The risks to economic independence
In March, public argues between Russian and Belarusian officials about the relations between countries in the oil and gas sector as well as about the fate of integration projects continued. The interview with Russian Ambassador Mikhail Babich, in which he once again linked Belarus’ receiving economic preferences (in particular cheap oil and gas) with a further deepening of integration within the framework of the so-called “Union State”, caused a big resonance. The gradual development of the EAEU is an alternative option, but in this case Belarus will not be able to count on meeting its demands for the formation of a single oil and gas market in the coming years. As a result, the Belarusian authorities will not be able to claim compensation for losses from the Russian tax manoeuvre, or to preservation of gas prices at the current level in 2020. At the same time, the Ambassador estimated the size of the current support of the Belarusian economy from Russia in the amount of USD 6-8 billion per year. The Belarusian authorities reacted painfully to these statements, calling the Ambassador “a prospective accountant” and suggesting to him a deeper insight into the specifics of the host country. The public criticism of the EAEU continued: according to the statements of the Belarusian Deputy Prime Minister Ihar Piatryshenka, this organization can hardly be called a full-fledged economic union, since there is no reason to speak of any free movement of goods, labour and capital. Moreover, now the development is going in the opposite direction: the number of restrictions and other bureaucratic delays only increases (for example, in 2018 the Eurasian Economic Commission eliminated 13 obstacles to the work, but added 19 of them).
At the same time, despite the public argues of officials, the conflict stays exclusively in the field of oil and gas relations. In other areas, Russia’s position remains more loyal. For example, in March, President Vladimir Putin signed a decree on the allocation of the requested loan to Belarus in the amount of USD 600 million. Apparently at the end of April, the Belarusian Government will receive the last tranche of the Eurasian Fund for Stabilization and Development in the amount of USD 200 million, the conditions for which are declared to be fulfilled. In addition, the Government has begun negotiations with Russia over the extension of the repayment period for the loan for the construction of the Belarusian NPP by 10 years. Their success will allow reducing the burden on the budget in terms of the cost of servicing the public debt next year. The position of the Rosselkhoznadzor regarding the part of the Belarusian manufacturers is softening: the ban on the supply of products to Russia for several Belarusian companies was lifted in March. In turn, Belarus also supports Russia in matters of supply of so-called “sanction products” through Belarusian territory. So, in March, it was decided to suspend the issuance of quality certificates for fruit and vegetable products, following in transit through the territory of Belarus to Russia.
Thus, it is obvious that Russia does not yet use all the tools of pressure on Belarus in the promotion of its integration agenda. It remains an open question whether this is a consequence of the banal desire of Russia to reduce its expenses using the proposals that are obviously unacceptable for Belarus, or the growing pressure is still ahead of the Belarusian economy.
The risks of financial instability
Despite the worsening conditions for the purchase of Russian oil, the results of foreign trade at the beginning of the year were quite positive. Commodity imports due to the folding of re-export schemes for Russian oil products showed a significant reduction (minus 3.7%), while exports declined less (minus 2.8%). As a result, the negative balance of trade in goods significantly reduced in comparison to the level of the previous year: the deficit in January-February 2019 amounted to USD 450 million compared to the deficit of USD 621 million a year earlier. The overall result of foreign trade, taking into account services, remains at a positive level (in January, its surplus amounted to USD 322 million).
Positive foreign trade contributes to maintaining a formally favourable situation in the domestic foreign exchange market of the country. March became another month of excess currency supply, which was formed, however, in a somewhat unusual way. This time, the population was a net buyer of currency (worth about USD 20 million), and legal entities at the same time formed a net supply in a larger amount (by USD 155 million by residents and USD 35 million by non-residents). The statistics of the coming months will show whether such a result indicates a change in the behaviour of the population connected with rising incomes and a fall in trust to the national currency, or is it only a single growth in demand.
