New Policies on Deposits, Waiting for Foreign Money – Digest of Belarus Economy
On 20 November 2015 Belstat, the official statistical body, released the updated macro-economic statistics. Disappointing figures on exports and manufacturing suggest that the economic downturn in Belarus continues.
However, on 11 November 2015 the National Bank of Belarus announced reforms on the deposit market. The bank tries to replenish the deposit’s term structure hoping that it can boost cheap investment in the economy.
Meanwhile, rising debt among individual companies raises the question of how much worse things can get. Loss-making state-owned enterprises dragged down by overdue debts are hoping that a good order can guarantee them potential further credit.
Economic Depression: Approaching the Bottom
According to Belstat by November 2015 GDP had dropped by 3.9 per cent year-on-year. The economy has lost its August "miracle" returning to the most negative forecast figures. After a half-point positive adjustment in August, GDP decreased twice by 0.2 percentage points in September and October. Exports have weakened further, falling to their lowest levels in the last decade (see figure 1). The Prime-Minister Andrej Kabiakoŭ, on 24 November 2015 admitted that the government's measures which were introduced in order to increase exports and find new markets were still not enough.
Nevertheless, the authorities hope to override the so-called "external-factors" in the economic crisis by significantly increasing the volume of loans granted to enterprises to boost their economic activity. They expect that these measures coupled wit old-fashioned Soviet style manual controls will bring economic salvation.
However, according to the National Bank of Belarus in the first nine months of the current year Belarusian banks decreased the volume of lending using the national currency by 6.5 per cent. The volume of new credits granted in foreign currency also declined by nearly $2.5bn.
Thus, to reverse such a negative tendency Belarus urgently needs new credit lines from the Eurasian Development Bank and the International Monetary Fund (IMF). However, on 20 November 2015 the National Bank of Belarus announced that the Belarusian authorities failed to conform with an IMF three-year programme of reforms supported by a new loan of $3bn.
Although that will spare the economy further short-term pain, the disease will remain. Loans that should have gone to vibrant companies with promising new ideas go instead to state "zombies". Hence, to sustain economic growth the economy needs increasing credits.
Deposit Market: Dreaming about Long-term Structure
Taking into account tough and long run negotiations about new loans with the Eurasian Development Bank and the IMF the only way to replenish the financial resources of the banking system is to attract additional deposits. However, by 1 November 2015 in comparison with May deposits in Belarusian rubles shrank by 22.7 per cent (see figure 2).
In this light on 11 November 2015 the National Bank of Belarus declared new rules for the deposit market in Belarus, which was adopted within the government’s program of macro-economic stabilisation.
The changes include the addition of an irrevocable type of deposits, not allowing early withdrawal of invested funds, and a 13% tax on income from interest on short-term deposits, less than 2 years for foreign currency deposits and less than 1 year for deposits in Belarusian rubles.
The National Bank of Belarus aims to build a long-term resource base for banks, and create a more efficient use of financing, including the availability of long-term loans for economic entities and the population. However, several pitfalls still exist before results will be achieved.
First of all, under the conditions of the current economic crisis, low competitiveness of Belarusian enterprises on external markets (primarily in Russia) decreases their investment attractiveness and leads free cash funds to continue to concentrate where they can bring the highest profit with the lowest risk and costs. This is on short-term deposits in Belarusian banks.
Secondly, repeated financial crises, the lack of tax stability and the protection of owners’ rights, have changed the preferences of Belarusians. For them it is better to have more cash in their hands today than make investments in long-term deposits.
Thirdly, the decrease in the level of the population's income will lead to a further reduction in savings and, hence, to an additional drop of deposits in Belarusian banks. According to Belstat, the real disposable cash income of the population in January – August of 2015 decreased by 5.3 per cent in comparison to the same period of the previous year. In dollar terms this decline amounted to about a third.
Companies’ Debts: Losing Ground
But dig deeper and the situation looks even less promising. The increase in accounts payable in recent months indicates that companies, including state-owned enterprises, repay loans slower than banks issue new ones (see figure 3).
Moreover, persistently harsh external macro-economic conditions suggest that state "giants" will compete harder for additional financial resources provided under another extensively used state policy that of direct preferential lending.
However, the use of the direct lending policy means that state-controlled banks lose the ability to perform the key function of financial mediation. They can no longer select effective credit projects.
Taking into account the tough prospects of obtaining new loans from the IMF and Eurasian Development Bank, coupled with the National Bank of Belarus's new policy of monetary targeting, government bonds remain as the key instrument for the implementation of such lending.
In July 2015 Belarusian large state enterprises like the Minsk Tractor Works (MTZ) and Gomselmash received such help. The timber industry hopes for the same after the authorities’ decided on 22 October 2015 to transfer their problem assets to the control of the Development Bank of Belarus.
Trying to avoid the acceleration of inflation, the government issues new bonds and turns and therefore turns into a formidable competitor for private companies. A distorted economic environment reduces the incentives for enterprises to increase their efficiency and leads to a decline in Belarus’s economic development.
