The risks to economic independence
Tensions in Russian-Belarusian relations continued to increase in April. Against the background of the lack of progress on resolving the most painful issues related to the tax manoeuvre and the future price of gas, the Belarusian authorities aggravated the current situation. Public criticism of Russia’s actions was increased (for example, Aliaksandr Lukashenka accused Russia of actually imposing economic sanctions against Belarus), and a part of the existing agreements was revised. In particular, the Belarusian authorities demanded to increase the cost of transit of Russian oil through Belarus by 23%, since the current tariffs are significantly lower than the ones in neighbouring countries. At the same time, Lukashenka ordered the officials to ensure the environmental interests of Belarus more strictly and, if necessary, cut off the oil pipelines in the event of repairing some of their sections. The massive stream of criticism was also brought down on Russia’s Ambassador Mikhail Babich, who in recent months has been a strong irritant for the official Minsk.
The efforts of the Belarusian authorities have brought results: at the end of the month, Ambassador Babich quite unexpectedly was recalled from Minsk. The appointment of a new Russian ambassador should reduce the degree of public confrontation, but there is no reason to talk about the removal of disagreements on economic issues. Negotiations on gas prices since 2020, judging by the lack of optimistic statements, do not have any particular result. The question of Belarus’ receiving compensation for losses from the tax manoeuvre in the oil sector in Russia seems to be removed from the current agenda at all. The granting of the last tranche of the EFSD loan, which, according to the assurances of members of the Belarusian Government, should have been received by April 30, is also delayed. The actions of Russia, aimed at the cancellation of the decision of the EEC on the issue of mutual recognition of certificates in the EAEU countries can be appreciated as obviously unfriendly. The public promise of the Russian authorities not to resort to the instrument of sectoral bans and to solve the issue of product quality separately for each enterprise does not reduce the risks for Belarusian exporters. Already in early May, the Rosselkhoznadzor (Russian Federal Service for Veterinary and Phytosanitary Surveillance) imposed a ban on the import of bulk milk for 37 Belarusian enterprises, which, in fact, differs little from the introduction of a sectoral ban.
Tensions in bilateral relations will be aggravated by problems with deliveries of poor-quality oil (its chlorine contain was many times higher than the norm) through the Druzhba pipeline during the period from April 19 to May 2. Belarusian authorities claim significant losses due to the damage of expensive equipment at Mazyr oil refinery and the reduction of exports due to the forced drop in refining volume. According to their data, Belarus received about 1 million tons of low-quality oil, and the shortage of export earnings amounted to about USD 100 million. Russian experts estimate the scale of the problem much lower: the volume of supplied off-grade oil is between 100 and 300 thousand tons, and the cost of damaged equipment is only a few tens of thousands of dollars instead of multi-million sums voiced by Belarusian TV channels.
One of the main issues is the deep integration within the so-called “Union State”, actively promoted by the Russian authorities. In April, the Belarusian authorities admitted that they had received a list of proposals from Russian on the development of integration, and even formed response proposals. Refusal to publicly disclose the details of these documents suggests that the proposals of Russia are unacceptable for the Belarusian authorities. In such a situation, it is advisable to expect the preservation of Russian pressure on the economy of Belarus. At the same time, the arsenal of leverage used by the Russian authorities may gradually expand if the Belarusian authorities use the current tactics in the future.
The risks of financial instability
In April, the credit ratings of Belarus with a stable outlook were immediately confirmed by two rating agencies: S&P and Moody’s. According to S&P, the main risks to financial stability are still associated with the cyclical nature of commodity prices, which seriously affect the country’s trade balance, and the strong dependence of the public debt on Russian financing. It can be stated that currently the factors of these risks are moderate. Foreign trade conditions for Belarusian producers are relatively favourable: oil quotes were fixed at a fairly high level (about 70 USD per barrel of Brent), and exporters’ price competitiveness remains at an acceptable level due to the stabilization of the real BYN exchange rate. As a result, foreign trade at the beginning of the year shows a positive trend to the level of last year. However, if the trade war between the United States and China is activated, and anti-Russian sanctions intensify, turbulence in world markets may increase significantly in the near future.
Against the background of the problems with obtaining Russian financing (which are temporary in the opinion of the authorities) the Development Bank was able to raise USD 500 million by placing bonds at 6.75% on the Irish Stock Exchange in April. Foreign exchange reserves continue to demonstrate positive dynamics, having increased by 5.7% since the beginning of the year and reaching USD 7.6 billion in April. So far, the Government can boast of a formal solution to the task of reducing external public debt: its size has decreased by 1.7% since the beginning of the year to USD 16.6 billion.
