Chernobyl-Style Economic Policy of Belarus
The reaction of Belarus' President resembles the Soviet Union’s approach to the Chernobyl accident. At his press conference last Friday he repeated the old mantra: “No crash happened, we have everything under control, do not listen to foreign propaganda, no reason to worry…”
In fact, there is a lot to worry about: an economic meltdown is in full progress. A large number of trading companies, whose business was based on imported goods, are suspending their operations. Factories, which rely on imported components for their production, are running out of material to continue their production. The result is an exploding unemployment rate. Even Belstat, otherwise overoptimistic and very questionable in their data, admitted one month ago that due to the crises about 600 000 people already lost their jobs.
The hot phase of the crisis in Belarus started in mid-March 2011. The Central Bank of Belarus could no longer supply new amounts of foreign currency to the money market. This affected all spheres of the economy and left the country in a desperate situation.
Belarus kept from Soviet times the old system of fixed foreign exchange rates. The foreign loans have been used to supplement the deficit in foreign currency which was caused by an enormous trade deficit all the while keeping the financial system more or less stable. Over recent years Belarus got used to a steady inflow of foreign currency mainly through foreign loans (Russia, IMF, Eurobonds). They used this money in two ways. First, to provide foreign currency to the domestic money market and maintain an exchange rate set up by the government. Second, it helped the government to fill holes in the state budget.
The price of such economic strategy was very high. According to official data of Belstat (National Statistic Agency of Belarus) the gross external debt rose to 87% of the GDP (as per June 1st 2011 calculated on the official exchange rate). Taking in account that the Belarusian rouble is still overvalued the real external debt should be around 140% of the GDP. These are alarming figures as the method of taking new loans is still the main issue of Belarusian financial policy.
A steep hike in salaries in the state sector, which accounts for about 85% of the GDP before the elections in December 2010. Printing additional money and maintaining a unrealistic exchange rate of 1$= 3 000 BYR proved that the president kept his pre-election promise of an average salary of 500 US$. Unfortunately, this promise lasted only until mid-March.
Suddenly foreign currency completely disappeared from the market. Reluctance of foreign lenders and dramatic reduction in Russian subsidies through cheap energy lead to devastating results. Companies, which urgently needed to buy goods abroad, either for trading or for production purposes, could in the past buy foreign currency only on the so-called inter-bank market where exchange rates were about 30-40% higher than the official rate.
But this possibility was also closed very quickly when the Central Bank recommended (in fact, ordered) commercial banks to sell their foreign currency not at a higher rate but at the official rate of 1US$= 5000 BYR. The commercial banks showed no enthusiasm and refused to sell cheap their valuable foreign currency assets received from exporters or deposits of citizens. Businesses were also cut off and now there is no way for them to buy hard currency at all. Certain dubious ways to buy hard currency remain. These methods, however, are illegal and no executive in a company wants to risk his freedom for that.
The economic situation today
The only remaining market, which works in Belarus, is the black market. This market developed over the last three months as a reminder of the old Soviet times. The rate on that market is about 1US$= 6000-6300 BYR. But this rate is meaningless because it reflects only the money circulating in the pockets of individuals who are not afraid to expose themselves in illegal currency operations.
The demands of Russia and the IMF to let the Belarusian rouble flow and to let the money market fix a rate have so far been ignored. The exchange rate of about 1US$=8000-9000 BYR would be a serious slap in the face. After all, the regimes’ political mantra has been economic and political stability. This stability is a thing of the past. For example, the author of this post learned from a Belarusian tax inspector that her net income in April 2011 was 850 000 BYR. Applying the above-mentioned real rate this is just about 100 US$ or 70€. Of course, the government cannot admit such a grim reality. It would confirm that the incomes of his citizens has reached the level of Zimbabwe.
The countermeasures initiated by the government reflect the Soviet style mentality of the political establishment. New market bans and restrictions only confirm the helplessness to cope with the real problems.
New large loans, to which the government was used to in recent years, are not in sight. The unwillingness to follow recommendations of the Russians and the IMF to initiate structural reforms put in question also the „small credit“ promised by EurASEC. It looks suspicious that the loan promised two weeks ago in Kyiv has not arrived to Minsk yet. Perhaps that loan was promised under certain preconditions, which have not been met yet by the Belarusian side. It is also doubtful that the IMF, not taking in account political odds, will give money before seeing any substantial change in the Belarus. Borrowing money on the international money markets is only possible at very high interest rates, since international rating agencies downgraded Belarus bonds to junk status.
