Russia hugs Belarus in ever-tightening embrace

By bne IntelliNews July 16, 2014

Ben Aris in Moscow -


"The ancient Romans used to say that a citizen is someone who pays taxes, who supports the state, who voluntarily gives up part of their labour for the common good," Belarusian President Alexander Lukashenko said during a speech to mark the 70th anniversary of Belarus' liberation from Nazi occupation and the country's Independence Day on July 1. "But taxes are not only an economic category, but also a political and moral one… The desire to evade taxes is moral treason."

The president was in fine form and he forecast that Belarus would record the highest GDP on record in 2014, earning a total of $72bn, which is $150bn in purchasing power parity terms.

Lukashenko then went on to equate diligence with patriotism in the sort of soaring rhetoric seldom heard since the demise of the Soviet Union. "Many take pleasure in condemning all things Belarusian. They claim that everything is bad in Belarus, that Belarusian goods are worse than anyone else's, they don't want anything Belarus-made but they want imports only. But let me ask it another way: who makes Belarusian products? Germans? Chinese? Americans? Maybe Russians? No! You and I, Belarusians, make Belarus-made products. When we evaluate Belarusian goods, we look into the mirror. It is us who have made Belarusian goods. If a Belarusian product is bad, we are the ones to blame."

He then exhorted the people in the crowd to take pride in their work. "Diligent work is a moral obligation. It is what daily patriotism is all about."

Prime Minister Mikhail Myasnikovich then picked up the baton and described how the government would throw itself into "vigorous modernization and innovation-driven development". "It's like riding a bicycle: in order to stay competitive, you have to pedal all the time and move without stopping,” Myasnikovich said at the same ceremony. “Investments in new technologies, equipment and factories represent the essence of our economic policy.”

Dire finances

Flowery speeches aside, the government has its work cut out. The economy grew by just 1% in the first four months of this year, a mild devaluation is on the cards in the second half of this year and the country is subsisting on handouts for the time being.

"The economy has struggled to achieve sustainable growth following a balance of payments crisis in 2010-11, which was triggered by a temporary cessation of Russian assistance," Moody's Investors Service said in a credit report on the country in June. "GDP growth over 2012 and 2013 averaged 1.3%, which is much lower than the 7% average GDP growth of the prior decade."

The country's finances are in bad shape. The government was running a $7.3bn current account deficit last year, equivalent to 10.2% of GDP. On top of that, it has some $4bn of hard currency debt repayments to make this year (of which $2.4bn is to external creditors). Bankers estimate the total currency call on the country will come to $10.7bn this year, but as of May the country had barely $2.6bn of foreign reserves left.

The Russians have taken most of the pressure off Lukashenko. On July 9, Belarus said it received a $450m loan from Russia under a deal the two governments signed on January 31. At the end of June, Russia's VTB Bank extended a $2bn short-term loan, which shored up Belarus' wobbly currency and gave the government some wiggle room when it comes to making policy. This followed on from a $1bn bridge loan the Russian bank extended in May. Belarus also been receiving instalments from a $3bn bailout loan agreed with the Eurasian Development Bank's EurAsEC Anticrisis Fund in 2011.

"Our estimates suggest that Belarus has already solved its external refinancing issues… [T]ogether with the [recently] agreed transfer of only 50% of [oil] export duties to Russia’s budget in 2015, the external position has visibly improved and a mild Belarusian ruble devaluation is our base-case scenario," VTB said in a note.

Moscow's aid to Belarus comes as Russian President Vladimir Putin tries to shore up support for his Eurasian Economic Union project – an extension of the current Customs Union between Russia, Belarus and Kazakhstan that is supposed to come into being this coming January. "Russia and Belarus will continue their economic cooperation," Putin said in Minsk where he had come to celebrate Belarus' independence day with its president.

Ukraine, Moldova and Azerbaijan may be reluctant to join Putin's trade bloc, but Belarus has already been a big winner from its membership of the Customs Union. Its volume of trade with Russia has increased by a third from $27.9bn in 2010 when the Customs Union was set up, to reach $43.8bn in 2012, although last year the figure fell back to $39.7bn due to Russia's economic slowdown.

In truth, Lukashenko now has little choice but to throw in his lot with Russia. Belarus’ relatively high GDP growth and rising per-capita incomes (now $16,000 against Russia's $18,000, according to the IMF, and well ahead of its other peers in the region) were achieved through persistently loose monetary and quasi-fiscal policies, according to Moody's.

"It’s a growth strategy which relies on increasing credit growth to drive investment higher and increasing wages to drive consumption higher," concludes Moody's. "Current policies are unlikely to change as long as they can be financed by external economic assistance from Russia. This assistance, in the form of energy subsidies and external credit, has increased Belarus’ dependence on Russia such that the economy is unable to withstand disruptions in Russian assistance."


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