Tim Gosling in Moscow -

A chronic trade deficit is draining Belarus' foreign currency reserves at a rate of half a billion dollars or so a month, data show, and in January the country's forex assets sank to their lowest level since the depths of the crisis. Minsk is facing some tough choices if it's to avoid its finances sinking further into the mire and given the events in the Middle East and North Africa, it has even more cause to be wary of a sharp economic downturn.

The National Bank of the Republic of Belarus announced in mid-February that the country's foreign reserve assets shrank by $700m in January to total $4.3bn, their lowest level since October 2009. The government moved swiftly to insist that the drop was the result of "seasonal factors" - namely a sharp increase in demand amongst the population for hard currency.

However, analysts argue that the cause is systemic, and to be found in the steadily deteriorating trade deficit. "The main reason for the drop in reserves is the country's steadily intensifying negative trade balance, which according to official data in 2010 amounted to over $9bn, a record in the history of independent Belarus," notes Kamil Klysinski of the Centre for Eastern Studies.

That negative trend in the trade deficit- which equalled 17% of GDP last year - is now catching up with Belarus, with hard currency reserves falling by one-third in January, pulling them down to just $1.3bn. Erste points out that until now, the pressure on the state's piggy bank has been obscured by the $800m raised via a Eurobond issue and what it terms "tricks", ie. forex lending by local corporate banks to the central bank.

Simply put, Belarus is buying too much abroad and selling too little - with government policy that forces economic growth via lending and wage rises simply putting more money in the hands of companies and people to buy more expensive imported goods. The removal of subsidies on Russian energy supplies hasn't helped the trade deficit either, with the value of the country's energy imports ballooning, whilst also limiting the export of refined oil products to the EU.

Underlying it all, however, is an economy populated by inefficient state-run companies turning out low-quality, heavily subsidized goods - in short, a typical picture of the early stages of transition to a market economy. Of course, the global economic crisis has done much to expose these woes, and whilst the country has a relatively healthy ratio of debt at 50% of GDP, it's due to pay down more than $12.5bn to creditors in the next 12 months.

Proper fix

The most obvious longer-term solution for Belarus is to carry out more privatisation and attract more foreign direct investment, which would not only bring in extra government revenue and reduce the current account deficit, but also start addressing those structural issues. However, for various reasons, a significant acceleration of such investment flows is some way off, so Minsk needs to urgently tap short-term strategies to give itself wriggle room.

As Erste analysts warn: "The huge current account deficit is clearly not sustainable and has to be tackled by the authorities, if they do not want to simply run out of reserves."

However, Minsk's bloody-mindedness has hardly let up since Alexander Lukashenko was re-elected president in December. Quite aside from the extra dose of siege mentality created by international condemnation of the crackdown on protestors after the vote, the government continues to sound like a Soviet propaganda film when it comes to economics.

Take a speech from Prime Minister Mikhail Myasnikovich to MPs in late February. He brushed off sceptics as he announced that the government aims to achieve a trade surplus by 2015, but stopped short of suggesting any specific measures to achieve it, other than raising exports and limiting imports.

Analysts suggest that allowing a drop in the value of the Belarusian ruble, reining in wage and budgetary spending growth and tightening monetary policy would help stifle the growth in imports. However, it would be more in their style for the authorities to simply clamp down on the forex market by applying capital controls and foreign currency rationing.

The other short-term option is to continue the strategy seen in 2010 - continue borrowing. Again, though, this is little more than robbing Peter to pay Paul. As Klysinski points out, the steady drop in reserves over the last few months is despite the issue of $800m in Eurobonds, meaning new credit is being used solely to roll over outstanding debt.

At the same time, if economic indicators continue to deteriorate, borrowing will become more expensive, and any shocks on the international debt markets could make life very difficult. Still, Minsk says it's considering another $200m Eurobond this year, as well 8bn in bonds in Russian rubles. Renaissance Capital analysts said in January they're bullish on Belarus debt, not least because the 2011 budget plans for no more than $1bn of external public debt to be raised.

However, that limit on borrowing may need to be revised, with politics likely to stir the hornet's nest. EU Observer reported in January that the EU is considering pressing the International Monetary Fund (IMF) and other institutions to withdraw support. If that went through, it would seriously damage the country's ability to raise debt.

The report appears to have sent Minsk to the Anti-Crisis Fund of the Eurasian Economic Community - set up by several of the Commonwealth of Independent States (CIS) in 2009 - for a $1.7bn loan, its full quota. Not a problem, says Alexander Kudrin of Troika Dialog, except that would leave Belarus "without this source of financing as an option in the future."

State sell-offs

Meanwhile, the former governor of the National Bank of Belarus, Stanislav Bogdankevich, told Prime Tass in January that although Belarus could make do without loans from international institutions for 12-18 months, that would depend on undertaking "large-scale privatisation attracting about $5bn-10bn."

That's an ambitious target: the state's privatisation strategy is still bogged down in confusion, and Lukashenko has a habit of reacting with erratic and furious edicts when offers come in below his expectations. The events of December have only served to give western investors even more cause for concern.

However, investment could flow from other directions. Chinese money has started to flow to Minsk, just as it has across emerging markets, whilst Bogdankevich suggests the country "may make up its mind to sell the family jewels to Russian oligarchs - the refineries, automobile plants, farm machine producers and Belaruskali." Truck producer Maz has already backed away from a proposed privatisation, and is in talks over a merger with Russian peer Kamaz.

Even if Lukashenko were to take the advice, how quickly such deals can fill the coffers and the government restructure its inefficient companies remains questionable. And as revolution spreads out of North Africa and possibly into the authoritarian regimes in the CIS, it's a valid question how much more economic hardship Lukashenko can risk foisting on the people who he's already had to repress in the last two months.