Remember reforms and forget about oil – digest of the Belarusian economy

On 1 June 2017, Belarusian President Alexander Lukashenka announced that the oil refining industry was experiencing substantial problems.

Meanwhile, the economy is still showing signs of recovery, growing three months in a row. This will encourage the government to make even better economic projections for next year.

However, according to Belstat, Belarus's official statistical body, the real price of this economic miracle continues to come at the cost of simple people – every month, half of all Belarusians bring home less than half the average monthly wage.

The oil sector: sinking giants

On 1 June 2017, Alexander Lukashenka declared that refining had turned from the bulwark of the economy into a loss-making industry (see Figure 1). He admitted that for the most part, inclement external conditions (falling oil prices) were to blame, but he also noted the failure of modernisation.

According to the President, the value added by oil refining to Belarus's GDP dropped last year to only half a percent. As a result, the contribution of two Belarusian refineries, Mozyr and Novopolotsk, is now equal to companies such as Beltelecom, a state-owned telecommunication company.

However, any radical change in the management of the oil industry still appears unlikely. Moreover, the authorities are once again planning to invest more money – as much as $1.2bn – to complete the modernisation of the two refinery companies by the end of 2019.

According to a recent statement by Uladzimir Siamashka, Vice Prime Minister of Belarus, this modernisation should allow the the depth of oil refining to increase by up to 90 per cent, turning these companies into 'aerobatics plants' – enterprises able to provide oil processing as deep as the world's best refinery companies and featuring a wider range of petroleum products.

However, these promises remain dubious for several reasons. First of all, Belarus is experiencing a shortage of money for large investment projects. According to the First Deputy Minister of Finance Maxim Ermolovich, approximately 10 per cent of the budget goes to repayment of the state debt (both external and internal).

Second, the country lacks high-level management skills at state-owned enterprises. Finally, Lukashenka has admitted that preparation for the project is not yet complete and points to inappropriate distribution of resources.

In light of this, on 27 June, Alexander Lukashenka announced radical measures for rapid development of the IT sector, which remains the only industry which still possesses competitive advantages.

Economic growth: waiting for better results

On 26 June 2017, First Deputy Prime Minister Vasily Matyushevsky declared that last month's results show that the economy is gradually emerging from recession – economic growth is increasing month to month.

The GDP did indeed increase by 0.9 per cent during the first half of the year in comparison with the corresponding period of the previous year (see Figure 2). Inflation has stayed at the lowest level in Belarusian economic history – for the five months of the year it reached only 2.7 per cent, less than half of what was predicted.

Export in January-April grew by 19.5 per cent. However, according to Vasily Matyushevsky, this was mainly thanks to technological products (motor vehicles, tractors, and machinery), rather than sales of commodities (petroleum products and potash fertilisers).

However, according to economic expert Anton Boltochko, the current positive economic figures reflect only conjunctural growth caused by the low base of the economy, the result of the past two years of recession. With a projected GDP growth of 1.1 per cent in the next year, this looks more like a stagnation scenario, not so much a development plan.

Moreover, even Vasily Matyushevsky reluctantly agrees with this statement. He emphasises the need for structural reforms accompanied by improvements in the institutional environment in order to fulfil the more dynamic target economic scenario.

Wages: directive planning may rise again

Meanwhile, it seems that while reforms remain only in the planning stage, directive tools of governance of the economy are once again gaining momentum. This is especially true for the growth of real wages.

According to the Belstat, the average salary in Belarus reached BYN795 ($414) in May 2017. Taking into account growth of consumer prices, the corresponding real wages have increased by 4.1 per cent in comparison with May 2016. However, it is necessary to take into account that the average wage fails to reflect the differences in regions and industries.

In comparison with economic centres (such as Minsk and regional capitals) this problem is exacerbated by the low level of economic activity. Differences between industries add additional pain.

On one side, light industry and agriculture are still largely loss-making, one the other side, telecommunications, logistics, banking, and information technology remain profitable.

Finally, in the public sector the average wage hovers at approximately 77 per cent of the country average. As a result, according to data revealed by Belstat on 29 June 2017, every second Belarusian has less than BYN370 ($192).

Given such low growth rates for wages and the significant differentiation across regions and sectors, it would take a miracle to fulfil the authorities' goal of achieving an average wage of BYN1,000 or $520 (growth by 26 per cent) by the end of this year using standard market methods.

Thus, taking all this together, the authorities may attempt to use directive (administrative) methods in order to ensure the growth of industrial production and wages. However, manual control over Belarusian companies may result in a chronically dire economic scenario: increased inflation and an economy threatened by financial instability.

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)




Under pressure from Eurasian Economic Integration – digest of the Belarusian economy

As of 26 December 2016, the oil and gas dispute between Belarus and Russia remains unresolved.

Moreover, Russia persistently rejects any tradeoffs: this deprives Belarus of a substantial part its foreign exchange earnings from petroleum product sales, thus aggravating the economic recession in Belarus.

In turn, the growth of state debt points to the formation of stable insolvency for most state-owned enterprises and increases the risk of a banking crisis in the economy.

The energy sector: losing ground

The current oil and gas dispute between Russia and Belarus has deteriorated since the beginning of the year. Minsk has decided to pay its own gas price of $73 (a fair price which conforms to the agreement on the transition to equal-income prices between countries). However, the contract claims that the price should be $132.

As a result, according to the Russian gas monopoly Gazprom, Belarus owes approximately $340m for gas deliveries from January to September.

In response to this debt, Russia decided in the middle of the year to nearly halve the quantity of oil supplies to Belarusian refineries: from 5.3m to 3.5m tonnes in the third quarter of the year, and to only 3m tonnes in the fourth quarter. Moreover, on 23 December 2016 Deputy Prime Minister of Russia Arkady Dvorkovich announced the court proceedings on the gas dispute.

Meanwhile, after some improvement at the end of last year and in the first quarter of this year, the country's economic growth has worsened again. One of the main reasons for this is the reduction in the amount of Russian oil processed.

According to Prime Minister of Belarus Andrei Kobyakov, the loss of 1.6m tonnes of oil in the third quarter has led to a chain reduction in industrial production and wholesale trade resulting in a 0.3 per cent GDP drop. By the end of 2016, this drop could reach 0.5 per cent (see Figure 1).

In turn, this reduces the real income of the population and effective demand within the country, thus creating preconditions for the formation of deeper systemic problems in the economy. For example, the number of foreign companies to close has overtaken the number of newly registered ones in Belarus in 2016.

Economic integration: a time of tough decisions

The main Belarusian argument in the energy dispute is grounded in the process of Eurasian integration, which implies four key economic freedoms for the participants in the Eurasian Economic Union (EAEU): free movement of goods, services, capital and labour.

However, this integration project includes various exemptions and limitations. In particular, the plans for the formation of a single energy market has been delayed until 2025.

At the same time, the creation of a common electricity market for the EAEU is scheduled for mid-2019. However, Russia and Belarus must first reach a compromise. Since Belarus produces electricity mainly from gas, the country urgently needs equal prices with the Russian regions by 2019.

However, Russia has so far shown few signs of willingness to radically amend its position (by transitioning to equal-income prices); it is offering to compensate only $300m a year for the difference in gas prices and only through resale abroad of part of the Russian oil supplied to Belarusian refineries.

This scheme thus reduces the oil flow to Belarus, as well as the amount of petroleum products produced from it, further decreasing its foreign exchange earnings. Moreover, Russia wishes to determine the volumes of oil supplies to Belarus on a quarterly basis, increasing Belarus's economic dependence even further.

In addition, Russia may insist on other tough conditions, including a requirement to redirect the export of oil products from Baltic to Russian ports and to sell the Minsk Wheel Tractor Plant – a very important asset for the Russian defence industry.

State debt: missing the target

The problems in the energy sector put pressure on the internal and external debt of Belarus. In particular, in 2017 Belarus may have to return approximately $3.5bn to its creditors.

At the same time, the economic slowdown in Russia (the main trading partner of Belarus) has led to the weakening of external demand for Belarusian products. As a result, export earnings have decreased and a substantial part of enterprises transfer from profitable to unprofitable, further limiting the ability of Belarusian enterprises to finance their debt obligations.

On 15 December 2016 Alisher Mirzoyev, the Director of the project group on financial loans of the Eurasian Fund for Stabilisation and Development, stated that the decrease in efficiency of state-owned enterprises (SOEs) and the low efficiency of long-term projects financed primarily through directed lending have formed a significant part of the debt burden in Belarus.

The directed lending has created large imbalances in the economy. For example, interest rates on preferential loans in 2015 reached only 9 per cent versus market rates of around 35 per cent. Therefore, according to the Deputy Minister of Economy of Belarus Dmitry Krutoy, in 2016 the volume of directed lending has decreased almost by half (from $20bn) in comparison with 2015.

