Belarus Economy: More Stable But Still Fragile
International agency Standard&Poors in April increased Belarus' credit rating from B- (negative) to B (stable). The agency i observed the signs of financial stabilisation in Belarus economy. Although inflation is still very high, it began to slow down, the pressure on devaluation of Belarus ruble decreased and foreign reserves increased.
Just in September 2011 Standard&Poors reduced Belarus sovereign rating from B to B- due to its foreign currency crisis which started in March of that year. Even though the stabilisation measures were undertaken in Belarus' economy, the question remains – for how long will the stability last and what factors can undermine it?
At the end of February Belarus was supposed to receive the third tranche of the loan ($440m) from the Eurasian Anti-Crisis Fund, but it did not come. The fund management explained that it wants to be sure that Belarus continues to implement tight monetary policy and finally starts the process of privatisation.
According to the terms of the loan agreement, approved in June 2011, Belarus has to cut monetary financing of state programmes to a maximum 4% of its GDP. The government had actually cut the financing of these programmes, but it is still at a level of above 4.5% of GDP, as seen in the statistics for 2011. And the Fund’s representative states that it is still too high an indicator. Another condition – the privatisation of state property has not even started. Belarus has to privatise state enterprises to an amount that will total of $2.5bn this year.
The concerns of the Eurasian fund leadership about the macroeconomic stability of Belarus' economy are justified. The Belarusian government has again started to mention a monthly salary increase target of $500. This is a minimum level which has to be reached this year. It is not an entirely unexpected rhetoric before parliamentary elections which are to be held in September later this year. The trend in salary increases over the past 17 years indicates that substantial increase occurs mainly before important political events (elections or referendums).
$500 average salary reached by monetary measures (money printing) before presidential elections at the end of 2010 became a trigger for the foreign currency crisis which started in March 2011 Read more
The $500 average salary reached by monetary measures (money printing) before presidential elections at the end of 2010 became a trigger for the foreign currency crisis which started in March 2011. It led to the threefold devaluation of Belarusian ruble and hyperinflation that reached 108.7% at the end of 2011. It eventually resulted in a decrease of the average salary to only $250.
Factors of Stabilisation
But since then the Belarusian government has been able to stabilise the economy to some extent. The sale of the last part of the gas transportation company Beltransgaz to Gazprom in December 2011 brought Belarus another $2.5bn and more advantageous prices for gas. In 2011 Belarus paid $265 per 1000 m3 of gas, but in 2012 the average price will be only $165.6. Thanks to this deal its rather poor foreign currency reserves increased from $4.631m (in November 2011) to $7.355.1m (in December 2011). At the moment the total foreign currency reserves consist of $8.085m (April 2012). This gives the government the opportunity to intervene on the foreign currency market and regulate the exchange rate if necessary.
Another positive impact on Belarus' economy was its increase in export of oil products during 2011. As a part of Common Economic Area and Custom Union from 2011 Belarus government was able to negotiate duty free supply of crude oil to Belarusian refineries. According to trade statistics Belarusian exports increased by 62.6% in 2011 and amounted to $41.1bn. In January – February 2012 Belarus was even able to reach a trade surplus to the amount of $838.6m.
Two thirds of the export is generated by oil products, and it increased by 39.2% to 15.6m tons in 2011. From this 12.3m tons were sold to the European Union. The trade surplus with European countries was $6.5m. Exports in this direction in general increased from 29% in 2010 to 38.5% from 2011. At the time when diplomatic relations with European Union are on the worst possible level since Belarus' independence, trade statistics indicate that it remains one of the main economic partners for Belarus and export market for Belarusian oil products.
A positive trend can be observed and with Belarusian ruble which stabilised and even appreciated in March this year. Stabilisation of its exchange rate came as a result of tight monetary policy and very high refinancing rates – at the end of 2011 it was 45%. That was a necessary measure to cope with inflation, but it has obviously paralysed the lending market as commercial banks derive their interest rates from the refinancing rate set up by National Bank.
the stability of exchange rate will not last long if the government continues to stimulate economic growth by monetary measures Read more
But the stability of exchange rate will not last long if the government continues to stimulate economic growth by monetary measures. In a few months the seeding period in agriculture will begin and it is at this time when Belarus government usually infuses money into this sector through preferential loans. As a result, the money supply increases and creates pressure on the Belarusian ruble's devaluation and leads to an increase in inflation.
