Updated at 15:27,23-09-2020

Post-election turmoil is taking a toll on the Belarusian economy

Kateryna Bornukova, BEROC, BelarusDigest

Post-election turmoil is taking a toll on the Belarusian economy
The exchange rate of Belarusian rouble, roubles per $1. Source: The National Bank of Belarus
The breach of trust in the government since the disputed 9 August presidential election has already cost the Belarusian economy a lot. People are withdrawing deposits from banks, large manufacturing enterprises are going on strike, and IT companies are planning to relocate. While the government tries to shift the blame for the current economic troubles onto protesters, only dialogue can avert much more serious, long-term damage.

Devaluation of the ruble and a run on the banks


The collapse in trust first affected the Belarusian ruble and the banking system. In the weeks since the 9 August presidential election, Belarusians have flocked to banks to withdraw their ruble deposits and convert them into dollars and other hard currencies. Several Telegram channels have added fuel to the panic by encouraging people to withdraw deposits in order to generate a banking and economic crisis with the aim of weakening the regime.

The demand for currency exchange has doubled, and the national bank has had to spend its foreign reserves to meet it. Despite these measures, the ruble still depreciated by 9% (from BYN 2.45 per USD 1 before the election to BYN 2.66 per USD 1 as of 28 August). While foreign reserves are currently large enough to support the ruble (USD 8.9bn as of 1 August), the national bank might spend as much USD 1bn this month alone, and it still has to keep currency aside to meet upcoming foreign debt repayments.

As Belarusians withdraw their deposits, the national bank finds itself between a rock and a hard place. It is trying to provide enough liquidity to support the struggling banks, without letting the excess liquidity flood the currency market. Interest in liquidity is already as high as 18%, compared with a refinancing rate of 7.75%. The banks (both the large Russia-owned behemoths like BPS-Sberbank and smaller private banks like Prior or Alfa-bank) are already cutting their lending programs. If the current situation of high pressure continues, it may have repercussions not only for the banking system but for the real sector as well. As a result of the coronavirus crisis, large state-owned enterprises (SOEs) have accumulated large debts, and are in constant need of refinancing.

Effects of the strikes


The strikes taking place at SOEs are ironic. Government support for loss-making manufacturing giants and their bloated employee base has been the cornerstone of the economic and social policy of President Alexander Lukashenka. Workers at almost all the largest SOEs have announced their intention to strike: these are MAZ truck works, MTS tractor works, BELAZ haul truck producer, and even the MZKT military transport works. So far, the economic effects from strikes are difficult to predict, as most have taken the form of the covert strikes typically seen in Italy, in which workers quietly sabotage their work or work less efficiently, rather than walking out.

Most painful would be strikes at the country’s major exporters – potash extractor Belaruskaly and two oil refineries, Naftan and Mozyr; workers at two of these entities have announced their intention to strike. Keeping currency flows coming into the economy stable is crucial, given the situation on the currency market. Other machinery-making enterprises have excessive inventories, and strikes will have symbolic costs instead of economic.

Exodus of IT


The post-election violence will have the most profound effect on the IT sector in Belarus, and not just because employees at major IT companies are among those who have been beaten and tortured. People who work in IT have a higher demand for security, law, and order. They can also easily find employment abroad, as their skills are in demand and transferable. No wonder many IT companies are already relocating their offices and employees to other countries. The largest IT companies like Wargaming and EPAM are offering a relocation option to their employees, and Russian tech giant Yandex has evacuated some of its employees out of Belarus. Other companies, including the popular messenger application Viber, have announced that they are stopping any new investments into the country.

In recent years the IT sector has been the only driver of growth for the stagnating Belarusian economy. While it will not disappear overnight, it will certainly stop developing, and Belarus is under threat of losing its image as an IT hub if things do not change.

Public debt and possibilities of default


In the coming years, Belarus will have to repay USD 2-3bn annually. The reserves accumulated by the Ministry of Finance will cover these needs this year. The initial plan was to refinance 75% of the debt. However, now the possibilities for refinancing are limited. After the election, the price of Belarusian Eurobonds fell, driving yields to 8-9%, a level that Belarus cannot afford. International financial organizations like the IMF will not cooperate with a sanctioned country that is not open to reforms. Meanwhile, China prefers to operate through trade credits and other types of tied loans and is reluctant to provide financing to support foreign reserves.

Belarus has only one place to turn for help – Russia. Russia together with the Russia-controlled Eurasian Fund for Stabilization and Development jointly hold 50% of Belarusian public debt. It looks like Belarus will either have to face default or, more likely, negotiate with Russia, deepening its economic and political dependence on its eastern neighbour. In return, Russia may ask for further integration with Belarus, which was discussed last year, or for lucrative privatization deals.

Long-term consequences


The economic crisis which is unfolding currently is only the beginning of Belarus’ economic woes. Without the restoration of trust in the government, the Belarusian economy will stagnate. Talented youth will choose to study abroad, and the most active and dynamic adults will emigrate.

Entrepreneurs will opt for safer options instead of exploring innovative ventures. Foreign direct investment will not grow, while domestic capital will flee. Any attempts at economic reform will fail due to the lack of popular trust in the authorities. The government itself will lose its best people. All these changes will happen gradually over time, and will not be noticed as much as the current, immediate political crisis. But they will result in long-term, economic stagnation if the current situation is not resolved through dialogue about implementing change in the country.

Kateryna Bornukova, BEROC

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)