In any case, in March, the National Bank again acted as a buyer in the foreign exchange market, which helped it to ensure the growth of gold and foreign exchange reserves by USD 151 million to USD 7.2 billion. At the same time, the size of external public debt since the beginning of the year has decreased by 1.5% to USD 16.7 billion. The prospects for the authorities to achieve plans for the gold and foreign currency reserves also look good. In the near future, the government plans to enter the Russian market with a pilot offering of sovereign bonds worth about RUR 10 billion (about USD 155 million). Negotiations to raise bank loans in the Chinese market are also under way. The government also sees significant potential for growth in the sale of government bonds in the domestic market. Thus, since the beginning of the year, the plan for attracting resources in the domestic market in the amount of USD 370 million has been implemented by half. At the same time, the government refrains from more active use of this source of replenishment of reserves in order not to cause a rise in the cost of corporate borrowing. In addition, according to its statements, the government constantly monitors other markets (European, Chinese), and in the case of a favourable yield, it is ready to promptly make new placements of bonds, including for pre-funded public debt service expenses for future periods.
At the same time, the situation with the acceleration of inflation observed at the beginning of the year is still quite tense. In February, the prices grew by 1.3%, which is the maximum value since the beginning of 2016. In general, in two months, consumer inflation reached 2.2% and on an annualized basis accelerated to 6.2%, while the annual plan is 5%. At the same time, the National Bank continues to insist that this is temporary and is connected with a rise in prices in Russia, an increase in household incomes at the end of 2018 and a seasonal increase in the cost of utilities. At the same time, the acceleration of inflation has not yet had a significant impact on the market. Thus, growth in both the BYN and foreign currency segments continues to be observed in the population deposit market at almost unchanged rates (1.6% and 0.6%, respectively). The stabilization of the liquidity situation is evidenced by the decision of Belarusbank, the largest bank in the country, to resume consumer and housing loans to the population.
The risks to economic growth
Economic growth at the beginning of the year continues to be better than the authorities’ initial expectations. Despite the fact that February of the current year turned out to be warmer than last year, which is why the supply of heat and electricity sector showed a decrease of 0.3%, overall economic growth still accelerated. GDP growth in the first two months was 0.8% compared with 0.7% a month earlier. The key drivers of growth were industry and retail trade (by 0.9% and 5.1% respectively). First of all, this can be explained by the growth of real incomes of the population, which increased by 7.2% compared to last year’s level. Agriculture, construction and freight traffic decline (minus 0.6%, 0.1% and 4.9%, respectively). Since the potential for crisis-free growth in household incomes is likely to have been exhausted, which is shown by both accelerated inflation and growing demand for currency from the population, the acceleration of economic dynamics to the 4% level planned by the authorities can only be associated with an increase in export supplies. The global increase in commodity prices should contribute to fulfilling this task, but the low potential for economic growth, as well as losses from the tax manoeuvre in Russia are the limiting factors. Thus, according to a new estimate of the World Bank, even with compensation for half of the losses, the annual growth of Belarus’ GDP will not exceed 2% in the medium term. This assessment is also close to the indicators of the Belarusian government, which is the basis of the 3-year budget plan. In the case of a lack of compensation, the World Bank expects the Belarusian economy to get into recession.
At the same time, the economic policy of the authorities does not undergo any significant changes and remains eclectic. The government’s intentions to liberalize the economy (for example, it is proposed to abolish the preemptive right of the authorities to purchase shares of privatized enterprises and generally to reduce the state’s share in the joint-stock enterprises) are combined with Lukashenka’s requirements about the personal responsibility of the heads of the regions for the results of the “sowing campaign”. The practice of creating special preferential conditions designed to stimulate points of economic growth continues to be used. In March, a decree on the creation of the second (after the industrial park “Great Stone”) special economic zone “Bremina-Orsha” was signed. It will be managed by a private institution. The abuse of this approach seriously complicates economic administration and distorts the incentive system for local authorities. For example, the heads of Maladzechna stated the desire to get the benefits similar to ones in Orsha to stimulate the development of their district.
The situation in the financial sector of the country remains stable, and the dynamics of GDP even slightly exceeds the expectations of the authorities. The conflict situation with Russia remains localized in the oil and gas sector and does not affect other areas of trade and the receipt of credit resources. At the same time, the lack of compensation for losses from the tax manoeuvre and the possible increase in gas prices in 2020 significantly limit the growth potential of the economy and complicate the task of ensuring financial stability.