However, risks of insolvency of SOEs still lead to loss of revenue for the country's budget. Moreover, deterioration of the financial conditions of SOEs lead to an increase in problem assets of the banking system and exacerbate the problem by creating an additional crisis in this sector of the economy.

For example, since the beginning of this year the share of problem assets of Belarusian banks has increased by 2.2 times. If at the beginning of January they constituted only 6.8 per cent of risk assets, in November they reached 14.9 per cent (see Figure 2).

Thus, the problems in the energy sector aggravate the economic recession in Belarus further, affecting the capabilities of profitable enterprises to repay their debts and harming the overall investment attractiveness of the country.

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)




Towards a new agenda for the West and Belarus

The results of the parliamentary elections on 11 September surprised many in Belarus. Few believed that Lukashenka’s regime would allow independent deputies in parliament, but these elections have shown that the Belarusian authorities are at least willing to appear to change.

Although this does provide optimism, Belarus and the West still need to create a new agenda to ensure that Belarus remains on a positive trajectory. In other words, the EU and US should not make demands that are completely unacceptable to the regime.

The West's main requirement, free elections, is not an unreasonable one. However, increasing democratic space within the country should be a greater priority. This could be accomplished , for example, by moving Western foundations to Belarus and pushing for a greater number of opposition politicians in local councils.

Parliamentary surprise

The idea that Lukashenka’s regime cannot change has existed for a long time, but the parliamentary elections on September 11 have showed a slightly different side to the Belarusian authorities. The author, an observer at the elections, personally witnessed the election commissions inflating turnout, while the process of vote counting remained opaque. In the end however, the Belarusian authorities surprised many by letting Hanna Kanapatskaja and Alena Anisim, two women with democratic views, into the parliament.

This shows that Lukashenka's regime appears able to at least implement token reforms to appease the West. A year ago, the Belarusian government released a number of political prisoners to this end and now seeks to similarly utilise the democratic MPs. This is a huge step, despite the circumstances.

The Belarusian authorities have in fact made concessions before, such as during dialogues of 2008-2010. At this time the regime returned certain independent newspapers to the public distribution system, such as Nasha Niva and Narodnaya Volya, and registered the Movement for Freedom, an opposition group led by Alexander Milinkevich.

But today's concessions are of a different nature. Two people with democratic views received official status and a salary of $800 a month and influence, which has not happened in Belarus for 12 years. This legitimises democratic politicians even for those who are not sympathetic to the Belarusian opposition.

The need for a positive trajectory

Pro-regime experts often argue that Belarus is not yet ready for democracy, but the authorities are wisely taking baby steps in this direction. This is not the case. In fact, Lukashenka's regime would like to avoid democracy, as it would threaten many figures of authority or wealth: certain Belarusian officials have made their fortunes thanks to the authoritarian nature of Belarus. One example is Mikhail Miasnikovich, the head of the Upper Chamber of the Belarusian Parliament, whose watch reportedly cost $30,000.

Nevertheless, as the parliamentary elections show, the Belarusian government is capable of some concessions. Changes have become possible largely due to the desire of Belarus and the West to continue normalising relations. As Lukashenka told Scott Rauland, then charge d'affaires a.i. of the U.S. on July 6, Belarus will not have a full-fledged foreign policy without first normalising its relations with Washington. Today, Belarus needs the EU and the US for a variety of reasons – from economic support to a desire to distance itself from Russia.

However, the Belarusian regime remains reluctant to cede power by holding free elections and the West needs to understand this. If the EU and the US require only free elections, it will not encourage the regime to make any concessions. On the other hand, it is vital that the West not give up its ideals, otherwise Lukashenka will lack incentive to reform.

Both sides now need a positive trajectory, in which Western requirements do not exceed Lukashenka's ability to change. It is no surprise that the regime will require carrots, and the West should continue to provide them conditionally. For example, now that the Belarusian parliament has two oppositions members, the level of cooperation with the Belarusian parliament ought to be increased.

What should be done

The story of Anna Kanapatskaja and Alena Anisim shows what the West should focus on: gradual institutionalisation of democratic groups and civil society in Belarus.

The European Union and the Unites States may require Belarus to clear the Augean stables. Some people, like Eduard Palchys, still remain in prison, while accusations against him appear at least partly politically-motivated. Belarus also retains article 193.1 in criminal law, under which a member of an unregistered organisation can receive two years in prison.

The West must take a stand in these matters, but this should not be the focus of its energy, as these issues do not have long-term value. Lukashenka's regime can repeal the law, but nevertheless send people to prison under a different article in the event of a change in the political climate. For example, Ales Bialiatski, leader of the unregistered human rights organisation "Viasna", was sentence for allegedly avoiding taxes in 2011.

More important is to contribute to longer-term changes – to increase Western presence and to help civil society and democratic groups to do the same.

For example, the Belarusian authorities could allow Western political and civil foundations to open their representative offices in Belarus. Their activities may be monitored, but the presence of organisations such as the American National Democratic Institute or the Swedish Forum Syd will be more effective if they are conducted in Belarus. The funds will be able to reach a greater range of Belarusians and support more grassroots initiatives; they remain invisible while working from Vilnius and Warsaw.

Moreover, a physical presence in Minsk will bring the West and democracy greater legitimacy in the Belarusian public space. Belarusian officials, experts or politicians can build long term relationships with the West and stop seeing the European Union or the United States as enemies.

Thus, the West may require more opportunities for democratic groups from the authorities in the local elections in 2018. Representatives of the opposition do not yet have access to all local councils. Moreover, the value of such councils in the Belarusian system seems marginal. Therefore, the election of several dozen opposition politicians will not threaten Lukashenka’s regime, although it will strengthen the germs of Belarusian democracy.

Vitali Silitski, the most well-known Belarusian political analyst, who died in 2011, often emphasised that change needs to come from inside the country, not outside. It seems that today a window of opportunity for active change has appeared.




The Midterm Exam for the Economy: Digest of Belarus Economy

On 19 July 2016 the National Statistic Committee of Belarus (Belstat) has announced the macroeconomic results of the first half of the year. The figures disappoint – economic growth still in the red zone.

Moreover, the Eurasian Development Bank has warned that the Republican budget requires additional cuts in order to sustain the acceptable level of state debt.

Finally, on 27 July 2016 the new round of Belarusian-Russian negotiations on gas prices and gas debt payment was held in Moscow.

Economic Growth: Leaving Plans for Christmas

In the first half of the year, the government planned to withdraw the economy from recession. However, actual results still dissatisfy. According to Belstat for the first half of 2016 GDP of Belarus has decreased in comparison with the previous year by 2.5 per cent and once again missed the official forecast this time by 2.6 per cent.

Such a reduction of economic growth still took place together with the weak domestic demand and demand from Belarus's major trade partners – the exports of goods dropped almost by fifth part accompanied by a significant slowdown in the growth of the physical volume of industrial production (see figure 1).

Meantime, Belarus' officials still have an optimistic view on the assessment of current macroeconomic situation. On 26 July 2016 the Prime Minister Andrei Kobyakov has announced that in the first quarter of 2016 the plan for creation of new jobs was exceeded by almost 2 times.

However, according to Belstat the number of work places in Belarus continues its reduction eight month in a row. In the first half of the year 341 thousands of Belarusians lost their jobs and outperform the number of employed by 81 thousands.

Additionally, the attraction of foreign investments in Belarus show little progress. For example, the number of new residents in the widely boosted Chinese-Belarusian industrial park "Great stone" still has not increased.

For two previous years the "Great stone" has attracted only eight residents and in the first half of the 2016 – zero. Moreover, only few currently registered residents began to implement the announced projects.

One of the main reasons that restrict the flow of foreign investments in Belarus tried to explain the British Ambassador in Belarus Fionna Gibb. She thinks that the Belarusian authorities do very little to overcome such situation. According to her, British companies avoid investment, because our country remains quite a closed country and business is not ready to take big risks.

State Debt: Resetting the Race

By the end of June the international reserves of Belarus increased by 7.3 per cent in comparison with first month of the year and amounted to $4.8bn (see figure 2). This number has already outperformed the official forecast for the whole year by $24m indicating the success of monetary policy realized by NBB in recent month.

However, this amount of international reserves remains at one of the lowest levels in recent years, which indicates that Belarus still possesses inadequate resources needed for the maintenance of its economy, and makes the problem of attracting additional capital not only from Russia still very difficult.

On the same time after two month of decline the state debt of Belarus has resumed its growth increasing by 7.4 per cent in comparison with the start of the year. The main source of growth falls on its external part taking into account the first $500m tranche of credit from the Eurasian Fund of Stabilization and Development.

