Macroeconomic Situation: Heading into the unknown under the flag of a foreign trade miracle

Dmitry Kruk


The year 2021 was quite controversial from the economic point of view. Judging by the key macroeconomic indicators, it could be recognized as relatively successful. Output grew by 2.3%, which did not look hugely impressive, yet it helped end the COVID-caused recession. Most of the macroeconomic and financial stability indicators showed a significant improvement, inflation being among few problems. Price rises accelerated to around 10%.

All positive trends were ensured by the preservation and even expansion of the ‘foreign trade miracle,’ i. e. the extremely favorable environment for Belarus’ foreign trade. However, it was deceptive in many respects, given the institutional regress and the growing pressure of sanctions that affected overall growth. The influence of the sanctions did not fully manifest themselves in 2021, but gave rise to great uncertainty and a wide range of threats to the Belarusian economy.

Echoes of the pandemic recession and weak growth environment

The near-term outlook seemed very blurred in early 2021. On the one hand, external demand was rapidly recovering in the second half of 2020, which began to pull Belarus out of the pandemic recession. This was also facilitated by the agreed prices and terms for the purchase of Russian crude oil and, primarily, natural gas. On the other hand, domestic demand remained sluggish with no structural prerequisites for a revitalization of its growth.

Investment demand looked problematic the most in this respect. Future growth of the households’ final consumption expenditure looked a little better: its increase could rely on recovery effects, but primary impulses of growth were needed in order to give it a boost, which could only come from the outside.

The growth potential depended one way or another on external demand, which, at the beginning of 2021, held out the prospect of nearly 1.5% output growth by the end of the year. A further significant improvement in the external situation would increase output to 2.0–2.5%, while a worse situation would result in zero growth or even a moderate recession.

Systemic risks and the government’s desire to hide from them

In addition to the above gloomy picture, a large number of systemic threats were identified in 2021. For example, during the pandemic, many state-owned enterprises faced a chronic problem of debts, so a growing debt crisis was quite probable early in the year, and then came the sanctions (both against Belarus and Russia), the aggravated political crisis, migration, and new global economy shocks.

Institutional measures were needed to neutralize these threats. However, after the period of the selective liberalization in 2015–2018, the authorities turned allergic to such measures. Short-term horizons and here-and-now priority measures became more and more evident in Belarus’ economic policy. Institutional issues were looked into every now and then, but not deeply and only out of necessity.

The tangible threat of the debt crisis forced the authorities once again to try to find at least a partial solution to this problem. The mechanism sought should be both painless for enterprises and for the country’s financial stability, and help avoid the visualization of de facto incurred losses.

Unable to find a way to invent the impossible, the government began to address the debt problem selectively in the most severe and acute cases. At the beginning of 2021, the situation at the Belarusian Steel Works (BMZ) was recognized as such.1 The equivalent of USD 620 million debt of the company was transformed into a debt to the national budget. The BMZ’s debt was restructured with respect to the payback period, and converted from foreign exchange into the national currency. The bonds, for which the country purchased the debt from banks, remained in foreign exchange, which meant that the national budget assumed the currency risk.

Finally, some of BMZ’s debts to banks were written off, repaid at a discount, and transformed into a banks’ share of the company. This episode was unique in the practice of debt clearing in Belarus in terms of its scale (about 1.3% of GDP), the number of instruments involved, and the results (in the form of transferring risks and losses to the budget and banks).

The BMZ case became a kind of a benchmark (decree No.391) for the general mechanism that ensures the conversion of bad debts into good debts through their restructuring and the application of new management standards at the debtor enterprises. When doing that, the authorities hoped to avoid admitting large-scale losses, and if they would nevertheless be visible, they would have to be shouldered by the national budget.

Greater integration package: an attempt to plug economic and political gaps

The tax maneuver in the Russian oil sector entered the next phase in 2021. For Belarus, this meant that the entry price of Russian crude oil rose from about 82.5% to 88.9% of the market price. However, the monetary equivalent of the oil subsidy remained close to the level of 2020 (because of the increased oil refining volumes and the market oil prices). Therefore, the impact of the tax maneuver was not so vivid.

On the one hand, it allowed to maintain the functioning of economic mechanisms tied to oil refining. But, on the other hand, all of them were hovering near the critical permissible level, and additional adjustments (excise tax deduction when selling fuel on the domestic market, increased fuel prices, etc.) were required to keep them working.

