Graham Stack in Minsk -

For all its image as a possible "safe haven" in emerging Europe and its low level of international integration, Belarus joined a growing band of Central and Eastern European countries to turn to the International Monetary Fund (IMF) for a loan. But the deputy chairman of the National Bank of Belarus, Yury Alymov, told bne that the banking sector is still stable.

Belarus applied on Thursday, October 24 to the IMF for a $2bn loan to stabilise the country's economy in the face of the global financial crisis and a widening current account deficit. This makes Belarus the third CEE country following Ukraine and Hungary to turn to the IMF in October. Belarus is also negotiating a $2bn loan from Russia. "It is small wonder that Belarus has asked for an IMF loan. The global financial turmoil has caused a cash deficiency and our trade partners have delayed payments for our services and products," central bank spokesman Anatoly Drozdov told Prime-Tass on October 24.

But most analysts agree the problem goes a lot deeper than merely delays in payment. Instead, Belarus is facing a widening current account deficit. Hard currency revenues are plummeting along with global commodity prices, while domestic demand for imports is still driven by the peak in commodity prices earlier in the year. Added to this is that Belarus was already struggling to deal with successive price hikes for Russian gas in 2007 and 2008.

Commenting to bne before last week's application for an IMF loan, Alymov explained that the 2007 hike in the gas price caused the current account deficit to reach 6.6% of GDP, but that the economy had quickly adjusted to the new price. In the first half 2008, despite a second 20% gas price hike at the start of the year, the current account deficit in fact dropped to 5.5% of GDP. But already in the third quarter of 2008, as the value of commodity exports dropped precipitously, the deficit doubled again to reach $1bn. Foreign currency reserves fell by $459.7m in September alone, to reach $4.12bn as of October 1.

With central bank reserves falling and foreign direct investment likely to slow rather than accelerate as had been hoped, the situation is becoming critical. And adding insult to injury, Belarus does not stand to benefit from falling oil prices, since it already receives subsidised oil and gas from Russia. Instead, it is faced with another substantial gas price hike come the New Year.

Peaking commodity prices skewer capital accounts

Belarus has been caught out by the same double whammy as Russia and Ukraine. With the start of the financial crisis in 2007, money moved out of securities into commodities, causing prices for everything from wheat to oil and gold to soar all round the world. According to the Minsk Institute of Privatisation and Management, in 2007 the value of Belarus exports increased by 20%, almost entirely due to rising commodity prices. Belarus is a major exporter of fertilisers, especially potash, and of refined oil products.

But as the global financial crisis developed, the record-breaking commodity prices proved short lived. As speculators started to get nervous about a looming global slowdown, they moved out of commodities - into dollars. And commodity prices dropped like a stone - exemplified by the world oil price halving over five months.

This lurch is now putting pressure on the currencies of commodity exporters as their trade deficits widen. Crucially, as Renasisance Capital analyst Elena Shapirova argues, for commodity exporting countries there is a time lag between the impact of a price drop on export revenues and its impact on domestic demand for imports. While hard currency receipts drop with commodity prices, domestic demand for imported consumer goods is staying high as last year's windfall works its way through the economy. And now this time lag is causing the trade balance of commodity exporter countries like Belarus, Ukraine and Russia to do the splits, causing exchange rates to wobble - and the IMF to arrive in town.

However, while the growing trade deficit is looking ominous, Belarus' banks are still holding up better than those in Russia and Ukraine, though Alymov doesn't deny that the global crisis could still hurt the domestic banking sector. "Over the last few years, Belarus banks have constantly increased their level of borrowing from non-residents," explains Alymov. "At the same time, their level of lending in foreign currency has accelerated, mostly using funds borrowed from non-residents. Funds borrowed from non-residents are, however, to a very large extent short term."

This means, according to Alymov, that "a potential threat... posed by the global financial crisis could be difficulties for Belarus banks in borrowing on international financial markets and problems connected with foreign currency liquidity."

Alymov, however, also points out that increased international borrowing by Belarus banks has been accompanied by increased involvement of foreign banks in the sector. "The arrival of new foreign investors can compensate decreased borrowing opportunities on foreign markets through growth in equity and capital and also make it easier to attract foreign loans."

"In addition," says Alymov, "it's important to note that in the case of difficulties, banks belonging to large western financial concerns can count on effective support from their foreign shareholders."

However, the theory that banks with strong foreign parents are safer than local banks is increasingly being questioned. Throughout Eastern Europe there were reports in October that foreign banks, facing problems at home, are restricting lending to their local subsidiaries, thus exporting the financial crisis by the back door.

Alymov refused to comment on rumours that Germany's Commerzbank, which in the summer seemed on the verge of acquiring 100% in Belinvestbank, Belarus' fourth largest, is backing out of the deal. He did say, unsurprisingly, that the planned London IPO for the country's largest bank, state-owned Belarusbank, had now been postponed due to the "unpleasant market situation."

But as a silver lining, Alymov sees opportunities beckoning for Belarusbank to develop as a "national champion" by expanding internationally through acquisitions. "We believe that such a large banking institution as Belarusbank, uniting 38.8% of the country's banking assets and 28.8% of capital, is perfectly capable of expanding onto global financial markets through acquiring subsidiaries in countries to which we are closely linked by trade and economic ties."

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