Russian Loans for Belarus: Postponing The Transition
On 28 July Belarus received a long-awaited loan from the Russian government worth $760 million. This was just in time to transfer the funds to the pockets of other borrowers – on the same day Belarus was due to pay $1 billion to the 5-years Eurobonds’ holders.
However, initially, it aimed at the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development (EABR). Thanks to this shift the international reserves has not changed that much recently and forced no panic on the currency market.
This year Minsk faces a peak of foreign debt payments of over $4 billion. A big piece of this debt Belarus owes to Russia. On the other hand, the international reserves of the Belarusian National Bank holds reserves of only $4.7 billion. Without additional resources Belarus could experience a significant currency depreciation in the short run, and stagnation in the long run unless the state launches economic reforms.
Urgent Credits From Russia On Preferential Terms
On 25 December 2014, Putin and Lukashenka agreed that Russia will provide Belarus with up to $2 billion in additional loans in 2014 to counteract the economic slowdown. The next day the Russian government approved the allocation of a $450 million loan for 10 years with a 4% interest rate, which is less than a half compared to average market rates for Belarusian Eurobonds. The resources quickly reached Minsk. However, that was only the beginning of the Kremlin's generosity.
In 2015 the government has already received two loans on very favourable conditions to refinance Belarusian payments to Russia. Earlier this year, Belarus collected $110 million to repay the interest on the Russian loan issued in 2010. Recently, at the end of July, the Russian government provided another $760 million. Both loans mature in 10 years and their first instalments are to be paid in 2019. Their interest rate is floating on the market, and currently amounts to slightly over 1.5%.
On the other hand, the loans hardly satisfy the needs of the authorities, since the economic situation deteriorates in unexpected ways. In January-July 2015 the economy plunged by 4%, resulting in the first recession since 1997. Hence, in July Belarus asked Russia for a new loan of $3 billion, particularly the EABR in return for promises of structural reforms in the coming years. Since Russia holds the predominant share in the organisation, the decision remains with the Russian government.
Commercial Loans On Market Conditions
Russian state-owned banks also directly support the Belarusian economy by offering commercial loans. In general, this scheme is more expensive but the government uses it in case of emergency, especially when Moscow holds back decisions on new financing. For instance, at the end of last month the biggest Russian bank, Sberbank, gave a €550 million loan to the biggest Belarusian enterprise, Belaruskali, for five years. Eventually, the resources arrived in the central bank’s international reserves.
In 2011 Belaruskali also received $1 billion from Sberbank, although on truly market conditions. The bank granted the one-year loan under dual warranty – the guarantee of the Belarusian government and the guarantee of a 51 percent shares in the Naftan refinery. The interest rate amounted to around 8.7%, more than the average economic growth of Belarus. Nevertheless, the authorities hardly had a choice because of serious economic problems.
Moreover, in December 2010 Belarus placed government bonds denominated in Russian rubles on the Russian financial market. It placed two-years bonds worth of $225 million. Two Russian state-owned banks, the Sberbank and Gazprombank, helped with the bond issuance. Though, the interest rate at 8.7% was very high again.
History Of Indebtedness
All in all the Belarusian authorities borrowed from Russia over $12 billion for state purpose since 2007, more than $1.3 billion or 2% of GDP on average per year (see the table). That includes many intergovernmental loans, credits from the Eurasian Economic Community in 2011-2013, resources from Sberbank and the Russian stock exchange. However, Belarus borrowed even more due to business credits for enterprises, and last but not least the huge credit for the nuclear plant.
In 2014 Russia offered Belarus a state credit line of up to $10 billion to build the nuclear plant by 2020. But, in fact, that is an export credit facilitating Russian companies, since the resources may cover only the supply of goods, works and services from the Russian authorised organisation. Hence, Moscow eliminated the possibility of spending the credit to create economic stabilisation.
Big Brother Always Helps
Belarus faces a challenging economic situation prior to the presidential elections in October. In order to avoid the financial turmoil just after the election it needs more loans, especially cheap ones. Only the Russian government can privilege Belarus in this way with low interest rate loans which are spread over a long period of time.
Furthermore, since the Russian government lends in Russian rubles, for Belarus it will be cheaper to pay them back due to the depreciation of the Russian ruble.
The ineffective quasi-socialist economic system survived in Belarus for over 20 years largely thanks to the financial support from Russia. In the long run, however, Belarus should start transition and pursue structural reforms, particularly when Russia itself experiences economic decline. Otherwise, the external debt stock will keep on growing, forcing Belarus to take a new loan to pay back the previous one. Eventually this will bring the economy to collapse.
Until now, in the most urgent situations Russia has always supported Belarus with quite beneficial aid. Sometimes it required some steps in return, real ones or at least political promises from Lukashenka. But Russia has never abandoned its partner, perhaps the last permanent ally of Russia. Currently Minsk hopes for another $3 billion from the Eurasian Fund for Stabilisation and Development. Sooner or later Minsk will get it.
Belarus Strengthens Its Air Force With Russia’s Reluctant Support
Last week, the Belarusian army newspaper Vo Slavu Rodiny published an article praising the newly received Russian warplanes. However, these Russian aircraft are a step backward compared to the equipment that Belarus already had.
