What Policy Can The Belarusian Economy Sustain?
The official forecasts for socio-economic development in 2014 is as conservative as it has ever been: the projected GDP growth is only 3.3%. International organisations and independent forecasters are even less optimistic.
The economic authorities' plans for 2014 are also unusual. Less than two years before the next presidential election, the "pillars" of the Belarusian social contract – wages and employment – are being affected. It has been stated officially that the real wages in the budget sector will only grow in the case of layoffs.
According to official projections, employment levels will decrease in 2014 by about 3.4%, mostly through the "optimisation" of employees in state-owned enterprises and budgetary organisations. Against abackground of such major changes, there are plans to significantly raise utility costs for households – a very unpopular move.
Why are the authorities adopting such measures? In 2013, the current account deficit reached alarming levels and households turned into a net buyer of foreign currency. If it had not been for tight monetary and fiscal policies, which were launched under the Joint Action Plan of the Government and the National Bank, the situation on the currency market in late 2013 could have been much more complicated.
Will the implementation of the initiatives already announced by the economic authorities be sufficient to stabilise the situation in 2014? If yes, how stable will the balance they strike be? And what happened to the economy that was called the "Eastern European Tiger" just a couple of years ago by some official media outlets?
End of economic growth
Indeed, economic growth has all but come to a halt in recent years. In 2009–2013, the average annual real GDP growth rate was only 3.2%, and this was after a 10% average annual growth rate in 2004–2008.
Even in the early 2000s, when the country was experiencing the effects of the Russian financial crisis and its own inconsistent policies, economic growth was higher (5.1% during 1999–2003). It seems that the Belarusian economy cannot grow at a rate consistent with the status of a country that is "catching up" in its development with more advanced economies.
A very simple illustration of the situation with long-term economic growth is the decomposition of the real GDP in a time series that considers both long-term trends and a cyclical element. The corresponding estimates of the IPM Research Centre show a steady decline of the long-term trends for the real GDP growth rate.
According to the most recent estimates, in December 2013 they barely exceeded 1.8% a year and five years ago (in December 2008) they reached 6.5% a year (see Figure 1). Moreover, the cyclical component of real GDP has been declining for more than two years, i.e. the authorities' attempts to revitalise the economy are not producing any real effects.
One can come to the same conclusions through an analysis of aggregate demand. Growth in domestic demand, which was a stimulus for GDP growth over the last 10 years, is no longer having a positive effect for economic growth due to the negative contribution of net exports. Imbalances grow while the economy does not.
Currency crises in 2009 and 2011 and imbalances in 2013
The accumulation of imbalances provoked by "bad policies" (enhancing of growth in domestic demand through directed loans, quasi-fiscal budget operations and income policy) was the main cause of the currency crises in 2009 and 2011. Negative external shocks played an additional role both in 2007–2009 and in 2010.
Once again, Belarus is facing a series of negative external shocks. In the first half of the 2013, a decline in exports occurred as a result of 2012's high levels of re-exported Russian petroleum products.
In the second half of 2013 exports fell because of a sharp decrease in exports of potash fertilisers (due to a conflict with Uralkali, a partner in the Belarusian Potash Company) and petroleum products (Russia cut its crude oil supplies to Belarus as a result of the "potash conflict").
Finally, from 2013 to the present moment, Belarusian exports (especially exports of investment goods) suffered from stagnation/recession in the Russian economy.
External shocks, which adversely affect its exports, were accompanied by an increase in imports under the influence of a rather rapid increase in domestic demand (both in consumption and investment). As a result, the current account deficit rapidly increased during the year and exceeded 10% of GDP in 2013, which is 2 percentage points more than on the eve of the 2009 crisis (see Figure 2).
A loss of confidence in the national currency supplemented an increase in external imbalances. Again, the situation became even worse in Belarus when compared to previous crisis episodes: in the second half of 2013 very high interest rates scarcely helped to contain the outflow of Belarusian rouble deposits from the banking system, although in the beginning of 2014 the situation saw some slight improvement.
The story is as follows: the economy of Belarus entered 2014 with a high current account deficit, unstable situation in the currency market and sub-optimal monetary policy – and all this against a backdrop of an unfavourable position in external markets, especially in Russia. It seems that there are many reasons to regard the Belarusian rouble as overvalued and growth in domestic demand as too high to maintain macroeconomic stability.
From the perspective of macroeconomic stability (if we do not take into account changes in any external conditions), the possible scenarios for 2014 are tied to the country's exchange rate policy and macroeconomic (monetary and fiscal) policy.
