The risks of financial volatility
In early April, an agreement with Russia on the supply of oil and gas was finally reached, which marked the end of the energy crisis ongoing from August 2016. The compromise decision was agreed upon only after personal negotiations between Aliaksandr Lukashenka and Vladimir Putin. According to the agreements, Belarus agreed with the contract price for gas and recognized the accumulated debt amounting to about USD 726 million (source). Some discount on gas will operate only in 2018 and 2019, while its size has yet to be agreed. The formation of the common gas market and the alignment of prices for it with the bordering Russian regions will occur only by 2025. Having conceded in the gas issue (at the end of March the authorities categorically didn’t recognize the gas debt and demanded the implementation of integration agreements (source)), Belarus received certain bonuses in the oil sector.
Thus, the Russian Government agreed on an annual oil supply of 24 million tons until 2024. Of this volume, 18 million tons will be processed, and 6 million tons can be re-exported with payment of a fee to the Belarusian budget. Given the current oil price and taxation conditions, this should bring an additional USD 570 million to the Belarusian budget each year and be a kind of compensation for high gas prices. Belarus is also exempted from the obligation to return 1 million tons of ready oil products to the Russian market, often associated with losses for Belarusian companies and a shortage of revenues by the budget. The issue of returning some foodstuffs of certain Belarusian producers to the Russian market, which was stopped supposedly for health reasons, will be re-examined (presumably with the positive result). The authorities estimate the total effect of the agreements for the Belarusian economy at the level of about USD 500 million in 2017, and at approximately USD 800 million in 2018 and 2019.
Russia also agreed to refinance the Belarusian payments for servicing the public debt in 2017 in the amount of about USD 750-800 million. This amount actually coincides with the amount of accumulated debt for the gas supplied, and its receipt will allow the authorities to fulfill their obligations without additional reduction of gold and foreign exchange reserves. Another tranche of the Eurasian Stabilization and Development Fund loan, which was to be held in October 2016 and January 2017, is also needed for “painless” refinancing of the external debt. Although the Belarusian authorities haven’t fulfilled all the formal requirements for obtaining the third and fourth tranches of this loan, Putin’s consent to contribute in this matter should move the matter off and allow the Government of Belarus to receive the planned USD 600 million.
In general, the resolution of the oil and gas conflict will positively affect the Belarusian economy (foreign trade and GDP dynamics will improve) and reduce the risks associated with servicing the external debt. At the same time, these achievements are still not enough to solve the issue of the necessity of the IMF loan even in the short term. The need for additional external financing remains relevant, although not so critical, and the authorities should still be focused on fruitful negotiations with the IMF. In March, representatives of the Foundation visited Minsk at the invitation of President Lukashenka and held a working meeting with him. According to some sources, the subject of the meeting was the alleged reform of the public sector and changes in the system of social protection, the need for which will arise in the intensification of reforms. No public statements and assessments were made as a result of the meeting. It was only reported about the continuation of negotiations with the representatives of the Belarusian Government in Washington in April of this year.
Still, we can state the success of the authorities’ policy in ensuring financial stability: the country’s gold and foreign exchange reserves are slightly but steadily growing (in March they exceeded USD 5 billion). It’s necessary to note that such a result was achieved against the background of the reduction of the external debt in February by 0.2%. The domestic market, where authorities successfully place currency bonds (for example, only in March the National Bank placed bonds for USD 144 million with an average yield of about 5.8% per annum), remains an important source of refinancing of payments. The inflation rate is rapidly decreasing, making 0.5% in February, and 7.1% at an annual rate.
At the same time, against the background of sufficiently large-scale protests in the regions caused by the social policy of the authorities in general and by the decree “on parasites” in particular, the populist rhetoric of the authorities has intensified. In addition to the demand for an increase of average wages up to the level of USD 500 by the end of the year, there was a promise to solve the problem of unemployment of the population. Simultaneous completion of these tasks, accompanied by the promised decrease in inflation, requires a tremendous increase in labor productivity, which is actually impossible in such a short period of time. However, its very statement can push the government to mitigate monetary policy, increase budgetary expenditures, and adopt populist administrative decisions (for example, increasing the number of employees at inefficient state enterprises).
