The sanctioned Belarusian economy

The sanctioned Belarusian economy
Belarus' Ministry of Finance / From:
By bne IntelliNews March 21, 2022

Sanctions keep taking their toll on the Belarusian economy, making it more and more isolated from global value chains. The Belarusian government is trying out new policies to ease the effects from sanctions. However, in the coming years we’ll see a Belarus with either very low or negative growth.

The sanctions effects on Belarus’ economy

Last week, Switzerland, Norway, Canada and Japan tightened their sanctions on Belarus. The pace, width and extent to which the Belarusian economy is currently being isolated is unprecedented.

In total, over 100 companies have left Belarus since the war started; another way to look at this is to note the fact that nearly 6,000 apps were removed from App Store in Belarus between February 24 and March 14 this year. Companies’ divestments in Belarus are increasingly rapidly, striking a heavy blow to the regime’s attempts at becoming an entrepreneurial hub.

The exodus of IT specialists from Belarus has been increasing, hitting the one sector which has been diversifying the Belarusian economy and the only sector which was actually helping the Belarusian economy to improve its resilience to macro-economic shocks.

Even the state flagship company park “Great Stone” is being affected, as the German Port of Duisburg pulled out its investments from the Great Stone park last week. The Great Stone park has been vital for the regime’s image as a manufacturing and logistical hub for trade between China and Europe.

Furthermore, this threatens Chinese investments in Belarus, as the latter's importance along the “Belt and Road Initiative” is further diminished by increasing tensions with the West.

While last year’s sanctions certainly slowed down Belarus’ GDP growth, they were not a major hindrance to it and throughout last year Belarus' GDP kept increasing. This was fuelled mostly by rapidly increasing export revenues from higher raw material prices.

However, now the Belarusian GDP growth is seriously losing steam. In January this year, Belarus GDP gained 2.7% compared to January 2020; but in February the year-on-year rise was only 1.2%. After the massive number of new sanctions during March, this month’s y/y development is unlikely to be any higher.

One could assume that Belarus’ two oil refineries Mozyr and Naftan would benefit from the higher prices on petrochemical products. The only problem is that they’ve lost one of their biggest markets, Ukraine, due to Russia’s war. What’s more, Mozyr and Naftan lost one of their major export routes through Estonia in February.

Together with the exodus of IT companies and its crumbling financial system, the reduced oil exports will most likely cause an even further slump in GDP growth this year.

Since the oil is traded in dollars, it’s also an important source of foreign currency revenues for the Belarusian economy; and its export hindrances are definitely not helping the Belarusian banking sector’s lack of hard currency.

All major Belarusian banks have, since the war, imposed tough limits of how much foreign currency can be withdrawn, as people have rushed to ATMs and bank offices to secure their savings in the more stable euros or dollars rather than the more volatile Belarusian ruble.

The Belarusian regime is probably looking into new ways of getting more loans, or restructuring old ones with other countries than Russia. On Friday,18 March, Prime Minister Golovchenko and Lukashenko’s son Viktor Lukashenko returned from the UAE, from what is believed to have been loan negotiations.

Today, Russia announced that it will give Belarus a deferral of 5-6 years on its state loans going to Russia, which owns more than 50% of Belarusian state debt. This gives Belarus time to focus on paying back the rest of this year’s loans; Belarus also gains significant time to restructure its economy and achieve a balance under the new hard sanctions, so that it can confidently pay back future loans.

Belarus’ latest measures

The Belarusian finance ministry has imposed measures which will help its economy adapt to the new international sanctions, which “will foremost concern sectors that have been most seriously affected by the negative factors.”

According to Interfax, the Belarusian government has now been given expanded powers on “determining the particulars for payment of value-added tax and excises on the sale of Belarusian oil and oil products; changing payment deadlines for taxes, fees, duties and other payments to the budget; the amount of payment for provision of government guarantees on bank loans; the deferral of obligations on budget credit and loans due in 2022; and the execution of central and local government guarantees.”

What this means in reality is a further erosion of the stability of the financial system and a heavier tax burden on the population. It means the government won’t be able to guarantee the central bank’s loans to private banks, and most likely not the state enterprises’ repayments to private banks either.

To ensure the continued operation of state enterprises in order to avoid mass layoffs, the state enterprises can be exempt from different tax payments. The funds for the state and regional budgets must, however, come from somewhere, and in February and March the regional council of deputies raised income taxes from 18 to 20% first in the Mogilev and later in the Vitebsk region.

Another measure taken by the Belarusian regime has been to allow the repayments on loans to “unfriendly” countries, i.e. those who imposed sanctions on Belarus, to be done in Belarusian rubles. In reference to Russia’s upcoming payment problems, Fitch ratings and Moody’s have deemed a repayment of loans in rubles to be a cancelled repayment.

Moreover, the Belarusian stock exchange has begun trading in Chinese yuan. What this will mean practically for the Belarusian economy is so far hard to tell, but what’s sure is that a dedollarisation of the economy is under way.

Belarus’ economy is heavily dollarised, as most often house prices or rents are given in dollars instead of Belarusian rubles. However, several big property sales have already begun to be conducted in Russian rubles instead of dollars, most likely due to the lack of dollars in circulation.

The limited transport routes for potash and oil will have further effects on production; but there are also signs of slowed growth in the real economy in other sectors.

Last week, a major housing project was stopped in central Minsk and according to construction workers, there is not even a single worker on site. According to the company responsible, A-100 Development, work was ceased due to “the reconfiguration and improvement of supply chains” and “adaptation of changes and cost management.”

The sanctions have already begun to affect the real economy, and the government has been forced to take rather drastic measures to ensure budget stability. In the end, these measures will damage the stability of the private banking sector and raise the economic burdens of the country’s citizens.

What’s positive for Lukashenko is that Belarus isn’t as sanctioned as Russia is, yet. The Belarusian economy’s sectors’ relationships to western markets are not irreparable, and in the long run Belarus could stabilise its trade, state budget incomes and loan repayments.