KIEV, Ukraine — Belarus may have to undertake drastic measures in the coming weeks to salvage the country’s financial system, analysts warn.
A steady stream of alarming news has been emanating from the country’s economic institutions, and some are predicting that President Alexander Lukashenko will soon face a painful economic day of reckoning.
On Tuesday, Belarus’ central bank announced that it was allowing a partial devaluation of the country’s currency, the ruble. Commercial banks were informed that they could buy and sell foreign currency to each other at a 10 percent deviation off of the official ruble rate. This follows a shut down last week of the foreign cash market, after the central bank halted all hard currency sales to local banks.
These measures are the latest in the government’s all-out effort to stanch a massive hemorrhaging of hard currency from the country.
The crisis is being fueled by a number of factors. First, Belarus must pay more for the oil and gas that it buys from Russia. Minsk used to be able to purchase energy from Moscow at heavily marked-down prices, which allowed the country’s inefficient, Soviet-era factories to operate with artificially low overheads.
At the same time, as a sweetener just before Belarusians voted in presidential elections last December, Lukashenko drastically raised public sector spending and increased state salaries by one-third.
Lastly, Belarus’ main export market, Russia, has shriveled in the past years.
Put it all together, and you have a toxic economic cocktail. The central bank’s dollar reserves have dropped by about $1 billion already this year, while the trade deficit has skyrocketed.
The state of affairs has led many observers to anticipate that the government will be forced soon to introduce a full devaluation of the ruble, perhaps by 20-30 percent. Belarus devalued the ruble once already, in early 2009.
“The situation seems to be escalating rapidly. We see no other reasonable alternative but for a devaluation against the currency basket,” Sanna Kurronen, an analyst at Danske Bank, wrote in a research note last week.
Officials at international financial institutions seem to agree.
Standard and Poor’s, the international ratings agency, dropped Belarus to five steps below investment grade, saying that the country was running out of cash.
"We do think a devaluation would be a good idea," Chris Jarvis, the head of the International Monetary Fund’s Belarus mission, told Reuters, adding that an alternative would be to introduce much tighter spending policies. Either option could potentially work, Jarvis added, but “time is getting short.”
So far Belarus officials have flatly rejected calls for devaluation — a highly unpopular move that would slash the public’s salaries and savings with a penstroke.
Though authorities probably do not fear mass unrest or demonstrations — the population is cowed at the moment, thanks to a draconian political crackdown introduced after the December presidential elections — devaluation could nevertheless seriously undermine Belarusians’ passive support of Lukashenko’s Soviet-style economic system.
“If Lukashenko devalues the ruble, it means that his economic system has failed,” said Pavel Daneyko, a economic expert and chairman of the Belarus Institute of Strategic Studies, by telephone from Minsk.
Daneyko believes that Lukashenko will instead limit exports and raise prices on utilities.
Some analysts believe Lukashenko could still muddle through his current spate of economic difficulties and that the doomsday scenarios currently being floated may not in fact come to fruition.
This, according to Minsk economist Leonid Zaiko, could only be accomplished through a massive cash injection — most likely from Russia. Belarus is at the moment negotiating a potential $2 billion to $3 billion in loans from the Kremlin and other former Soviet states.
A loan from the West is for the moment a non-starter. The United States and European Union have imposed severe sanctions on the Lukashenko government for its crackdown on the country's opposition. The EU has introduced a travel ban against some 150 Belarus officials, including Lukashenko himself, and may expand this by another 19.
But Belarus would have to yield to Russian businesses the country’s best economic enterprises in order to secure credits from Moscow – “selling the family silver,” as Zaiko refers to it.
“Lukashenko does not have a choice,” Zaiko said. “He has to crawl on his knees before the Kremlin. That’s all there is to it.”