Currency Market and Banking System: No Collapse
Project Kosht Urada
Summary
In 2022, Belarus’ currency market and banking system faced severe difficulties stemming from the war in Ukraine and subsequent sanctions. In the spring, the situation appeared disastrous, but measures taken in Russia and Belarus, the delayed effects of the sanctions, and other factors contributed to stabilization. Both the ruble and the banks survived, albeit not unscathed.
Trends:
Following the onset of the war in Ukraine, the Belarusian ruble (BYN) plummeted after the Russian ruble (RUB). However, as RUB stabilized and thanks to restrictions on currency operations inside Belarus and a relatively strong balance of payments, BYN recovered from the shock;
For a time, banks did not fully meet their obligations to customers, further eroding confidence in BYN and the overall banking system, yet a full-fledged default was avoided;
The outflow of foreign currency from the banking system persisted throughout the year. Additionally, there was a noticeable transfer of funds from time deposits to current accounts, as well as an increase in money supply;
In the second half of the year, BYN inflow to banks, along with a decrease in economic activity and demand for loans, resulted in a liquidity surplus in the banking sector and the stabilization of interest rates.
The Exchange Rate Plummeted, but then Rebounded
The year 2022 was stressful for the Belarusian currency market. After Russia’s invasion of Ukraine on February 24, RUB plummeted. This decline inevitably affected the BYN, and the subsequent numerous sanctions only seemed to only worsen the already fragile position of the national currency. However, emergency measures, taken primarily by the Russian central bank, temporarily stabilized the situation, preventing a catastrophic year for the Belarusian currency market.
Immediately after the onset of hostilities, RUB began to plummet, depreciating against the dollar by 49.6% by March 11,1 with the rate reaching a record 120.4 to the dollar. On the Belarusian market, the dollar’s growth was not as significant, but still substantial: by March 11, BYN depreciated against the dollar by 24.5%,2 reaching a record BYN 3.3 to the dollar.
This significant difference in the growth rates of the dollar in Belarus and Russia was due to the strengthening of BYN against RUB. As of March 11, the RUB rate on the Belarusian market had dropped by 17%. This situation was devastating for Belarus' foreign trade, heavily tied to Russia. An expensive BYN in relation to RUB made Belarusian goods expensive for Russians, and Russian goods cheap for Belarusians, which in the medium term could greatly increase imports while reducing exports. However, in the short term, the National Bank allowed such fluctuations in exchange rates to prevent a significant rise in the dollar, seen by the population as a beacon of stability.
In 2022, the National Bank allowed BYN to strengthen significantly against RUB, expecting that the Russian currency would at least partially recover its lost positions in the future. This strategy aimed to keep the dollar stable and return the exchange rate of BYN against RUB to levels comfortable for exporters. This expectation was realized.
After the late February - early March collapse, RUB began to recover quickly, returning to pre-war levels in April. This rebound took place for several reasons: the Russian central bank imposed unprecedented restrictions on capital movements, and high commodity prices and sanctions imposed on Russia led to an increase in the country’s export revenues, while imports declined.
The National Bank of Belarus, for its part, did not impose bans on either currency sales or the release of hard currency deposits. Technically, when implementing various new restrictions, the banks acted on their own initiative. They limited hard currency issuance from accounts, halted the sale of cash dollars and euros, and often set daily limits or high spreads (the difference between the purchase price and the sale price) for cashless currency exchange transactions, making the exchange unprofitable. Despite these restrictions, the combined efforts, along with the strengthening of the RUB and, subsequently, the BYN, quelled the currency panic, contributing to the further stabilization of Belarus’ currency market.