The risks of economic recession
The reverse side of the restraining monetary policy is the negative dynamics of GDP, which again fell down, this time by 1% in January-February. The continuing recession is still conditioned by a set of conjuncture and fundamental factors. And while the effect of conjuncture factors (in particular, the decline in the export of oil products and foodstuffs) can be leveled, a significant increase in economic efficiency remains highly doubtful. Further reduction in consumer demand can be caused by a change in the behavior pattern of the population, which is gradually adapting to a new level of income. This process is indicated by an increased decline in retail trade turnover (minus 3.7% in January-February 2017) against the background of stabilization of real incomes of the population (in February real wages showed a slight increase for the first time in 3 years).
The weak investment demand, falling down for the 13th consecutive quarter, will also restrain future economic growth. The decline in output due to a reduction in production capacity may be a deferred effect of investment depression. The absence of sanation and liquidation of chronically insolvent enterprises is a threat to relatively efficient sectors of the economy. The government is trying to curtail the problems of such enterprises by transferring their debts to its account, refinancing them through issuing state bonds, and providing covert support (for example, by allowing to accumulate debts for energy resources). However, the newly emerged growth of bad bank debts shows that this measure is aimed only at fighting the consequences, but isn’t struggling with the root cause of the problem. As a result, such inefficient enterprises become “toxic”, spreading financial problems in the economy through a system of non-payments.
At the same time, the drop in rates on the deposit and credit market is certainly a positive factor for the revival of economic activity. Since the beginning of the year, the National Bank has reduced the refinancing rate for the fourth time, and since April 19 it will be 14%. Interest on newly attracted deposits and newly issued loans have almost returned to the level of the beginning of 2010, which preceded the period of great devaluation and imbalance of the monetary system. At the same time, the current drop in rates in nominal and real terms doesn’t lead to an outflow of deposits and speculative demand for ruble loans, while the banking system faces a significant excess of liquidity. This may indicate a reduction in inflation expectations in the economy, which in turn creates the potential for further lowering of the rates in the money market.
The risks for economic independence
The solution to the oil and gas conflict with Russia was reached without reducing the number of restrictions and exemptions in mutual trade, a large number of which were sharply criticized by Prime Minister Andrei Kabyakou at the last meeting of the Eurasian intergovernmental council. There is also no equalization of gas and electricity prices for industrial consumers in Russia and Belarus, which at best is expected by 2025. At the same time, the protracted oil and gas negotiations showed that Minsk didn’t have effective instruments to achieve the compliance with the spirit of integration agreements. The final agreement actually repeats the compromise variant proposed by the Russian side in December 2016 and previously rejected by the Belarusian authorities. In addition to price discrimination, which seriously affects the competitiveness of energy-intensive industries, Belarusian organizations continue to face damage from the actions of Russian state bodies. For example, in addition to the usual bans on the supply of goods for sanitary reasons, at the end of March, due to the introduction of new software by the Federal Customs Service, imports of imported goods with Belarusian quality documents to Russia was blocked. At the same time, Belarus’ debt dependence on Russia continues to grow, while Russia is still the only external source of refinancing the national debt. In fact, the Belarusian authorities continue to solve current economic problems through the accumulation of risks for the economic independence of the country. In the long run, this will lead to an increase in Belarus’ political dependence on Russia and may contribute to the loss of control over part of the state property.
The solution of the oil and gas conflict with Russia reduced the risks of financial destabilization of the economy and created an additional factor for activation of the economy. At the same time, the scheme of the agreement is rather complicated and doesn’t correspond to the initial requirements of the Belarusian Government, which in the future can pave the way for new disagreements. The issue of populist reversal in economic policy remains pressing, which can be caused by the growing discontent within the population with the socio-economic policies of the authorities.