Simultaneous fiscal, monetary and political crises are weighing heavily on Belarus’s unique growth model – and could even combine to finish off the country’s authoritarian president, Alyaksandr Lukashenko.
In the face of fiscal meltdown, the government has secured some cash support, and some promises, from Moscow – but such aid doesn’t come free of conditions any more, and talks on the terms are continuing. But Minsk still prefers it to a with-strings IMF programme.
On August 15, Russian prime minister Vladimir Putin announced that, on top of a $3 billion loan programme from the Eurasian Economic Community (EurasEC, a Russian-dominated economic club of former Soviet countries), Belarus would get a discount on gas import prices in 2012.
But the size of that hand-out has still to be negotiated between the Russian state-owned gas exporter Gazprom and Beltransgaz, the importer. Part of the deal is that Gazprom will buy the 50% of the Belarussian gas pipeline system that it does not own, which is worth about $2.5 billion.
This aid is modest, though, compared to the long-term subsidies Moscow provided to Minsk before the world financial crisis: duty free crude oil for its refineries, mostly phased out in 2007–09, and gas imports at prices close to those for Russian customers, which was axed in 2007.
Lukashenko’s government struggled to balance the books after those supports were pulled away – and then, in the run-up to the presidential election last December, overspent heavily on public-sector wages, pensions and other crowd pleasers. Even so, the authorities felt so insecure about the outcome that five candidates who stood against Lukashenko, and hundreds of their supporters, were arrested.
The spending spree triggered a currency crisis earlier this year, leading to a 40% devaluation in May and, subsequently, an unstable regime of multiple exchange rates. Now, international markets doubt that Belarus’s economic model – based on the strong Russian support, a large state sector, processing industries, a skilled workforce and relatively high living standards – can survive.
On July 21, Moody’s downgraded Belarussian government bonds from B3 to B2, citing “the limited external assistance received thus far to bridge the balance of payments gap”, the impact of foreign exchange shortages, and continued concerns over the political fallout of external liquidity constraints.
Atsi Sheth, vice-president and senior analyst on Belarus, says that Moody’s expects a $5 billion current account deficit this year. “Current foreign exchange shortages may seem like a liquidity problem, rather than a solvency problem, but actually Belarus’s foreign-financed, credit-driven economic model is at risk – not simply because of liquidity issues, but because of more serious competitiveness and productivity issues.”
Belarus had full employment, much better living standards than Ukraine, and 7% annual average growth over 15 years. “The model worked and people bought into it. But now it is changing, and that is hard,” Sheth says.
“There is a diverse economy and a skilled workforce. But that’s not enough. The enterprises need to be made profitable, and presently there is no way of measuring whether they are or not.”
An IMF mission visited Minsk in June, in the wake of the devaluation. Its head, Christopher Jarvis, made clear afterwards that a loan programme would be conditional on a macroeconomic policy shift and “structural reforms to improve the efficiency of enterprises and the financial system”.
Jarvis says the crisis originated in “excessive credit growth and wage increases that the economy could not afford”, and the solutions lay in restraining money creation. He says the foreign exchange market was not working and calls for a floating exchange rate.
IMF SPURNED
Minsk held out against striking a deal with the IMF, and in June landed agreement on the $3 billion EurasEC loan package, of which $800 million was disbursed immediately.
The terms are generous – a three-year grace period on repayment of the principal, and interest capped at half Belarus’s current borrowing cost – but there are conditions, reportedly including tighter monetary and fiscal policy and privatization of $7.5 billion of state assets over the next three years. Russian companies are hoping to scoop up much of those.
Economists at international financial institutions and banks consider the loan requirements to be positive – but say that, in isolation from a new macroeconomic strategy, they cannot save the day.
Alexander Pivovarsky, senior economist at the EBRD, says some of the policy measures adopted in recent months could delay adjustment, undermine public confidence and exacerbate the crisis. He says, “A large devaluation should help rebalance the economy, by means of a shift away from consumption-oriented to export-oriented activity. But the government has taken measures that make such a shift difficult, such as limiting exports of agricultural products and white goods, and imposing price controls.”
The government’s economic policy is “not yet underpinned by a consistent macroeconomic framework”, he warns. The danger was that privatization revenues under the deal with Moscow “would be spent on unsustainable policies”.
Andreas Schwabe, an analyst at Raiffeisen Research in Vienna, says: “In addition to a lack of coherent policies that could lead to structural reforms, Belarus has little experience in carrying out such reforms. The governmental system is used to administrative solutions.”
Not only is Lukashenko perceived as unwilling to undertake the reforms western institutions urge, he also appears to be running out of options as his albeit grudging popular mandate is eroded. This year has been marked by the biggest wave of street demonstrations, and the authorities have responded with more than 2,000 arrests and some lengthy jail terms.
Valentin Stefanovich of Viasnia, a prominent human rights group, says: “The aspiration to democracy has brought people out to protest, but the economic factor also plays a big role. The devaluation had a big impact on wages.”
The question now is not if, but when, the Lukashenko model will break down, and what will follow it.