Outlook for Inflation Improves, Reserves and Income Grow – Belarus Economy Digest
Price increases for regulated goods and services, as well as the abolition of price regulations on meat had a stimulating effect on inflation in Belarus.
In the first half of 2014 a gradual reduction of Belarus' foreign currency reserves occurred as a result of significant foreign debt service payments. But over the summer this year external and internal borrowing and foreign currency purchasing by the National Bank had a positive influence on the volume of foreign currency reserves.
Although the growth of real wages in the first half of 2014 slowed down, it remains in the green. Increases in real income helped to reduce the number of households with incomes below the national poverty line.
Exceeding Planned Growth
In accordance with the updated official forecast, price growth on consumer goods and services at the end of this year will hit 117.3 per cent. Originally, the inflation of consumer goods was anticipated to be 111 per cent, but this mark has already been surpassed over January-July 2014.
Mainly food products and services saw the most rapid price hikes. For example, prices for meat and poultry over an 8 month stretch rose by more than 32 per cent, while kindergarten schooling saw a 93 per cent increase.
On the one hand, as long as inflation continues to rise, the prices for regulated goods and services will also climb.
On the other hand, this has had a stimulatory effect on prices following an official decision to abolish price ceilings in this instance as it allows for meat to be sold on the open market without restrictions.
Due to higher costs, especially in regulated prices, the inflation rate for the poorest segments of the population grew at a faster pace than that for its wealthiest citizens. In the second half of this year the main drivers of prices continues to be forecasts of further devaluation, including the Belarusian ruble's rate of devaluation, as well as an increase in prices for goods whose prices are regulated by the state.
Taking into account these current trends, the expected inflation rate for 2014 will exceed the level seen in 2013. For example, consumer prices increased by 16.5 per cent by the end of 2013. According to a preliminary forecast for the end of 2015, analysts expect the growth in prices to slowdown, levelling out at 12.5 per cent.
Foreign currency reserve showing good signs
On 1 September, 2014 the foreign exchange reserves of Belarus were $ 6.3m. This volume covers about 1.9 months worth of imports (with a minimum appropriate level being 3 months). The negative impact on the nation's foreign currency reserves over the period assessed was mainly due to Belarus servicing its foreign debt.
In 2014 alone the state's payments on foreign obligations will exceed $3bn. At the same time, despite an increase in payments on its external public debt, Belarus has managed to increase the volume of its foreign exchange reserves in recent months. It achieved this through external and internal borrowing and purchasing foreign currency on its domestic market.
A $2bn loan from VTB Bank bolstered current reserves. Loans from International Bank for Reconstruction and Development, the Chinese government, and export credits from the Russian Federation for the construction of a nuclear power station, and other factors, also contributed to Belarus' maintenance of its reserves.
Additionally, the excess foreign currency supply, which sat above domestic market demand for both the population and economic entities, had a stimulating effect on the size of the available foreign exchange reserves in July and August.
The Ministry of Finance periodically sells government bonds denominated in a foreign currency to businesses and individuals. This tool allows it to attract foreign currency to transfer into its own foreign exchange reserves without increasing its foreign debt. This also leads, however, to an increase in domestic public debt.
In August, foreign exchange reserves increased by $78m, which is largely due in part to purchases of currency on the domestic market by the National Bank, but is also due to the placement of foreign currency bonds. According to official forecasts, foreign exchange reserves for Belarus will increase by $0.2-0.5bn by year end.
Belarus saw its wages continue to climb in both nominal and real terms in January-July 2014. The average salary in July amounted to BYR 6.5m (US$629). At the same time we can see a gap in the average wages when looking at regional dynamics. While the Vitebsk region's average nominal salary was BYR 5.7 m (US$557), in Minsk this figure was BYR 8.3m (US$809).
The differences noted above are natural enough, as traditionally metropolitan areas costs of living are much higher than in small towns and rural areas. As was previously true, the highest salaries in Belarus remains in economic zones that contain airports or companies from the petrochemical, financial or IT sector.
According to a sample survey of households in the first half of 2014, the number of low-income families in Belarus has decreased. In the period studied, the share of households with disposable incomes below the subsistence minimum was 3.5 per cent over all, while in the first half of 2013 it was 4.2 per cent. This gradual income growth helped to support higher growth levels for retail turnover.
In accordance with the official forecast, income growth in real terms will grow 3 per cent throughout 2014. In order to increase the efficiency of the economy, the increased labour productivity needs to be similar to that of the growth in real wages.
Anastasiya Luzgina, Belarusian Economic Research and Outreach Centre
This article is a part of a joint project between Belarus Digest and the Belarusian Economic Research and Outreach Centre (BEROC)
Belarus Smuggles EU Food to Russia Despite Sanctions
On 19 September Russian Agricultural Control announced that Russia can restrict the imports of fish and dairy from a number of Belarusian companies. These companies allegedly violate the sanctions regime by re-exporting EU products under fake labels.
Since the very imposition of sanctions, Russia has constantly charged Belarus with cheating. Belarusian officials have denied the accusations or blamed incidents on technical mishaps.
For Belarusian food producers, Russia's ban on Western food imports has become an opportunity to cash in, and they have been willing to take risks in order to earn money.