However, in the second half of the year the internal part also will add up some additional pain. According to NBB since the beginning of year the volume of problem assets in banking system has increased by two times and reached 13.4 per cent growing already for eight months in a row – a historical maximum for the Belarus.

This situation occurred due to substantial granting of loans on preferential terms for mostly loss-making enterprises. In order to solve this problem the government will be forced to increase borrowings in the internal market.

Energy Sector: Monetizing the Negotiations

Meantime, on 27 July 2016 the new round Belarusian-Russian negotiations on gas prices and gas debt payment was held in Moscow. According to Russian side the debt of Belarus for gas has reached $270m since the beginning of the year.

Belarus' authorities believe that the price should be lower since energy prices are getting cheaper on the world market. Besides that Russia itself has lowered price for some consumers, for example, Armenia, but unwell to reduce price for Belarus.

Price for 1 thousand cubic meters of gas for Belarus is $132. While Belarus considers a fair price equal to $73. The main argument of Minsk stays the intergovernmental agreement in which it is written that for Belarus should be applied equal prices (export price minus transportation).

Meantime, in order to force the decision Russia has reduced oil supply to Belarusian refineries by 37 per cent. Due to such a sudden strike estimated losses of Belarus may rich additional $200m per quarter significantly outperforming the amount that Belarus saves on the price of gas.

Furthermore, the negotiations were complicated due to extra conditions that Russia put forward, namely to revive the previously announced privatization projects (MAZ, Grodno-Azot and other enterprises).

Summing up, the government still waits playing with gas bargaining and new coins arrived after denomination occurred on 1 July 2016. While it helps to avoid painful structural reforms and spend some time in the shuffle, it still little contributes to restore the shrinking economy.

Moreover, such situation may additionally transform into even harder problems in the next year – slowing down economy driving at a first gear cannot easily switch to higher one without improvements in labour productivity, innovation and entrepreneurship.

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)




The Costs of the Economic Downturn – Digest of Belarus Economy

On 6 May 2016 the Chairman of the Board of the National Bank of Belarus (NBB) Pavel Kallaur disclosed the long-suspected information about problems in the banking system.

Two weeks later, the Prime Minister Andrei Kobyakov has called for market-based instruments in order to cure sinking state-owned enterprises (SOEs).

And оn 22 May 2016 the Minister of Finance Vladimir Amarin has announced budget cuts appealing Belarusians to live within one's means. The Belarusian population is paying for mistakes made by the government focused on preserving inefficient state enterprises.

Toxic Assets: Bogging Down in Debts

On 6 May 2016 the Chairman of the Board of the NBB Pavel Kallaur has said that projected dynamics of troubled assets indicate a possible rise of bad debts for banking system in Belarus, but he assured that the situation stays manageable.

Meanwhile, the share of toxic assets in the Belarusian banks increased in March by 4.3 per cent consuming the 11.5 per cent of their total assets. As a result, its current level became the new high for the banking system of Belarus. The previous record lasted only three month, when on 1 January 2016 the share of toxic assets of the Belarusian banks reached 6.8 per cent.

All these happened due to high level of debt load of borrowers and the continuing devaluation of Belarusian ruble that negatively influenced the ability of Belarusian enterprises to fulfill credit obligations to banks in time. For example, for the first three months of 2016 the share of loss-makers in manufacturing reached 34.2 per cent.

the rating agency Fitch Ratings the share of troubled assets will grow gradually even if in the second half of year the economy will begin to recover

Further, according to the rating agency Fitch Ratings the share of troubled assets will grow gradually even if in the second half of year the economy will begin to recover. However, 3 per cent GDP drop in the first four months of 2016 seriously questioned such a scenario.

Thus, the agency warned that in order to control the situation the special organisation aimed on operations with such assets should be established.

Market Reforms: Craving for Growth

According to the IMF forecast the Belarus's GDP will fall again this year by 2.7 per cent adding additional pain to economic misery of 2015, when GDP fell below the 2010 and 2008 levels reaching $54.8bn in terms of average annual exchange rate of the NBB.

A small growth can start after 2018 and only due to the so-called "low base effect", when the fall reaches the bottom and starts at least some minimal growth.

Meantime, taking above forecasts into account the Prime Minister Andrei Kobyakov on 18 May 2016 has proclaimed that Belarus urgently needs to speed up the involvement of the market-based instruments in next three directions – exports, employment and investment – to stimulate economic growth.

For export promotion Belarus’s government expects to diversify sales equally in three destinations (Eurasian Economic Union, European Union, other countries) by 2020 in order to escape from overwhelming dependence on the economic situation in specific countries (first off all Russia).

As a result of substantial reliance on eastern neighbour trade balance considerably deteriorated (see Figure). Particularly, it damaged sales in the famous Belarusian export "Trucks" category – since 2013 the annual exports decreased by 64 per cent reaching only 3.9 thousand items in 2015.

Concerning labour market the government determined the employment target of 50 thousand new jobs as a priority for local authorities in Belarus. Finally, the investment program for 2016-2020 supposes attraction of foreign investments in the amount of $30bn for the metallurgy, engineering, electronics, optics and ICT in the first place.

Public expenditures: Cutting the "Edges"

On 22 May 2016 the Minister of Finance of Belarus Vladimir Amarin has announced the reduction of budget expenditures by BYR15trn or about 7 per cent. The optimisation originally concerned non-priority items only (subsidies to local budgets and reduction of financial support to SOEs) without spending cuts for social sector (salaries, social benefits and medicines).

The Minister claimed for effective use of budget resources in order to achieve greater results. However, experts doubted about such an emergency decision. According to Belarusian economist Sergei Chaly planned budget cuts represents actually a huge amount – any adjustments higher than 5 per cent may have a very depressive effect on the economy.

Later, on 27 May 2016 the Deputy Minister of Finance of Belarus Maxim Ermolovich has questioned the issue of reduction of public expenditures even further saying that the issue of social cuts still stay under pressure. According to him solution of this problem depends on the possibility to reduce capital expenditures, which are also of high priority for the government.

As a result, the pessimistic forecasts made by economists of the IPM Research Center (about 2.2 percent poverty increase in Belarus measured as the share of the population living below the absolute poverty line) may become a reality even faster and hit more than 7.2 per cent of Belarusians.

According to their opinion children and adults that due to any circumstances have the worst labour market prospects remain the most vulnerable population groups of Belarusians to risk of poverty.

Thus, it seems that the Belarus’s economy still pays its bills for wrong economic policy decisions made in previous years. Overindebted state-owned "giants" and dragging down banking system leave no choice for government but to cut budget expenditures. Further, as it always happened the main costs for economic mistakes seem to incur by simple Belarusians.

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)




The Long Road to Liberalization: Digest of Belarus Economy

On 29 March 2016 Prime Minister Andrei Kobyakov proclaimed the government's intention to speed up the long-awaited process of joining the WTO.

Moreover, after renegotiating different scenarios for pension reform in Belarus, the authorities have agreed to an increase in the retirement age for men and women.

Meanwhile, оn 21 April 2016 President Alexander Lukashenka announced that it would be a tough year for the economy, all the while encouraging the government to accelerate its attempts to develop the economy.

WTO: Reforming the Negotiations

On 29 March 2016 Prime Minister Andrei Kobyakov announced that in the near future Belarus jointly with the WTO team would formulate final proposals and terms for the accession to the organisation. In September 2015 Belarus agreed to a WTO roadmap that includes negotiations with 40 countries.

Belarus has been trying to join the WTO since 1993. However, it is only now after almost a quarter of a century that the authorities have finally made the tough decision to speed up this process. The Belarusian government has taken such an "extraordinary" forward looking decision under pressure from the significantly negative internal and external macroeconomic shocks.

A prolonged economic recession, the skyrocketing negative trade balance with China, increased disagreements with Russia, the country's main trade partner, and the successful accession to the WTO of the other four members of Eurasian Economic Union (EEU) trade bloc prompted the Belarusian side to take the decision.

Moreover, Belarus has already met a substantial number of the WTO obligations by virtue of the participation of other EEU states in the trade organisation, including reduced customs tariffs and financial support for state-owned enterprises (SOEs).

At the same time, some trading partners are increasing import tariffs for Belarus, while others are still avoiding signing bilateral trade agreements with Belarus (for example, China). Therefore, in order to challenge tariff barriers and trade restrictions, accession to the WTO is becoming an irreversible process and one of the main challenges for the state.

Pension Reform: a Gradualist Approach

On 11 April 2016, in an effort to preserve the existing ratio of workers and pensioners, Lukashenka signed a new decree that increases the retirement age for the working population in Belarus. From 1 January 2017 the threshold for retirement will gradually increase by six months each year until it reaches 63 years for men and 58 years for women.

