Belarusian crisis: devaluation of Lukashenko

Belarus is in crisis. Both the crisis and the ambiguous situation the leadership of that country has found itself in have evident reasons i.e. structural problems of “the Belarusian model.”

In the early period of its independence, Belarus had rather good industrial base that was inferior to the Baltic states only. The country had quite efficient machine-building and metalworking, light and food industries. Even the “democratic” authorities of Belarus did not hold any large-scale privatization. It became irrelevant after Alexander Lukashenko came to power in 1994. Eventually, even in early 2000s, state-run enterprises accounted for 70% of GDP in Belarus. Privatization rates were rather slow and complicated, since the authorities treated private owners “outrageously” and the local assets were little attractive for investors. Actually, only 7 of the 34 auctions held in 2008-2010 were successful.

The “market socialism” (© Lukashenko) had seemed a successful alternative to the Russian model for a long time. In 1996, the economy of Belarus resumed its growth and often it was quite significant (11.4% in 1997, 11.5% in 2004, over 10% in 2006 and 2008). The economic structure has not changed and the state remained mostly “socially oriented.”

This was the “façade” that hid huge direct and secret subsidies of Russia ($5.8 billion in 2007, $5.3 billion in 2011 through supply of cheap energy resources). Russia’s subsidies - both the direct and indirect ones in terms of cheap loans and loans with negative interest rate - were transformed into subsidies in Belarus’ industry and agriculture. In 2010, direct “stimulation” accounted for 8% of total GDP in Belarus. Furthermore, the subsidized Belarusian industry had free access to the huge Russian market. The other side of that was the falling efficiency of investments and poor performance of the government sector (workforce productivity there was by 40% lower than in the private sector).

The first wake-up call for the socialist “paradise” rang in 2009 when the Republic of Belarus had to devaluate the national currency by 40%. Nevertheless, the economy of Belarus overcome the crisis better than the economy of Russia (zero growth in 2009 vs. dramatic decline in Russia). The crisis of 2011 proved to be more serious. Within a year, the US dollar has appreciated tangibly against the Belarusian ruble – from 3,000 to 8,500 Belarusian rubles per 1 US dollar, amid dramatic decline of the average salary from $500 to $218. The inflation totaled 53.3% at the end of 2011 and 59.1% in 2012. The reasons of the crisis are obvious – in 2010 trade balance deficit totaled $7.56 billion, with current account deficit totaling $7.6 billion (16% of GDP).

After the crisis, the Belarusian economy has not recovered yet. In 2012, the GDP growth totaled 1.7%, in 2013 – 1%, in 2014 – 1.6%. In 2015, it fell 3.9%. The figures show that economy of Belarus was in a poorer state yet before the Ukrainian crisis. One of the reasons was the foreign market, the slackening growth in the Russian Federation, Russia’s joining WTO, and partial halting of the indirect subsidies in late 2012. However, the key factor affecting the economic growth was domestic system issues.

In 2013, the Belarusian industry often produced for stock – low quality products and marketing problems made it less competitive on the Russian and domestic markets. In Jan-Jul 2013, as compared to the same period of 2012, Belarus exported by 23.6% fewer tractors, by 36.9% fewer trucks, by 13.4% less agricultural equipment. Instead, for the same period, it increased import of trucks threefold, light cars – by 42.7%, combustion engines – by 15.5%, drugs – by 29.8%, computers – by 148.7%, communication devices – by 65.3%. In addition to it, enterprises illegally transferred huge funds abroad. Eventually, unfavorable balance of trade totaled $5.8 billion, current account deficit totaled $7.6 billion, with 35% of “economic entities” appearing to be insolvent – their overdue debts increased by 75.2% within the year. The potassium scandal (involving Uralkali, Russian potash fertilized producer and exporter) just speeded up the recession.

The attempts to “seal to hole” through privatization failed. Incomes from privatization totaled just $70 million (3% of the anticipated amount). All this resulted in another “gradual depreciation,” an 18.3% inflation, and a 13.8% growth of the state debt.

In other words, the Belarusian model began to fail yet before geopolitics started to play against it.

In 2014, devaluation and establishment of the Belarusian commodity offshore in August helped the country increase export and curtail import certainly, reducing the unfavorable balance of trade to $3.042 billion and the current account deficit - to $5.2 billion. Nevertheless, industry was still in poor state: BelAZ halved production of haul trucks, and MAZ assembled by one-third fewer trucks and almost half as many buses.

