The risk of financial instability.
The most important event of the month was an agreement with the Russian government on crediting of all export duties on oil products produced in Belarus to the Belarusian budget. The Belarusian authorities have hoped to achieve functioning of the oil market in this format for several years, and the benefits from this agreement are really significant: over USD 1 billion will additionally remain in the budget of Belarus. And compared to the year of 2014 the bonus will be more than USD 2.5 bln, as a whole. These funds will help to easily pass the next period of foreign debt payments, which in 2015 will amount to about USD 4 billion. However, the next year will be the peak in terms of the bonus size, and further its amount will reduce due to the tax maneuver of the Russian authorities. Together with the decrease in the nominal gain, Belarus will come across with the deteriorating operating conditions in the oil refining industry, as well as generally higher prices on energy resources for economic actors. The risks for the oil refining have caused particular concern of the Government, which has requested to urgently develop a plan for its modernization, aimed at deepening of oil processing from the current 72% to 90-92%. Without achieving these parameters by 2017 the Belarusian refineries will not be able to provide the loss-free operation.
In general, the economic situation in Russia and the actions of its Government currently pose the most serious operational risks to the economy of Belarus. Here particular attention should be paid to the weakening of the Russian ruble against the US dollar, which since the beginning of the year was over 35% and rapidly continued in October. As a result, the Belarusian ruble significantly strengthened against the Russian currency (from 290 rubles at the beginning of the year to 255.50 rubles at 01.11.2014), which worsens the position of domestic producers in the market of the eastern neighbors and by analogy with the year of 2008 may cause a shock in foreign trade. And weakening of the Belarusian ruble, which is encouraged by the chief lobbyist of the interests of industry Deputy Prime Minister Vladimir Semashko, is seen as impossible at the moment for quite objective reasons. More rapid devaluation without outstripping growth of rates in the deposit market may cause the transfer of the ruble assets to the currency assets, moreover, in recent months the relative profitability of ruble deposits related to the currency deposits has sharply declined. Thus, if in the early summer the ruble deposits gave real profit 3-4 times higher to the currency deposits profit, now they are no more than 2 times more profitable. The reserves of the Government are too small to be confident in the possibility of the currency panic redemption. And in general, despite all the conversations after the crisis of 2011, the dollar exchange rate remained the main anchor of expectations of the economic actors, and any of its abrupt changes provokes a lot of problems throughout the economy (growth of inflation and interest rates, deceleration in GDP growth, reduction of real income of the population, etc.). In this situation, the only option is to continue the current policy of gradual and rather slow (to solve the tasks of ruble loans cheapening) weakening of the ruble against the dollar, while monitoring the dynamics of foreign trade and, in case of its failure, to seek unplanned sources of replenishment of the gold and foreign currency reserves at the expense of increasing the national debt or privatization.
While the situation in the financial sector continues to develop in line with the previous months, the foreign exchange market situation is close to the balance of purchase and sale of foreign currency, the interest rates on ruble assets have slightly declined as if they have reached the bottom, the banking system situation is described by the excess of ruble liquidity. A relative stability of the financial situation confirms preservation by S&P of the credit rating of Belarus at «B- / B» with a stable forecast.
The risk of economic independence.
The situation with implementation of the so-called integration projects (i.e. provision to the Russian capital of access to the large objects of Belarusian state property) remains unchanged. Despite the fact that there are only 2 months left until the year end, none of the 5 planned projects have been implemented. The rate of development of each of them is nearly the same: differences with the Russian side arise at the stage of the property objects evaluation. The method to delay the privatization is not new and was already used in 2012 in the framework of merger of MAZ and KAMAZ, which is still at the stage of negotiation and discussion. Russian Prime Minister Dmitry Medvedev expressed his dissatisfaction with such attitude of the Belarusian authorities to the integration projects during his visit to Minsk in October. The Russian official has pointed out a possible revision of relations with the Belarusian colleagues in the absence of progress on this matter. Certainly, the Russian companies and the Government have many ways to put pressure on the Belarusian authorities, but it seems unlikely that they will move to hostile action in the first year of life of the newly established Eurasian Economic Union.
The visit of IMF mission to Minsk in October is also worth mentioning. Prior to its arrival, some officials have announced almost the beginning of negotiations on the new program. In fact, the discussion touched upon the new program, but only hypothetically. The members of the mission stated that the Fund is ready to allocate another financing to Belarus, but only in case of deep reforms. However, current joint action plan of the National Bank and the Government was evaluated as a positive, but insufficient measure. Judging by the reaction of the Belarusian officials, it is obvious that radical reforms at this stage are not being considered by the authorities at all, and the Fund is proposed to positively evaluate the mere fact that the economy of Belarus is moving towards a more market and open nature. Prime Minister Mikhail Myasnikovich has offered first to agree on the beginning of the program and later to discuss the measures of the Government within its framework. Obviously this proposal will not find understanding among the representatives of the Fund, and their further contacts with the Government of Belarus will continue in a similar vein of views exchange at least until the next presidential elections.
Risks of economic recession.
The situation in the Russian economy (close to zero economic growth, falling real income of population, reduction of investment activity, growth of rates in the ruble market) generally has a negative impact on potential GDP growth in Belarus. According to the IMF experts, the negative processes are transferred to the Belarusian economy from the neighboring country through the trade channel (we may consider an example: drop in sales of domestic engineering products) and through the banking channel (there are cases of capital withdrawal from Belarusian subsidiaries of the Russian banks). Although part of these negative effects should be compensated by the increase in demand for the Belarusian goods as a result of restrictions on import from the European countries, as well as a shift in demand to lower quality but cheaper substitute products.
In general, it seems that the authorities do not know how to get out of the trap of low economic growth. As for the project of socio-economic development for 2015, which has not yet been adopted, a priority for the Government will be servicing the foreign debt, while the economic growth is predicted at a modest level of 2-2.4%. It’s not a much more than the GDP growth at 1.5% for the 9 months of the current year. Based on the discussed parameters of the National Strategy for Sustainable Development of Belarus until 2030, which seems to be the main pre-election document of the authorities, the Government ceased to hope for rapid economic growth in the long term. Thus, according to the strategy developers, by 2030 the GDP in Belarus should grow by 1.5-2 times of the current level, which corresponds to an average annual GDP growth rate of 2.7-4.7%. In this case, since the task for years 2016-2020 supposes structural reforms, it is obvious that the growth will be more modest during this period. Such way of separation of the strategy into 2 stages (carrying-out reforms and actually achieving long-term plans in the framework of a reformed economy) should secure the authorities from the repeated failing of a formal plan for the current five-year period, approved by the National Assembly (for 2011-2015 the total GDP growth should make the projected at 62-65%, and in the end, it is unlikely to exceed 13%). Meanwhile, the government is trying to accelerate the growth and improve the budget execution by usual administrative measures: by combating the shadow economy and parasitism.
Thus, the results of the month are relatively ambiguous. On the one hand, the authorities managed to achieve the complete abolition of the need to credit the export fees on oil products to the Russian budget. This measure will significantly improve the balance of payments in 2015 and will help to ensure the financial stability. On the other hand, development of the situation in the Russian economy creates many problems for the Government of Belarus, primarily because of the actual strengthening of Belarusian ruble and risks to the economic growth. It is hoped that in case of urgent need the Belarusian authorities will be able to get financial help from the ally, moreover, its possible amount is relatively small for the Russian budget.