The demographic problem is the main reason for this reform. In Belarus there are ten people of working age for every four pensioners; by 2035, this number will increase to six. As a result, according to the Deputy Minister of Labour and Social Security Valery Kovalkov, from 2020 this trend will lead to an additional substantial burden on the budget. Thus, in order to solve this problem the government is encouraging economic entities to hire elderly candidates.

However, experts express doubts about the interests of employers in accomplishing such a task. According to Svetlana Korosteleva, director of consulting company Kvadrat, in Belarus there exists an unspoken age limit for new workers – approximately 45-50 years for both sexes. In most cases employers "fear" that older applicants will not be up to date with industrial trends, will have poor computer skills and perform tasks slowly.

Moreover, business owners that grew up in the 90s seem particularly "vulnerable" to age discrimination as they tend not to hire new specialists over 35 years. But such a "modern" practice of Belarus’s businessmen strongly violates national labour legislation, which prohibits weeding out candidates by age, gender, eye colour and other traits.

Economic Growth: Escaping from Dreams

According to an analysis by Standard & Poor’s (S&P) carried out on 10 April 2016, the additional economic problems that Belarus is experiencing are due to the low predictability and efficiency of its institutional system, the very weak external economic position of the country and a lack of flexibility of its monetary policy. S&P experts also believe that Belarus will continue to experience an economic downturn (see figure 1).

Later, on 14 April 2016, the IMF in turn revised its forecast on the Belarusian economy. IMF experts think that Belarus's GDP growth in 2016 will decrease by 2.7 per cent, which significantly differs from their October 2015 estimates that predicted a contraction of 2.2 per cent.

However, the Belarusian authorities still forecast positive economic growth for this year. But in the past five years the government has accomplished none of the most important socio-economic indicators it identified. For example, official forecasts assume five-year economic growth equal to 62-68 per cent, but real figures foresee results more than ten times lower.

This has happened mostly due to the prescriptive, declarative nature of such indicators. In most cases local authorities consider such orders as non-binding obligations that do not correspond with economic reality.

In order to break up such a vicious circle, on 5 April 2016 Prime Minister Andrei Kobyakov announced substantial efficiency improvements in resource use by enterprises. From now on, a return on every rouble of investment constitutes one of the main goals of the new government’s economic program for 2016-2020.

Additionally, the government has banned the popular practice of local authorities establishing prescribed economic indicators for state and private enterprises, which presupposed accelerated growth rates in previous years.

Thus, after two decades of "easy" solutions to big problems, Belarus seems to be reversing its economic course in the direction of a more liberalised economy, at least in the labour market, trade policy and management of SOEs. But further, inevitable decisions are still waiting for the right moment.

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)




Freedom House: Belarus Shows Minor Improvements in Transition

This month Freedom House published Nations in Transitions report on Belarus authored by the Editor-in-Chief of Belarus Digest​ Yaraslau Kryvoi.

According to methodology, country experts prepare reports while Freedom House has a final say on the ratings. Most of Belarus' ratings remained the same except for Civil Society and Election Process which have slightly improved.

The Electoral Process rating improved because of a reduction in political violence and persecution of opposition figures, and the relative openness of criticism of the government in the October presidential election. The Civil Society rating improved due to the release of civic activists from prison and an increase in political space for advocacy campaigns and fund-raising during the year.

Background

July 2015 marked the 25th anniversary of Belarus’s declaration of independence from the Soviet Union. After a brief period of democratic transition in the early 1990s, the country gradually developed into a consolidated authoritarian regime under President Alyaksandr Lukashenka.

In October 2015, Lukashenka secured a fifth term in an election that observers from the Organisation for Security and Co-operation in Europe (OSCE) did not recognise as free and fair. However, unlike the December 2010 presidential election, the 2015 voting was not followed by violence or imprisonment of major opposition figures.

Russia’s illegal annexation of Crimea in 2014 and the subsequent conflict in eastern Ukraine had an important psychological impact on Belarusian authorities. The government is increasingly concerned by Russian actions in Ukraine and is trying to distance itself from its eastern neighbour.

Belarus is also suffering from the effects of Russia’s economic downturn. In an attempt to improve relations with the West and offset the influence of an increasingly assertive Russia, the Belarusian administration released all political prisoners in August 2015.

Political Environment

The release of prisoners and decreased state persecution of the political opposition contributed to a modest improvement in the country’s political environment. However, the executive remained firmly in control of all branches of power, with very little public oversight of its activities.

From Sanctions To Summits: Belarus After the Ukraine Crisis Belarus is returning to the international spotlight, but for once, not just as the “last dictatorship in Europe”. The two summits that Minsk hosted in the past year on the conflict in east Ukraine indicate a tentative shift in Belarus’s political alignment.

The conflict in Ukraine persuaded both the authorities and a significant part of the population that political changes could undermine stability in the country, and this was used as a justification to stifle dissent and to preserve the existing political regime.

In October 2015, following the prisoner release and peaceful election, the European Union (EU) suspended restrictive measures against hundreds of Belarusian officials and other individuals seen as linked to human rights violations. Similarly, the United States temporarily lifted sanctions against several major Belarusian companies.

After hosting important negotiations on the resolution of the Ukraine crisis, which culminated in a February 2015 summit attended by the leaders of Germany, France, Russia, and Ukraine, Belarus had worked to intensify its contacts with Western Europe and the United States. It had also softened its anti-Western rhetoric, attempting to pursue a more balanced foreign policy and cautious economic reforms.

After the presidential election, most international observers praised the nonviolent treatment of political opponents, minor improvements in the election legislation, and opportunities for the opposition to campaign. However, nothing changed at the fundamental level.

The authorities continued to abuse their monopoly on television during the campaign period; used administrative resources to increase the turnout of voters, particularly by coercing people to participate in early voting; and failed to conduct a transparent vote count, among other election irregularities.

Civil Society

The situation for civil society improved slightly in 2015, with more opportunities for advocacy campaigns, local fund-raising, and attempts by high-level officials to engage with civil society groups, especially on economic reforms.

The release of all political prisoners in August also helped to open space for civil society activities. Separately, Belarusian authorities joined the Bologna Process on European standards for higher education, and began to encourage participation in pan-European research projects and networks, such as Horizon 2020.

However, civil society organisations still face significant challenges, including obstacles to registration as legal entities and the threat of criminal sanctions for operating without registration. Although new domestic fund-raising mechanisms are gaining popularity, the government maintains restrictions on funding for civil society organisations, particularly from foreign sources.

Independent Media

The authorities continued to suppress independent broadcast and print media in 2015, marginalising the voices of those who disagree with the regime. Although state television has started to invite prominent opposition figures to prime-time talk shows more frequently, this has not changed the nature of public debate in Belarus.

Foreign media outlets struggle to obtain official accreditation in the country. Internet-based media generally remain available to most users, but the government continued its policy of restricting access to some opposition websites at state-controlled institutions.

Corruption

The authorities took a number of steps to address corruption in 2015, including adoption of a new anticorruption law, after a public consultation, and the implementation of a national program to combat crime and corruption.

According to various enterprise surveys, Belarus is often regarded as one of the least corrupt countries in the Commonwealth of Independent States, but implementation of anticorruption measures remains selective in practice and lacks transparency.

Outlook for the future

The authoritarian nature of the political regime in Belarus will not change in 2016. The executive branch, with President Lukashenka at the top, will avoid implementation of significant reforms, though economic modernization is likely to continue without much fanfare.

That would be in part a result of the gradual replacement of Soviet-minded conservatives with a new generation of officials, but also a response to major problems in Russia, the country’s main financial supporter.

Economic and political pressures from an increasingly assertive Kremlin will lead to more attempts by Belarus to improve its relations with the West. The authorities can be expected to continue treating the political opposition and media without unnecessary brutality, while denying them the freedom necessary to change the political status quo.




Waiting for a Miracle: Digest of Belarus Economy

On 28 March 2016 the Council of the Eurasian Fund for Stabilisation and Development (EFSD) approved the provision of a new loan to Belarus.

In the meantime, the export and real estate market established new numbers of their record fall, questioning the limits of slowdown in Belarus.

In such a situation the government tries to secure state financial support – President Alexander Lukashenka has signed a new decree that grants funding only for profitable strategic investment projects.

Exports: Reaching the Bottom

According to new data announced on 21 March 2016 by Belstat, Belarus’ exports in January has decreased by more than 20 per cent (in dollar terms) in comparison with the same month last year to just $1.6bn – the lowest level for one month since 2009 (see figure 1).

Moreover, exports declined for 16 straight months in a row. This happened mainly for three reasons. First of all, approximately half of Belarus’ exports go to Russia, where growth has been under pressure since 2014.

