Russian Loans for Belarus: Postponing The Transition
On 28 July Belarus received a long-awaited loan from the Russian government worth $760 million. This was just in time to transfer the funds to the pockets of other borrowers - on the same day Belarus was due to pay $1 billion to the 5-years Eurobonds’ holders.
However, initially, it aimed at the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development (EABR). Thanks to this shift the international reserves has not changed that much recently and forced no panic on the currency market.
This year Minsk faces a peak of foreign debt payments of over $4 billion. A big piece of this debt Belarus owes to Russia. On the other hand, the international reserves of the Belarusian National Bank holds reserves of only $4.7 billion. Without additional resources Belarus could experience a significant currency depreciation in the short run, and stagnation in the long run unless the state launches economic reforms.
Urgent Credits From Russia On Preferential Terms
On 25 December 2014, Putin and Lukashenka agreed that Russia will provide Belarus with up to $2 billion in additional loans in 2014 to counteract the economic slowdown. The next day the Russian government approved the allocation of a $450 million loan for 10 years with a 4% interest rate, which is less than a half compared to average market rates for Belarusian Eurobonds. The resources quickly reached Minsk. However, that was only the beginning of the Kremlin's generosity.
In 2015 the government has already received two loans on very favourable conditions to refinance Belarusian payments to Russia. Earlier this year, Belarus collected $110 million to repay the interest on the Russian loan issued in 2010. Recently, at the end of July, the Russian government provided another $760 million. Both loans mature in 10 years and their first instalments are to be paid in 2019. Their interest rate is floating on the market, and currently amounts to slightly over 1.5%.
On the other hand, the loans hardly satisfy the needs of the authorities, since the economic situation deteriorates in unexpected ways. In January-July 2015 the economy plunged by 4%, resulting in the first recession since 1997. Hence, in July Belarus asked Russia for a new loan of $3 billion, particularly the EABR in return for promises of structural reforms in the coming years. Since Russia holds the predominant share in the organisation, the decision remains with the Russian government.
Commercial Loans On Market Conditions
Russian state-owned banks also directly support the Belarusian economy by offering commercial loans. In general, this scheme is more expensive but the government uses it in case of emergency, especially when Moscow holds back decisions on new financing. For instance, at the end of last month the biggest Russian bank, Sberbank, gave a €550 million loan to the biggest Belarusian enterprise, Belaruskali, for five years. Eventually, the resources arrived in the central bank’s international reserves.
In 2011 Belaruskali also received $1 billion from Sberbank, although on truly market conditions. The bank granted the one-year loan under dual warranty – the guarantee of the Belarusian government and the guarantee of a 51 percent shares in the Naftan refinery. The interest rate amounted to around 8.7%, more than the average economic growth of Belarus. Nevertheless, the authorities hardly had a choice because of serious economic problems.
Moreover, in December 2010 Belarus placed government bonds denominated in Russian rubles on the Russian financial market. It placed two-years bonds worth of $225 million. Two Russian state-owned banks, the Sberbank and Gazprombank, helped with the bond issuance. Though, the interest rate at 8.7% was very high again.
History Of Indebtedness
All in all the Belarusian authorities borrowed from Russia over $12 billion for state purpose since 2007, more than $1.3 billion or 2% of GDP on average per year (see the table). That includes many intergovernmental loans, credits from the Eurasian Economic Community in 2011-2013, resources from Sberbank and the Russian stock exchange. However, Belarus borrowed even more due to business credits for enterprises, and last but not least the huge credit for the nuclear plant.
In 2014 Russia offered Belarus a state credit line of up to $10 billion to build the nuclear plant by 2020. But, in fact, that is an export credit facilitating Russian companies, since the resources may cover only the supply of goods, works and services from the Russian authorised organisation. Hence, Moscow eliminated the possibility of spending the credit to create economic stabilisation.
Big Brother Always Helps
Belarus faces a challenging economic situation prior to the presidential elections in October. In order to avoid the financial turmoil just after the election it needs more loans, especially cheap ones. Only the Russian government can privilege Belarus in this way with low interest rate loans which are spread over a long period of time.
Furthermore, since the Russian government lends in Russian rubles, for Belarus it will be cheaper to pay them back due to the depreciation of the Russian ruble.
The ineffective quasi-socialist economic system survived in Belarus for over 20 years largely thanks to the financial support from Russia. In the long run, however, Belarus should start transition and pursue structural reforms, particularly when Russia itself experiences economic decline. Otherwise, the external debt stock will keep on growing, forcing Belarus to take a new loan to pay back the previous one. Eventually this will bring the economy to collapse.
Until now, in the most urgent situations Russia has always supported Belarus with quite beneficial aid. Sometimes it required some steps in return, real ones or at least political promises from Lukashenka. But Russia has never abandoned its partner, perhaps the last permanent ally of Russia. Currently Minsk hopes for another $3 billion from the Eurasian Fund for Stabilisation and Development. Sooner or later Minsk will get it.