Belarus economy near collapse as Lukashenko orders price freeze on staples

By bne IntelliNews June 1, 2011

Vic Vapennik in Minsk -

In a sign of increasing desperation to contain the ongoing economic collapse, the Belarusian government ordered a price freeze on staples, including fish, tea, coffee, some kinds of sausage, cheese, and selected fruit and vegetables, that became effective June 1.

Food prices have been soaring since the National Bank of Belarus caved in to mounting pressure on the local currency and devalued the Belarusian ruble by 56% to BYR4,977 per US dollar a week earlier. Economists say a further devaluation may be necessary. Currency traders have reappeared on the street where the black market exchange rate is around BYR6,000 to the dollar.

Prices for foodstuffs doubled or trebled over the last month after panic buying cleared the shelves, and importers have found it increasingly difficult to bring products into the country as the state attempts to husband its dwindling hard currency reserves. Russia and several other ex-Soviet nations are to decide on a bailout package to help the Belarusian government through the crisis on June 4.

Slippery slope

Rumours about the inevitability of another devaluation had already began to circulate prior to December's presidential election, but President Alexander Lukashenka promised he would not let it happen again. The population is still smarting following a 20.5% devaluation on January 2, 2009.

The problem is that many took the wage hikes lavished on them by the state as its main election platform and began buying hard currency. According to the National Bank of Belarus, the demand for foreign currency increased by 83% in 2010 and amounted to more than $1.5bn. In January, net purchases of foreign currency among the population totaled $56.94m. At the same time, people bought 118.08 kilograms of gold, three times more than for the same period last year.

The central bank started to hemorrhage money, something made worse by the growing trade deficit that was running at around $1bn at the start of the year. On March 22, the National Bank tried to halt foreign exchange trading and the next day the head of the National Bank, Piotr Prokopovich, the 68-year-old "Honourable Construction Worker", an award from the Soviet era, attempted to talk down the growing panic saying: "The feverish demand of the population for currency has subsided; the people have calmed down." Prokopovich went on to blame private traders and entrepreneurs of speculation.

Six steps to curb imports

To save the country's reserves, the government has chosen to restrict imports at whatever the price. Over the past two and a half months, this decision resulted in at least six steps aimed at curbing the importers' activities in Belarus. The Decree #240/5 introducing restrictions on the importation of a wide range of goods - a "black list" of goods that's 22 pages long.

As any strong medicine, these measures produced side effects. The companies suffering the most are also the biggest importers. Local press reports that electronics maker Samsung has suspended all deliveries of all their products to Belarus. The company says it will restart some imports later in the year except for its IT products and vacuum cleaners. South Korea's LG has also suspend deliveries of monitors, vacuum cleaners and air conditioners, and says it has no plans to resume deliveries until the situation becomes a bit more stable.

Two of the three distributors of Samsung products in Belarus have already hiked prices to allow for the currency risk. Distributors of many other producers like Canon, Xerox and HP have followed suit, while all distributors have shifted their attention to collecting their outstanding debts as quickly as possible.

Uncertainty over the exchange rate will soon spill over into the real economy, reckon business leaders in Minsk. Importers of construction materials believe that the interruption of purchases from abroad may result in shortages of the materials on the market. "People are now sweeping everything from the shelves," says an assistant at a construction materials store. "They took even some pieces of plumbing made in Ukraine that no-one had been looking at before and we no longer hoped to sell."

In the last two weeks, the prices of computers and office equipment jumped by 15-30% after vendors warned these goods could become even more expensive. "Prices went up due to the high devaluation expectations," admits Nikolay, a manager of the company with a strong position on the IT products market.

Andrey, the owner of a big transportation company involved in the international transportation by sea, had to suspend the execution of certain contracts and he was going to stop operating in Belarus, at least for some time. "It looks like it's now that the crisis really starts in Belarus," he says.

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