The risks to economic independence
In January, the key topic was the refusal of the Belarusian authorities to purchase oil from most Russian oil companies. The is no agreement on the companies’ premium for long-term contracts, which according to some estimates ranges from USD 10 to USD 20 per ton. The Belarusian authorities refuse to pay such premium. As a result, in January, only 2 Russian companies were involved in oil supplies to Belarus. Both of them are connected with the oligarch Mikhail Gutseriev, who in turn is a friend of Aliaksandr Lukashenka. The volume of these deliveries covered only less than a third part of the needs of Belarus — according to various sources, in January they amounted to 400 to 650 thousand tons with a monthly demand of the Belarusian oil refining sector in the amount of 1.5 million tons. At the same time, it was not possible to compensate for the lost volume at the expense of alternative sources, which indicates the spontaneity of the decision to abandon Russian oil and the Belarusian Government’s unpreparedness for it. The only alternative supply in January was a one-time purchase of Norwegian oil: its volume turned out to be quite small (86 thousand tons (source)), and the authorities did not disclose the economic component of the deal.
The current situation was the result of disagreements regarding the deepening of Belarusian-Russian integration. Russia is considering a drastic change of conditions in the oil and gas sector (in particular, a reduction in gas prices to domestic prices in Russia and the Belarusian refineries receiving compensation for the tax manoeuvre from the Russian budget) only in conjunction with Belarus’ signing of integration road maps. At the same time, the integration directions proposed by Russia (common currency, single tax and budget system, creation of supranational bodies) are unacceptable for the official Minsk. The attempts to resolve the situation at the political level (in particular, to exclude clauses threatening the national sovereignty of Belarus from the integration program, or even to unlink the conditions for oil and gas supplies from the development issues of the so-called “Union State of Belarus and Russia”) were unsuccessful. According to the results of the meeting of Vladimir Putin and Aliaksandr Lukashenka, which took place on February 7, 2020 in Sochi, the position of Russia has not changed. Without deepening integration, Russia is ready to roll over the current gas agreement for the whole year, setting the price at USD 127 per thousand cubic meters, and supply oil to Belarus on the terms of 2019: the market price minus export duty plus a premium of the suppliers.
From the point of view of economic feasibility, there is virtually no choice of actions for the Belarusian authorities in this situation. Of course, the economic feasibility of diversifying oil purchases will grow in the medium term as the tax manoeuvre in Russia is completed. However, at the moment, Russian oil is still much cheaper than one from the competitors, and the refusal to purchase it negatively affects the economy of Belarus. Kazakhstani suppliers could offer conditions close to Russian (by virtue of joining the EAEU), but at the moment there is no clarity with the potential volume of such supplies (initially, there were talks about supplying from 1 to 3.5 million tons of oil and oil products). Another issue is transporting oil through the territory of Russia. On the whole, the full provision of Belarusian industry with non-Russian oil is a logistically difficult task. The authorities cannot solve it in a short time. The flip side of the gradual reduction in energy preferences is the weakening of the dependence of the Belarusian economy on Russia, as well as the strengthening of incentives to accelerate structural reforms.
The risks of financial instability
The deterioration of foreign trade causes significant fears. Thus, in December, the negative balance of foreign trade in goods exceeded USD 1.25 billion, which is the worst level since the crisis of December 2014. January results, even against the background of a warm winter and a decline in gas imports, are also likely to be weak due to subsidence in exports of oil products and crude oil, as well as a decrease in the supply of potash fertilizers. So, according to the top management of Belaruskali, the company is forced to temporarily reduce the production of potash salts by 30% due to the lack of a contract with Chinese customers, the conclusion of which may still be delayed due to the spread of coronavirus in China.
A noticeable deterioration of the situation in the external sector is already reflected in the country’s foreign exchange market. So, according to the results of January, for the second month in a row, there has been a situation of net demand for foreign currency both from the population (almost USD 45 million) and from resident legal entities (USD 24 million). As a result, BYN has noticeably weakened since the beginning of the year both against a basket of currencies (as of February 10, by 1.64%) and to the US dollar (by 3.45%).