Beginning in February the government began to decrease the refinancing rate – first to 43%, then to 38% (in March) and to 36% (in April). It should be reduced to 19-20% till the end of the year. In a competitive and efficient economic system the refinancing rate normally should not be higher than 10%. But in Belarus any achieved macroeconomic stability is not accompanied by the necessary reforms to increase the competitiveness of the economy.
In this case the risk of the Belarusian ruble's devaluation and high inflation still remains. The Belarusian government plans to reach 5-5.5% GDP growth this year and maintain inflation at 19-22%. But according to IMF and World Bank experts these results can hardly be reached. In its recent analysis of Belarus' economy, the World Bank forecasted 38% inflation to the end of the year and a GDP growth of not more than 4.5%.
Loans Only for Reforms
The present stability of Belarus' economy has been achieved mainly by foreign borrowing, lower energy prices and positive trends in oil exports. Instead of implementing real reforms Belarus' government continues to seek external financing. The foreign debt has already reached $34bn, or 62% of the GPD. It increased by 19.8% from last year. This year Belarus has to pay off $1.2bn in interest for external debts and another $3bn of its other main external debt – which comes is amount that is half of its current foreign currency reserves.
The IMF will not start any new programs with Belarus' government before considerable steps in reforming the present economic system are be made Read more
The head of National Bank of Belarus Nadezhda Ermakova has already announced that Belarus would apply again to the IMF for another stabilisation loan. But it is very unlikely that the fund would agree for another program with Belarus. The official representative Natalia Kolyadina left Belarus at the beginning of April. She noted that IMF will not start any new programs with Belarus' government before the considerable steps in reforming the present economic system are be made. The presence of political prisoners and rather tight diplomatic relations with the European Union is also a serious obstacle for another IMF stand-by loan.
The rather fragile stability of Belarus' economy can be easily undermined if the government attempts to reach high economic growth with monetary tools instead of reforms. If this happens, Belarus can fall even into an even more severe crisis, one from which it would be even harder to get out of. The recent delay of the third tranche of loans from the Eurasian fund only indicates that even Russia is also no longer eager to support Belarus' economy in the absence of real reforms.
Are There Any Oligarchs in Belarus?
On Monday, Switzerland joined the EU sanctions against Belarusian citizens and firms believed to support dictatorship. Most of these firms belong to Vladimir Peftiev. Belarusian and international media often portray him as having a significant role in the regime. That prompted the EU to punish him and some other businessmen for their support of Lukashenka. However, the significance and influence of the so called Belarusian "oligarchs" should not be exaggerated.
While in Russia and Ukraine oligarchs form a clique of business moguls which could seriously influence the government, Belarusian "oligarchs" are much poorer and have hardly any clout in national politics. In reality they are just replaceable managers rather than stakeholders of the Belarusian regime.
The Belarusian ruler brings them to the top, then puts in prisons, forgives them and uses them again as he deems proper. Their function is to run profitable firms and take care of whatever the regime permits them to do.
“Oligarchs”: Real or Fake?
Three of the "oligarchs" became prominent as being the most important for the regime – Uladzimir Peftiev, Yury Czyzh and Alexander Shakucin. Andrzej Poczobut of Polish Gazeta Wyborcza called Peftiev “doubtless No.1”. Independent Belarusian media estimated his property at about $1bn. Although the basis for such estimate is unclear they nicknamed him “Lukashenka's purse”.
Lukashenka inherited Peftiev with his lucrative military export business from previous Belarusian leader Vyachaslau Kebich Read more
Media can easily assign Peftiev the role of the main villain because he worked in arms trade. Lukashenka inherited Peftiev with his lucrative military export business from previous Belarusian leader Vyachaslau Kebich. Peftiev is also doing business with both sons of the current ruler. In addition to arms trade, he has interests in alcohol production, the lottery and various branches in construction.
He has probably the most international interests among all Belarusian “oligarchs” as his firms own property and operate abroad, in Malta, Austria, the UAE and India, according to Internet daily Ezhednevnik. Peftiev himself prefers to spend most of his time on Malta rather then residing in Belarus. When in July 2011 the EU put on a travel ban list, Lukashenka publicly swore that he had seen Peftiev “not more than three times” and had not taken money from him.
Other “oligarchs” are by far much poorer. The 48-years old Yury Chyzh frequently appears along Lukashenka at public events. Chyzh owns the Triple Corporation which is famous in Belarus for its soft drinks. He also has extensive business interests in construction as well as Russian oil imports, reprocessing and exports. Thus, Slovenia vetoed putting a travel ban on Czyzh as a Slovenian firm is now building together with Chyzh a Kempinski Hotel in Minsk. The other international interests of Czyzh also include biofuel production in Lithuania and Latvia.