Second, Belarus’ main exports are positioned to markets outside the Eurasian Economic Union; this includes potash fertilizers and oil products. In January, the delivery of these items to foreign markets fell by more than a third in dollar value compared to the same period of the previous year.

However, according to the General Director of Belarusian Potash Company Elena Kudryavets, the company (Belaruskali) increases its share in the world exports and focuses on the real needs of the market while responding to changes in demand.

Next reason concerns refinery. Belarus exports about 14-15mln tones of oil products produced mainly from Russian crude oil and purchased at a reduced price. Therefore, the drop of world oil prices adversely affected the interests of Belarus – the lower world price, the lower the margin between the world and price for Russian oil.

Additionally, export prices for oil products has fallen more in comparison with world oil prices. As a result, foreign exchange earnings of Belarus from the sale of oil products in 2015 fell by 28 per cent compared with 2014.

Real Estate: Repeating the Bubble

Deep recession and big financial rescues for inefficient Belarus’ state-owned enterprises led to the downfall of households’ incomes (nearly by half). However, right now the next wave of economic problems has reached the shores of Belarus’ main private companies.

Starting in 2001, the rising oil prices marked the beginning of the "golden age" for real estate investments in Belarus. Sensing the smell of "easy money" local major entrepreneurs have started to turn into real estate bosses. As a result, the average house prices in Belarus almost tripled by the end of 2013 (see figure 2).

However, since 2014 house prices dropped by more than 28 per cent – the nightmare for Belarus’ real estate market.

The bubble occurred generally due to three motives: the overconfidence in stability of oil prices and the Russian market; steady growth of incomes of Belarusians subsidised by loose monetary policy of the National Bank of Belarus (NBB); and lack of other possibilities for profitable investment.

Moreover, Belarusian companies helped to ignite the fire of problems by themselves leading to the rising debts of their operations including real estate transactions.

Additionally, this situation plays both as a consequence of the economic crisis and a big reason for its continuance causing subsequent problems in the banking sector. According to the NBB, in February 2016 the amount of troubled assets of Belarus’ banks increased once again and reached 10 per cent share of their whole assets.

State Governance: Swapping the Rules

Step by step the state machine begins to change its main driving economic mechanisms. On 21 March 2016, a new Presidential decree, No.106, changed the system of formation of state programmes and the provision of state support to economic entities.

The main adjustments suppose the transition from an individual towards a programme approach for the granting of state financial support. It cancels the possibility of direct requests of the enterprise for additional financial resources in case of permanent economic troubles.

For now, the government provides financial resources only according to the strategic investment priorities of the economy and the possibility of the fulfillment of strict requirements for achieving efficiency targets.

As a result of such a daring decision, the EFSD, on 28 March 2016, approved the provision of $2bn loan to Belarus in order to support the economic policy measures and structural reforms proposed by the government and the National Bank of Belarus.

According to EFSD’s press centre, Belarusian authorities agreed to insure the control over the monetary policy, through implementation of flexible exchange rate policies and the achievement of a balanced budget. Moreover, structural reforms assume substantial increase in the share of compensated utilities by the population – up to 70 per cent by the end of 2017.

All these should add up to reduction in cross-subsidies and direct lending, playing an important role in the increase of competitiveness in the economy.

However, according to former NBB’s Chairman Stanislau Bahdankevich, the economy, right now, is experiencing substantial difficulties with repayment of previously obtained loans ($3.3bn only in 2016). The inability to accomplish such transactions means default for the economy; Bahdankevich believes that the new EFSD’s loan is needed only to avoid such a negative scenario.

Belarus’ economy still suffers from recession, stacked in debts enterprises, free falling exports and a declining real estate market. However, it seems that state authorities finally got some insight into the economic troubles and have started the process of finding a way out.

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)




The Moment of Truth: Digest of Belarus Economy

On 16 February 2016, President Alexander Lukashenka announced zero tolerance for structural reforms being proposed by the government.

Meanwhile, since the beginning of 2015 state debt has increased by more than half and real wages in dollar equivalent have fallen to a ten year low.

Belarus's government is still trying to find a simple way out of the crisis by releasing new development plans while waiting for credit from the IMF and Russia.

Economic crisis: approaching phase two

On 18 January 2016 Minister of Economy Vladimir Zinovskii predicted a tough 2016, and said it would influence Belarus’s economic performance in the next five years. The World Bank believes Belarus' GDP will contract this year by 0.5 per cent.

Taking into account these forecasts, experts speak morosely of a "new reality", admitting that previous methods of dealing with the country's economic problems have been exhausted. According to representative of the National Academy of Sciences of Belarus Georgy Grits, the economy has entered a prolonged recession and unpopular measures are needed to find a way out of it.

Economic data published on 20 February 2016 indicates that the country has started the new year by repeating the acute problems that began in 2015. GDP has dropped by 4.3 per cent and industrial production has shrunk by 6.8 per cent (see Figure 1).

However, in contrast to 2015 the budget for 2016 is based on much more shaky ground. The state finances for 2016 assumed an average oil price of $50 a barrel and a small budget deficit. But turbulence in the oil market in January, when the price of oil dropped to $30 per barrel, has put hopes for such a scenario to rest. The government has announced that it will introduce deep spending cuts and tax increases.

All this adds up to trouble and a declining economy. Belarusian families will face a fundamental degradation in their quality of life. The process has just begun.

Last year real wages in dollar equivalent fell by more than 12 per cent. Additionally, on 1 January 2016 the government increased tariffs for heating and hot water by one third, and plan to cut back subsidies to increase the consumer payment level for utilities to 80 per cent.

So, the first phase of Belarus’s crisis in 2015 has revealed all its consequences for enterprises. But for ordinary Belarusians, phase two is only just starting, and looks to be much worse.

State debt: the warning signs of trouble

In previous years the bullish case for Belarus depended on the belief that the state machine could always combat a slowdown by repeating its well-known trick – printing roubles. As a result, with higher spending from people and increased industrial production, economic growth engaged its second gear.

But today’s situation differs. Without extra money from oil and new contracts with Russia, such a policy will increase prices and decrease the ruble exchange rate, further reducing income for Belarusian families. Add here increasing debts and drawing down of national reserves, mix the ingredients and you will get a toxic combination (see Figure 2).

The warning signs are there that despite a more flexible exchange rate, reserves are steadily evaporating. The only way to replenish them remains external borrowing. Thanks to the gods, Russia has decided to spare its neighbour and has announced that it will dispense a $2bn loan to Belarus in the near future.

Additionally, the weakening currency and the National Bank of Belarus’s (NBB) new policy for deposits are prompting savers to scrape up their money from the banks. According to the NBB, in the last seven months ruble deposits have declined by almost 30 per cent. The problem lies in people’s expectation of a further devaluation, creating a self-fulfilling reduction in savers' confidence.

However, the biggest trouble concerns state debt. Since the beginning of 2015 it has increased by 66.4 per cent and is approaching the threshold value for economic security. It has reached 22.7 per cent of GDP with a threshold value of 25 per cent.

Further, excessive government borrowing that is used to finance a sharply increasing budget deficit has caused a crowding-out effect in the economy. When the state becomes a borrower it pushes out competition from the private sector, leaving only crumbs on the investment market and thus decreasing the market's efficiency.

It is easy to say, but Belarus should have cleaned up its financial system and freed its exchange rate several years ago. Now the economy has slowed, debt has piled up and the dollar earnings from oil refining have been drained, leaving almost no painless way out.

Economic reforms: resting in peace

So far Belarus's rescuers have focused too much on raising taxes and cutting spending, and too little on reforming the state and freeing up the economy. The economic downturn has seen wages fall considerably, and the country remains chronically uncompetitive.

It will be essential to broaden and deepen Belarus’s economy before its biggest advantage, a cheap workforce, is spent. However, the government proposed to begin with budgetary reform and anti-crisis plan.

Next, the Ministry of Foreign Affairs declared its program for export development. State-owned enterprises are apparently uncertain of how to diversify the supply of products.

Meanwhile, on 18 February 2016 the Minister of Economy of Belarus Uladzimir Zinouski made the most significant proposal yet. He suggested carrying out government optimisation by reducing the number of ministries, thus increasing the efficiency of decision making.

However, experts have pointed out that on the whole these measures hardly count as game-changing reforms.

According to Belarusian economist Sergei Chaly, the authorities still have an ongoing dispute about the key problem in the economy: some senior officials propose to reform the public sector by privatising state-owned enterprises, while others argue that the biggest problem concerns the monetary policy that led to the high cost of loans and inefficiency of state companies.

