Belarus - Economy

Belarus was hit hard by the coronavirus pandemic, and many blamed Lukashenka, who refused to institute any lockdown measures, dismissing the virus as nothing more than “mass psychosis.” The World Bank predicted the economy would contract 4 percent this year, the biggest drop in 25 years. Despite calls from international lenders and some of Lukashenka's own advisers over the years to reform the economy, the state still accounts for about 60 percent of economic activity. Rejecting privatization, even at the price of inefficiency and propping up loss-making enterprises, has allowed Lukashenka to largely avoid the unemployment and dislocation that would inevitably accompany reform.

Belarusian economy was reeling, with GDP falling by 3.9 percent in 2015 and by 2.6 percent in 2016. The Belarusian authorities maintained macroeconomic and financial stability amid a challenging environment during 2015-16, relying on tight budgetary and monetary policies while pursuing institutional and structural reforms. Macroeconomic and financial conditions remain fragile, however, with weakened balance sheets, elevated vulnerabilities, and eroded policy buffers.

External shocks—including recession in Russia and lower commodity prices—have hit an economy already hindered by low competitiveness, weak balance sheets, and other domestic structural impediments to growth. Tight macroeconomic policies remain critical to supporting stability, with the pace of easing contingent on the pace of structural reforms. Real GDP was expected to fall in 2016 (-3.0 percent) and more moderately in 2017 (-0.5 percent).

SOE reform included recent de jure moves to replace production targets with efficiency indicators, launching a phased reduction in directed lending, and a decision to separate ownership and regulatory functions. To more fundamentally improve resource allocation, boost productivity and competitiveness, and help support financial sector stability, the following steps were recommended by the IMF: (i) implement legislation requiring all SOEs to adopt international accounting standards; (ii) carry out a comprehensive review of fiscal risks emanating from the SOE sector and develop the capacity to monitor these risks on an ongoing basis; (iii) undertake an in depth inventory of SOEs to determine which carry out commercial as opposed to government functions, and incorporate all commercial enterprises; (iv) strengthen SOE corporate governance, including by implementing the policy to separate ownership and regulatory functions through centralizing ownership in a single entity and strengthening the independence and capacities of SOE boards; (v) enhance and strengthen the framework for restructuring SOEs, including by developing clear insolvency and privatization procedures; (vi) articulate time-bound policies to achieve full utility tariff cost recovery by 2018; (vii) de facto implementation of efficiency objectives; and (viii) strengthen the business environment, including reduction of nuisance taxes; and (ix) securing WTO membership.

Faster and deeper progress on the reform agenda, particularly in the closely linked state-owned enterprise (SOE) and financial sectors, were recommended in March 2016 by the IMF to reduce vulnerabilities and more fundamentally transform and modernize the economy—aiming for higher market-led growth and higher living standards. First Deputy Economy Minister Aleksander Zaborovskiy said during a parliamentary hearing in the capital, Minsk, on 17 November 2015 that the government would seek either to restructure or liquidate more than 400 struggling state-owned companies rather than trying to keep them afloat. The volume of state support provided to state-owned companies at the expense of the state budget will be reduced, President Lukashenko’s press-service said 18 May 2016. A draft ordinance called for reducing central state budget expenditures on compensations to companies for interest payments on bank credits.

Although the Belarusian ruble is not officially pegged to that of neighboring Russia's, Belarus is highly dependent on Moscow and very sensitive to Russia's economic problems. Belarus sends about half of its exports to Russia and relies heavily on Russian subsidies. By late 2014 Russia was trying to avoid falling into a recession as it struggled with a steep drop in oil prices and with US and European Union sanctions due to its actions in Ukraine and annexation of Crimea in March.

On 18 December 2014 Lukashenko demanded that Belarus’s transactions with Russia be settled in dollars or euros because of the slump in the value of Russia’s rouble, which had fallen around 40 percent against the dollar since the start of 2014. Belarus ships mainly trucks, tractors, industrial machinery and food products to Russia, and around 92 percent of transactions are normally carried out in rubles. It earned $739 million less on exports year-on-year in January-October 2014 even though volumes remained the same, according to official statistics.

By 2014 attempts to boost activity with policy stimulus, in lieu of much-needed structural reform, had failed to raise growth and contributed to large external imbalances. Adverse developments in the region further clouded the outlook. High financing needs and low buffers left Belarus highly dependent on external financial support. The risk of disorderly adjustment remained high.

As part of the former Soviet Union, Belarus had a relatively well-developed industrial base. Following the breakup of the U.S.S.R., Belarus retained this industrial base, which is now outdated, energy inefficient, and dependent on subsidized Russian energy and preferential access to Russian markets. The country also has a broad agricultural base that is equally inefficient and dependent on government subsidies, as well as a high education level. However, Belarus remains the only country in Europe with a higher education system that has not acceded to the Bologna Process promoting common European standards. The Government of Belarus has shown little interest in moving toward a free-market system given that the state- run economy provides a key element of social control.

