RZB Group in Vienna -

1. Current situation

According to the contract signed with Gazprom, Belarus will see a two-fold increase in the price it pays for gas to $100/1000m3 in 2007. The price is still the lowest among the former Soviet Union states, however it should gradually rise to market rates in the coming years.

The higher gas price will hit industry in 2007 through an almost doubling of gas and electricity costs. We estimate that gross additional costs are $1.06bn. Despite the lowered profitability in general, industry should be able to bear the increased price. State subsidies to key and high power-consuming enterprises are expected.

Late on January 12, Belarus and Russia agreed the customs duty for crude oil exports to Belarus at $53 per tonne, while earlier Belarus had paid none. This fact will create additional costs for oil refineries of around $1.05bn in 2007, lowering their profitability from 30% to 12%. Total losses resulting from the gas price increase and the introduction of customs duty for crude oil exports to Belarus will amount to approximately $2.1bn, or 5% of Belarusian GDP.

2. Possible consequences for the economy

We are not changing our forecast for GDP growth. We expect a slowdown from 9.9% last year to 6.5% this year. However, the slowdown will have a negative effect on inflation, the current account and on the budget.

The biggest deterioration will happen in the trade balance and in the current account. The negative "Terms of Trade" shock should result in a current account deficit of 5.9% in 2007 (following 2.1% in 2006). In 2008, we expect that the current account will deteriorate again. Inflation is likely to increase not as much, because the full gas price hike will not immediately be passed on to households, like it was in Ukraine in 2006.

However, the trend in the CPI should change until the end of the year 2008. We expect that inflation will rise again above 10% next year. We also forecast that the unemployment rate will start to climb this year and the positive development in the growing forex reserves should also be reversed.

3. State Budget

The 2007 budget will be burdened with the losses incurred by industrials (-$509m) and extra spending on subsidies on agriculture, energy consuming industries and households (-$700m). The adjustments to budget revenues that should result from gas transit costs (+$61.25m), and the first tranche for 12.5% of Beltransgaz (+$625m) will bring the deficit to $890m.

4. Exchange Rate Forecast

The state can finance short-term foreign debt via import barriers and increasing state debt. However, long-term obligations remain uncovered. Therefore, a devaluation of the Belarusian ruble is inevitable, although the National Bank of Belarus most probably will stick to a reasonable policy of a gradual devaluation.

We think that the depreciation of the Belarusian Rouble will be managed by the National Bank of Belarus. We are also much more bearish on the ruble after the agreement. Before we only forecast a slight depreciation.

Send comments to Gerhard Lechner