The risk of financial instability.
The most important event of the month, and perhaps of the whole year, was the oil prices collapse, which is seen by many analysts as the end of the high oil prices era. Gradual reduction of oil prices started in June (from a peak value of about USD 115 per barrel of Brent) and was regarded as temporary by many experts. Only after the OPEC meeting in November a consolidated view in the market has been developed that the stabilization of prices will be at a relatively low level (thus, according to the forecast of the Ministry of Economic Development and Trade of the Russian Federation, the price at an average of USD 80 per barrel of Brent crude oil is considered optimistic). The result of this fall was reflected in a further weakening of the Russian currency, which in November has reached the threatening to the Belarusian economy rates (the growth of the US dollar against the Russian ruble in November amounted to almost 20%). As a result, in early December, the Russian ruble broke through the mark below BYR 200 (in comparison to BYR 290 at the beginning of the year). This situation creates unfavorable conditions for the Belarusian exporters to the Russian market, which has traditionally been the primary market. And the yield of oil refining is significantly reduced as well, giving a significant boost to the trade balance. To restore the competitiveness and to prevent the significant deterioration in the payments balance is possible only by reducing the real cost of labor (through devaluation or by directly reducing the nominal income of the population). Both options are politically undesirable for the Belarusian authorities in the election year, so the plans for 2015 provide for the hybrid option, involving both non-radical restriction of domestic demand and a relatively slow devaluation of the ruble. The authorities expect some recovery in oil prices (USD 83 per year on average) and the Russian ruble (RUB 43 per dollar). The obvious weak link for the successful implementation of this plan is the small amount of gold and currency reserves in Belarus (USD 5.8 billion, according to IMF, at the need of USD 4 billion a year to service the national debt), which in case of deterioration of the results of foreign trade and the growth of devaluation expectations of the population may be quickly depleted. Especially since there were the first signs of change in the strategy of the population against the ruble (growth in demand for currency, reduction of gold and currency reserves, lack of liquidity in the banking system, apparently caused by the outflow of ruble deposits), which in the absence of decisive actions of the Government may turn into a full-scale panic. The irony is that the one-step devaluation will also require serious waste of gold and currency reserves: to pay off the panic in the first months after the devaluation and to conduct additional capitalization of state-owned banks, which will obviously face increase of bad debts on foreign currency loans. As a result, the Government has found itself in a difficult situation, when the gold and currency reserves are threatened by rapid depletion regardless of the actions taken. There are not many solutions to this problem: either to attract extra funding from the IMF under the program of major structural reforms (the obvious condition of the fund in this case will be a sharp weakening of the ruble, possibly through transition to the free exchange rate), or to receive extra funding from Russia, possibly in the form of sale of a large state-owned facility. In this case, the amount of funding must be large enough: preferably not less than USD 3 billion at a time, and about USD 5-6 billion for the whole year. There is not much time left for decision-making by the Government, provided the current situation in the Russian economy remains the same: by March 2015 the gold and currency reserves may reduce to the level of USD 3.5-4 billion due to net purchases of currency by the population and the enterprises and the need to service the external debt (only the IMF loan in December 2014 and February 2015 will require to pay more than USD 160 millions). In this case, the situation may develop according to the 2011 uncontrolled collapse scenario.
The risk of economic independence.
In the last months before the start of the Eurasian Economic Union (hereinafter referred to as EEU) the relations with Russia were overshadowed by another trade conflict. This time the matter of dispute was the alleged re-export from Belarus of the European food banned in Russia. As a result, the Russian supervisory authority banned delivery of products from a number of major Belarusian meat and dairy producers for allegedly inadequate quality. And what is more important an order was prepared prohibiting the transit of products from Belarus to Kazakhstan without Russian border screening. The latter is inconsistent with the principles of the common customs area of the current Customs Union (hereinafter referred to as CU) and the future EEU, which caused reasonable indignation of the Belarusian authorities. According to the statements of the Belarusian officials, the conflict will be resolved in the first half of December, but it once again showed us quite an arbitrary attitude of Russia towards its obligations, in this case to ensuring the free movement of goods and services within the CU. In this situation, it is clear that existence of EEU does not completely save Belarus from hostile pressure of the Russian capital. In general, taking into account the problems in the Russian economy and its conflict with the West, the newly formed EEU is not so attractive for Belarus, although it remains a single option condition for the normal existence of the economic system of the country.
The risk of economic recession.
In the second half of November the plans of the Government and the National Bank for 2015 were finally declared, which turned out to be quite unexpected. After the criticism of Alexander Lukashenko towards the forecasts of the Council of Ministers and sending them back for revision, there were fears that the new documents will turn out too optimistic, which has become customary in recent years. As a result, the authorities have adopted a reserved outlook for 2015: the GDP growth at the rate of 0.2-0.7%, the rising real incomes at the rate of 1.1-1.5%, the deterioration of the trade balance due to the falling oil prices up to minus 3.3-3.5% of GDP. The budget surplus is planned to be significant (at the level of 1.8% of GDP), 10% of the proceeds of which will be spent on servicing the foreign debt. The parameters taken are significantly worse than the values achieved for the 10 months of the current year (1.5% growth in GDP, trade surplus), and worse than many independent forecasts (for example, the World Bank predicted growth of Belarus in 2015 at the rate of up to 1.5%). Particular attention is paid to the Government plans to reduce the inflation rate (in 2015 up to 12%, in 2016 up to 9%), which suggests a significant tightening of monetary and fiscal policy, as well as the use of administrative measures. The downside of the forecast is considered the fairly optimistic parameters of oil prices and the Russian ruble.
In general, according to the government plans, the year should pass under the slogan of preserving the current situation. And moving to the same comprehensive reforms and elimination of existing structural problems is planned only in 2016. Thus, the Government announced preparation of the plan of structural reforms, one element of which would be a substantial reform of the mechanism of distribution of public expenses in the real economy. It is planned to dramatically reduce the number of government programs, while maintaining support of only those industries that are considered points of growth. Thus funding will only be spent for the capital needs, and completely abandon the support of the public sector activities. The companies, which will not be able to function independently, will be subject to bankruptcy proceedings.
Conclusion.
At the end of November the Belarusian authorities found themselves in a very difficult situation. The change of cycle in the oil market has exposed the existing problems of the economy: non-diversified export, inflexible monetary policy, small size of foreign currency and gold reserves and high degree of dollarization of the economy. The authorities once again faced the task of quick elimination of external imbalances, which settlement with the help of devaluation is not yet possible both due to political and economic reasons. While maintaining the external environment, the key objective of the Government in the coming months will be looking for emergency financing aimed at avoiding the situation development according to the uncontrolled scenario.