Goods made in Belarus were still not competitive even in the domestic market – import of TV-sets totaled 85%, though the country has two TV manufacturing companies; nearly half of the domestic demand in shoes and clothing were imported, despite developed light industry. As a result, production for stock or halting of production and losses continued to be a typical tendency for the country.

By the end of the year, production of metalworking and woodworking machines fell by 36.7% and 55.3% respectively. Production of the notorious TV-sets and washing machines fell by 60%. Consequently, the increased incomes of Belarus cost them high. In Jan-Dec, the state debt increased by 19.7%, money supply increased by 23.9%. Privatization plans failed.

The “hole” in the foreign balance was still deep. Following the foreign exchange crisis in Russia in December 2014, Belarus saw foreign exchange panic and the Belarusian ruble collapsed (25% within the year) and continued to fall at the beginning of 2015. Gold and forex reserves in the Central Bank fell from $6.6509 billion to $5.0591 billion. Inflation totaled 18.3% again.

In 2015, the economy of Belarus almost fully repeated the trajectory of the Russian economic decline, though Russia accounts for about 40% of its trade turnover. Export of goods from Belarus fell 24.2% (the Russian market’s share was less than half) and import fell 25.4%. Current balance was reduced but remained negative (-$2.074 billion) with at least $1.5 billion were Russian subsidies – taxes on export of oil products were returned to the Belarusian budget. Another $1.6 billion were direct Russian loans.

Industry in Belarus still experienced sales problems – stock reserves increased to 73.5% of average monthly produce versus 68.7% a year before. As a result, overdue debt increased rapidly.

The government settled the problems as it used to do. Thus, in 2014 the monetary base increased by 13.8%, in 2015 – by 14.8%. This resulted in another devaluation – in total, the national currency depreciated by 55% over the year, amid growth of the gross external debt from 52.8% to 69.7% of GDP and reduction of gold and forex reserves to $4.178 billion. Privatization attempt failed again, as the government did not manage to sell Grodno-Azot CJSC, one of the largest “backbone” enterprises in the country.

In Q1 2016, GDP continued to shrink up to March. Gold and forex reserves in Jan-Apr increased just by 1.3% with foreign debt service to total $3.3 billion this year. Devaluation of the national currency totaled 8.7% for the period under review.

In this light, the government raised excise taxes and other taxes, prices for services of natural monopolies. Actually, in December, railway ticket prices soared by 33% and in January Minsk refused to regulate prices of socially important commodities.

Russian loan and certain awakening since the end of Q1 will become a short-term salvation for the economy of Belarus. What are long-term prospects?

Belarus is an evident half-bankrupt that depends on Russian subsidies only. Industry is ageing, as nearly every effort to modernize it fails. For instance, an ambitious program of cement industry development that looked to boost annual production to 10 million tons ended in nothing – production was increased from 4.6 million tons in 2011 to some 4.64 million tons in 2015. The population is ageing too – pensioners will be accounting for 28% of total population by 2025 (19.6% in 2013). The country is experiencing a dramatic outflow of labor force, though official statistics tries not to notice facts. By some data, about 1 million Belarusians work in Russia – it is about one-fifth of the employable population. This category of the population “swallows” labor reserves from Central Asia, despite Minsk’s efforts to attract them.

Inherently, the “unique Belarusian model” exists mainly by inertia - assets are under government control just because no one buys them, while dismantling of the “social state” is predetermined.

The specifics of economy mostly determines Lukashenko’s behavior. Western sanctions may be disastrous for the economy of Belarus (Belarus has favorable trade balance just with EU). Minsk’s overall dependence on Moscow and the danger of turning into a figure-head if the Russian business amalgamates the Belarusian economy, which is almost inevitable, makes Lukashenko try to gain alternative foothold and stimulates Russophobia. In addition, tales about horrors of “Moscovia” look to restrict labor migration. Further, Russia is the lightning rod for the people’s discontent at economic problems. After all, “Europe’s last dictator” cannot but realize how precarious his position is. Nevertheless, the equivocal policy of Minsk will be continued in the future too and the inevitable “perestroika” in Belarus is fraught with serious risks.

Yevgeny Pozhidayev