If Belarus’s authorities still show exceptional resistance to implementing real reforms, decreasing reserves, increasing state debt and evaporating savings are transforming into an incurable disease for a slowing-down 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)




One Step Forward, Two Steps Back: Digest of Belarus Economy

The drop in oil prices in the first two weeks of January and the resulting volatility of the Belarusian rouble have taken centre stage.

The Belarusian government took some small steps towards reforms, but took no serious measures to reform the state-owned sector of the economy.

Instead, it continued to pump money into inefficient enterprises to keep them afloat. Meanwhile, trust in the Belarusian rouble and the banking system is declining, leading to significant deposits outflows.

Oil turmoil hits the Belarusian rouble

Despite the presence of much depressing economic news in January (such as the 3.9 per cent decline in GDP growth in 2015, or the small traders strike), the adventures of the exchange rate of the Belarusian rouble were making the headlines. From 1 January to 31 January 2016 the Belarusian rouble lost 12 per cent of its value against US dollar, as the exchange rate changed from BYR18, 569: $1 to BYR20, 823: $1.

The exchange rate reacted to the drop in oil prices, which affects Belarus in several ways. First of all, the Belarusian economy, in particular the exports, depends greatly on the Russian market and the exchange rate of the Russian rouble, which in turn is reacting to the oil price. Second, Belarusian oil refineries make greater profits the higher the price of oil, and there are similar consequences for tax collection.

The current Belarusian budget is based on a forecast average price of Brent oil at $50 in 2016. Prices in the first month of the year made clear that the government needs to revise the forecast down, and cut the expenditures it had planned.

The behaviour of the exchange rate in the next months will largely depend on the oil price fluctuation, and the Belarusian rouble might even appreciate if the oil price goes up. But given the uncertainty on the oil market, and complete inability of the National Bank (central bank) to stabilize the exchange rate fluctuations since the currency reserves are low, the rouble may see a lot of volatility in the future.

Reforms: two steps forward, one step back

In January the government took several important steps towards reform. As expected, the government started implementing IMF-recommended reforms with unpopular subsidy cuts. On January 1 heating tariffs increased substantially, along with increases in other utilities tariffs,and a VAT tax on utilities was introduced.

At the end of January the government announced that it was working on providing targeted support to those who will have difficulty covering their utilities bills. In another unpopular move, the government liberalised prices on some social goods like milk and bread.

At the beginning of January the government rolled out yet another plan for the economic development of Belarus. As many previous editions of similar documents, the plan contains a lot of well-intended policy initiatives, like creation of the same market conditions for private and state-owned companies. But it remains unclear if or when these policies will be introduced.

Continued financial support for loss-making state-owned enterprises is certainly a step backwards for the reforms.

The Deputy Minister of Finance Maksim Ermolovich in an interview on January 26 also announced a change in the budgeting process, namely a shift to results-oriented budgeting, and equal opportunities for the state-owned and private firms to get financial support from the state.

On the other hand, at the beginning of January the government issued a series of documents offering financial support to several state enterprises. In particular, cement industry enterprises received significant support (around $300m) in the form of government debt guarantees.

Several glasswork factories received significant support, as well as light industry enterprises like Kamvol, one of the largest textile producers. Continued financial support for loss-making state-owned enterprises is certainly a step backwards for the reforms. The departure from directed lending and other forms of support for uncompetitive enterprises is one of the main recommendations from both independent experts and the IMF.

Deposit outflow

Rouble deposits of natural persons continue the decline that they started in August 2015. On 1 January 2016 people held BYR40,204bn in bank deposits, just slightly higher than the amount held a year ago, and much lower than on 1 August.

 

There are several reasons for this deposit outflow (which is very significant, especially given the average deposit rates of 20-25 per cent). The National Bank decree that came into force in November 2015 introduced income tax for the interest earned from transferable deposits to motivate long-run non-transferable deposits.

Several rounds of fast and unpredicted depreciation in August and November 2015 also contributed to the reduction of trust in the national currency. Combination of these factors also made it difficult to speculate on high rouble deposit rates. Another important factor in the deposit outflow is the decrease in real incomes – given the drop in wages people save less, and some of them probably had to spend some of their savings.

In January the depreciation of the rouble continued. No one expects real incomes to increase either, and the deposit outflow will most probably continue. The outflow of rouble deposits is not a huge threat to the banking system – the National Bank can print roubles and be the lender of last resort. However, if the outflow of currency deposits starts, it will be much more difficult for the National Bank to stabilize the situation.

Given the uncertainty in the oil price outlook, and the fragile state of the currency reserves, the Belarusian government and the National Bank have a difficult task to accomplish. Preserving financial stability without financial support from the outside seems impossible, and the IMF loan looks like the best option to both get the funds and receive impetus for reforms.

Kateryna Bornukova, BEROC

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




Who Blocks Economic Reforms in Belarus

No economic reforms will be carried out in Belarus, Alexander Lukashenka announced in his 26 January address to the government.

This was the fourth time since the October 2015 presidential election that the President confirm his desire to keep the existing state-dominated economic system.

Lukashenka's statements suggest an ongoing struggle within the political elite over the country's economic future. The anti-reform coalition includes heads of state-owned enterprises, officials who work in the ministries and concerns tasked with coordinating the state sector, and supervisory agencies that benefit from arcane rules and regulations. So far, the President has sided with the old guard on the desirability of economic reforms.

Who Advocates for Reforms

Economic reforms such as reducing subsides to state enterprises and allowing private business more freedom have been on the government's agenda for a long time. Lukashenka frequently references to the reforms them when accusing his government of seeking to "inhibit the development of Belarus's political system."

According to Lukashenka’s economic adviser Kiryl Rudy, "since 2013 all leaders of the Government and the National Bank … have generated structural reform programmes." And these programmes are becoming more comprehensive because of the government's growing awareness about the need for reforms.

The advocates of reforms include First Deputy Prime Minister Vasil Maciusheuski, Deputy Head of the Presidential Administration Mikalai Snapkou, Lukashenka’s economic adviser Kiryl Rudy, Chairman of the National Bank Pavel Kalavur and others. All of them attended the meeting on on economic development held on 26 January and headed Lukashenka's announcement.

On average, members of the pro-reform coalition hold higher positions in the government than its opponents do. They have built ties with independent economists and international organisations. They are not only more pro-Western, but also more knowledgeable about the economy than an average Belarusian bureaucrat. These people support the reforms because they see no other option for generating economic growth.

And yet the pro-reform group is currently losing ground to the opponents of economic changes.

Who Wants Business as Usual

In December 2015, daily “Belarus Segodnya” (Belarus Today) published two lengthy articles by Siarhei Tkachou, Lukashenka's former economic adviser. In the articles, Tkachou criticises free market principles, praises Belarus's current economic model, and warns about the dangers of embarking on "radical reforms."

Tkachou's uncompromising position suggests that he may stand at the forefront of the old guard that opposes the economic reforms. The fact that his ideas were printed in the largest and most read Belarusian newspaper suggests that they reflect an influential strand of thinking among the country's political and economic elite.

Trakchou's views are certainly shared by heads of state-owned enterprises who view the reforms as a danger to their comfortable existence. According to Belstat, the national statistics office of Belarus, every fifth state-owned company remains unprofitable. Without government subsidies and protectionist policies, most of these entities will go out of business. Their directors will lose jobs.

The officials who work in the ministries and concerns tasked with coordinating the state sector will also suffer from economic restructuring. Many of these entities, such as the Ministry of Industry or the State Concern for the Production and Sale of Light Industrial Products, continue to advocate increasing governmental subsidies.

The third group of potential "losers" comprises various supervisory and law-enforcement agencies. In 2014, the Ministry of Taxes and Fees uncovered violations in the documentation of 99% of private entrepreneurs it inspected. In 2015, 99 out of 100 customs inspections revealed violations according to the representatives of the State Customs Committee. Such high rates of violations might be due to arcane rules and regulations, on the one hand, and to corruption within the law enforcement and supervisory agencies, on the other hand.

The anti-reform camp lacks clear leaders, but is held together by the broad consensus among the middle and low-level Belarusian officials

Many state agencies do not play a productive economic role. Instead, they serve primarily the material interests of their employees. Simplifying Belarus's economic legislation and limiting powers of supervisory agencies will deprive their personnel of abundant opportunities for rent-seeking.

The economic reforms will also deprive the soil under the feet of many advocates of the previous economic policy which lead to the current sorry state of the Belarusian economy. Consciously or not, these people misstate the facts to avoid reforms.

For example, Leader of the National Academy of Sciences of Belarus Uladzimir Husakau recently said that the growth of the Belarusian economy in 2016 could reach 8-8.5% of GDP. This is a striking and unrealistic prognosis at the time when everyone in the government, international organisations and independent think tanks expects further recession.

