Belarus slides towards the economic abyss

By bne IntelliNews August 30, 2011

bne -

Belarus is sliding towards the abyss. The government needs to find $3bn-6bn of fresh cash before the end of the year or else face another devaluation and economic collapse, yet the government has found doors slammed in its face left and right over the last few weeks.

The economy is bleeding money thanks to a record high current account deficit, meaning it has to do one of three things fast: raise new money from abroad, cut spending drastically, or sell off some major assets.

The population seems to have lost faith in the government's ability to put any of these measures in place. Earlier in August, the National Bank of Belarus (NBB) was forced to deny rumours it was about to impose a ban on foreign currency sales at kiosks and President Alexander Lukashenko felt it necessary to go on TV to promise the government had no intention of seizing the population's personal deposits.

Minsk made its debut on the international capital markets about 18 months ago and raised another $800m with a Eurobond issue earlier this year. That bond issue was organised by the Royal Bank of Scotland, which is now being forced by the British government to cut off ties with Minsk because of its human rights record, the UK press reported this week.

RBS' decision is only the icing on the unpalatable pie that President Lukashenko baked himself after unleashing the riot and secret police on people protesting the obviously fixed presidential elections last December. In a single day, Lukashenko squandered what good will he had built up in the West following a sustained campaign to open up the country to foreign investment that was launched in November 2008.

Minsk then turned to its old ally Russia, cap in hand, but was almost immediately rebuffed and shunted along to the Eurasia Development Bank (EDB) - the former Soviet Union's answer to international financial institutions like the International Monetary Fund (IMF). However, the EDB said on August 25 that it may delay a second $440m payment from Belarus' $3bn bailout fund. A payment of $800m was already made in June. EDB Managing Director Dmitry Krasilnikov told reporters in Minsk on August 25: "We have had no fixed term, those were preliminary estimates. It is hard to say when the second tranche will be provided, but there are no doubts there will be a second tranche."

The EDB is doing its IMF-esque job and insisting the government put its house in some order before the rescue money is forthcoming and that little progress has been made. "So far, the following things have not been performed: there has been no unification of rates, the reserves are not stable, and the trust in the national currency has not been rebuilt," Krasilnikov was reported by Prime as saying.

Talks on a potential $2bn loan from Sberbank have got bogged down over the collateral; Sberbank is asking for a 35% stake in the state-owned fertiliser producer Belaruskaliy, the most valuable asset in the country, but Minsk has balked at the prospect of putting the country's best family silver at risk of seizure.

And talks with the IMF have also broken down. There is nothing the leaders in Minsk hate more than being told how to run their country. However, the IMF remains the lender of last resort and Minsk may be forced to do a deal with the fund, just as it had to in early 2009 following the last crisis.

Privatisation problems

Minsk's prospects of borrowing its way out of the financial hole are poor, but the prospects of selling off some assets to stave off collapse are even worse.

The mooted deal to sell Belarus' legendry giant mining truck maker, the Minsk Automobile Plant (MAZ), to Russia's Gaz or Kamaz that could be worth billions is also unlikely to happen before the end of the year. The valuation of the government's stake is due in September, but wrangling over price and possible partners is proving to be hard going.

Likewise, a deal to sell the other half of Belarus' gas pipeline monopoly Beltransgaz is proving hard. Minsk is trying to link the sale of the valuable pipeline company to the terms of the country's gas imports, but while Prime Minister in mid-August told reporters that his government plans to set a decreasing coefficient to calculate prices of Russian natural gas supplies to Belarus in 2012, there is still no sign of a final deal. Don't hold your breath.

And only last week the National Bank of Belarus (NBB) threw a new asset into the ring, its 98% stake in Paritetbank. "We are interested in an efficient new owner from the point of view of commercial approaches," NBB Deputy Governor Sergei Dubkov told reporters on August 25, without providing details of how much the stake is worth.

In June, Belarusian Prime Minister Mikhail Myasnikovich said the government is negotiating with Russian companies on the sale of seven additional strategic companies. In particular, Myasnikovich mentioned the possible sale of stakes in fertiliser company Grodno Azot to Sibur or Rosneft; the Naftan refinery to Lukoil; and the Mozyr refinery to Rosneft.

As none of these sales is likely to go through anytime soon, the government is in the meantime resorting to increasingly desperate measures to keep the economy afloat. Belarus already has one of the only dual exchange rates left in the Commonwealth of Independent States that appeared after the state stamped on the right to sell foreign currency a few months ago, whose prices range from the black market rate of BYR6,000-7,000 to the dollar and more for cash dollars, to the effectively unavailable official rate of BYR5,050.

Having already pared state investment and procurement programmes back to the bone, on August 26 the state announced it would cut $2bn from government spending, which means cutting wages to a large share of the population. Wage growth has already hit zero in June after growing at over 30% per annum in recent years. The economy was growing at around 9% going into the 2008 crisis, but is now visibly slowing. It is expected to grow by about 6% this year on the back of the previous momentum, but analysts at Renaissance Capital say that by December the annualised monthly growth rate will be down to something like 1.5%.

At the same time, the NBB is expected to hike overnight rates for the eighth time this year to 27% this week, reports Prime. The NBB has already extended the list of foreign currencies that are subject to mandatory sale to the government - a drastic crisis-busting measure that almost all the countries in the CIS abandoned over a decade ago. The list reads like a land grab of any kind of convertible cash Belarus' companies might have on deposits, including: Lithuanian litas, Latvian lats, Kazakh tenge, Polish zloty, Czech koruna, Hungarian forint, Chinese yuan, new Israeli shekel, New Zealand dollar and Turkish lira.

On August 29, Lukashenko called for a meeting between the leaders of Belarus, Russia and the EU to discuss his country's situation, but with (huge) problems of their own to sort out - not to mention Belarus' renewed pariah status - it's very unlikely anyone with any clout will travel to Minsk to meet with Lukashenko. "As the head of state, I invite all reasonable people who love their country, regardless of their political affiliation, to sit down at a round table, look each other in the eyes and evaluate what each can do to improve the situation," Lukashenko said on August 29.

Someone should explain to him that the time for talking is past.

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