The risk of financial instability.
The most positive situation for the authorities undoubtedly develops at the foreign exchange market. Due to the net supply of foreign currency from individuals and legal entities, which amounted to almost USD 350 million as of March, the National Bank supports the stability of the currency basket without any problems. The rapid strengthening of the Russian ruble once again led to an increase in price of the Belarusian currency against the US dollar and the euro. In this situation, the deposits in the national currency became more attractive, which resulted in a drop of rates in the ruble market. There is, however, the administrative burden of the National Bank, which continues to instruct the banks with the rates on ruble deposits of the population. At the same time liberalization of the currency market continued: for example, compulsory sale of foreign currency earnings was reduced to 30% (i.e., to the level as at the beginning of December 2014). Besides, according to the National Bank, serious preparatory work is conducted to perform transition of the currency trading to the format of continuous double auction. This will make the Belarusian ruble more flexible, and the exchange rate formation process will be more transparent, which will reduce suspicions about the economic feasibility of the current exchange rate. Alongside with liberalization of one segment, the National Bank continued to tighten the administration of another segment of the financial market, namely the market of ruble deposits and loans. Thus, according to the decision of the National Bank, starting from June 1 the additional payments will be introduced to the reserve funds from the amounts of deposits and loans, attracted and granted at the rates above the regulations. For the deposits such regulation will be at the rate of overnight loans, which as of the beginning of May amounted to 35%. This decision is obviously aimed at improving the availability of credit resources for the economy and should enhance growth. However, by reducing the flexibility of the deposit rate the responsiveness of the banks to changes in the economy expectations is reduced and there is a risk of the bank run, which to some extent takes place annually since 2011.
The authorities continue to pursue a tough monetary and fiscal policy. The state support to the enterprises is also significantly cut and is mainly aimed at the particular investment projects. Due to limitation of the state expenses, the budget continues to be performed with a sufficiently substantial surplus, which in January-March amounted to 3.2% of GDP. Furthermore, according to the results of the six months, due to the falling revenues (at least as a result of the oil tax reduction, the budget may lose about USD 1 billion) it is very likely that the budget will be revised and formal cuts in expenses, primarily investments, will be applied. Almost within the established framework the average growth of funds is observed (in annual terms in March it amounted to 36.9% against the target of no more than 30% as at the end of 2015), and inflation does not exceed the planned level (4.6% in the first quarter) . It is important that even the approaching presidential elections this time does not lead to softening of the governmental policy.
The risk of economic independence.
There is still a big problem of insufficient and declining gold and foreign exchange reserves. Although this reduction is not so significant (in April the gold and foreign exchange reserves amounted to about USD 91 million, and by the end of May formed a minimal increase at all), but against the backdrop of massive foreign debt payments (for example, in August the state has to effect a lump sum payment on its Eurobond obligations for the amount of USD 1 billion) the gold and foreign exchange reserves should already be showing a sufficient growth. The authorities hope to refinance a part of the obligations by a new placement of government bonds, and it was even discussed in mass media that there were negotiations held on this issue with serious potential organizers and investors. However, the Moody’s reduction of the sovereign rating of Belarus seriously increased current yields on bonds circulating on the market (as at the beginning of May the bonds Belarus-2015 showed near 25% yield per annum, and the bonds Belarus-2018 showed near 14% per annum). The projected cost of the new placement has grown to the similar extent. Thus starting the negotiations with the IMF, which are characterized by the authorities as very active, will give results clearly not in the coming months. In fact, now they are at a very early stage and only the procedure of the program implementation is agreed. Thus, Russia remains the only source of the required emergency financing. According to Prime Minister Andrey Kobyakov, an agreement was reached with the Russian leaders on refinancing of all payments in 2015, including payments on the ACF EurAsEC loan. Though the particular amounts and terms of refinancing are still not known.
In general, the relationship with Russia is far from ideal. Thus, in April Belarus suspended deliveries of petroleum products to the Russian market. The Belarusian government has justified this measure by the falling prices on the Russian market and loss of yield for our enterprises. In response, the Russian Energy Ministry declared the possibility of the relevant cuts in oil supplies already since the third quarter of 2015. Russian Deputy Prime Minister Arkady Dvorkovich once again stressed the need for political decisions to accelerate the so-called integration projects, which were to be implemented as early as in 2014. However, at the moment the project of combining MAZ and KAMAZ, which was started in 2012, dropped out of the number of priority projects due to the inability of the parties to reach an agreement.
Not so long ago there was an idea of a single currency within the EAEC. But the Kazakh authorities clearly stated that introduction of the single currency is completely excluded and is not an obligatory condition in case of creating the economic union. Shortly after that Mikhail Myasnikovich expressed an opinion about the dangers of introducing a single currency for the sovereignty, and it was he, who two months ago asked to speed up the process of the single currency creation.
The risk of economic recession.
On the whole, the achievement of financial stability still remains the priority against the economic growth. It was confirmed by Alexander Lukashenko, who stated in his regular address to the Parliament and the people, that reduction of the inflation rate remains the priority of the current economic policy. In practice, this has led to a sharp acceleration of the GDP fall in January-March 2015, which amounted to 2%. The most difficult situation is observed in the industry, which reduction compared to last year exceeded 7%. In some industries the situation may simply be called critical: for example, in March 2015 compared to March last year, the production of harvesters dropped 6 times, trucks and TV sets almost 5 times, buses, tires and engines more than 2 times, tractors and dump trucks by 40%. In addition to falling production we observe an increase of overdue debts in the economy, including bad debts with the banks. The factors letting us hope for the radical improvement of the situation in the nearest future are not observed. The growth of the Russian ruble currency rate certainly increases the competitiveness of the Belarusian exporters, but against the backdrop of continuing economic recession in Russia (minus 3.4% of GDP in March) will not lead to a significant increase in sales, particularly in sales of investment goods. Any significant replacement of the Russian market with any other clearly looks a utopia.
In this situation, the authorities started to revive their favourite idea of increased trade protectionism. In the above mentioned address A. Lukashenko paid a lot of attention to the possibility of a stronger protection of the domestic market even in the EAEC conditions. As part of this work in early May the Ministry of Trade held a meeting with the representatives of private trading networks and recommended them expanding of the fleet through the MAZ vehicles purchase.
In April, the situation continued to develop in the familiar direction: the financial market is gradually returning to the situation before December 2014, while the state of the real economy is rapidly deteriorating.
The deteriorating situation in the real sector of economy creates prerequisites for the beginning of large-scale economic reforms. In this respect the article by the President’s assistant Rudy Kirill, in which he justifies the need for reforms and outlines their main destinations is very prominent. He expresses the thought of the need to consolidate the society around the idea of «collective liberalism», which represents the synthesis of the ideas of a liberal market economy and the severe restrictions in the political sphere. It is unlikely that this article is a project for the authorities, it is rather an attempt of a particular official or a group of officials to influence the opinion of political elites. It is clear that the resistance to the radical reforms will be extremely serious on the part of the economic nomenclature, and to start they need a serious political will. It seems that the economic situation is not yet bad enough to force the government to take radical decisions. At the same time the governmental officials are mostly supporting the idea that the task to somehow maintain the industrial capacity in hard times is facing the economy, after which the Russian economy will again start showing significant growth and the demand for the Belarusian goods will sharply increase. At the same time the basic problems of the economy are seen not in the systematic distortion of the economic incentives, but in the poor execution and negligence of the particular performers, overcoming which is intended to be performed through the re-certification of the heads of agricultural enterprises or fight against social parasitism.