russian Welcome

In June 2011 Belarus entered into a Loan Agreement with the Eurasian Development Bank, being the Anticrisis Fund’s managing institution. It is now counting on receipt of three resting loan’s instalments of $440m: one in 2012 and two in 2013.

Their transfer is, however, subject to a set of preconditions. Inter alia, the Belarusian authorities have undertaken that in 2012 they will carry out privatisation of state property for up to $2.5bn. Up to now, they have not made any serious attempts to sell state assets.

In the circumstances of noncompliance with its contractual obligations, Belarus hopes that the Anticrisis Fund will support its economy. Actually, that means Belarus counts on Russia. The big eastern neighbour’s share in the Anticrisis Fund’s capital is 75 per cent and it has the same amount of votes in the Fund’s Council.

Whether Russia will provide support to Belarus just because it is Russia's loyal ally is no longer up for question. It will not. The only remaining question is how much of Belarus' independence will live through the consequences of such support.  

Mind the Rates

Eurobonds is an instrument which does not depend directly on third countries’ political will. But raising money through Eurobonds is very expensive. The yearly interest Belarus is to pay under Eurobonds is up to 9 per cent annually, while, e.g., the loans from the International Monetary Fund imply paying at the rate of only 2-4 per cent per year.  

Some bonds with lower interests Belarus will to place within its borders. In the near future, they will become available to Belarusian companies; by the end of the year to individuals. Their supposed interest rate is going to be about 6-7 per cent annually.

So, Belarus will repay cheap International Monetary Fund’s loans with new ones, which are almost two times more expensive. Yet again: this money is not going to boost the Belarusian economy. It is just to cover earlier debts. They will say the people “have eaten this money”. But most Belarusians do not remember any luxury dishes on their tables.

Stuck between the threats of falling into bigger debt and dependence on Russia, Belarus should feel nostalgic about International Monetary Fund’s loans. However, in March 2012 the World Bank’s institution refused to refinance Belarus’ debts. The main reason was lack of economic reforms in the country. Is the opinion biased? Probably not. A prudent creditor would never finance a debtor who makes no use of borrowed money.

In fact, however, the government may still postpone deep worries about the money - it still has a 9.5m population. They cannot and will not say no to a new devaluation. 

Darya Firsava is a Minsk-based lawyer working on her PhD and leading a number of educational projects in Belarus.

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