Belarus ensnared by Russia's recession for another year

Belarus ensnared by Russia's recession for another year
By Sergei Kuznetsov December 21, 2015

It promises to be another bleak year for the economy of Belarus – and the authoritarian leader's continued digging in of his heels over the scope of structural reforms won't help the former Soviet republic win desperately needed loans.

President Alexander Lukashenko has fended off demands for austerity from prospective Western creditors, most notably the International Monetary Fund (IMF), rejecting the attempts of "others" to foist their economic strategies on the Eastern European country of 10mn people.

"The rigour which they are trying to impose allegedly universal development models from outside is no better than religious fanaticism,” Lukashenko said on December 12 at a conference of "neutrality policy" in Turkmenistan, a fitting forum as the former state farm director pursues his precarious tightrope walking between the EU and Russia, his country's main trade partner.

After the expected contraction of the Belarusian economy in 2015 by 3.5%, the country's GDP will continue to decline in 2016 due to weak demand in both domestic and external markets – above all in Russia. Eventually, and with some compromises, the government will probably be able to secure funding from international donors to help it service its foreign debts. However, the Belarusian authorities are unlikely to demonstrate the political will to embark on significant and far-reaching structural reforms.

The economy of Belarus is in recession for the first time since 1995. According to a World Bank forecast published in November, real GDP will decline by 3.5% in 2015, and by 0.5% in 2016. The European Bank for Reconstruction and Development (EBRD) has the same forecast for the current year, while it predicts a 1% decline in 2016.

According to official statistics, the country's GDP dropped by 3.9% year on year (y/y) between January and October. Industrial output declined by 17.1% y/y in January-October, as industrial giants in Belarus have been badly hit by the recession in Russia caused by a trade dispute with Western nations, a weakened domestic currency and low global oil prices.

There are few indications that the recession in Russia will come to an end in 2016, which means it will continue to affect the economy of Belarus. The central Bank of Russia (CBR) forecasts that Russia's GDP will decline 2-3% in 2016, investments will continue to shrink, and unemployment will rise.

The World Bank underlines that the outlook for 2016 is subject to uncertainty related to oil prices and developments in Russia and Ukraine. "Progress on a comprehensive structural reform agenda would affect outcomes, too. Implementation of reforms would not immediately deliver growth, as restructuring – especially of small and medium-sized enterprises – takes time. But without reforms, the recession could be deeper and longer," the multinational lender's November forecast said.

Poker face and new threats

The Belarusian government has a more optimistic take on the country's economic prospects in 2016, predicting GDP growth at a minimum level of 0.3%. According to official reports, this will be possible if the oil price does not fall below $50 per barrel, and the Belarus ruble/dollar rate stays at BYR63 to the dollar.

The estimates likely reflect a desire on the part of the Belarusian cabinet to demonstrate a positive mood before the public and the authoritarian Lukashenko, who won another five-year term in office in October’s presidential election. However, the fact that Brent has already dropped to around $37.4 per barrel, its lowest level since December 2008, upsets the government’s forecast.

Meanwhile, the Minsk-based think-tank IPM Research has identified a new threat to the financial stability of Belarus against the backdrop of the traditional risks of inflation and devaluation: the deterioration of banks’ asset quality. "A recession environment promotes rapid growth of problem loans. Moreover, there is reason to believe that at present, not all de facto problem loans are adequately reflected in the [banks'] statements," IPM wrote in a note published in December.

The government was able to largely "neutralise" this problem in 2015 by exchanging the non-performing loans (NPL) of state-owned banks for government bonds. However, according to the think-tank, this means that the threat of the growth of NPLs has only been partially "repackaged" and transformed into a threat against the stability of domestic debt in the future.

Relying on external funding

Despite the fact that Belarus passed a peak in its foreign state debt repayments in 2014-15, when it needed more than $3bn each year, Minsk still needs to allocate around $1.6bn for the servicing of its foreign debt in 2016. This will pose a threat to its finances, as international reserves stood at just $4.56bn on December 1. Some Minsk-based experts believe the situation is even worse, given the country's reserves contain up to $2.7bn that the central bank owes to local commercial banks.

With the aim of finding extra funding for 2016, the Belarusian government is negotiating new loans both with the IMF and the Russia-led Eurasian Fund for Stabilisation and Development (EFSD). However, the talks appear to be difficult.

After months of consultations, Minsk says it hopes to receive a final decision from the IMF on a new $3bn loan by the end of the first quarter of 2016. Taras Nadolny, first deputy governor of the National Bank of Belarus (NBB), made this statement in early December, but hinted that the authorities may fail to reach a deal with the donor. "I think in the first quarter of [2016] it will be clear whether we are going to continue working with the IMF, on what terms or whether we are not going to continue working," Nadolny said.

Russia, which controls the EFSD's lending policies, is also reluctant to comply with Belarus' request. Russian Finance Minister Anton Siluanov has underlined that the fund would theoretically be able to lend up to $2bn to Minsk instead of the requested $3bn, however it would like to determine a larger number of structural measures before issuing the first tranche of the loan. "The decision on budget-substituting loans for Belarus has not been made yet," he said on December 8.

Reforms – what reforms?

Lack of faith in Minsk's will to implement structural economic reforms has always been the main hurdle to new funding by donors. Specifically, the IMF has stated over the past years that it wants to see "a credible and strong commitment at the highest level" to a comprehensive package of deep structural reforms and consistent macroeconomic policies. In other words, Lukashenko should personally agree to take the unpopular economic steps, which he has always tried to avoid.

Apparently, different approaches to possible reforms and their terms have also been front-and-centre during the current negotiations with both the IMF and the EFSD. According to reports by Belarusian official media, the IMF insists on privatisation of state property, which could provide additional funding to the government.

Previously, the Belarusian government has stalled on privatization by offering an extremely high price for assets as well as imposing social and production conditions for investors, which made privatisation unprofitable and inefficient. Furthermore, doubts remain that Lukashenko is ready to loosen his grip of state-owned property. "As for privatisation, we must be sure that it will be honest, clean, open and competitive," the president said in early December, speaking about the IMF's demands.

The IMF will probably request the government increase significantly utility and transport tariffs, which could also trigger Lukashenko's suspicions. At the same time, the president seems to be ready to raise the pension age in Belarus. "The IMF strongly recommends us to do it. As I said before the election, I am absolutely convinced that we need to raise the pension age," he said in early December.