The wealth and the role of third “key oligarch” 52-years old Alexander Shakutin is very questionable Read more
The wealth and the role of third “key oligarch” 52-years old Alexander Shakutin is very questionable. He chairs the board of directors for Amkodor – a corporation which works in road construction, cleaning and forestry machinery. He is also one of Amkador's shareholders.
But his role in Amkodor probably is probably just a formal position because the firm effectively belongs to a Nepalese businessman. Trained as a physician, Shakutin worked in health system and had his own medical equipment business. Then, his old Nepalese fellow student from the Minsk Medical Institute brought Shakutin into the management of Amkodor in early 2000s to consolidate his control over the firm. The logic of Shakutin's companion is clear: even today the Belarusian state does not like too many foreign faces in directorial positions.
Shakutin has the prestigious yet completely unimportant regalia of being a member of the higher chamber of the Parliament. That chamber is even weaker than the lower one which has no power whatsoever. He also has a position on the board of one of the pro-Lukashenka movements called Belaya Rus. This movement has absolutely no function in current Belarusian politics.
Being a Businessman in Belarus is a Dangerous Job
Other “oligarchs” own relatively big businesses by Belarusian standards but can hardly be called accomplices of the dictator. None of them has guarantees of their personal security or security of their businesses. Last autumn, the KGB arrested Viktar Shaucou, a big businessman with interests in banking and construction.
Shaucou was charged with committing financial offences in construction projects undertaken by his firm in Venezuela. Since 1990s, he actively supported Belarusian foreign policy aimed at establishing links with developing countries which involved sometimes rather sensitive deals. His Trustbank – back then called Infobank – worked with Saddam's Iraq and has been on a list of the United States' sanctions because of these dealings.
Imprisonment is an occupational hazard of all Belarusian big businessmen Read more
Imprisonment is an occupational hazard of all Belarusian big businessmen, officials and directors of huge state factories under Lukashenka. In 2007, the KGB arrested Alyaksandar Barouski, director of the state conglomerate Belnaftakhim, for financial irregularities in oil industry – reprocessing imported Russian oil for Western markets. In 2008, Barouski was found guilty and got 5 years of imprisonment. Lukashenka pardoned him nine month later and in 2009 appointed him as general director of one of the largest Belarusian state owned enterprises – Minsk Automobile Works (MAZ).
Shareholders of the Regime
The director of the Belarusian Institute of Strategic Studies Alaksiej Pikulik once described Belarusian regime as a kind of joint-stock company. Its shareholders support Lukashenka and get their dividends for it. But, “there is no tradition of promising shareholders freedom and independence instead of dividends.” And “oligarchs” are just bigger but are far from being controlling shareholders of the regime.
Of course, they run some business enterprises both for their own profits and on behalf of the regime. That is the model of state capitalism. It emerges with the fusion of the political regime and business, though the state remains the dominant party and allows the oligarchs to take only so much. At the same time, the state redirects some of the profits gained to economic development of the country as a whole.
Belarusian officials like to refer to authoritarian regimes of South-East Asia like Singapore or Malaysia which have had such models for decades. But they could also look at Putin's Russia and Nazarbayev's Kazakhstan where this kind of relationship between government and business has been successfully implemented quite recently.
Under such circumstances, the role of even the biggest businessman is insignificant. Former Russian economy minister Evgenii Yasin recently expressed it eloquently, “Belarus you have one oligarch – Lukashenka. And he runs everything. Well, some people [“oligarchs"] emerge to whom he can give an order: hear, invest there and there. That is it!”
All Belarusian "oligarchs" are just managers which can be replaced and stripped of their property at any moment Read more
Actually, it could not be otherwise. There is no real private property in the country. There are no functioning legal norms or courts which would allow you to protect private property of any significance without approval of the regime. Both rich and poor are equal in this regard. All Belarusian "oligarchs" are just managers which can be replaced and stripped of their property at any moment.
That means that sanctions against “oligarchs” are a nice gesture but their implications are doubtful. They do not threaten the foundations of the regime. Rather, they support and cement the current situation when big businessmen are just servants of the regime with no escape. Moreover, as example of Shakutin shows the list of biggest the “oligarchs” may contain significant mistakes. The sanctions against oligarchs only pay lip service to democracy or human rights without actually promoting them.