Accordingly, it is likely that in 2021, the oil refineries operated with next to zero profitability (the exact statistics were no longer published after the imposition of Western sanctions). The oil feed for the budget and the balance of trade were near the all-time low. The next iteration of the tax maneuver (in 2022), all other things being equal, will highly likely lead to crossing the line of tolerance both at the micro- and macro level, and/or will require a substantial revision of the industry functioning mechanisms.

The situation in the oil refining industry, increasing sanctions and the political isolation of Belarus from the West prompted the Belarusian government to sign a package of agreements with Russia on greater integration. The so-called “Union programs” on trade in oil, oil products and gas, and “harmonization of tax and customs legislation” were the key ones in that package for Belarus. Agreements based on these programs de facto imply an exchange: Russia will meet Belarus halfway on gas and oil prices (by means of a reverse excise duty for Belarusian refineries, which is interpreted as a compensation for the tax maneuver) in the coming years, and Belarus will undertake to sign interstate agreements on indirect tax collection and customs regulations. The related programs are interlinked both in terms of execution and timeframes.

The other 25 programs cover virtually all economic segments. In combination, the standards can be viewed as an institutional basis of the economy, setting the red lines and rules of the game. The programs basically mean that Belarus will adopt and adapt to the Russian standards.

Foreign trade miracle: healer of the symptoms of economic woes

External demand was the main generator of economic activity in 2021, pulling the Belarusian economy out of the COVID recession and ensuring its growth. The foreign trade miracle consisted of three components: (1) a rapid increase in exports, the physical volume of which reached a historical peak; (2) impaired growth of imports in physical terms; (3) significant improvement of the terms of trade (export/import price ratio), especially in the second half of the year.

Exports of a wide range of goods began increasing rapidly back in the 3rd quarter of 2020. Most commodity groups showed an increase to the pre-pandemic volumes at the turn of 2020-2021. The recovery effect could be expected to weaken thereafter. However, the peculiarities of the global post-pandemic market behavior and a number of specific effects determined further rapid growth of demand for Belarusian goods.

The physical volume of exports rose in 2021 by 9.9% from 2020. Its trend equilibrium growth rate was estimated at about 2% per year, whereas, when comparing the lowest point in 2020 and the highest one in 2021, the increase was gigantic, reaching 47.5%.2

Five factors are seen as key to explain these dynamics.

  1. During the COVID-19 epidemic, global demand strongly shifted from services to goods. The dominant market players were sometimes unable to promptly fill this new niche (for instance, due to limited production capacities or component supplies). The producers who had ready-made goods in stock, or could quickly produce them, got significant competitive advantages.
  2. During the pandemic, many well-established logistics and transportation chains were broken. Disruptions and, quite often, chaotic attempts to make new arrangements caused the prices of logistics and transportation services to skyrocket. The manufacturers’ ability to deliver goods to the customers quickly and at a relatively low price was a great competitive advantage. The production and business practices that were typical of many Belarusian producers, and had been considered as defective for external competitiveness, i. e. the low internationalization of production and remoteness from sea routes for supplies, unexpectedly turned out to be strengths.
  3. As prices were going up in many markets, consumers began looking at lower price segments, which also gave an advantage to Belarusian producers, because many of them operate in those segments.
  4. Demand for foods grew in the CIS in the post-pandemic period, creating a good environment for Belarusian agriculture and related industries (manufacture of agricultural machinery, fertilizers, etc.).
  5. The effect of the low comparative base was working, since the usual export volumes of oil products and potash fertilizers were back.

Along with the positive dynamics of exports, important metamorphoses took place in imports. On the one hand, they grew by 5.2% against 2020. On the other hand, there were grounds to expect their much more rapid increase.

Traditionally, other things being equal, the physical volumes of exports and imports go hand in hand in the Belarusian economy. Simply put, export volumes largely predetermine imports, because, basically, a stable amount of imported raw materials and components is used to produce goods for export. Accordingly, a rapid increase in exports usually leads to a proportional increase in the imports of intermediate products. In fact, however, the increase in the latter was very modest. It did not even recover to the pre-pandemic level of 2019 (standing around 95%), whereas exports surpassed their pre-pandemic volumes by 13.5%. The growth dynamics of the intermediate imports was largely lowered by commodities other than oil and gas, and, to a certain extent, consumer and investment goods.