The current situation may significantly affect the plans of the authorities to de-dollarize the economy. The shaft of bad news is once again able to aggravate the public confidence in the national currency. In addition to the lack of agreements with Russia and BYN depreciation the beginning of the year, such bad news can be attributed to a decrease in the size of foreign exchange reserves (minus USD 150 million in January), an increase in government debt in 2019 (plus USD 200 million), and the expected acceleration of inflation in the first quarter. As a result, there is a possibility of a recurrence of the situation at the beginning of last year, when against the background of accelerating inflation, credit and deposit rates increased. Moreover, the current situation is characterized by fundamentally worse conditions: both economic (primarily the deterioration of results in foreign trade), and political. In particular, against the background of the upcoming elections, the authorities are decreasing the arsenal of politically acceptable measures (for example, raising the refinancing rate and limiting credit activity), while the use of measures that can provoke acceleration of inflation is expanding on the contrary (in particular, preserving of the directed lending, as well as increased participation of commercial banks in this process instead of the planned abolition of this practice).
The credit risks associated with a possible increase in the number of insolvent borrowers also can cause significant problems for the economy in the event of deteriorating external conditions. According to the calculations of the National Bank under a stressful scenario (a slowdown in global economic growth and a further deterioration of the terms of foreign trade), the amount of non-performing debts in the banking system can increase to 10%. This will create a significant threat to the banking system and the financial stability of the country as a whole.
The risks to economic growth
According to the results of 2019, the Belarusian economy grew by 1.2%, which is lower than both the target indicator (4%) and the conservative forecast used in budget planning (2.1%).
According to the results of January with a high degree of probability we will see the economic recession. The main factors in slowing economic activity will be the problems with the production of petroleum products and potash fertilizers, as well as a reduction in energy production due to the warm winter. At the same time, government officials are already declaring that this year it will be very difficult to achieve the growth target of 2.8%.
Against the background of the problem of low economic growth, there are growing contradictions within the economic authorities regarding the necessary measures to increase the efficiency of the country’s economy, and especially its large-scale public sector. Thus, the National Bank and the economic block of the Government continue to consider the reduction of the role of the state and tightening budget constraints for enterprises as the basis for increasing productivity in the economy. So, the National Bank’s adopted strategy to increase confidence in the national currency involves strengthening financial discipline and removing inefficient enterprises from the market, including through their liquidation. In turn, Prime Minister Syarhey Rumas criticizes the current economic development program for the next 5 years due to the prevalence of a conservative approach in it, which does not imply a change in the structure of the economy and the role of the state in it.
At the same time, Aliaksandr Lukashenka and his administration adhere to a different point of view. Thus, Lukashenka, in his usual emotional manner, criticized “moaning” about the need for substantial reforms and spoke out for maintaining the existing economic system. Within the framework of this concept, some important decisions regarding state support for problematic investment projects, as well as the development of the agricultural sector of the Viciebsk region were made. It is planned to save problematic agricultural organizations in the region (there were 130 of them with a total of 240 agricultural organizations) by joining 7 processing enterprises (it should be noted, that these enterprises are also far from being the most successful). The debts accumulated by agricultural enterprises are supposed to be transferred to a special organization for debt management and taken out of the enterprises’ balance sheets. In fact, the authorities intend to use in the agricultural industry the practice of creating holdings, previously actively used in industry without any noticeable positive results there. At the same time, it is assumed that an important role in the management of these holdings should be played by local authorities, in particular the chairman of the local district executive committees. The planned limitation of profitability in housing construction at a level of no more than 5%, and the measures being discussed to combat mediation organizations can be seen as examples of voluntary decisions. The appointment of the new deputy head of the presidential administration, Valery Belsky, a well-known adept of state support for the economy, including using the so-called “canalized emission”.
Against this background, the Government stopped working with the World Bank to develop a roadmap for measures to improve the efficiency of the economy. Earlier, the Government considered this document as a possible basis for starting a new loan program with the IMF. However, the results of the work of expert groups have not been finalized, although Vice Prime Minister Dzmitry Krutoy promised to use the best practices in formulating the program for the next five-year period. In fact, the Government could not even make a symbolic commitment to reform the economy in accordance with the recommendations of international funds.
Operational risks are associated with a deterioration in the results of foreign trade, including the refusal of the Belarusian authorities to import Russian oil. Against the background of a slowdown in economic growth and the upcoming presidential election, the probability of expanding practices to support the public sector of the economy increases, which creates the potential to accelerate inflation.