So far, there are no signs of a weakening of monetary policy aimed at stimulating economic growth ahead of the 2020 presidential election. At another quarterly meeting, the National Bank expectedly made a decision to maintain the refinancing rate at the current level of 10%. Forced growth can’t be observed in the corporate lending market as well: enterprises’ debt has decreased by 1.3% for BYN loans and by 1% for foreign currency loans since the beginning of the year. The budget is executed, as before, with a surplus, although its level slightly decreased compared with the previous year (2.8% of GDP in January-March 2019 against 6% of GDP in the same period of 2018). As predicted by the National Bank, inflation began to slow down. Consumer price growth in March was 0.4% after 1.3% in February, and in annual terms it slowed to 5.8%. In the absence of significant force majeure, the National Bank expects inflation to reach the planned trajectory of 5% in the last quarter of the year.
In the banking sector, the trends of recent months, including not only positive ones, continue to persist. Thus, the size of household deposits (both foreign currency and BYN ones) again increased in March (by 1.3% and 0.05%, respectively). Despite the immutability of the National Bank’s interest rates, both credit and deposit rates continue to increase slightly. On the one hand, such dynamics of rates absorbs the risks of outflow of resources from the deposit market and cools credit demand in the situation of rising inflation expectations. On the other hand, this indicates that the risk premium for BYN assets remains at a fairly high level (about 5-6 pp to the level of inflation) and in order to solve the problem of dedollarization, the authorities need to seriously increase confidence in the national currency, which is hardly realizable under the current economic policy.
The risks to economic growth
Economic growth for 3 months accelerated from 0.8% to 1.1% and exceeded the level planned for the first quarter by the Government. At the same time, the main drivers of growth were retail trade and construction, which grew by 6% and 5.9%, respectively. Growth in industrial production remains sluggish (0.9%), while agriculture is still declining (minus 1%). This was due to the continued growth in incomes of the population (real incomes increased by 7.1% compared to last year), as well as the further activation of consumer lending. Thus, consumer debt increased by 4% since the beginning of the year.
At the same time, it is difficult to achieve further acceleration of economic growth due to domestic consumer demand without a significant increase in imbalances in the economy. The National Bank recognizes this as well, assessing the current economic growth at a level close to equilibrium. The rapid growth of population income, according to the National Bank, began to create inflationary pressure in the last quarter of 2018. This year, the quality of growth in household incomes has only deteriorated: with real wage growth of 7.3% in March, productivity growth is observed at 1%. The National Bank closely monitors the risks of overheating of the consumer lending market, expressing its readiness to tighten the standards of the credit burden for citizens. In the current situation without a significant increase in investment demand or export growth, the authorities can hardly expect to achieve an optimistic plan for GDP growth by 4% in 2019.
The most important factor limiting the potential of the economy is the problem of low efficiency of state enterprises. As part of solving this problem, the Government launched a campaign to appoint state representatives as heads of the supervisory boards of joint-stock enterprises. At the same time, top-level officials who are not specialists were appointed to these positions: Prime Minister Siarhei Rumas was appointed Chairman of the Supervisory Board of Minsk Tractor Plant, Chairman of the Council of the Republic Mikhail Myasnikovich – of Belarusian Automobile Plant (BelAZ), Head of the Presidential Administration Natalia Kachanova – of Naftan, etc. According to the Government, this measure is part of the process of dividing the function of the state as a regulator and owner and should remove the function of developing strategies for specific enterprises from core ministries. The government is also working on the possibility of somewhat reviving the privatization process through the launch of its new mechanism for enterprises operating through leasing their space, as well as enterprises with a state share of up to 10%. Such objects are supposed to be transferred to the ownership of local authorities, who will subsequently sell them.
At the same time, the authorities, as before, actively use the “manual mode” of economic management. A vivid example here is the “sowing campaign” with daily conference calls at the ministerial level and the distribution of equipment and materials. There is a task to preserve large Soviet enterprises even in case of dubious economic feasibility (for example, the authorities booked a site for building a new “Motavela” (Motorcycle and Bicycle Plant) in the “Great Stone” industrial park, a program to restore the Strommashina plant is being developed). Lukashenka’s demand and to strengthen state regulation of prices without regard to the opinion of the main lenders raise concerns as well.
The general the situation in the economy remains the same: GDP is growing sluggishly, the financial sector is characterized by the stability of key indicators, the problematic issues of relations with Russia are unresolved. The main risks are associated with the growth of turbulence in world markets, increased pressure from Russia and possible attempts of the authorities to stimulate economic growth in the pre-election period by monetary factors.