Emerging Europe: Belarus embarks on a charm offensive

Belarus’s leaders are promising a dramatic package of reforms that could overhaul the country’s sclerotic command economy and reduce its dependence on Russia. The only trouble is, no one believes them. Mixed messages to the bond markets haven’t helped.

Belarusian policymakers can talk a very good game. When Euromoney visits Minsk in early February, politicians and central bankers are eagerly touting a new reform package that they claim will not only put the country’s ailing Soviet-style economy back on its feet but also attract a much-needed influx of hard currency and investment from the west.

Alexander_Zaborovsky-160x186
  It is our absolute
priority to repay all our debts on time

Alexander Zaborovsky,
deputy economy minister

Spending, they promise, will be slashed. Wages in the public sector, which in Belarus still account for more than half the economy, have been frozen – a big step in a country where annual increases of 50% are not uncommon and where presidential elections are looming later this year. "In a situation where we are expecting a small shrinkage of GDP, there is no fundamental justification for wage increases," says first deputy economy minister Alexander Zaborovsky, austerely. 

Support for state-owned enterprises (SOEs) will also be reduced, while all government projects that are less than 80% complete have been put on hold. Still more strikingly, for a country that maintains Soviet traditions of full employment, headcount requirements at SOEs have been scrapped in favour of targets that prioritize profitability and financial results. "We recognize the need for restructuring of these companies in order to make them globally competitive," says Zaborovsky. 

Whatever else may be cut, however, debt servicing – including the redemption of a $1 billion Eurobond that comes due in August – will be sacrosanct. "It is our absolute priority to repay all our debts on time," adds Zaborovsky, "and even in a worst-case scenario we are confident we will have a sufficient budget surplus and the tools to do this." 

Policymakers are equally confident of their ability to raise as much as $2.5 billion of new funding in the Eurobond market this year at "reasonable" yields – meaning well below the 20% quoted on the sovereign in the Eurobond market this year. "We might look to come to market in the spring or after the repayment of our maturing Eurobond, depending on when we see a good window," says central bank first deputy chairman Taras Nadolny. 

On the monetary side, meanwhile, officials describe a new policy of irreproachable orthodoxy. Restrictions on credit growth, policymakers’ preferred tool for combating galloping inflation in recent years, have been replaced with an approach based on broad money targeting via the supply of liquidity to the banking sector. "We believe this is the most efficient way to manage the inflation rate," says Nadolny.

Official interest rates have also been hiked and limits on bank rates lifted to reduce pressure on the Belarusian rouble, while the currency itself has been unhitched from its peg to the dollar and linked to a trade-weighted basket that also includes the euro and the Russian rouble. Much-criticized emergency measures introduced in December to prevent contagion from Russia’s currency crisis, including a 30% tax on FX transactions, have mostly been abandoned. 

Above all, policymakers insist, the main focus for Belarus’s government will be to reduce the country’s dependence on Russia for funding, investment and exports. "In this time of world and regional turbulence we believe the key to economic development is diversification of trade and capital flows," says Zaborovsky. "This is the only way to reduce Belarus’s vulnerability to possible external shocks and is the core of our strategy."

State's stranglehold

It all sounds just what the IMF ordered – yet outside government circles in Minsk, and among western Belarus-watchers, there is deep scepticism that such pronouncements herald any real change. 

This is partly because most of it has been heard before. Authoritarian president Alexander Lukashenko has promised to reform Belarus’s command economy many times during his two decades in power but repeatedly reneged on his commitments. Most recently, in 2010, he signed up to a slew of measures designed to open up Belarus’s economy in return for a $3.5 billion loan from the IMF – yet more than four years later, the state’s stranglehold on the economy remains as strong as ever. 

Privatization, a key tenet of the 2010 agreement, has been almost completely ignored. The only big sale of state assets in the past decade involved the purchase by Russian energy firm Gazprom of the remaining 50% of local pipeline operator Beltransgaz. A commitment in 2013 to raise $4.5 billion from the auctioning of 88 state companies also came to nothing and today the government seems to have given up even promising to privatize. 

Zaborovsky insists that privatization is "not a taboo" but says conditions are currently unfavourable. "The optimal time for privatization is when the economy is growing and when there are no politically motivated sanctions in place," he says. More than 200 Belarusian individuals, including Lukashenko, and 18 companies are blacklisted by the EU for persistent human rights violations and anti-democratic activities.