President Lukashenka recently publicly complained that the Kremlin had refused to give Belarus a dozen aircraft. The Belarusian authorities therefore are delaying the establishment of a Russian airbase in Belarus. Minsk trying to convince Moscow to give it newer aircraft.
Is the Agreement on the Airbase Ready?
According to an article published by the Russian news agency Sputnik on 17 August, Belarus and Russia had already agreed technical and legal details on establishing a Russian airbase. The two sides reportedly have prepared a draft agreement.
no Russian military units deployed on the airbase could be used without the consent of the Belarus Read more
According to the draft, Belarus agrees to a permanent Russian military presence in the form of an airbase for at least 15 years after the signing of the agreement. However, according to the document, the prospective airbase will be subordinated to the goals and objectives of the Single Regional System of Air Defense, which means that no Russian military units deployed on the airbase could be used without the consent of the Belarus.
But the situation around the base still remains unclear. Some time ago, Belarusian Defence Minister Andrei Raukou said that the issue of the base still had not been decided upon politically. Speaking on 4 August, Lukashenka likewise failed to mention the prospective airbase while explaining that the existing Russian military communication and radar facilities pose no threat to Ukraine.
Which Planes has Belarus Received?
The issue of the Russian airbase closely relates to the state of the Belarusian Army and its capability to fulfil its tasks with the Soviet-era equipment that it has. Since 1991 Belarus has bought no combat aircraft. Although it may appear that Belarus has many modern aircraft, including up to four dozen MiG-29, the real figure and the state of them has caused many doubts. Belarus has sold scores of planes since early 1990s and has given up on exploiting the more sophisticated Su-27 fighter jet.
Minsk did get some new military equipment. On 12 August, Air Force and Air Defence commander, Major General Aleh Dvihalyou announced that by the end of the month Minsk was going to sign a contract to purchase four more Yak-130 aircraft in addition to the four planes of the same type it had got from Russia in April.
Belarus is going to replace by 2020 all the L-39 Albatros it had used as jet trainers with Yak-130 advanced jet trainer/light attack aircraft. Belarusian officials emphasise that the Yak-130 can carry out a wider range of tasks, while the L-39 functions essentially only as trainer. Moreover, the Belarusian Army has successfully absorbed the Yak-130, said Dvihalyou.
The Army daily Vo Slavu Rodiny proudly wrote, “For the first time in its history, our aviation has used high-precision munition – guided bombs KAB-500Kr – dropping them from the Yak-130.”
No wonder that the Belarusian Army coped with Yak-130, as it is a backward development. For decades the Belarusian Airforce flew older yet more sophisticated machines such as the heavier Su-27 (comparable with the F-15) and the lighter MiG-29 (comparable with the F-16).
Overhaul Instead of Buying
For now, Minsk has failed to get advanced military aircraft from Moscow. On 4 August, Lukashenka said how he had asked Moscow to sell or "give" [whatever it means] Belarus "a dozen of aircraft" before the 2014 Ice Hockey World Championship. The Kremlin offered to “give” Minsk just “three or four” planes which Lukashenka accepted. This story corresponds to previously known information about the aircraft flight of Russian fighter jets deployed to Belarus back then.
Lukashenka insisted that the mentioned aircraft had returned to Russia. So currently no Russian military planes – in any capacity – are deployed in Belarus. He hinted at the problem of getting newer – and even second-hand equipment. Nevertheless, the Belarusian leader asserted
We have enough of aircraft. When I was refused [by the Kremlin] is to be sold certain weapons, including aircraft, I gave the order to overhaul and upgrade ten fighter jets. We have enough of them but their effective life-span nears its end. In November, we will finish the last overhaul – of the tenth fighter.
The Belarusian government obviously tries to strengthen national defence although it has limited funds for this. The following table of the known overhaul and modernisation works undertaken by Belarusian industry for the national army illustrates that.
In addition, Minsk apparently decided to spend more on fuel. The fuel deficit for years debilitated the national air force, as for instance in 2000 a Belarusian military pilot flew two to five hours a year.
In 2011, the Air Force set a goal to achieve 100 hours a year per pilot. The government supports this plan. Recently, the army press hinted at a possible increase in the fuel limit for the Air Force by more than 2,000 tonnes – to 16,000 tonnes in 2015.
Two Goals of the Belarusian Authorities
In its military policies in general and in its modernisation of the air defence in particular, the Belarusian authorities pursue two major goals. First, they want to remain a militarily valuable ally for Russia. In particular, the Belarusian government would be eager to provide air defence for Moscow from the western side by itself.
Belarus established together with Russia the Single Regional System of Air Defence in 2012. Despite concerns that it would put a part of the army under Russian control, Minsk holds its ground and even got its officer appointed as the system's commander. Now, the system serves Minsk as a bargaining chip in its attempts to get economic and political favours from Russia.
But Minsk has a second goal in mind, to keep some distance from Russia, especially after the war in Ukraine.
To resolve the contradiction between the two goals Minsk opted for delaying strategy. Belarus can live with deficiencies in its Air Force yet for Russia they present a vital threat. They mean a hole in the defence perimeter of Russia's capital.
To fill this hole, Russia while refusing Belarus' requests for newer planes in the 2010s decided instead to put its airbase in Belarus. However, if Minsk manages to procrastinate longer, the Kremlin will have no other option but to give Belarus the planes it wants.