One more component of the foreign trade miracle became increasingly evident in the second half of the year: the better terms of trade, i. e. the export/import prices ratio. The rise of export prices resulted from an increase in world prices of many commodities and intensified global logistical problems. Import prices rose at a slower rate, being largely cushioned by the preferential terms of Russian oil and gas supplies.

Sanctions as a blow to the present and the future

Western sanctions grew stronger by the middle of 2021, and reached a qualitatively new level. Firstly, selective sanctions hit some systemically important financial and non-financial companies. The U. S. put Belaruskali on its SDN list, and the EU sanctions were targeted at Belarusbank, Belagroprombank and Belinvestbank.

Secondly, for the first time, the European Union and the United Kingdom imposed sectoral sanctions, which ban imports of particular groups of Belarusian commodities, which, importantly, include oil products and, partially, potash fertilizers. Also, sanctions against the largest banks can be also interpreted as sectoral financial sanctions.

Thirdly, Western countries began to increasingly coordinate their sanctions. Since the implementation mechanism had been different, this coordination was an important prerequisite for the effectiveness of the sanctions.

The impacts of the sanctions where somewhat cushioned, because they were stretched in time until the end of 2021, so the main effects were expected no sooner than late 2021 and early 2022. The sanctions pressure increased by the end of the year, being strongly influenced by the migration crisis orchestrated by the Belarusian authorities. New packages of selective sanctions were imposed against systemically important companies, such as Belavia, Belorusneft, Belshina and Grodno Azot (by the EU), as well as the Belarusian Potash Company and Slavkali (by the U. S.). Also, the United States strengthened the sanctions related to the Belarusian government debt. Finally, at the very end of the year, Lithuania tried to terminate the contract on transit of Belarusian potash fertilizers through its territory.

The sanctions packages of late 2021 hit 13.5% of Belarus’ entire exports, potentially threatening with about 8% output losses in Q2 through Q4 and, later, nearly 12%. At the same time, there was a chance to briefly boost the exports to third countries of goods that could not be sold in the West. The financial sanctions were more like a threat to the competitiveness and stability of the financial sector in the relatively distant future, rather than right away.

Overall, the sanctions came as a new crucial factor of the functioning of the Belarusian economy, as they reduced the growth potential of the economy and undermined its stability. However, in 2021, the foreign trade miracle mechanisms outweighed the effects of the sanctions. Moreover, this situation may well persist for a while.

Inflation surge and economic policy inconsistencies

Inflation in Belarus accelerated in the second half of 2020. Unlike the previous years, the National Bank ignored the inflation dynamics, probably because of the shifted state economic policy priorities. Output support considerations appeared to increasingly replace the previous focus on curbing price hikes.

The logic of monetary policy, its goals and tools were adjusted to fit business trends. This included the almost manual bank liquidity regulation and a lesser role of interest rates. The latter were only raised once to 9.25%, i. e. next to the actual inflation rate.

Inflationary impulses were not extinguished at the early stages, though. Through the mechanism of inflation expectations, they went into the self-maintained mode. Closer to the end of the year, when external price pressures rose, which was the flip side of the foreign trade miracle, inflation settled near 10%.

Acceptable macroeconomic results of the year with extreme uncertainty about the future

The macroeconomic results of 2021 looked pretty comforting, especially compared with the expectations in the beginning of the year. Output grew by 2.3%, signaling not just the end of the pandemic-induced recession, but also growth relative to the pre-pandemic level (by 1.6%). In terms of demand, the net export (2.7 percentage points) and household final consumption (2.3 p. p.) were the key contributors to output growth, while the gross fixed capital formation was negative (–1.5 p. p.).

Acting as growth drivers were the manufacturing industry (1.4 p. p.), information and telecommunication (0.7 p. p.), energy and trade (0.4 p. p. each), and health care (0.2 p. p.). The output contraction and, accordingly, its negative impact on the overall dynamics were reported in construction (–0.8 p. p.), agriculture (–0.4 p. p.), and financial and insurance services (–0.2 p. p.).

