In 2014, amid increasing geopolitical risks and economic sanctions imposed by the European Union and the United States against Russia, the Russian ruble dramatically depreciated, and the Russian economic expansion slowed. As a result, supplies of Belarusian-made products and services to Russia became unprofitable, which caused the government and the National Bank to take urgent measures. In order to support the price competitiveness of Belarusian exporters and increase import costs, the authorities devaluated the national currency. At the same time, the strengthening of administrative price controls by the state allowed limiting import supplies and curbing demand for foreign exchange.
In 2015, the authorities will continue using the tactics of internal devaluation envisaging measures to reduce internal demand, real wages, and real GDP in order to restrict external depreciation of the Belarusian ruble against the main foreign currencies.
- Drop in export of Belarusian products and services and reduction in foreign currency revenues from Russia in the U.S. dollar equivalent because of the dramatic depreciation of the Russian ruble;
- Growing demand for foreign exchange at the end of the year driven by expectations of further devaluation;
- Introduction of a more liberal exchange rate formation mechanism amid shortage of gold and foreign exchange reserves.
Geopolitical tensions in the region grew stronger in 2014 in the wake of the Ukrainian crisis. In response to Russia’s campaign in Crimea and the southeast of Ukraine, the European Union, the United States, Canada, Australia, New Zealand, Japan, Switzerland, Norway, and some other countries imposed economic sanctions against leading Russian banks, oil and gas companies, and defense enterprises.
The sanctions lead to foreign capital flight from Russia, for the most part through reductions in foreign debt liabilities of Russian residents. The sanctions produced a serious negative impact on not only the banks and companies, against which they were targeted, but also the rest of Russian companies and financial institutions, which suffered from limited access to international capital markets and growing costs of foreign borrowing. As a result, the Russian ruble dropped vis-à-vis the U. S. dollar to RUB 56.26 per dollar, or by 71.9%. 1
Under the circumstances, Belarusian manufacturing companies were faced with the real risk of losing the Russian market for some of their commodity groups (resulting from poor price competitiveness). At the same time, import of commodities and services from Russia hiked (specifically, of motorcars, household appliances, food, travel services, etc.).
On 18 December 2014, President Lukashenka held a meeting addressing economic policies and approved a package of measures to limit import supplies and curb demand for foreign exchange, including a 30% tax on purchases of foreign exchange by individuals and companies. The introduction of this discriminatory foreign exchange practice by the Belarusian authorities became a response to the sharp depreciation of the Russian ruble and slow growth in the Russian economy resulting from the economic sanctions imposed by the European Union, United States, and some other countries.
The tax on purchases of foreign exchange was essentially a hidden devaluation move; however, unlike classical devaluation, Belarusian exporters did not have additional preferences in terms of stronger price competitiveness in foreign markets. Soon after the introduction of the tax, real devaluation began. In the period from 18 December 2014 (the day the presidential meeting was held) to 23 March 2015, the Belarusian ruble lost 35.9% of its value, going down to BYR 14,790 per U.S. dollar. The ruble depreciated by 55.5% from 31 December 2013 to 23 March 2015, whereas the Russian ruble depreciated by 83.4% during the same period. As a result, the current depreciation gap between the Russian ruble and the Belarusian ruble is 17.9 percentage points. 2
The sharp depreciation of the Belarusian ruble may have the following negative consequences for the Belarusian economy and social sector:
- Fast inflation in the consumer market and manufacturing sector, decrease in living standards;
- Higher prices of imported goods and services (including investment commodities, natural gas, oil, and oil products);
- Depreciation of ruble-denominated deposits (except for those pegged to the U.S. dollar) and decrease in the propensity of households to make medium-term savings in the national currency;
- Need for supporting high rates on ruble-denominated deposits and, consequently, high loan rates, which may affect investment activity and economic growth as a whole;
- Higher debt burden associated with the servicing and repayment of the external debt and internal liabilities in foreign exchange. Combined external debt of Belarusian residents stood at USD 40.061 billion as of January 1, 2015, which includes USD 23.212 billion of gross external debt of the public sector (in its broad definition);
- Lower investment appeal of Belarus for foreign investors and increase in foreign capital outflow from the national economy;
- Growth in social tension in society and political risks in the country.
Furthermore, it is important to understand that depreciation discourages exporters to increase efficiency. Why should exporters seek to boost their efficiency and approach new markets, if another devaluation move will redistribute the money of the rest of the economic players (including households) in their favor? Overall, in the current context, sharp devaluation of the Belarusian ruble is a serious threat to the economic, financial, and political stability in the country. Belarus will eventually have to attract new foreign resources to maintain stability in the domestic money market throughout 2015.
Gold and foreign exchange reserves and current account balance
According to the National Bank, in 2014, gold and foreign exchange reserves of Belarus under the Special Data Dissemination Standard (SDDS) of the International Monetary Fund (IMF) dropped by USD 1.592 billion (or by 23.9%) to USD 5.059 billion as of January 1, 2015. Calculated in accordance with the national standards, gold and foreign exchange reserves fell by USD 1.521 billion (or by 21.0%) to USD 5.716 billion.
Of the total SDDS gold and foreign exchange reserves, 47.9% are formed by foreign exchange borrowed by Belarusian commercial banks. Foreign exchange liabilities of the National Bank to the banking sector amounted to USD 2.423 billion as of January 1, 2015. The low level of gold and foreign exchange reserves limits the capacity of the central bank to support the exchange rate of the Belarusian ruble within the framework of currency interventions.
