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)
Belarus Without Sanctions: What Now?
Federika Mogherini, the EU's chief diplomat, has denied that Brussels lifted sanctions against Belarus on geopolitical grounds. Anonymously, EU officials, on the contrary, have confirmed that the decision embodied the victory of pragmatism in Brussels.
For the EU, democracy in Belarus has become less important than maintaining sustainable relations with the country. On the other hand, economic hardship and Russian unreliability have made Minsk value the European Union more.
With the sanctions removed, Belarus can now hope for increased financial support from Brussels. The latter still expects some progress in the fields of democracy and human rights. Although Minsk will not concede anything crucial, much room exists for cosmetic or minor liberalisation. However, rising protest activity in the country could make the government turn off its “good child” mode, thus spoiling the re-engagement with the West.
Not “Just Another Thaw”
Critics of the EU decision, besides appealing to the moral dimension of the problem, also invoke practical arguments. They recall what happened in 2008, when “naive EU politicians strove to re-engage Lukashenka and suspended sanctions, hoping to democratise him”. It failed then, and another thaw will fail again, critics argue. This scenario may eventually come true, but the latest phase of EU-Belarus relations has a notably different context and level of ambition in both Minsk and Brussels.
The pro-Western wing of Belarusian foreign policy was just a tool to bargain for new Russian bonuses Read more
In the past the pro-Western wing of Belarusian foreign policy was just a tool to bargain for new Russian bonuses. This time, Minsk, by all accounts, is treating its re-engagement with the EU more seriously and the motivation remains purely pragmatic. Belarus has fallen into recession and needs urgent economic support. Russia, the traditional safety net, has become unable and unwilling to help due to its own financial troubles.
On the other side, Brussels has already burnt its fingers once because of its illusions about the Belarusian ruler and his readiness to evolve. Minsk got rid of sanctions, above all, for pragmatic reasons. One EU official in a recent conversation with the author described this new atmosphere in Brussels: “We have many problems now, and we do not want Belarus to become another one”.
Waves of refugees, the terrorism threat, war in Syria, Russia's presence in Ukraine, tough talks with the UK, vulnerable governments in Chisinau and Kiev – all that has increased the EU's desire for stability in its neighbourhood. Hence, relations with Belarus, in Brussels' current view, should be sustainable and more or less friendly, even if the country is not necessarily democratic. This is especially the case since sanctions and engagement both failed to democratise it.
Additionally, the EU has felt it necessary to reward President Alexander Lukashenka for distancing himself from Russia and facilitating Ukrainian peace talks.
What's on the Table
Alongside lifting sanctions, Brussels has also proposed a package of “carrots” for Belarus and a number of the usual expectations from Minsk.
The EU wants progress in the areas of freedom of association, assembly and media, a moratorium on the death penalty, and rehabilitation of former political prisoners. Brussels emphasises electoral reform and the need for a freer parliamentary campaign in the autumn of 2016.
The “carrots” menu includes funding by the European Investment Bank and European Bank for Reconstruction and Development, supporting Belarusian bids for a new IMF loan and WTO membership, increased technical assistance, lifting of some trade barriers, negotiating a basic cooperation agreement with Minsk, arranging a bilateral coordination group etc.
The Belarusian authorities have indicated their readiness to discuss human rights issues with the West. Lukashenka even ordered the establishment of an interdepartmental task force on implementing OSCE election recommendations.
Challenging Road Ahead
For Brussels, returning to sanctions anytime soon after giving Minsk a credit of trust would be another loss of face. For such a scenario to unfold, the Belarusian authorities would need to do something truly flagrant, like imprisoning a new pack of politicians. Nevertheless, several of the author’s interlocutors in Brussels agreed that the EU would not provide substantial financial support without any positive steps from Belarus.
Minsk will try to deliver as few concessions as possible – autocracies do not consciously shoot themselves in foot Read more
Minsk will try to deliver as few concessions as possible – autocracies do not consciously shoot themselves in foot. However, with the positive atmosphere in relations and new priorities in Brussels (stability and predictability over human rights), even small and cosmetic steps may work.
The Belarusian authorities seem ready to implement some of the OSCE recommendations on electoral law and practises. They are unlikely to address core concerns: non-transparent ballot counting, early voting, composition of electoral committees and administrative backing of pro-governmental candidates. The government can expand the rights of observers and alternative candidates, ease some financial constraints on campaigning or let more members of political parties into parliament.
It remains difficult to say whether the democratic opposition will get into parliament. Considering the minor importance of the parliament itself (presidential decrees surpass laws in legal force), a few opposition members in the legislature would not threaten the Belarusian regime.
On the other hand, Lukashenka is psychologically opposed to the idea of having an unsterile parliament in which some of its members persistently make a fuss. They will be able to challenge other governmental agencies with their requests, have certain legal immunity and more tools to interact with the public. That is why one of Lukashenka's first steps to strengthen his power in 1996 was ridding parliament of opposition members.
they may also ease pressure on independent journalists, establish a human-rights ombudsman office Read more
What can he realistically deliver? The government may register some opposition forces like the moderate Tell the Truth campaign. Potentially, it may also ease pressure on independent journalists, establish a human-rights ombudsman office or, in a longer-term perspective, expunge convictions of former political prisoners and put a moratorium on the death penalty. These measures would not threaten the political regime, but the government could sell them as instrumental concessions to the well-disposed West.
It is harder to predict the government's attitude to protests. Refraining from use of the force is becoming more challenging because new groups in society are suffering from the economic slowdown. Hundreds of small traders already rallied in the centre of Minsk and other cities to protest the suffocating regulations. Although the rallies were unauthorised, the police did not react.
Others will see that street protests are becoming surprisingly safe and may also consider this form of fighting for economic interests. However, this situation cannot go on forever in Belarus; eventually the government will react. So far, the risk of a crackdown on growing protest activity seems the major challenge to the Belarus-EU re-engagement.
Still, the new phase of relations is a positive development. In the end, Belarus will need a foreign helping hand to launch reforms and drag itself out of the crisis. For the sake of the country’s future and independence, this hand would be better coming from the West.