After an initial burst of capitalist reform from 1991 to 1994, including privatization of state enterprises, creation of institutions of private property, and development of entrepreneurship, Belarus’ economic development has greatly slowed under Lukashenka, and in many cases, reversed its pace of privatization and other market reforms while emphasizing the need for a "socially oriented market economy." About 80% of all industry remains in state hands, and foreign investment has been hindered by a climate hostile to business. A few banks, which had been privatized after independence, were renationalized under Lukashenka, with state banks in 2011 accounting for 75% of the banking sector.

Potash, the country's most valuable mineral resource and a major hard currency earner, is sold as fertilizer. According to informal sources, Belarus accounts for more than 16% of world market’s potash supply. Belarus also has deposits of clay, sand, chalk, dolomite, phosphorite, and rock and potassium salt. Forests cover about a third of the land, and lumbering is an important occupation. Potatoes, flax, hemp, sugar beets, rye, oats, and wheat are the chief agricultural products. Dairy and beef cattle, pigs, and chickens are raised. Belarus has small reserves of crude oil, though it imports most of its crude oil and natural gas from Russia at prices substantially below world market prices. The main branches of industry produce tractors and trucks, earthmovers for use in construction and mining, metal-cutting machine tools, agricultural equipment, motorcycles, chemicals, fertilizer, textiles, and consumer goods. The chief trading partners are Russia, Germany, Ukraine, Poland, and the Netherlands, though the vast majority of industrial goods go to Russia, with energy exports flowing west.

Economic output, which had declined for several years following the collapse of the Soviet Union, revived in the mid-2000s thanks to the boom in oil prices. Belarus exported at market prices refined oil products that were produced from Russian crude oil purchased at a steep discount. The funds from this so-called “oil off-shore” allowed the Government of Belarus to enter into a so-called “social contract” with Belarusians: political passivity in return for a slowly increasing standard of living.

However, in late 2006, Russia began a process of rolling back its subsidies on oil and gas to Belarus. In December 2006, after a short-lived dispute, Belarus and Russia agreed on a schedule of graduated price increases toward European market prices for the gas Belarus would receive. Russian gas giant Gazprom also bought a 50% stake in Belarus’ pipeline firm Beltransgaz. Under this deal, although Gazprom raised prices for Belarus gas deliveries in 2010, the costs were still less than the price paid by EU member states. Tensions over Russian energy reached a peak in 2010, when Russia stopped the export of all subsidized oil to Belarus save for domestic needs. However, in December 2010, Russia and Belarus again reached a deal to restart the export of discounted oil to Belarus, although the terms were far less favorable than before and increased Belarusian energy dependence on Moscow. In November 2011, Belarus and Russia reached an agreement to drastically reduce the price of natural gas in exchange for Russia gaining full control over Beltransgaz, the natural gas pipeline operator.

Due to the economic and political climate, little new foreign investment has occurred in recent years. However, the government publicly claims to support foreign investment and has made various regulatory changes designed to attract investment. Belarus was ranked number 58 in the World Bank’s “Doing Business 2010” report and was among the top 10 “reformers” for 2008-2009. In 2011, a financial crisis was triggered by the Government of Belarus raising salaries by over 30% and far ahead of productivity in the run-up to December 2010 elections. This policy was compounded by an increased cost in Russian energy inputs and an overvalued Belarusian ruble and eventually led to a nearly three-fold devaluation of the Belarusian ruble in 2011 and 118.1% year-on-year inflation, leading to a concomitant drop in living standards. The present situation has stabilized in the short term due to a $3 billion, multi-tranche, 3-year loan from the Russian-dominated Eurasian Economic Community (EurAsEC) Bail-out Fund; a $1 billion loan from the Russian state-owned bank Sberbank (terms and duration are not public); and the $2.5 billion sale of Beltranzgas to Russia state-owned Gazprom.

The IMF granted Belarus standby credit in September 1995, but Belarus fell off the program and did not receive the second tranche of funding, which had been scheduled for regular intervals throughout 1996. Belarus agreed to a stand-by arrangement with the IMF in 2008 (which was approved by the IMF in January 2009) and concluded the program in April 2010. In 2011, Belarus sought IMF assistance to deal with its ongoing economic crisis but was rebuffed by the IMF. In an October 17, 2011 public release the IMF stated that Belarus would need “to demonstrate a clear commitment--including at the highest level--to stability and reform and to reflect this commitment in their actions” before negotiations could begin.