How to fix it
The only solution to receive large amounts of hard currency for the time being is to sell state assets. This is also difficult because the other side (evidently Russia) can play on time and squeeze the price to a desired level. Russia is not pressed to buy anything, but Belarus desperately needs to sell. Lukashenka is really not willing to sell therefore he requests high prices and imposes additional conditions which no buyer can accept.
What will happen next? Lukashenka will continue Chernobyl-style policy to let the things go as they go without offering a real solution. So far he needs not to fear the pressure of voters, opposition, unions or other potential opponents to his policy. Repressions against these groups have worked very well thus far. However, pressure from the street will grow as well repressive actions by the state.
The final showdown is difficult to predict. If the discontent of the citizens goes beyond a critical point there will be not 3 000 as on June 15th but 500 000 people on the streets of Minsk. No security force will be able to confine such a force easily. This can result in a chain reaction where all options will be open.
Oiling the Unrest in Belarus
Two months ago Alyaksandr Lukashenka ordered to find more oil deposits in Belarus. He was visibly upset that his country did not have enough of its own oil and had to depend on Russia. After all, oil revenues help many authoritarian regimes to stay afloat for decades. So far Belarusian geologists failed to discover new oil deposits in Belarus. Oil imports from Russia become increasingly expensive.
For over a decade, refining cheap Russian oil and selling oil products to the West has been a cornerstone of the Belarusian economy. Now Belarus has to share a large part of its oil profits with Russia. Still, exporting oil products remains a lucrative business. With budget revenues dwindling the authorities are trying to seal Belarus Western borders to impose a state monopoly on reselling oil products to the West. These export restrictions and increased gasoline prices make many Belarusians angry.
Last week hundreds of cars blocked the center of Minsk. Motorists were demanding lower gasoline prices. Although the authorities subsequently imposed fines on the most active protesters, Lukashenka backed down on the next day and ordered to lower gasoline prices. The protesters enjoyed wide support of the public who helped to raise several kilograms of Belarusian money to pay the fines.
A few days later, gasoline-related protests erupted in other parts of the country. New restrictions on gasoline exports by shuttle traders caused the protests. It is no longer possible to frequently travel abroad with a full tank of gasoline. Angered by that, shuttle traders blocked the border crossing on the Polish-Belarusian border near Hrodna for several hours. Police had to disperse the crowd using tear gas. They also detained over a dozen of protesters and sentenced them to large fines. The authorities also deprived fifteen protesters of the right to travel abroad for a year. Most of those people were shuttle traders who made their living by cross-border trade.
A similar accident occurred not far from Brest at the Varshauski Most border crossing. Around 100 people gathered at the Belarus-Poland border and demanded to cancel quotas on gasoline exports. There police did not have to use force and the protesters left after talking to the head of the administration of the Brest region.
There is more illicit cross-border gasoline trade. The state news agency Belta reported that a hand-made pipeline was constructed underground to link Belarus with an unnamed neighboring Baltic state. Belarusian smugglers pumped oil products through that pipeline. Belarusian KGB vowed to punish the smugglers and currently investigates the pipeline construction.
The government is also tightening export restrictions on other goods. Heavily subsidized state enterprises often produce cheaper goods compared to foreign equivalents. Consumers in other countries like it. In the past, when economic subsidies from Russia were more generous it was not a big deal. But today the government completely banned exports of pastas, refrigerators, gas stoves, cement and other goods. These measures puzzle analysts because while Belarus can control exports to the European Union and Ukraine, the border with Russia remains open. This is where most of Belarusian goods, besides oil products, end up going.
Sviatlana Kalinkina observed in Narodnaya Volya that Belarusians were buying in Lithuania all they could: cheese, coffee, washing powder, butter, construction materials. The Lithuanians are happy to see the surging demand for what they sell and offer Belarusians discount cards. Belarus, on the contrary, imposed harsh export restrictions on nearly everything it produces.
This shows how unhealthy the Belarusian economy is. It will take more than reduction of gasoline prices to cure the economy and appease Belarusians.