The risks to economic independence
Despite the numerous meetings of Belarusian and Russian economic officials and the personal negotiations between Putin and Lukashenka in December, the year ended without any agreement on integration issues. Moreover, the rhetoric of the parties was quite different. Belarusian officials emphasized the fruitfulness of the negotiations and their constructive nature, expecting that disagreements on controversial issues will be resolved at the political level. At the same time, the top leadership of Russia in the persons of President Putin and Prime Minister Medvedev once again voiced the idea that without deep integration, involving the creation of supranational bodies, a single currency and fiscal policy, there would be no talk of Belarus receiving energy preferences (in particular gas prices at the level of the Smolensk region and compensation for losses from the tax manoeuvre).
Without agreements on roadmaps on deepening integration the conditions for the supply of Russian gas and oil to Belarus in 2020 were not agreed on as well. As a result, a temporary compromise was reached: the conditions of 2019 were prolonged for 2 months. Then the situation with oil turned out to be more complicated: due to the lack of an agreement Russian oil traders suspended supplies to Belarus on January 1, 2020. As a result, the Belarusian refineries were forced to reduce refining to a technological minimum, which did not stop the production process. At the same time, Belarus was forced to completely stop the export of petroleum products in order to avoid a shortage in the domestic market. Later, independent Russian oil companies started one-time oil deliveries to Belarusian refineries in relatively small volumes (650 thousand tons in January with a planned volume of 1.947 million tons) and at a price on the terms of Minsk. But such a supply is sufficient only to close the needs the domestic market of Belarus.
Although some media called the current situation the Third Oil War, its character differs significantly from previous similar situations. Judging by the information voiced, this time the failure of the agreements occurred precisely on the initiative of the Belarus. Russian suppliers express their readiness to continue working on the conditions of the previous year — to supply oil at market prices minus the size of the export duty. However, the Belarusian authorities are trying to reduce this price by rejecting the premium for the long-term contract, which is USD 10 per ton. With the volume of oil imports planned for 2020, the gain for Belarus in the event of such a decrease would be about USD 240 million. This would become a partial compensation for losses from the growth in oil prices due to a tax manoeuvre. At the same time, the idea of reducing Russia’s share in oil imports and actively attracting alternative suppliers currently seems economically unreasonable. The price of oil offered by Russian suppliers for Belarus is still noticeably lower than the market price (it is about 86% of the world price), and abandoning it in favour of alternative sources will mean an increase in Belarus’s trade deficit by an impressive amount of about USD 1.6 billion.
Given such a balance of possible gains and losses, the Belarusian authorities are not yet aggravating the conflict. For example, an agreement on the transportation of gas through Belarus was signed for the whole of 2020. The transit of Russian oil is fully ensured, and there are no steps to unilaterally review the cost of transportation through Belarusian pipelines. In turn, it is obvious that Russia has so far refrained from applying any repressive measures against Belarus — the proposed conditions for the supply of energy goods are actually an extension of last year’s contracts and are not nominally a deterioration. At the same time, one cannot exclude the tightening of its position in the event of a final failure of integration negotiations.
The risks of financial instability
The main indicators characterizing the stability of the financial system as a whole continue to show positive dynamics. In November, annual inflation slowed down to 5% and accordingly reached the level planned by the authorities. At the end of December, the size of gold and foreign exchange reserves again set a historical record and almost reached the level of USD 9.4 billion. Thus, the increase since the beginning of the year amounted to more than 30%. This achievement was made possible because of the situation in the foreign exchange market, when the National Bank had to act as a buyer of excess currency, as well as because of a successful policy of attracting debt resources. So, solving the problem of replacing loans blocked by Russia, the Government of Belarus in December attracted a large Chinese loan in the amount of USD 500 million.
In the deposit and credit market, there is a tendency to reduce rates. At the same time, following the results of November, a small drop in the population’s debt on consumer loans (by 0.4%) was recorded. This situation confirms the validity of the National Bank’s measures to reduce the refinancing rate and allows us to conclude that the risk of excessive growth in the debt load of the population has now significantly weakened. While the danger of such risk was previously pointed out by international experts. The situation with bad debts in the banking system also improved: the share of non-performing loans since the peak in May 2019 (6.2% of assets exposed to credit risk) decreased to 4.7% by December.
