State debt and weak trade policy test Belarus recovery – digest of the Belarusian economy
On 5 September 2017, Belarusian president Alexander Lukashenka once again declared the need to accelerate the government’s efforts to improve legislation concerning economic embezzlement and other abuses that are slowing down the economic development of the country.
Meanwhile, export are recovering briskly, although mostly due to goods based on raw materials. What’s more, the debt burden on the economy is rising, reaching a historical maximum. This is now the most significant risk to the national economy.
Trade Policy: exporting to the European Union
In the first half of the year, Belarus increased its export of goods, although this is primarily due to the price factor and goods based on raw materials. The dominant exports include fuel, meat, milk and other food products, chemical products (especially potash fertilizers), and metals.
Thus, the main export items comprise goods with relatively low value added. Meanwhile, on 11 July 2017, Lukashenka officially demanded that export partners be diversified, first of all to the EU market. According to him, all Belarusian economic authorities and enterprises need to ‘bite’ into the European market, given its status as the most most effective and technologically advanced.
However, in the first half of the year, the share of EU countries accounted for only about a quarter of Belarusian exports. This is in stark contrast to the early 2000s, when Belarus delivered almost half of its exports to Europe.
In 2012, Belarusian exports to EU countries reached a record of $17bn, primarily due to the export of petroleum products produced from duty-free Russian oil. Afterwards, disputes with Russia concerning the price of supplied oil and the redistribution of duties from oil products, along with a decline in world oil prices, has resulted in a drop of export to EU countries of approximately 67% in 2014-2016 (see Figure 1).
Nevertheless, the share of raw materials in exports to the EU remains huge – approximately 80 per cent of Belarusian sales still consist of fuel, wood, chemical products, and metals. Therefore, it is evident that an increase in exports of high-tech products remains a very important task for the economy as a whole.
According to the President of the Mises Scientific Research Centre, Jaroslav Romanchuk, Belarus’s economy still lacks the prerequisites for increasing and diversifying its exports in the Western direction. On the contrary, economic self-isolation threatens Belarus, as competitors displace Belarusian exporters even on the Russian market.
State debt: increasing pressure
The debt burden on the economy is on the rise. The national debt relative to GDP has reached 40.4 per cent – a historical maximum. As a result, continuing with existing growth dynamics creates serious challenges for the economic development of the country.
According to Doug Constable, in 1997-2006, the debt burden on the Belarusian economy remained at very low levels — external and internal debt were less than 10% of GDP. Low energy prices from Russia and the growing Russian market allowed the Belarusian economy to grow rapidly in the early 2000s without the need for additional borrowing.
In 2007, however, Russia revised energy prices on oil and gas for Belarus. As a result, in order to ensure a high rate of economic growth and the stability of the exchange rate of the Belarusian Ruble, the government became actively involved in external borrowing.
Thus, starting in 2007, the debt burden on the economy began to rise. From 2007 to 2012, the national debt relative to GDP increased by more than four times. Moreover, due to the devaluation of the Belarusian Ruble and the economic recession of the last two years, by the beginning of this year the national debt has grown by almost half, reaching 39.4 per cent.
As a result, today the debt service costs alone for the national budget make up approximately 10 per cent of its expenditures; to repay the main part of its debt, Belarus needs keep borrowing.
According to the Honorary Chairman of the Business Union of Entrepreneurs and Employers, Georgiy Badei, such dynamics will remain negative until Belarus has an acceptable rate of economic growth: to pay the debt, the economy needs to generate growth. If the economy grows, the budget revenues will increase and we Belarus can begin to repay accumulated debts.
At the same time, the reduction of investment in fixed capital over the past several years (such as plant machinery and equipment) does not lead to optimism regarding acceleration of growth of output and employment. Therefore, the only significant steps to be taken to liberalise the economy include reducing taxes on enterprises. This could will stimulate economic activity and help to repay accumulated debts.
The budget: balancing fiscal stability
Meanwhile, the consolidated budget in Belarus has boasted a surplus since 2011, which is used for repayment of state debt (see Figure 2). The structure of revenues and expenditures of the budget has remained stable over the last eight years.
However, securing a surplus is posing more and more of a challenge. In real terms, budget revenues shrank in 2015-2016 because of a recession (although revenues remain relatively stable as a share of GDP), becoming the reason for expenditure restraint from the government.
In recent years, capital expenditures have decreased the most. As a result, fiscal policy has become persistently procyclical. What’s more, steady growth in social transfers has become a major instrument of the government to provide a certain level of social protection and limit the poverty level in the country.
Taking together, the physical volumes of foreign trade have led to strong growth, thus helping the government fulfil budget obligations. However, debt sustainability is becoming the largest risk for the national economy.
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)
Putin expects Belarus to boycott ports of Baltic States
On 16 August, at a conference on transportation in Northwest Russia, Russian president Vladimir Putin demanded that Belarus stop exporting its oil products through Latvian and Lithuanian ports. Instead, Moscow wants Belarus to reroute through Russia’s Baltic ports. This way, Putin intends to put even more pressure on the Baltic states.
The next day, the Belarusian state–affiliated news agency BelTA published an interview with the acting director general of Belarusian Oil Company, Siarhei Hryb. The article made clear that Minsk wishes to continue its cooperation with the Baltic states.
It seems that Russia and Belarus are heading towards another oil dispute just months after ending the previous one. Minsk refuses to blindly follow the Kremlin’s policy of strangling the Baltic states, if only for pragmatic reasons. To survive as a sovereign state, Belarus needs good relations with all its neighbours, not just Russia.
