Monitoring of the situation in the field of economic security of Belarus (December 2020)


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The risks of financial instability

The country’s financial system finishes the difficult 2020 year relatively calm. Fundamental trends in the system have slowed down and, as a result, key indicators show weak dynamics. Thus, at the end of December, the country’s gold and foreign exchange reserves showed a slight increase of USD 92 million, which is mainly due to the growth in the cost of gold. Despite the traditional growth of imports for the end of the year, the BYN exchange rate remains very stable: in December, with a slight weakening of the currency basket against the USD, it even strengthened. A formal improvement is also observed in banking liquidity — for example, the average rate of the interbank market in December fell to 7.44% compared to 13-15% in the autumn months. However, it is very likely that such an improvement is temporary and is due to significant budget spending at the end of the year. In December, the situation on the foreign exchange market somewhat worsened (net purchase of foreign exchange by the population amounted to more than USD 230 million, and by resident organizations about USD 30 million), but in general this situation is typical for the end of the year.

At the same time, the risks in the medium term continue to increase. Thus, an urgent problem for the authorities is the depletion of the country’s gold reserves, the amount of which in 2020 decreased from USD 9.4 billion to USD 7.46 billion. According to the forecasts of the authorities, this trend will continue, and the size of foreign exchange reserves by the end of 2021 may amount to about USD 6 billion. The expected fall in the gold and foreign exchange reserves is associated with the need to finance the budget deficit and repay the state debt. Thus, the Government has planned a budget deficit of BYN 4 billion for 2021, or about 2.6% of GDP. At the same time, the authorities are experiencing objective difficulties with external sources of financing for the declared needs. In the context of the political crisis, projects with the EBRD have been suspended, there is no hope of unfreezing relations with the IMF, and the authorities are not planning new placement of Eurobonds on Western markets. It is also difficult to count upon attracting Chinese loans, since in recent years there has been only one precedent for China’s granting an untied loan to the Belarusian authorities (in 2019, in the amount of USD 500 million). There is relative clarity only with the next Russian loan in the equivalent of USD 500 million, the allocation of which was announced by the Russian Government. In this situation, the Belarusian authorities plan to refinance the state debt in 2021 only in the amount of USD 1 billion (of which USD 200 million through borrowing in the domestic market and USD 775 million in foreign markets), and the rest (about USD 1.9 billion) to be paid for account of internal sources, incl. previously accumulated reserves.

At the same time, in addition to the state debt, the situation on the foreign exchange market and the deposit market may also exert significant pressure on the gold reserves. To normalize the deposit market, it is necessary to restore confidence in the national currency, which has been significantly undermined by the political crisis in the country. There is outflow of deposits of the population (both in BYN and in foreign currency) although it’s slowing down. As a result, over 11 months, foreign currency deposits decreased by USD 1.5 billion, and BYN deposits — by almost BYN 600 million. In this, any force majeure factor (for example, the introduction of sectoral sanctions by the EU and the United States or the deterioration of relations with Russia) will worsen the expectations of the population and business and increase pressure on the financial system. It is questionable whether the normalization of the deposit and foreign exchange markets is generally possible without a radical increase in rates, which will negatively affect economic activity and which the National Bank is not yet ready to implement.

The authorities’ policy to preserve output amid a decrease in external demand led to a deterioration in the financial situation of the Belarusian economy, especially a significant part of its public sector. Thus, the net profit in the economy for 9 months of 2020 fell by more than 3 times, and the share of unprofitable organizations increased from 13% to 17.6%. This situation creates significant credit risks for banks, although official statistics, which traditionally raise doubts among international experts, do not show the growth of bad debts. If state-owned enterprises are unable to fulfil their obligations to banks, restructuring of such debts with the participation of the government will be required. In turn, this will entail the measures to support the banks themselves (for example, such support was provided to the three largest state-owned banks at the end of December in the amount of almost BYN 800 million). However, the widespread practice of BYN financing increases inflationary risks, and the authorities’ possibilities for foreign exchange funding are significantly limited. The plans of the National Bank to stimulate commercial banks to attract debt and maternity capital to the country more actively may also not bring the desired result due to the growth of country risks.