A Klondike for Belarusian Food Producers
On 6 August Russia imposed a ban on the import of food products from the Western countries that had previously supported sanctions against Russia. Russia also sought to counterbalance the loss of imports. Western producers who worked on the Russian market experienced serious problems, while non-Western countries benefited by increasing their exports to Russia.
Belarus reacted to these developments immediately. On 7 August the Deputy Minister of Agriculture Leanid Marynič said in an interview with RIA Novosti that Belarus is ready to replace the banned products, calling the situation a “Klondike for Belarus." The Ministry of Agriculture officials reported that they could earn an estimated $200-400m more this year thanks to the sanctions.
Vladimir Putin called Lukashenka on 7 August after the sanctions were introduced, asking him to “accept this measure with understanding” and protect the Russian market. Apparently, Putin anticipated the unscrupulous behaviour of Russia's Customs Union partner. Unsurprisingly, Lukashenka promised full transparency for any goods that were to cross the Belarus-Russian border.
The head of the Russian Agricultural Control Agency Sergei Dankvert arrived in Minsk on 12 August and urged Belarus to increase agricultural exports to Russia. Dankvert reported that Belarus would be allowed to process EU food products and export them to Russia. In response to this, Deputy Prime-Minister Michail Rusy confirmed that Belarus was in full control of the situation and that the deliveries would proceed in full compliance with corresponding agreements.
Meanwhile, Lukashenka described his opinion of the situation in a very simple way: “We need to move on this, seize the moment and makes some money. We did not commit ourselves to any restrictions regarding our own internal market. We can import the [food] products from anywhere, process them, and sell them to Russia”.
The Dishonest Partner
Despite the ongoing public assurances from Belarusian officials, the Belarusian side was caught cheating friends in the east on multiple occasions.
On 18 August Dankvert told the ITAR-TASS agency that Russia had detected attempts to re-export EU fruits and vegetables via Belarus. He said some EU countries do not indicate the place of origin of their production or mislabel their goods before sending produce to Belarus, from where exports eventually travel to Russia.
The goods sold to Russia sometimes lack accompanying documentation. Upon examining the goods on the Russian side, it was found that many products actually originated from Poland, Slovenia, the Netherlands, and Lithuania.
Interestingly, state-owned company Belmytservis, founded by the State Customs Committee, was listed as one of the main violators of the Russian embargo on EU food products.
Dankvert urged Belarus to monitor the situation more closely and threatened to impose restrictions on the imports from Belarus if violations persisted. However, the Ministry of Agriculture of Belarus has denied all accusations. The Minister called Dankvert privately, but and received no confirmation of the alleged violations, according to a Ministry official who spoke to BelaPAN news agency. Nevertheless, the Russian Agricultural Control Agency has continued to report violations on a daily basis.
Collapse of TIR Business
Although Belarusian officials hoped for a Klondike, many Belarusian businesses have actually suffered from sanctions. One example is TIR companies, which owns large trucks and specialises in transporting goods from the EU to Russia. The imposition of Russian sanctions have led to a sharp decline in TIR's business.
The owners of Belarusian transport companies say that the market is virtually collapsing, with orders falling by about 30% in recent months. Competition grew sharply, and many companies offer cut-throat prices in order to attract customers.
As Stanislaŭ Savicki, the director of the Autamahistral company from Belarusian border city of Hrodna said in an interview to Naviny.by: "The European market is dead for us. Profits have fallen by 60%. At the moment, selling the trucks looks more reasonable than using them."
Competitors from Russia and the EU have flooded into the Belarusian market, as they are also losing their markets. Companies that own refrigerator trucks became especially vulnerable to competition, since these vehicles have been traditionally used exclusively to transport food stuffs. Now they are loaded with anything for the businesses to stay afloat.
Many companies have turned to the Belarusian Ministry of Transportation offering their vehicles for transporting the allegedly increased exports of Belarusian foodstuffs to Russia. Even so, this is unlikely to make up for their losses due to the imposition of sanctions.
Sanctions Bring EU Investment
EU businesses are demonstrating renewed interest in investing into Belarus. Several EU producers have offered Belarus to cooperate in processing and selling EU goods to Russia, which was permitted by Moscow.
Aliaksej Bahdanaŭ, head of the Foreign Trade Department of the Belarusian Economy Ministry, said the Ministry is currently examining offers from potential partners. Officials from Latvia, Lithuania and Poland have already discussed possibilities for cooperating with Belarus as far as dairy exports are concerned.
The Polish Minister of Agriculture Marek Sawicki visited Minsk on 14 August to discuss the increase in supply of Polish fruits and vegetables to Belarus. Twelve Polish companies attended the meeting. After the meeting, Sawicki announced that Belarus would be buying 200,000 tonnes of Polish milk per month.
Moscow's sanctions are thus having divergent effects on the Belarusian economy. On the one hand, sanctions have benefited food producers and may increase Western investment in Belarus. On the other hand, the food ban has harmed delivery companies that relied on EU-Russia trade.
The ongoing re-exports of goods also show that Belarus seeks to make money on the tensions between Russia and the West, using Russia's momentary weakness to its advantage.
For Lukashenka, the Eurasian Union does not present itself as a union of values, but rather a means of extracting as many economic benefits as possible to support his regime.
The Union's architect Vladimir Putin seems to understand this. Given the difficult circumstances, however, he needs as much Belarusian support as he can get – and he is ready to pay for it.