Moscow wants Belarusians to join in a boycott of the Baltic states
Last year, Belarus exported 13m tons of oil products – a significant number for such a small country. In comparison, Russia exported 156m tons in 2016. Traditionally, Minsk has exported its oil products through Lithuanian and Latvian ports due to their geographic proximity. Notably, Belarusian cargo, mostly oil and potash products, made up 36 percent of the total volume of shipments of Lithuanian railways last year.
In contrast, Russia has decided to put a complete halt to export of its oil products through the Baltic states by 2018, opting to use its own ports on the Black and Baltic seas instead. The director of Russian Railways, Oleg Belozerov, told Putin at a conference on 16 August that Belarusian firms are refusing to use Russian railways and ports to export goods. Belarus has made this decision despite Russian Railway’s offer to double the standing discount for transporting Belarusian oil products to Russian Baltic Sea ports to 50 percent. According to Belozerov, Belarusians cite their long term contracts with Baltic state ports.
Putin supported the complaints of Russian Railways: ‘Belarusian oil refineries reprocess only our oil, they have no oil from other suppliers… hence we shall offer it [to Belarus] as a package: if they get our oil they use our infrastructure.’
The conference also dealt with a related issue which demonstrates that Moscow is making no distinction between friend and foe in its renewed effort to strangle the region. Russian officials discussed establishing transport routes between Russia’s Kaliningrad Province and the rest of Russia and circumvent foreign states. Moscow aims to develop a direct communication line which would link its exclave to Russia proper and stop transiting through both Lithuania and Belarus.
Two months ago, acting Governor of Kaliningrad Anton Alikhanov announced plans to triple the capacities of ferry lines between Kaliningrad province and the Ust-Luga port near Saint Petersburg by 2020. In his own words: ‘This is an important step because our dear neighbours – Lithuania, Latvia, Poland, and Belarus – love to exploit the transportation factor, the isolation of Kaliningrad from the rest of Russia.’
Belarus unlikely to join Putin’s continental blockade
Moscow has so far failed to pressure Belarus into using Russian ports instead of Lithuanian or Latvian ones. Now, both the Belarusian government and the business sector intend to resist Putin’s demands, even at the risk of a new oil dispute.
Even in March, when Russian Railways offered Minsk a 50 percent discount on oil products shipments, Belarusian Transport minister Anatol Sivak outrightly dismissed the offer. Commenting on Putin’s recent initiative, Hryb told BelTA on 17 August that even the high discount offered by Russia would not make much difference. It is still cheaper to send Belarusian oil products through the Baltic states. In addition, the Russian Baltic sea ports have had problems processing oil products and ensuring they remain undamaged by the elements in winter. Hryb maintains that his company offers customers the option of transporting oil products through Russian ports. However, the customers choose ports in the Baltic states.
TUT.by, the largest Belarusian news portal, quoted an anonymous oil trader who brought up the fact that it is not only the transportation tariff that matters, other factors are important too: how much time it takes to transport cargo, which port infrastructure is available, which services are offered, and so forth. The Baltic state ports win out over their Russian competitors in all these regards.
A strategic sector
Purchase and refining of predominantly Russian oil, along with the subsequent export of its products, are a key sector of the Belarusian economy. Talking in June at a government conference, Lukashenka called the oil refining industry ‘strategic.’
According to calculations by the IPM Research Centre, if in 2018 Russia supplies 23m tons of oil (the standard volume in earlier years when bilateral relations were good), then the Belarusian GDP would grow by 2.7 percent. If the strained situation of 2016 or 2017 is repeated and Moscow cuts supplies (which would then make up just 18m tons) the Belarusian GDP would increase by just 0.5 percent.
TASS news agency quoted several experts as saying that for Belarus, switching to Russian ports would cost up to $150m in financial terms. However, this sum is insignificant in perspective: after all, Minsk currently earns about $1.4bn on cheap oil it gets from Moscow.
Minsk looks for solutions abroad and inside the country
To counter the Kremlin’s repeated oil threats, Minsk is looking for alternative sources of oil by making new attempts to import Azerbaijani and Iranian oil. Out of the 18.6m tons of oil imported by Belarus in 2016, 0.5m tons were imported not from Russia, but most probably from Azerbaijan.
On the other hand, Minsk is working on a strategic long-term modernisation of the Belarusian petrochemical industry. In March, Alyaksandr Dzyamidau, the newly appointed director of Naftan, a Navapolatsk–based refinery, explained to the media that Lukashenka had asked him to accelerate the modernisation of Naftan. The aim, according to Dzyamidau, is to make Belarusian refineries capable of processing oil of any brand and from various countries.
The government is investing huge amounts of money to modernise the two oil refineries, and the process should be complete by 2019. However, in 2011-2015 alone, investments in Naftan development exceeded $1.2bn, and the refinery continues to receive millions to the present day. Another refinery in Mazyr has received $1.47bn for ongoing modernisation.
The Kremlin’s impossible political demands of Belarus threaten to drive it into a corner. Moscow could even endanger the alliance between Minsk and Moscow. However important Russia is for Belarus, Minsk cannot radically reduce its relations with its other neighbours, even if the Kremlin insists.
For Belarus, cutting links to the Baltics would mean significant financial losses and deterioration of political relations with the EU, as well as a return to political isolation. This would also lead to a fatal dependence on Russia and its oligarchic capital, reducing Belarusian statehood to a nominal status like that of Abkhazia or South Ossetia. There is no reasons to believe such a situation would be acceptable for the current Belarusian leadership.