Alongside its influence on the growth dynamics, foreign trade conditions provided attractive external and fiscal positions, which helped avoid strains on the national debt servicing, and enhanced financial stability with respect to a number of indicators. The current account position was the best in the history of sovereign Belarus with a surplus of 2.7% of GDP.

Indicators of the nominal exchange rate remained virtually unchanged during the year. In real terms, due to the inflationary dynamics, the ruble grew stronger, and there was a negligible, almost zero deficit in the consolidated budget, although the government expected a significant deficit of up to 3.5% of GDP. The budget of the public administration sector (i. e., including the Social Protection Fund) even had a small surplus.

This favorable external and fiscal situation made it possible to easily repay a small portion of the external public debt (USD 336 million) and to service the remaining part. The gold and foreign exchange reserves grew by almost USD 1 billion (12.8%) to USD 8.5 billion, which is close to the all-time high.

Together with the above trends, an important role in the dynamics of the gold and FX reserves was played by the Special Drawing Rights (SDR), a special reserve asset of the IMF received by Belarus. According to its quota, Belarus received SDR 653.2 million (about USD 930 million), which were used to recharge the reserves. However, de facto, Belarus has little chance to exercise its right to use these funds (in accordance with the IMF procedures) due to the sanctions and political isolation. In this sense, the increase in the gold and FX reserves, which is almost mathematically identical to the value of the received SDR, can be considered as not entirely accurate.

A certain upturn also took place at the micro level. Thanks to increased revenues, the financial performance of the real sector improved, and its debt burden decreased. However, restricted public access to statistics does not allow assessing the scale of this progress, especially when it comes to state-owned enterprises.

The macroeconomic indicators of household incomes and the labor market also looked very positive. The average real wage rose by 4.4%, significantly outpacing the output growth rate. There was also a gradual decrease in unemployment to 3.9%, to compare with 4.0% in 2020.

At first glance, the inflation rate was the only fly in the ointment, while the in-depth analysis reveals some alarming trends. Although economic activity continued to increase, employment was rapidly declining by about 1.3% per year due to demographic factors and layoffs, as companies were seeking to cut excessively inflated labor costs. The number of new jobs was the lowest ever. This suggests that companies perceived growth as temporary and unguaranteed in the future.

There were many reasons for this uncertainty. It is highly likely that the foreign trade miracle will fade out sooner or later, and its negative effects (inflationary pressure, logistical disruptions, etc.) will increase. The sanctions will intensify closer to the end of the year, and their influence will soon begin to outweigh external environment advantages.

Negative macro-trends were already evident in the second half of the year. Output growth declined at first, and turned into a fall by the end of the year. Inflation continued to accelerate. Meanwhile, the authorities did not show any willingness to initiate a political thaw, which could have had a favorable effect on economic prospects. On the contrary, the political rhetoric and repressions became harsher. The government kept showing an arrogant and flippant attitude to the already obvious substantial risks.

As a result, at the turn of 2021–2022, the degree of uncertainty was sky high. The range of qualitative and quantitative characteristics of further development scenarios (comparable in terms of probability) increased greatly from continuing moderate growth based on the foreign trade miracle to a deep and long recession coupled with a financial crisis caused by the sanctions and structural flaws of the national economy.


Three macroeconomic factors can be highlighted as key in 2021: (1) the stagnant domestic environment with a hint of recession; (2) increasing pressure of sanctions; and (3) the foreign trade miracle. From the point of view of the key macroeconomic indicators, the foreign trade miracle decisively outweighed the impact of the first two. Therefore, output exceeded the pre-pandemic level at the end of the year, and most of the macroeconomic stability indicators significantly improved. Accelerated inflation was the main macroeconomic problem of the year.

In 2021, the West brought the sanctions to a qualitatively new level. They began to transform from selective and symbolic to sectoral and systemic. Against this backdrop, the institutional environment regressed, and the weak long-term growth potential weakened even more. Institutional and structural changes practically came to naught.

In 2021, the sanctions mainly had a negative informational effect, and only slightly weakened economic activity, but their role will be great in the future. They have generated a whole bunch of serious risks to the national economy. Given the large number of systemic flaws of the Belarusian economy, this generates a huge uncertainty of the future. It is equally likely that thanks to the foreign trade miracle, growth will remain at the beginning of 2022, but it will be insignificant, or there will be a dive into a deep and prolonged recession.