The anti-reform camp lacks clear leaders, but is held together by the broad consensus among the middle and low-level Belarusian officials. These people believe that the current economic crisis will hardly destroy Belarus's political system, while system reforms might.

Which camp Lukashenka belongs to

Many key figures in Belarusian politics, including the President’s son Viktar Lukashenka and Belarusian Foreign Minister Uladzimir Makei, have remained silent on the subject of economic reforms. It is these people who will determine which side the president chooses in the reform debate.

The Belarusian leader may prefer the ideas of the lower levels of the bureaucracy for two reasons. First, Lukashenka and the anti-reform coalition share the fear that the reforms will take away their privileges and their ability to control the economy. They also worry that political liberalisation will follow economic changes in Belarus.

Second, Lukashenka does not see the benefits of structural reforms. According to him, there is no reason to "break something in vain while overly straining the people." By “the people” the President means not only the ordinary citizens, but also the entire ruling class.

Yet this does not mean that the President is firmly wedding to the anti-reform coalition. After all, it was Lukashenka who appointed some of the prominent advocates of reforms to senior positions in the Government, the Presidential Administration, and the National Bank.

It is notable that Lukashenka allows both sides to conduct a fairly sharp – by Belarusian standards – debate about the costs and benefits of economic changes. After that, he will make up his mind.




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)




Creeping Signs of the Approaching Crisis – Belarus Economy Digest

The first half of the year has shown clear evidence that the Belarusian economy needs better incentives to revive its industrial strengths.

In July the authorities announced their plans to provide financial assistance to several "giants" of industry. However, this decision has cast doubts over whether or not other taxpayers will ask the same from the state.

Also, this month the government carried on negotiations with the IMF and Eurasian Fund for Stabilisation and Development and are seeking to attract additional potential sources of loans. After their preliminary meetings all parties have decided to continue consultations showing striking unity on the necessity of economic reforms.

Economic Data: Spinning Down

Belarus’ GDP fell 3.3 per cent in first half of the year, which raises questions about the government’s official forecast growth rate of 0.7 per cent and fears that the country’s efforts to bring a halt to the nation's current economic turmoil by the end of August may not be enough.

The hardest hit were mostly exporters to the Russian market

Belstat, the official state statistical body, released on 6 July its report on loss-making enterprises in Belarus for January-May 2015. Net losses for these enterprises hit around $0.8bn and more than doubled in comparison with the same period from last year. The hardest hit were mostly exporters to the Russian market, where shrinking demand was compounded by the further decline of the Russian ruble.

Yet in June, in comparison to May, industrial production rose by 3.8 per cent. Manufacturing seems to be in better shape, while the industrial activity of Russia continues to shrink by 4.8 per cent. If Russia’s economy does not start seeing a recovery in the near future, things will get nastier for its strategic partner as well.

The problem of wage arrears presents a particular concern. According to Belstat, by the beginning of July 555 enterprises (mostly from the agriculture, hunting and forestry sectors) not paid 95,200 of their employees. The overall amount of overdue debt has increased from May by a considerable 37 per cent.

The numbers indicate that economic reforms are taking much too long. But where to begin? So far the government has failed to show a proactive approach to improve the situation.

State Support: Saving the "Giants"

Belarus’ economy needs new ways to kick-start economic growth. However for the moment the government is relying mostly on increasing public borrowing. On 1 July, the President signed several decrees in order to support and stabilise the financial and economic situation at MTZ and Gomselmash (see figure 1) – two manufacturing "giants" dragged down by low sales.

Given this grim picture, Belarus has clearly decided to bear the burden. The Ministry of Finance provides the main chunk of state financial assistance by issuing $425.8m in foreign currency bonds. This currency injection is supposed to act like a shot of adrenalin for Gomselmash – a leading manufacturer of combine harvesters and agricultural machines.

The MTZ, producer of a wide-range of tractors, is the second party to receive the states help, it will receive currency bonds worth around $150m underwritten by the company’s assets. Operations with these bonds are exempt from taxes, which in reality is a tax credit for those who will buy the bonds.

This mechanism, supposedly, aims to hide the prohibition of direct financing of the economy using the printing of the domestic currency in order to restructure the bad debts of the loss-making industrial "giants". Apparently, in terms of the current regime of monetary targeting a broad money supply, this will lead to its expansion, which strictly contradicts the IMF rules.

In light of this, the only way to get around the IMF’s tough stance on this issue is the gradual closing of the pipeline of state support for all of the other collapsing manufacturers, meaning the remaining "giants" will be slowly edging their way towards extinction. However, in order to avoid the worst scenario imaginable from unfolding, the government may decide to utilise a policy by which it would create artificial demand for "machines" by distributing them to other companies in the country and paying for them out of the national budget.

In any case, all of this unavoidably leads to more money printing, and, thus, creates the necessary conditions to jump start the next round of the familiar inflation-devaluation cycle.

New Credit Negotiations: the Long Way to Make a Deal

The IMF turned down Belarus’ preliminary agenda of economic reform. The snail's pace progress on freeing up the economy and implementing reforms has cast doubts on a new credit line of $3.5bn from IMF. The IMF calls for something more radical than just "formation of a legal framework" meaning the actual liberalisation of prices, a reduction in subsidies, the cancellation of mandatory plans for enterprises, and really carrying out privatisation.

In July Belarus tried to sell new promises of structural reforms to the Eurasian Fund for Stabilisation and Development

A deal with the IMF would help the country to pay for its imports and to refinance its previous debts. From the beginning of the year, Belarus’ foreign-exchange reserves have shrank by 9 per cent from $5,059m to $4,620m, less than what is needed to pay for one month and a half of imports. Without a deal debt payments during the year will eat up more than half of the country's international reserves and leave it with less than one month’s worth of imports.

In July Belarus also tried to reduce the tempo of their declining reserves by selling new promises of structural reforms to the Eurasian Fund for Stabilisation and Development, but they were also largely unsuccessful. However, the real obstacles of negotiating with the Fund have always been the political constraints implicit in working with it, particularly when it is taken into account that Russia holds the largest share of power in it.

Nevertheless, in order to not sink the economy of its strategic partner, the Russian authorities approved a loan of $760m for the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development​.

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)




Collapsing Economy Weighs on the Authorities – Digest of Belarusian Economy

A labour strike at a major state-owned plant in June suggests that the current economic crisis will present serious political challenges to Belarus. Despite it being an election year, wages and pensions are not growing – a rare occurrence. Yet, it stagnating incomes are not the country's primary problem.

Many state-owned enterprises do not have enough money to even pay the low wages they have in place now. They have to cut back on their labour expenses. Even the government expects situation to worsen, and this may just be one of the factors behind moving the election one month ahead.

Economic Crisis and the Labour Market

Belarusian GDP continued its descend in May, dropping 3 per cent in January-May 2015 relative to the same period last year. Manufacturing experienced the most serious decline – 8.3 per cent. Many enterprises are experiencing serious issues with their liquidity. Most of manufacturing enterprises, especially those that are state-owned, export a large portion of their goods to Russia. As the Russian market continues to decline, exports for Belarusian companies have similarly fallen, despite the stimulating effects that typically accompany devaluation.

Declining production adds strain to the labour market. In the absence of any stimulation policies from either the government and the National Bank real wages continue to fall (-3.2 per cent in Jan-Apr 2015 relative to the same period last year). But the real crisis lies in paying wages to their bloated workforce, a task that is all but impossible for most enterprises.

the official unemployment figure is climbing mainly thanks to the so-called “social parasite” law 

Official employment figures dropped by 25 thousand people over the course of December 2014 to April 2015. The official number of individuals registered as unemployed also grew slightly, up to 1 per cent of the overall labour force. But this low figure says nothing of the true reality facing the labour market – it is abundantly clear that not every unemployed person will register, as the unemployment benefits are minuscule.

Currently the official unemployment figure is climbing mainly thanks to the “social parasite” law – obtaining the status of being unemployed frees one from the obligation to pay the “parasite tax”. Employment centres have even had to increase their working hours to accommodate everyone who wishes to register.

Many state enterprises are avoiding releasing their workers despite their inability to pay their wages. As a result of this policy, on the 1st of June 444 companies had wage arrears. A total of 75,900 people have not received their wages on time. Wage arrears and cutting back on the number of working hours and days of operation at the factories could provoke social unrest.

a factory in Slonim paid its employees wages not in roubles, but in sour cream

On 8 June the workers of Maladechna plant producing steelworks organised a strike because they had not received wages for two months. A couple of days after the strike the workers received their wages, but the plant still has a number of other debts to contend with, and its future prospects are dim.

Another instance of social arrest unfolded at a milk-processing factory in Slonim that paid wages not in roubles, but in sour cream. One of the most successful Belarusian enterprises, lingerie-producing Milavitsa had to cut its working days from 5 to 3 days a week with a corresponding cuts in wages.