At the same time, the widely discussed risks associated with the easing of monetary policy (the so-called “launch of the printing press”) remain rather hypothetical. Although in the government offices there is the discussion about the more active monetary stimulation of the economy, the National Bank still declares its adherence to the policy of limiting the money supply. There is also no significant growth in credit in the economy, although the disproportion in preferential lending to the public sector is growing. In this context, a possible change in the leadership of the National Bank can simultaneously strengthen the positions of supporters of soft policy and worsen the expectations of the population and business regarding the stability of the national currency.

The growth in oil prices (which exceeded USD 55 per barrel in early January) became a favourable factor for the financial system. Optimism in commodity markets is associated with several factors at the same time: this is the beginning of a wide vaccination campaign and the still weak influence of the second wave of COVID-19 on the largest economies, the Democrats gaining full power in the United States, the new agreements of the OPEC countries (especially beneficial for Russia). Strong oil has a positive effect on the BYN exchange rate and budget revenues. At the same time, a possible reversal in the oil market (for example, due to the expansion of restrictions in China or a change in the dynamics of expectations) can seriously accelerate negative trends in the financial market of Belarus.

The risks to economic growth

The Belarusian economy ends the year with the best GDP performance in the region. According to various estimates of the authorities, the economic falldown in 2020 should be from 0.5% to 0.8%. For comparison, Russia’s GDP is expected to fall by 3.5%, Ukraine’s – by about 5%, Poland’s – by 3.5%, Lithuania’s – by 2.5%. The formal success of the Belarusian economy is associated both with a relatively low share of services in the structure of GDP (it is this sector that suffers most from quarantine measures), and with the authorities’ policy to preserve output at the largest state-owned enterprises as much as possible, despite the fall of external demand. As a result, the Belarusian economy is witnessing an increase in warehouse stocks to a record level over the past 5 years, and the authorities are actively using administrative measures to sell products on the domestic market.

At the same time, the authorities expect the economy to recover to the pre-crisis level already in 2021 due to the planned GDP growth of 1.8%. It is planned to achieve this indicator by activating domestic demand and recovery processes in foreign markets. At the same time, Prime Minister Raman Halouchanka promises to present a detailed target plan to achieve the declared growth — such a working document is new for the Belarusian government.

The expectations of international funds are noticeably more pessimistic: for example, according to Sberbank’s estimates, the growth of the Belarusian economy in 2021 will be only 1%, and the World Bank predicts that the recession will deepen to 2.7%. The implementation of the plans of the Belarusian authorities can be broken by several factors, the most important of which is the ongoing political crisis in the country. Thus, according to the results of a survey of company executives, this factor is considered by business as the main source of problems (39% of the surveyed executives hold this opinion). The political situation affects the economy through several channels. First of all, the result of the observed confrontation in society is the growth of investment and consumer pessimism, which is accompanied by the refusal of business expansion plans, and the population from long-term acquisitions. It will negatively affect the potential for economic growth and accelerate migration of the working-age population, incl. highly qualified IT specialists who are at the forefront of this process. Sanctions from the EU and the United States also pose a threat to the economy. The third package of sanctions measures adopted in December has so far had a limited direct impact on Belarusian companies (the sanctions list contains only a few businessmen and organizations that are not critical to the economy as a whole). However, a further expansion of the sanctions list is announced, which may occur as early as the end of January, and which will increase the direct losses of the Belarusian economy. An increase in sanctions pressure can also be expected from the United States after the end of the transit of power to the Biden administration. In addition to the direct effect, the sanctions also have an indirect effect on the economy through a significant decrease in the country’s investment attractiveness. Already according to the current statistics for 2020, there is a significant reduction in external investment, and compared to the first half of the year, we can even talk about capital outflow from the country.

