Belarus: Russia crucial to quashing devaluation fears


Guy Norton
Published on:

Current account deficit key economic weakness; Government spending promises add to woes

As Euromoney went to press there was widespread speculation that Belarus would be forced to devalue the rouble for the second time in as many years, amid a spiralling current account deficit and dwindling FX reserves.

Russian financial assistance is likely to play a key role in Belarus avoiding devaluation and a possible sovereign debt default. However, any funding from Moscow is likely to come with strings attached and might lead to prize Belarusian assets falling into Russian hands. Belarus is seeking a $1 billion loan from Moscow and $1.7 billion from a Russia-led regional bailout fund.

In recent weeks Belarusian citizens have been besieging banks and foreign exchange bureaux seeking to swap their Belarusian roubles for dollars and euros. The speculative demand for foreign currency has already caused the unofficial exchange rate to fall by around 20%.

fall in Belarus’s foreign currency reserves in six months

fall in Belarus’s foreign currency reserves in six months

That fall mirrors the 20% official devaluation that Belarus carried out in January 2009 as one of the conditions for receiving a $2.5 billion loan from the IMF to help prop up its economy after exports plummeted in the wake of the global economic downturn. The 2009 devaluation was largely the result of problems elsewhere but this time devaluation fears have been sparked by domestic concerns.

Ahead of his re-election in December 2010 Belarusian president Alexander Lukashenko boosted state wages by 30% and ordered lending policies at Belarusian banks to be relaxed. This led to a 40% growth in loans last year. The result was a shopping boom by Belarusian citizens, which sucked in imports and increased the current account deficit to 16% of GDP – widely regarded as unsustainable.

According to the IMF, Belarus’s foreign currency reserves have shrunk by more than a third from $5.8 billion in October to $3.7 billion in March, amid efforts to shore up the currency and deliver on Lukashenko’s spending promises.

Ivan Tchakarov, chief economist at Bank of America Merrill Lynch in Moscow, believes the near $3 billion funding package from Russia is the country’s best hope of shoring up its economy, as other solutions such as a new IMF programme or the sale of fertilizer producer Belaruskali will take time to put in place.

However, Tchakarov adds: "Still, even if the scenario of Belarus obtaining a loan from Russia were to transpire, it would only provide a temporary respite as the market will need stronger reassurance that the key underlying vulnerability in the economy, the current account deficit, is being addressed in earnest."

Although Russian finance minister Alexei Kudrin has indicated that Russia is willing to provide Belarus with funds by mid-May, it is reported to have called on Belarus to end low-interest lending and to accelerate state property sell-offs.