The authorities have no problems with budget execution, the surplus of which as of November 1 reached 3.8% of GDP. At the same time, judging by the published budget plan for 2020-2022, the authorities still abandoned the idea of a deficit budget for the entire specified period. So, the budget deficit is now planned only in the pre-election 2020, and the budgets of 2021 and 2022 are expected to be balanced.
In such a situation, the main internal risks for the financial system remain associated with the continued outstripping growth of household incomes. As of November 1, 2019, the growth of the latter in real terms amounted to 6.6%, and by the end of the year it should reach 7.5%. According to the authorities’ forecast, in 2020 the dynamics of income should significantly slow down: over the year, household incomes should grow by 2.4%, while in the first quarter – only by 0.7% (source). However, taking into account the presidential elections expected at the end of summer, another overfulfilment of this forecast indicator is very likely.
Together with the factor of a planned increase in prices for housing and communal services in January, such an increase in household incomes may again accelerate inflation at the beginning of the year. The authorities also forecast the acceleration — according to the government’s calculations, according to the results of the first 3 months of 2020, inflation may reach 2.5% with annual forecast of 5%. If the situation in the foreign exchange market changes simultaneously with rising inflation (for example, as a result of rising household incomes or worsening devaluation expectations if relations with Russia deteriorate), the authorities may need to return to tightening monetary policy, including raising the refinancing rate. The first sign of such a deterioration may be the results of the foreign exchange market for December 2019: according to the results of the month, the population and resident legal entities became net buyers of foreign currency, generating demand on a net basis in the amount of USD 190 million. If this situation on the market is not related to seasonal factor and other temporary trends, the return of the foreign exchange market to a stable net deficit will become a noticeable factor in pressure on gold and foreign exchange reserves.
The risks for economic growth
The authorities did not expect a sharp acceleration in economic growth in the 4th quarter of 2019. According to the results of 11 months of the year, the GDP growth remained at the level of 1.1% and there is no reason to speak about the possibility of achieving the annual growth of 2.9%, declared by the authorities.
The beginning of 2020 is also expected to be challenging — in accordance with the quarterly forecast of the Government, in the first quarter GDP growth will amount to only 0.7%. The pessimism of the authorities can be attributed to the problems of some large enterprises: due to the lack of a contract with Chinese consumers, Belaruskali has experienced a significant drop in exports, BelAZ and Gomselmash faced a sharp drop in demand (in November it declined by 43.7% and 50.3% respectively). An unplanned halt in the export of oil products will aggravate the situation — in fact, from the point of view of exports and economic growth, we can talk about a repetition of the problem of last year related to the supply of dirty oil. Belarusian Nuclear Power Plant cannot yet become a factor in the revitalization of the economy and an improvement in the balance of foreign trade. The launch of the Plant, until recently planned for January 2020, seems to be postponed once again.
Despite the obvious problems at the beginning of the year, the Government expects to accelerate economic growth to 2.8% by the end of 2020. A plan of action to create conditions for economic development, approved and published at the end of December, should help to achieve this goal. The specified document did not bring anything new — most of the measures indicated in it have already been repeatedly voiced before. In accordance with this plan, the authorities are counting on accelerating the economy through measures to free business initiative (primarily through the so-called decriminalization of economic crimes) and stimulate investment (steps mainly aimed at protecting rights and creating additional incentives for direct investors). At the same time, measures to improve the efficiency of the public sector are described very briefly — they come down to the development of a new draft law on state organizations and a pilot project on transferring the debt of 2-3 troubled enterprises to the Asset Management Agency. Steps to increase the autonomy of local authorities are completely limited only to the preparation of a report on these issues for Lukashenka.
Perhaps the most interesting points of this plan of the Government are the analysis of existing preferential regimes (HTP, Great Stone, SEZ) and the possible expansion of some of their conditions throughout the economy, as well as compiling a list of enterprises with a government share of less than 25% to be sold to investors. In case such a list is formed, it will be quite ironic, because on the issue of privatization the authorities will return just to the situation taking place 10 years ago. The similar list drawn up in 2010 was cancelled personally by Lukashenka with the argument that with a good price offer, any state-owned enterprise can be sold. Such walking in a circle is a good example of a persistent fundamental contradiction: a significant part of the liberal undertakings of the Government is blocked by the head of state and control bodies at the adoption stage or is levelled in the process of their implementation.
The key operational issue on the agenda is reaching an agreement with Russia on the issue of energy trade in particular and on the development of the integration project as a whole. An unbalanced increase in household incomes, which can continue for political reasons and in 2020, contrary to the plans of the Government, creates rising risks for the financial system.