The currency exchange crisis persists in Belarus while the government is looking for ways to tackle it at a minimal political cost. Russia has declined to grant Belarus the much awaited loan of 1 bn. USD.

The last hope is a loan from Stabilizing Fund of the Eurasian Economic Community, where Russia has a decisive voice. And Russia almost literary declared – if you want financial support, you need to start selling your state-owned enterprises. If Belarus agrees on Russia’s conditions it will receive a 1.2 bn USD loan from the Eurasian Economic Community this year. But it will hardly save the agonizing economy, even if the amount of the loan were to be much higher.

The exchange market was stuck waiting for foreign currency and a currency devaluation for about two months, while the government was waiting on Russian loans. Only at the beginning of May, when Russia's Finance Minister Kudrin announced that no loan could be expected directly from the Russian budget, the National Bank devaluated the Belarusian ruble by 30%. On May 24th it devaluated ruble by another 30%, but the situation on the market remains bad – no one is eager to sell foreign currency at the official exchange rate.  Already in April the devaluation had reached 100% on the black market as well as the interbank market in comparison to the official rate. The inability of the government to pull Belarus out of an economic crisis provoked the introduction of a multiplicity of currency exchange rates, which had already previously been observed in Belarus in late 1990s.

The recent official devaluation of the Belarusian ruble was too late to improve the situation of the foreign exchange market. After two months of uncertainty with currency restrictions, and with the resulting black market speculation, a Pandora's box of devulation and inflation forces had already spread throughout the economy. Trust in the government and the banking system are decreasing at the same speed that prices on most products are increasing.

According to the National Bank of Belarus during March alone Belarusians bought $768m USD, while throughout the whole of last year it was only $1.5bn USD. The restrictions on the exchange market did slightly slow down the outflow of foreign currency reserves in March and April, but this led to more negative outcomes for the economy.

The lack of trust in the official exchange rate and deficit of foreign currency made importers increase the prices on their goods according to the “market” (in fact, black market) exchange rate, which was 50% (and even 100%) higher than the official one before the devaluation. As a result, prices for all imports had immediately soared, which boosted an increase in inflation. In only the first four months did the rate of inflation reach 10.9%. Deputy of Minister of Economy Andrey Tur has already confessed that inflation could reach about 39% at the end of the year.

The first signs of an increase in unemployment showed up too. Many companies dependent on imports were forced to suspend their activity and fire employees.The Minister of Statistics and Analysis has already announced that about 600 thousand people lost their jobs. But the actual number is probably much higher. 

The National Bank, unable to make decisions independently from the Presidential Administration, turned into an experimental lab of not particularly competent bureaucrats. Despite banning itself from any decisions in April the National Bank increased the refinancing rate four times during the last two month period – to 16%. This measure is supposed to stop at least the bank run – the increase of the refinancing rate subsequently leads to an increase in the rate on ruble deposits. But with generally low confidence in the Belarusian currency, it seems to be quite a useless measure.

But most of the  “entertainment”  in recent months was reserved for the commercial banks. At the end of March the National Bank set free the exchange rate for interbank operations. But when the exchange rate increased to more than BYR5000 for $1 USD (with the official rate 3048 BYR/USD) for interbank operations, the unofficial recommendation from National Bank came not to increase the exchange rate more than 4500 BYR/USD. In turn, it paralyzed the whole interbank sector for a few weeks. However, the second devaluation to 4970 BYR/USD failed to revive the interbank market, as the government still prevented commercial banks from increasing the exchange rate higher than 2% from the official one. 

The recent devaluation did not change much in the economy – it is still impossible to buy foreign currency for ordinary people. Commercial banks can buy currency only on the stock exchange market – the National Bank refused to sell its foreign reserves. And the present “free” (officially devaluated) exchange rate of 4970 BYR/USD is still far from an equilibrium. Belarus' ruble will devaluate further (and create an increase in inflation) if no adequate steps are undertaken in the next few months. The economic tools at the disposal of Belarusian government is highly limited – it consists of either external loans or printing money. And today such tools can bring about only negative results.  

What can be observed in Belarus' economy now resembles the breakdown of Soviet economic and political system. More and more the situation in the country reminds one of those wild 1990s with queues, deficits of goods, inflation and unemployment. From the Soviet Union Belarus inherited the nature of its extensive economy, when only a mass influx of resources enabled economic growth. In the case of Belarus it was the financial and natural resources received from Russia, which were then redistributed among state-owned companies through the state budget or commercial banks. This type of economy is unable to regenerate and create sustainable returns on investments.

The disintegration of the economic system will subsequently undermine the present political regime. However, it is hard to predict how soon it will happen. The only thing that is obvious – the price of political and economic transformation, skipped by Belarusians in 1990s, is going to be high. 

Volha Dudko