The difficult situation facing the labour market may be one of the reasons that convinced Lukashenka that he should move to hold the presidential election a month earlier. The situation in the economy is getting worse and worse every day, and even one month could make a big difference. Still there is life after the elections, and the government has a difficult problem to solve – how to restructure the inefficient state-owned enterprises without causing widespread social unrest?

Motovelo, Prakapenia and Reforms

It is not clear precisely what to do with the state-owned enterprises, but the government bodies responsible for the economy understand quite well what the private sector needs. At the end of May, the Council of Ministers approved a draft of a new directive to support entrepreneurship. The directive excludes unnecessary intrusions by the government into market matters, separates the functions of the state as a regulator and as an owner, and proposes other steps to make competition fair for both state and private firms.

But at the same time the government continues to use the old methods of “regulating” economic problems. After the loud, and still unresolved, arrest of an IT entrepreneur and investor Viktar Prakapenia, the authorities have nationalised Motovelo, a plant producing bicycles and motorcycles, and have arrested its owners.

The privatisation of Motovelo was not done in a transparent manner, and the new owners, as it turns out, have violated the investment agreement, decreasing the number of employees it has substantially and did not bother to develop the capacities of the plant. While the nationalisation move may be legitimate, it certainly does not send a positive signal to any potential investors.

Exchange Rate Liberalisation

The National Bank, which has made several important steps towards macroeconomic stabilisation this year, has decided to further liberalise the exchange rate market. On the 1 June official exchange rates were formed through continuous order matching, a procedure that allows for direct trades between buyers and sellers matched by a price as explained in more detail below.

Before 1 June the Belarusian rouble was floating freely technically (the National Bank declared did not influence the exchange rate and only smoothed out the fluctuations).

While the trends seen here with the exchange rates reflects a balance of supply and demand, the National Bank has determined the size of permissible change. With the new mechanism the market will completely determine the exchange rate, although the National Bank still reserves the right to take part in market operations.

The introduction of this new mechanism coincided with the sharp depreciation of the Russian rouble. As Belarusian economy remains heavily dependent on Russia, after the switch to a floating currency regime, the Belarusian rouble fluctuated together with the Russian rouble. And as the Russian rouble depreciated almost 10 per cent over the week, the Belarusian currency followed.

In June the rouble once more hit a historical low, almost reaching 15,500 per US$1, which will have consequences for rouble deposits (they tend to go down as the rouble depreciates) and for the banking system as a whole.

Clearly, next year will pose many challenges to the Belarusian economy. But the government should not forget about long-run growth when trying to save the economy from its short-term malaise. At the end of the day inefficient state enterprises would have to shed some of its excessively large labour, and the government should soften the blow by offering employment programmes to the unemployed, not by printing money in order to provide loans to the plants and factories.

The aggressive attitude towards investors also is coming at an inopportune time. And while the National Bank, under the new leadership, takes important steps towards macroeconomic stabilisation, it is not up only to the National Bank to undertake reforms.

Kateryna Bornukova

This article is a part of a joint project between Belarus Digest and the Belarusian Economic Research and Outreach Centre (BEROC)




The Government is Preparing for a Recession – Belarus Economy Digest

For 2015, any positive growth would be considered a great success for the Belarusian authorities. Apart from external shocks, several structural challenges have emerged.

A spike in inflation, deeper depreciation of the national currency, the distress of the banking industry, and growing unemployment have all become urgent issues that must be addressed.

The government is trying to formulate a coherent response to all of these issues. So far the signals from the government suggest it is going to focus on tools of direct administrative control.

Economy in 2014: Weak Growith

In 2014, the Belarusian economy grew by 1.6%. Weak GDP growth demonstrated once more that the Belarusian economy has all but extinguished its potential for high growth. In other words, prior structural weaknesses continue to plague the economy.

However, cyclical factors also contributed to weak growth. In the spring and autumn a slow, but uneasy recovery took place. Since autumn, the economy started to suffer from lower demand from Russia, cheaper oil prices (which it re-exports from Russia), and deterioration in domestic agents’ expectations. Finally, in November and December, these factors overwhelmed the weak roots of the economic recovery. Since then, the Belarusian economy has started to dip into a recession again (see Figure 1).

Preconditions for a Recession in 2015

In 2015, the environment for the Belarusian economy will deteriorate further. First, a recession in Russia seems all but inevitable. During the last couple of weeks a majority of forecasts for the Russian economy have come to the consensus that its GDP is going to shrink by 3-5% in 2015. For Belarus, this means that the country can expect a further contraction in demand from Russia.

Second, Belarusian exports in Russia will suffer from a lack of price competitiveness. Despite the depreciation of roughly 40% against major currencies, price competitiveness is far from its ‘normal’ standing. For instance, the real exchange rate of the Belarusian ruble vs. Russian ruble remains much higher (15-20%) than it was just a few years prior. This will contribute to a further contraction in exports.

Third, real wages are declining due to wage policy restrictions and price growth. Reducing real wages will determine if a downturn in household consumption will unfold.

Fourth, the overall financial fragility, generally negative expectations, and high level of uncertainty will make banks more reluctant to provide new loans. Interest rates will be unaffordably high for a majority of comapnies (as of today, a lower threshold for nominal rates for ruble loans are hanging hesitatingly around 55% per annum). While other sources of financing capital investment are hardly accessible, capital investments will undergo a further contraction.

The 'internal reserves’ for a majority of companies, especially state-owned ones, have already been exhausted

Fifth, the financial position of companies has become another serious concern. Due to their sagging competitiveness, the profitability of Belarusian companies not dealing with finance has remained very low. The 'internal reserves’ for a majority of companies, especially state-owned ones, have already been exhausted. Hence, many companies will either need one or another form of financial support (permission to raise prices, access to cheap loans, etc.), or will have to layoff employees.

Sixth, no affordable external loans are directly available as of today. Access to the IMF’s funds requires a strong commitment to structural reforms. New loans from Russia are hardly accessible, unless both parties agree on a new political deal.

Yesterday’s Problems May Look Like Success Today

The official forecast from the Belarusian government projects around zero GDP growth in 2015 (0.2-0.7%). However, it also assumes a more favourable environment than really exists at present. Taking into account the preconditions above, a recession is much more likely. However, projections for 2015 are still not clear. They depend on the extent and speed of the new problems that could soon appear as well as the government’s response.

First of all, there is the issue of an unstable and unpredictable exchange rate. Fundamental factors at play will push further rouble depreciation. The latter may cause a new round of financial stress on the deposit market. However, the National Bank is still demonstrating a lack of clarity in its intentions. On the one hand, it is claiming to support a free floating currency regime. On the other hand, it fears a deposit withdraw shock, which could adversely affect exchange rates as well.

Another issue is the relatively huge price overhang that has formed during last month

Another issue is the relatively huge price overhang that has formed during the last month. If there were no price controls in place, the most optimistic projection for CPI inflation in 2015 would be 30% (official forecast project 12%). This kind of inflation will cause an additional push towards further depreciation. At the same time, long-term price controls will only enhance companies’ weaknesses and lead to a deficit in some commodity segments.

The poor financial standing of companies will require new financial injections. Moreover, deteriorating liquidity and a growing number of non-performing loans will push banks to seek cash injections too. This may result in pressure on the National Bank to soften its monetary policy. But the latter may become yet another trigger for a inflation-devaluation spiral.

So, the puzzle is extremely complicated and no good solution seems to be at hand. There are only really three major solutions still on the agenda. First, is the immediate launching of structural reforms, which will open access to cheap external funds (like, to the IMF) that are able to help mitigate the recession. In this scenario, a drop in GDP in 2015 might be significant (down to 10%), but in the long-term things could become much better.

Second, a ‘forced’ monetary softening that presumes new massive liquidity injections. Under this scenario, GDP growth rate may fluctuate around zero for 2015. But an inflation-devaluation spiral and a gradual disorientation of financial markets will be inevitable. However, the fresh memories of an inflation-devaluation spiral in 2011-2012 makes this scenario less plausible.

Third, a massive increase in administrative controls, which includes control of prices, imports, employment, wages, etc. In the view of the authorities, direct price controls may neutralise further depreciation. Direct import controls may help compensate for export losses, etc. Direct control over wages and employment may also help Belarus avoid a sharp growth in unemployment.

For the short-term, this solution may be effective in the sense of mitigating a recession and the associated outcomes of well-being. This scenario may secure either near zero GDP growth or a modest decline (down to 3%). However, for in the long-term it also assumes huge risks, beginning with a more fragile financial system up to significant losses in growth potential. As of today, the government is hesitating on whether or not to proceed precisely with this option.

Dzmitry Kruk, 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)