Belarus — Economic troubles ahead

Anna Maria Dyner,
Analyst,
Polish Institute of International Affairs,
Poland

Instead of an introduction

Many texts written about the economy of Belarus begin the same way: That without structural reforms, its economic model will collapse within a few years. So far, however, the Belarusian economy has weathered and recovered from great turbulence, mainly thanks to Russian subsidies and credit support. When political relations with Russia were not at the best stage, the Belarusian authorities were able to obtain support from Western countries (for example, an IMF loan in 2009) and China. The favourable situation on the fuel and fertilizer markets also was working for Belarus. However, the current situation differs significantly. As a result of last year’s presidential election, which was followed by a wave of protests that prompted Alexander Lukashenka blamed on Western countries, de facto breaking off political relations with them, Russia became Belarus’ only political, economic, and military partner. Without doubt, none of this benefits the Belarusian economy.

Politics and the Pandemic: What Influences the Economy of Belarus?

The two most important factors adversely affecting the Belarusian economy over the past several months are the COVID-19 pandemic and the political situation. Several indicators testify to the deepening crisis. In 2020, Belarus’ GDP decreased by 0.9% compared to 2019. The country’s budget in 2021 was planned with a deficit of BYN 4 billion ($1.58 billion) with income reaching BYN 23.3 billion. The average salary last year was about BYN 1,300 (equivalent to about $500), which is comparable to 2019’s level, but $90 less than the year before.

Moreover, Belarus’ foreign exchange reserves decreased in the last year by $1.9 billion (20.5% the state of reserves). In just the first quarter of 2021 they shrank by another $529 million (7.3%). Belarusian international reserve assets as of 1 May 2021, according to the National Bank, amounted to $7.277 billion and in April increased by $337.9 million. What is more, in recent years Belarus has accumulated a record foreign debt—more than $40 billion, which will be very difficult to pay off.

Further, inflation in 2020 amounted to 7.4% (in April, the National Bank raised its inflation forecast for the end of 2021 to 7%). Moreover, the National Bank notes risks of continued high inflation in the future. At the same time, foreign direct investment has decreased significantly (from $7.2 billion in 2019 to $6 billion in 2020). And plenty of private enterprises, especially in the IT sector, decided to move abroad, mainly to Poland and Lithuania. It is very likely that they will be followed by mostly young, educated people, and therefore we can expect an intensification of emigration trends in the near future.

One of the reasons for the growing budget deficit is the reduction of income tax revenues, which is one of the effects of the COVID-19 pandemic. This also shows that many companies, mainly due to the pandemic, have found themselves in serious financial difficulties. It is worth emphasising here that Belarusian businesses could not count on any support from the state, as no lockdown was formally introduced.

The problems caused by the pandemic were exacerbated by the political crisis in the country, as a result of which the Belarusian authorities froze relations with Western states. Moreover, due to violations of human rights by the Belarusian authorities, the EU and the U.S. have re-imposed or enacted new sanctions on Belarus.

Gloomy Prognosis

This time, the U.S. sanctions may have a serious negative impact on the Belarusian economy, especially if they affect oil processing. Naftan, one of the two Belarusian refineries, is on the sanctions list and if it turns out that because of the U.S. restrictions Russia’s biggest oil companies will not sell it crude oil, this will mean serious problems not only for Naftan but also for the entire economy, for which the sale of petroleum products is one of the most important sources of currency.

Even with all this, the Belarusian authorities will be even less willing to introduce any reforms than before. Their main political goal is to stay in power, and they still count on economic support from Russia and possibly China.

However, there are no doubts that Russia will take advantage of Belarus’ economic and international problems, angling to get it to sign a deeper integration plan in autumn this year. Belarus’ overdependence on Russia, the effects of the COVID-19 pandemic, and lack of reform are the biggest factors that could lead to the collapse of the Belarusian economy.

At the same time, the bad economic situation will have a negative impact on the public mood, deepening the current political crisis. As long as the authorities can afford to maintain the power structures, though, the system will continue in Belarus. However, if there is not enough money to pay wages to the security services, further political upheavals can be expected.

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