A return to a policy of credit or fiscal expansion would ruin rather quickly the current fragile stability, there are two options left: (i) a strict macroeconomic policy with a crawling band/peg or (ii) a stringent macroeconomic policy with a floating currency and inflation targeting as a new nominal anchor. From the perspective of external imbalances, the efficact of the first scenario depends on how far the economic authorities will go down the path of reducing domestic demand.
The efficacy of the second scenario depends on how successfully the transition to a flexible exchange rate regime will be supported by monetary and fiscal policy measures. Both scenarios imply a curtailment of imports and some stimulus for exports, but if there is a transition to a free-floating exchange rate the effects will be considerably stronger and faster. Both scenarios mean that the economy of Belarus will endure recession or, at least, it will not grow by the 3.3% which the official forecast envisaged.
There is one significant difference between the current situation and that of 2011. Even if the Belarusian rouble is adjusted in real terms by, let us say, 20%, it will result, according to our estimates, in about a 4% of growth in exports, which are not related to crude oil, petrol products or potash fertilisers. During a recession in Russia, even this potential effect appears to be highly debatable.
However, since a fall in exchange rates will negatively affect domestic demand (this is eloquently demonstrated by Belarus' experience in 2009 and 2011), a growth in exports will be insufficient to ensure any growth in GDP.
Will it be sustainable?
Thus, to maintain macroeconomic stability, it is desirable to combine the transition to a free floating exchange rate, backed up with a strict monetary and fiscal policy. However, even if this were to occur several important questions remain. First, a tight monetary policy implies a serious reduction in support for state-owned enterprises.
A set of restrictive measures implemented by the economic authorities in late 2013 already led to decline in the financial status of Belarusian enterprises. Further curtailment of direct and indirect government support endangers the basic functioning of many state-owned enterprises. Accordingly, the restructuring and privatisation of state-owned enterprises will become pressing issues for the economic authorities.
It is also necessary to first improve the efficiency and flexibility of Belarus' labour and capital markets. But making the decision to start structural reforms is very difficult for the Belarusian authorities. The last currency crisis took place almost three years ago and they still have not made the "new (old) decision" in favour of reforming state-owned enterprises.
Without this choice, every possible scenario involves the risk of a return to supporting state-owned enterprises and the consequent risk of preserving of the current "model" for the economy, one which is prone to regular crisis and stagnation.
The beginning of structural reforms can improve Belarus' position in any negotiations with the IMF and other international financial institutions. Regardless, the authorities will have to launch reforms without any financial support. It remains to be seen whether the economic authorities will be able to introduce a policy that the economy can sustain.
IPM Research Center, Minsk
Why Lukashenka Wants to Make Friends with the New Ukrainian Government
On 12 March at a meeting of the Security Council of Belarus, Lukashenka confirmed that Belarus would maintain contact with the new Ukrainian government. He emphasised the close economic ties between Belarus and Ukraine and gave guarantees to Ukrainian business that their fruitful relationship would continue unscathed.
Belarus' large stake in trade relations with Ukraine can be seen as the primary motivation for Lukashenka's affirmation of continued good will. Ukraine, after all, is Belarus' third largest export market with around $5bn in annual trade. As Ukrainian oligarchs continue to play a role in Ukrainian politics and Ukraine's economy, Lukashenka will have no choice but to work with them, despite the political orientation of the new government.
80% of Belarus' exports to Ukraine, however, come from refined petrol products that are made with Russian oil, making Belarus' lucrative oil scheme vulnerable to Russian pressure.
To mitigate this and other possible threats that may arise as a result of a potential disagreement with Russia over the Ukrainian crisis, Lukashenka is trying to play the military card and raise his anti-NATO rhetoric game to appease Belarus' ally to the east.
We are Ready to Support the Ukrainian People
Lukashenka's recent public addresses demonstrate that he is trying his hand at playing a rather peculiar role in the ongoing Ukrainian crisis. Despite giving an order to conduct military manoeuvres and let more Russian fighter jets to be stationed in Belarus as a response to NATO's own manoeuvres in neighbouring EU countries, he also stated that the position of Belarus towards the Ukrainian situation remains unchanged, or in other words, Belarus continues to support the territorial integrity of Ukraine.
Moreover, Lukashenka has made several comments on the economic interests of Belarus in Ukraine and expressed his readiness to work with the new Ukrainian government to maintain the economic ties of the two countries. Lukashenka, at a recent Security Council gathering, stated:
Currently in Ukraine some politicians are trying to tackle the nation's problems. We, by no means, are going to interfere with them. Moreover, we have not broken any ties with Ukraine, especially not our economic ties. We have always done our best to meet the demands of Ukrainian business and still do so…We supplied Ukraine with energy resources and food, amongst other things. We are ready to support the Ukrainian people in this difficult situation.
