beyondbrics

On the surface, the capital of Belarus appears unchanged – the same broad and slightly lifeless boulevards presided over by the occasional Lenin statue peering down on the sensibly dressed people below.

But on closer inspection, something in Minsk is amiss, and getting worse. The country is in the midst of a growing economic crisis, one that threatens both the reign of Alexander Lukashenko, Belarus’s authoritarian president who has ruled since 1994, and even the country’s independence.

In the city centre, clumps of people sit hopefully by currency exchange points, which long ago ran out of hard currency, waiting to convert their fast depreciating roubles into dollars or euros. In the shops, imported goods are seeing their prices soar. Once they are sold, they are often not restocked.

“These apples would have cost 3,000 roubles last month, now they’re going for 7,500. We change the price almost every day,” says Natalya, who runs a fruit stand in one of Minsk’s large outdoor markets.

Belarus has seen its current account deficit soar to 16 per cent of GDP, and its foreign currency reserves have plummeted to less than $4bn, barely enough to cover one month of imports.

The central bank has refused an outright devaluation, which would restore competitiveness to Belarus’s limping exports, but also hit living standards, which could be politically dangerous. Instead, Belarus now has multiple exchange rates, ranging from the official central bank one of just over 3,000 to the dollar, to an unofficial interbank rate of about 10,000 to the dollar.

Belarus has been in increasingly dire economic straits for several years, as Russia ended its policy of selling it cheap crude and gas, part of which was re-exported to the west for a windfall profit. The regime attempted to continue the social bargain of providing full employment and decent salaries by conducting an extremely loose fiscal and monetary policy – which set off the current crisis.

Making Lukashenko’s situation even more complicated, his violent crackdown on the opposition following protests after last December’s flawed presidential elections has damaged his ties to the west, making it difficult for him to turn to the EU or the US for help. He could turn again to the IMF, which saved the economy with a standby loan during the crisis, but only at a cost of undertaking serious economic reforms that would threaten his control of the economy.

That leaves Russia, which has been savouring Lukashenko’s discomfort.

Last week, Russia shot down his hopes of a loan, but this week Lukashenko says that Belarus may be in line to get $6bn in help from Russia and other ex-Soviet republics.

He didn’t mention the price and it looks to be steep. The Russian press says that only $1bn of the money is in the form of a loan – the rest is payment for Belarus’s share of the natural gas pipeline running from Russia to the EU and one of the few strategic assets owned by Minsk.

Moscow is also likely to push for the privatisation of other key assets like the remaining refinery in Belarusian hands as well as mobile telephone networks and fertiliser plants.

“The government had hoped that there would be a lot of international interest in the 140 companies it is thinking of selling,” says Siarhei Chaly, an independent economist. Instead, only a handful of companies are interesting, and Russia is the likeliest buyer.

“The Russians are the only ones with leverage here,” says a western diplomat.

The choice facing Lukashenko is stark: take the Russian help to stave off economic collapse for a few months at the price of falling permanently into Moscow’s orbit, or else undertake the kinds of economic reforms that changed other central European countries but at the price of probably losing political control of Belarus.

Or he could nothing and hope for a miracle. “We’re heading in the direction of Zimbabwe here,” says the gloomy diplomat.

Related reading:
Belarus to privatise 244 state-owned groups, FT
Belarus file, beyondbrics