The political situation also negatively affects the country’s credit market, when, against the background of falling confidence on the part of the population, banks are forced to significantly tighten lending conditions — both through raising rates and strengthening requirements for borrowers. As a result, in the last months of the year, there has been a stagnation in the debt of private business and the population to banks. In fact, the only steadily growing sector is lending to state-owned enterprises, which in the future threatens to deepen the chronic problems of the Belarusian economy.

The authorities’ fiscal policy may also have an ambiguous effect on economic growth. Halouchanka government has planned a significant budget deficit for 2021, which is a standard measure for a downturn, as it’s aimed at reviving economic activity. However, at the same time, the Belarusian authorities made decisions on a significant increase in taxes, which, on the contrary, is usually viewed as a step that restrains economic activity. The increase affected both direct taxes for certain categories of payers (income tax for mobile operators was increased from 24% to 30%, income tax for employees of High Technologies Park and Great Stone industrial park residents increased from 9% to 13%), and indirect consumption taxes (VAT was introduced at a rate of 10% for imported medicines, VAT was increased from 10% to 20% for some children and food products). The increase in taxes will provide additional revenues for the budget in the amount of about BYN 1 billion, but at the same time it will limit consumer and investment activity. Also, the revision of taxes for HTP members contradicts the previously adopted decree on the invariability of the tax regime for these organizations until 2049, which brings with it reputational losses for the state and may increase the outflow of the industry from the country.

A possible positive factor for the Belarusian economy could be a sharper than previously expected rise in prices in the commodity markets, and, accordingly, an accelerated recovery in demand in Russia. Also, in the first months of the year, a noticeable increase in GDP is very likely. It will be explained by purely methodological reasons – the factor of comparison with the same period of the previous year will work here. And at the beginning of 2020 the Belarusian authorities refused to process Russian oil. In the future, this statistical distortion will be gradually levelled.

The risks to economic independence

In the current environment, good relations with Russia are becoming critically important for the Belarusian authorities. The Russian government and its affiliated structures are actually the only possible source for an emergency replenishment of the gold reserves of Belarus in case of such a need. In turn, public tension in relations with an ally can significantly aggravate the crisis of confidence in the national currency and the banking system in Belarus.

In such circumstances, the rhetoric of the authorities regarding the new agreements on oil and gas for 2021 has changed dramatically: now they express their satisfaction with the agreements reached. At the same time, these agreements look objectively worse than last year’s ones, which the Belarusian authorities did not hesitate to criticize. Thus, the gas price rises from USD 127 to USD 128.5 per thousand cubic meters. On the one hand, this price is significantly lower than current prices on the spot market in Europe (at the end of December it exceeded USD 200 per thousand cubic meters), but on the other hand, the old problem of price disparity with Russian regions remains unresolved, which limits the price competitiveness of Belarusian producers. The new agreement on oil also implies an increase in its price to 88-90% of the global level, as well as a refusal from the Russian Government to compensate part of the premium to oil suppliers (in 2020, this option gave the Belarusian budget about USD 60-70 million). The issue of compensating Belarus for losses from the tax manoeuvre, around which there was a heated dispute at the beginning of last year, this time is not raised at all. It can be assumed that the soft position of Minsk in many respects contributed to the allocation of the next tranche of the loan in the amount of USD 500 million in the last days of December.

This positional weakness of the Belarusian authorities significantly increases Russia’s ability to strengthen its strategic influence on the Belarusian economy. The agenda may again include issues of privatization of some objects of state property, deepening integration, and deeper penetration of Russian capital into certain sectors.


Against the background of the operational lull, the medium term risks continue to increase significantly. The plans of the government in the context of limited opportunities for attracting external financing presuppose the active use of the accumulated gold reserves. This means that any significant force majeure factor can put the authorities in the dilemma of taking unpopular emergency measures. The resolution of the political crisis remains an important condition for the normalization of the financial market and growth of economic optimism.