Oil and Energy Trade at Stake
Ukraine is an important outlet for Belarusian exports, and is its third largest market after Russia and the Netherlands. Both for Ukraine and the Netherlands, refined petrol products make up an overwhelming majority their imports from Belarus. Petrol products remain the most lucrative market for Belarusian exports. In 2012, Belarus sold oil and petrol products to the Netherlands for $5.6 bn and sales reached $4.2 bn with Ukraine according to national statistics.
Over recent years, the export of petrol products grew to two-thirds of Belarus' overall share of exports to Ukraine. Belarus itself depends on Russia to supply its oil refineries. Belarus has increasingly become more and more dependent on trading refined Russian oil, while other formerly strong sectors of the economy, such as manufacturing of heavy machinery, are lagging behind and have become non-competitive abroad.
Furthermore, Ukraine is Belarus' fourth largest import partner, with electric energy topping the list of imports, giving Belarus also depends on Ukrainian energy supplies. This middling position places Belarus in a doubly difficult position, as it depends on continued oil exports and electricity imports. Lukashenka has little choice then but to do business with the current Ukrainian government, despite any political inconvenience that it may cause. This role, however, is not entirely unfamiliar for the Belarusian ruler, who has typically put the Belarusian economy before any political considerations in the past.
New Government, Old Oligarchs
According to Lukashenka, and something that he has oft repeated as of late, the Ukrainian corrupt oligarchic political system was the primary reason for Maidan and the subsequent Crimean crisis. According to Lukashenka, a Belarusian Maidan is unthinkable, if not impossible, due to stark differences in the two nations' political system and the substantially lower level of corruption in Belarus.
Indeed, Belarus does appear to have a stronger grip on corruption, and the trials of corrupt officials are a regular event in Belarus. The World Bank estimates that corruption in Belarus in 2012 is two and a half times lower than in Ukraine.
The difference between these two cases can be explained by the countries’ internal development over their respective periods of independence after the collapse of the Soviet Union. In Ukraine, vast privatisation schemes created a group of oligarchs who gained control over whole industries that were formerly state property. The oligarchic elite also acquired new influential institutions like media outlets and banks.
Before Maidan, oligarchs and the Yanukovych "family" (a group estimated to be around 100 persons in all) controlled 80% of the nation's wealth. In reality, oligarchs became the main force in Ukrainian politics long ago, and their business interests defined the nation's political dynamics domestically and even externally.
After the ousting of Yanukoych, Ukraine's oligarchs, far from disappearing, have been able to reaffirm their roles Ukrainian politics and its economy, though a noticeable shift towards more "opposition" friendly (opponents of the Yanukovych regime) oligarchs gaining power has occurred.
Some of them recently received posts in eastern regions of Ukraine to help the new government defend the nation's territorial integrity and quell pro-Russian uprisings, a move that many consider very clever on the part of the new Ukrainian leadership. Others, like Rinat Akhmetov and Viktor Pynchuk, have voiced their public support for the new government and Ukraine's territorial integrity.
In fact, Ukrainian businessmen are the main partners of Lukashenka's oil trade. And as long as Ukrainian oligarchs remain in power, Aliaksandr Lukashenka will have to deal with them, regardless of their political leanings. So long as they buy Belarusian refined oil and petrol products for the vast Ukrainian market, they will remain friends of Belarus.
Lukashenka's Oil-Defence Game
It is beginning to appear that, given Lukashenka's own recent speeches and actions, that he is trying to elaborate his own policy towards the Ukrainian crisis. On the one hand, he does not support the Russian invasion of Crimea, fearing that such precedent can create grounds for an intervention in Belarus in the future.
To compensate for his diplomatic dissent with Belarus' closest ally, Lukashenka has invited additional Russian fighter jets to equal those of NATO on Belarus' border. By doing so he is symbolically showing his loyalty to Russia within the existing defence agreement.
However, Belarus' economic interests force Lukashenka's hand to continue to build good ties with the new Ukrainian government and to continue the export of oil to Ukraine and the import of Ukrainian electricity.
This arrangement remains quite vulnerable, as Russia can try to manipulate oil prices and supplies to Belarus in order to force Lukashenka to support its military excursions. Therefore Lukashneka will continue to try to trade military cooperation, coupled with anti-NATO rhetoric, for cheap Russian oil.