Belarus: Problems with the Neighbour
By Chris Weston, CEE Consulting Group
First of all, Belarus, contrary to some perceptions, is one of the world`s most open countries by trade with total of imports and exports of the order of 140 percent of its GDP.
However, Russia is both its main importer (59 percent of imports) and leading export market (35 percent of total exports). While it has been insulated by the up to now oil and gas prices by subsidies from Russia â€“ in the mid-2000s, it was estimated that the annual subsidy amounted to about USD 4 bln –Â the massive depreciation of the Russian currency in 2014 and the recession in Russia this year has wreaked havoc on Belarus` exports.
Belarusâ€™ GDP fell 3.3 percent in first half of the year, which raises awkward questions concerning the governmentâ€™s official forecast growth rate of 0.7 per cent. Moreover, the IMF, in its May report on the country (of which more later) has projected a 2.25 percent fall in GDP for the year.
Belarus is beginning to be weighed down by the ongoing conflict between the EU and Russia, its largest trading partner, as well as the inherent deficiencies in its economic model.
The slide in the Russian ruble led to Belarus devaluing its currency by 30 percent, thus rendering its imports from the EU, i.e. Germany, consequently more expensive, and leading to a current account deficit i.e. more imports than exports, of 7 percent, as well as high rates of inflation with 22 percent inflation is expected during 2015.
This current account deficit requires financing from overseas. Typically, Belarus would go to Russia for the currency. Belarus has already borrowed USD 2 bln from Russia last year and received a further USD 110 mln loan in April for Belarus to pay interest on a further outstanding Russian loan from 2010. An appeal to Russia this year for a further USD 3 bln elicited an offer of just USD 760 mln.
In addition to a substantial current account deficit, Belarus has USD 4 bln of borrowings to repay this year. In order to preserve its options, Belarus invited the IMF to visit the country for discussions on providing financial assistance of USD 3.5 bln.
Problems are steadily mounting in Belarus` real economy:
- Belstat, the official state statistical body, released on July 6, its report on loss-making enterprises in Belarus for January-May 2015. Net losses for these enterprises hit around USD 0.8 bln and more than doubled in comparison with the same period from last year. The hardest hits were mostly exporters to the Russian market.
- By the beginning of July, 555 enterprises (mostly from the agriculture, hunting and forestry sectors) had not paid 95,200 of their employees.
- Recorded unemployment of around 1 percent is ludicrously understated and reflects the law passed earlier in April 2015 on fining â€śsocial parasites,â€ť which essentially makes unemployment illegal.
The IMF is unwilling to render such assistance given its belief that structural reforms are necessary. Some of these reforms are likely to centre around ongoing government subsidies to major Belarussian firms like MTZ (Minsk Tractor Works) and Gomselmarsh, a leading manufacturer of combine harvesters and agricultural machines.
Indeed, the Ministry of Finance provided state financial assistance to both of the above entities by issuing USD 425.8 mln in foreign currency bonds.
Thus, the IMF report concluded with the following: â€śAny future arrangement would require a credible and strong commitment at the highest level [i.e. President Lukashenko] to a comprehensive package of deep structural reforms and consistent macroeconomic policies. [The IMF] looked forward to continued close engagement with the authorities on these issues.â€ť
With the country`s foreign reserves around USD 4.6 bln â€“ representing just one and half months` imports and thus well below a norm of three months` imports coverage, – the Russian president may yet expect a visit from a neighbour seeking something to tide him over for the time being.
Photo courtesy of user 699 (Wikimedia Commons).