Belarus on the brink – again

Belarus on the brink – again
Victory Square in Minsk, where the authorities are preparing for worst-case scenario for the economy. / Photo by CC
By Sergei Kuznetsov in Minsk February 12, 2016

Belarus seems to be on the brink of another deep financial crisis, for the second time in five years. Official statistics published by Minsk in the last few days demonstrate that the Eastern European country does not have enough financial resources to repay all its external obligations within the next 12 months. Additionally, the crisis in Russia and falling oil prices have burned a $1.7bn hole in the state budget.

“We should be prepared for the worst-case scenario,” Belarusian Prime Minister Andrei Kobyakov said during a government meeting on February 9, admitting in a rare moment of public honesty that the government’s economic forecast for this year, prepared in late 2015, has already been made obsolete by developments in Russia, the country’s key trade partner, and on the global markets. “The situation has now sharply changed.”

The Belarusian authorities previously forecast 0.3% GDP growth for 2016 under a scenario whereby the oil price would remain at $50 per barrel and the Russian ruble’s average rate would be RUB63 per dollar. They believed the Belarusian ruble’s average rate would be BYR18,689 per dollar. However, with the oil price declining to around $30 per barrel, the Russian ruble remains near RUB80 per dollar, and the Belarusian government’s new forecast for the domestic currency is BYR22,719 per dollar.

“According to estimates of the Belarusian finance ministry, the gap between the approved budget scenario and today’s numbers is about BYR38tr ($1.7bn), or 14% of the expenditure of the state consolidated budget,” Kobyakov explained.

Running out of cash

The really worrying news for the Belarusian government is that the country’s foreign reserves had fallen to $4.03bn as of the beginning of February. This amount is equal to about one and a half months of import cover, which is significantly lower than the level considered safe by economists.

“$2.6bn of this amount [of $4bn] was created by bonds issued by the National Bank of Belarus (NBB), which the regulator should repay within the next 12 months. The bondholders of these notes are local commercial banks. The regulator also has to repay up to $1.7bn of its external debt in 2016. And the central government has other foreign debt obligations to be repaid this year,” Alexander Mukha, a Minsk-based financial analyst, tells bne IntelliNews.

This means that even without the foreign state debt of the central government, whose estimated amount varies depending on the source, the Belarusian authorities have significantly less cash than obligations that they need to service and repay.

Minsk-based experts believe that the NBB will, no doubt, try to issue new bonds to local banks whilst simultaneously repaying its current debt. “However, the economic situation in Belarus is deteriorating. And individuals could start to withdraw their forex deposits from banks with the aim of paying for their daily bills. That will put pressure on the banks’ forex liquidity, and they may be reluctant to purchase new notes from the regulator,” Mukha believes.

Stanislav Bogdankevich, a former governor of the Belarusian central bank, tells bne IntelliNews that, “The latest fluctuations of the Belarusian ruble give a clear indication that the NBB is unable even to support the currency during its sharp decline triggered by [market] speculators. But the regulator is obliged to do so.”

Reforms? What reforms?

Mukha believes that the government will try to patch up the $1.7bn gap in the state budget through cuts to capital investments in construction and modernisation of state-owned enterprises, salary freezes for employees of the budget sphere, and by imposing limitations on imports purchases such as foreign weapons.

As for repaying its foreign state debt, the government has only one reliable option: to quickly secure new loans from foreign lenders. The authorities are currently negotiating a new $3.5bn loan from the International Monetary Fund (IMF) and a new $2bn aid package with the Russia-led Eurasian Fund for Stabilisation and Development (EFSD). “Given the enormous amount of debt that should be repaid within the next year, it would be perfect to secure loans from both the IMF and the EFSD,” Mukha says.

The problem is that Belarus’ authoritarian president, Alexander Lukashenko, appears unwilling to embark on the badly needed structural reforms that both donors will definitely demand from Minsk. “I do not think it is possible and necessary to change course in this situation,” Lukashenko told a government meeting recently. “This is the course that helped us acquire independence and create our state. Today, I still cannot allow anything to be broken and put excessive pressure on people without results, I am absolutely against it.”

Bogdankevich says he’s confused about why the authorities aren’t taking drastic measures to revive the economy and address the financial problems. “I don’t see any steps to establish a new government team of officials with fresh ideas,” he says, adding that without reforms, loans could only preserve the existing stagnation of the economy. “We need a new, brave reform programme.”

A source in the Belarusian economy ministry tells bne IntelliNews on condition of anonymity that, “Belarus and the IMF reached a preliminary agreement over a new programme at the expert level in December [and] their proposals have been transferred to the highest level for the final decision.” He adds that some details of the programme were apparently met with opposition by Lukashenko.

If MIGs could fly

Lukashenko, who was re-elected for his fifth presidential term in October 2015, not only publicly rejects reform, but has also announced that Russia is ready to support the struggling Belarusian economy. “The president and the prime minister of Russia have not only promised [to help], they have decided to support the Belarusian economy regardless of how hard the situation in Russia may be,” Lukashenko said on February 9, three days after he met Vladimir Putin in the Russian resort of Sochi.

That could presage new funding from Russia, but the main question is what the Kremlin will want from Lukashenko in exchange for its cash. Will its demands be restricted to guarantees of overall political alliance, or will the Kremlin want to expand military cooperation as it looks for a response to Nato’s expansion towards its borders?

In September, after a meeting between Lukashenko and Putin, Moscow announced plans to establish an air base in the Belarusian city of Baranovichi, 145km from Minsk. Until now, the Belarusian president has avoided giving a clear response to the Kremlin over the prospects of the establishing this base, which could be a manoeuvre aimed at bargaining with the Kremlin over additional preferences.

However, it appears that this is the last call for Lukashenko to answer the Kremlin, as Belarus is simply running out of cash.