Summing up, all this puts pressure on the National Bank's new economic policy. If the authorities decide to switch on the printing machines it could lead to a financial crisis once again.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)
Belarus and the Declining Eurasian Economic Union
The first year of the Eurasian Economic Union (EEU) has highlighted how differently Russia and Belarus see this integration project.
While Russia tries to create something resembling for the external audience the European Union and for the internal audience Soviet Union, Belarus has failed to gain additional benefits from the project. Reduction of a large number of trade tariff exemptions has been slow and Belarus’ trade within members of the EEU fell by a third.
On 24 November, the Russian newspaper Kommersant wrote that the Eurasian Economic Union may soon abolish duty-free export of cars produced on the territory of the EEU. This will hit Belarus the most and may undermine the whole idea of the existing assembly lines of Geely, Peugeot and Citroen cars in the country.
Union for Russia’s Ambitions?
The first year of the Eurasian Economic Union showed that Russia wanted to make the project look like the European Union. Armenia and Kyrgyzstan became members alongside Belarus, Kazakhstan and Russia. The EEU has signed a mutual free trade agreement with Vietanam, and according to Putin’s article published on 17 November on the web site of Chinese news agency Xinhua, currently about 40 countries are considering having an FTA with the Eurasian Economic Union.
Some ideas look EU-inspired, such as the desire to abolish roaming within the EEU and working on a common identity. At the beginning of the year, the Speaker of the Higher Chamber of Russia’s Parliament, Valentina Matvienko highlighted the need to "strengthen information work to grip the masses with Eurasian ideas."
But it seems that only Russia thinks about the Union in this way. Belarus looks at it differently.
So Little of the Economy and So Much of Politics
The first year of the Eurasian Economic Union brought poor economic results for Belarus. Moreover, falling oil prices and declining Russian economy has hit the integration project hard.
In the first six months of 2015 the trade between Belarus and other EEU countries was $2.5 billion less than in the first half of 2014. This means that Belarusian trade with the Eurasian Economic Union dropped by a third this year. According to data of the Eurasian Economic Commission, only Belarus and Armenia experienced a similar decline.
The year 2015 failed to bring trade liberalisation. This may sound weird for Belarus, as the country usually sticks to protectionist policies, but Belarus actively promotes the removal of restrictions on trade between EEU member countries.
Belarus tries to reach out to important markets such as gas and oil. However Russia plans to liberalise them at last, but only in 2025. This will allow other countries' companies to buy Russian resources under the same conditions as Russian companies.
During 2015, it seems all Belarusian top officials advocated the reduction of restrictions. On 12 July, Uladzimir Makei, the Minister for Foreign Affairs, complained that "the EEU should not be a toy" hinting that the Kremlin sees the union this way. According to Andrei Kabiakou, the Prime Minister of Belarus, the list of exemptions in mutual trade began to increase in February 2015.
The greatest problem of the Eurasian Economic Union has little to do with the economy, at least in terms of what people usually understand as the economy. Trade wars, despite previous agreements, have continued. The Eurasian Economic Union began its life against the background of the Belarus-Russia food war. Throughout the year, the conflict flared up when Russia accused Belarus of re-exporting Western products. Therefore Russia banned the import of goods and reinstalled customs checks at the Belarusian-Russian border.
Continued trade wars indicate that the Kremlin perceives the EEU as a political project. Moreover, now almost every issue has become politicised.
On 24 November, the Russian newspaper Kommersant published an article according to which Kazakhstan and Russia propose to remove preferences for foreign car manufacturers who assemble cars in the Eurasian Economic Union. If that happens, foreign companies could stop the assembly of Geely, Peugeot and Citroen in Belarus. This summer Belarus signed a contract with General Motors, which could also be reviewed if the EEU cancels the free zone benefits.
In December, the heads of the Eurasian Economic Union may make a decision on removing the trade preferences. It seems that all countries except Belarus support this move.
The Two Inertias of Eurasian Integration
Despite the fact that Belarus in many respects appears no closer to the other countries of the EEU this year, the Eurasian Economic Commission, the technical body of the Union, made a few steps forward in integration. In September, the Commission announced that it had adopted a number of agreements on the energy, agricultural and infrastructure sectors. The next year the liberalisation of the drug market should occur, and in 2017 there will be a common foreign exchange market.
However, political inertia remains dominant, which causes disintegration. Russia perceives the EEU as a political project promoting their own hegemony. Therefore many other countries fear Eurasian integration.
Moreover, some countries remain reluctant to see the Eurasian Economic Union as only an integration project in itself. On 24 November, Kazakhstan completed the ratification of documents related to accession to the World Trade Organisation. A significant portion of tariffs agreed between Kazakhstan and the WTO appeared lower than those adopted in the EEU.
Moreover, the economic decline, particularly in Russia, undermines incentives of countries to integrate further. Under such conditions the first year of Belarus membership in the Eurasian Economic Union has shown rather poor results. Eurasian integration remains more about hype than substance.