At the current phase, gold and foreign exchange reserves are mostly used to repay and service internal and external debts of the central authorities (the government and the National Bank) denominated in foreign exchange. In the current context, the central bank is making use of the flexible exchange rate formation mechanism, which envisages higher volatility of the exchange rate of the Belarusian ruble to the main foreign currencies, including the U.S. dollar.
Analysis shows that in 2014, repayments of previous foreign loans taken by the central government and growth in net demand for foreign exchange by households—caused by the rapid depreciation of the Russian ruble—became the main reasons for the drop in gold and foreign exchange reserves. In December 2014, households bought a record high USD 901.6 million worth of foreign exchange (including cashless transactions) more than they sold, which compares to USD 324.8 million in November and USD 93.7 million in October.
In July 2013, net demand for foreign exchange by households amounted to USD 621.5 million (including cashless transactions), in March 2011, net demand reached USD 768.1 million, and in December 2008, net demand for foreign exchange was registered as USD 783.2 million. The structure of net demand for foreign exchange in December looked as follows: net purchases amounted to USD 328.1 million, and conversion of ruble-denominated deposits into foreign exchange deposits reached USD 573.5 million.
According to the National Bank, in January 2015, foreign exchange revenues from export of goods and services, incomes and current transfers of nonfinancial organizations and households shrank by USD 638.5 million year-on-year, or by 20%, to USD 2.547 billion (see Table 1), a new record low since January 2011.
|Period||Receipts||Payments||Balance||Balance, adjusted for oil transfers|
Source: National Bank of Belarus
The marked reduction in currency receipts in January 2015 can be attributed to two factors: (1) following the increase in the share of mandatory surrender of currency revenues to 50% and heightened devaluation expectations companies preferred holding back some of their foreign exchange revenues abroad; (2) export supplies of Belarusian-made goods and services to Russia dropped because of the weak demand from local consumers and low profitability of exports in the wake of the devaluation of the Russian ruble in the international money market.
For their part, payments for import of goods and services, as well as incomes and current transfers of nonfinancial organizations and households in January 2015 shrank by USD 1.011 billion year-on-year, or by 31.9%, to USD 2.157 billion, a new record low since February 2010 (see Table 1). There are three main reasons behind the drop in payments in foreign exchange: (1) some importers had to suspend their operations because of the tightened administrative price controls; (2) import of goods and services fell because import prices hiked following the devaluation of the Belarusian ruble; (3) incomes of Belarusian households plummeted in real terms.
Overall, in January 2015, the surplus of foreign trade transactions associated with flows of goods, services, incomes, and transfers, amounted to USD 389.3 million, whereas in December 2014 and January 2014, foreign trade transactions came to a deficit (USD 465.4 million and USD 289.3 million, respectively). The transfer of export duties on refined oil to the Belarusian budget (starting January 2015) produced a positive impact on the external balance, along with the considerable reduction in currency payments.
In February 2015, households, companies and nonresidents became net sellers of foreign exchange. However, the expected gradual cancellation of price controls (including the abolition of resolution No. 1207 of 19 December 2014) will lead to an increase in import deliveries and, consequently, demand for foreign exchange by companies. On the other hand, in 2015, the authorities will be using the tactics of the so-called internal devaluation (reduction in domestic demand, real incomes, and real GDP), rather than external devaluation (reduction in the exchange rate of the Belarusian ruble against foreign currencies).
At the same time, the authorities have been taking measures to increase supply of foreign currency and boost gold and foreign exchange reserves – they raised the share of foreign exchange revenues that must be surrendered to the budget and introduced a EUR 45/ton export duty on potash fertilizers and a duty on crude oil export. The government also resolved to withdraw profits of some of the better-off companies, especially Belaruskali. In 2015, the company will have to transfer more than 75% of its profit to the state budget; furthermore, the government limited Belaruskali’s investment and upgrade costs.
It should also be noted that the current situation in Belarus largely depends on external factors, which Belarus cannot influence on its own (such as the expansion of the Russian economy, devaluation of the Russian ruble, economic sanctions against Russia by the European Union and the United States, conflict in the east of Ukraine, fall in oil prices, etc.).
Belarus has entered a difficult economic phase, which will be characterized by some of the features of the economic crises of 1998 and the early 1990s (following the disintegration of the USSR) and new specific features associated with the record-high external debt of Belarusian residents. During the previous periods affected by recession, Belarusian residents had no such serious external debt liabilities. The risk of foreign capital flight increases, and so does the risk of withdrawal of FDI.
Should the situation in Russia and Ukraine further deteriorate, some Belarusian residents may delay payments of their foreign liabilities. At the same time, the government will be making efforts to meet all of its obligations associated with the payment and service of foreign debts.
According to our forecasts, Belarus’s GDP will decrease by 5% year-on-year in 2015 in comparable prices, whereas inflation will go up by 22–27% (based on the December – to previous December methodology), with the adjusted official forecast remaining between 16% and 20%. Also in 2015, unemployment and underemployment will likely increase, while real wages will continue decreasing (given the current inflation rate). Furthermore, the average wage will also drop in the U.S. dollar equivalent. For its part, the reduction in real incomes will bring about a curtailment of consumer demand and affect credit-related activities by households.
Finally, amid the sharp devaluation of the Belarusian ruble, the debt burden on the country will increase because of the need to repay and service the total external debt and internal liabilities in foreign exchange. As a result, commercial banks may see the share of distressed assets increase in 2015 and require additional funds to create special reserves in order to cover potential bad debts, which may produce a negative impact on performance and profitability indicators.