Atypical non-residents and typical fluctuations
By the end of 2022, Belarusian enterprises ($1.33 billion) and banks ($0.65 billion) became the net buyers of foreign currency. Operations by the general populace had negligible influence on the ruble’s exchange rate at the end of the year. Belarusians sold a total of $0.03 billion in absolute terms - a minor amount in the broader financial market. In contrast, non-residents set a record as net sellers, injecting the market with $2.51 billion. This figure is about five times the annual volume of past net sales by non-residents (Table. 1). The sharp increase in foreign currency sales by non-residents can likely be attributed to Russian citizens making expenditures in Belarus using Russian debit cards and payments stemming from parallel imports to Russia.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Individuals | –1114.8 | –597.7 | 1969.8 | –53.4 | –26.3 |
| Legal entities | 672.4 | –531.7 | 977.9 | –678.9 | 1327.5 |
| Non-residents | –493.7 | –571.9 | –596.7 | –575.0 | –2509.1 |
| Domestic banks | –617.8 | –705.9 | –714.4 | –151.1 | 645.8 |
Table 1. Dynamics of the difference between the volume of purchase and sale of foreign currency, 2018-2022, USD million3
Note. Positive numbers - net currency purchase, negative - net currency sale.
Overall, the market generated a currency surplus that allowed the Belarusian ruble to stabilize. and the National Bank at least partially plugged the hole in the Gold and foreign currency reserves. During the currency panic of February and March, the regulator was compelled to draw from these reserves to moderate the ruble’s volatility. The interventions during these two months are estimated at approximately $0.9 billion.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| USD/BYN | 9.5 | –2.4 | 22.3 | –1.2 | 7.4 |
| EUR/BYN | 5.0 | –4.4 | 34.0 | –9.0 | 1.1 |
| RUB/BYN | –9.2 | 9.2 | 2.6 | –1.6 | 10.2 |
Table 2. Annual BYN volatility, 2018-2022. %4
Note. Positive number - BYN weakened, negative - BYN strengthened.
As a result, in 2022, the Belarusian ruble depreciated by 7.4% against the dollar and by 1.1% against the euro (this difference is due to the strengthening of the dollar against the euro). The Russian ruble also fell by 10.2%, which had a positive impact on foreign trade. As indicated in table 2, such annual fluctuations in the exchange rate can hardly be described as unprecedented, but rather typical for the Belarusian market.
Restrictions on Withdrawals from banks
The risk of a large-scale withdrawal of deposits posed a significant challenge for the banking system in 2022. Consequently, in March, most banks imposed restrictions on bank account disbursements. Since these measures weren’t uniformly mandated by the National Bank, but were instead individually decided on by the banks, these restrictions varied significantly. For instance, as of March 12, Alfa-Bank permitted withdrawals up to a maximum of 10,000 dollars and 3,000 euros every 30 days, while Priorbank set a cap of 3,000 dollars per day. Some banks, on the other hand, did not impose any restrictions.5 In almost every case, the currency was disbursed upon request.
Checking accounts with debit cards also had withdrawal caps. For example, as of March 12, BelVEB set a withdrawal limit of 1000 USD/EUR per day, while Belgazprombank allowed up to 500 USD per day. These restrictions hindered account holders who, for example, might have wanted to travel abroad briefly and withdraw their savings from foreign ATMs.
In essence, these measures signified a breach of banks’ obligations to customers. Nevertheless, they averted a full-scale default. It is important to understand that depositors' funds aren’t simply stored in a bank vault; they are channeled into the economy in the form of loans. Thus, a bank cannot instantly return all the deposited money upon request. By extending disbursement times and imposing daily and monthly limits, banks staved off a collapse. However, these actions significantly eroded trust in the banking system.
It is understandable that the most substantial outflow affected foreign currency accounts. Depositors who save in dollars and euros generally do not have confidence in the Belarusian ruble. Thus, they tend to be more cautious and risk-averse compared to the average BYN deposit holder.
Despite the restrictions, in March, foreign currency deposits held by individuals shrank by 9.7%.6 This includes a 5.9% reduction of all individual funds from term deposits, and a significant 21.5% decrease from transfer deposits (commonly referred to as checking accounts). In monetary terms, Belarusians withdrew $512.2 million dollars from banks. Without the imposed limitations and the presence of non-redeemable deposits, which couldn’t be prematurely accessed, this figure would have been much larger.
Legal entities, for their part, have shifted their foreign currency assets from fixed term accounts to checking accounts to facilitate access. In March, term foreign currency deposits belonging to legal entities fell by 11.7% ($347.1 million), whereas transfer deposits rose by 12.7% ($312.2 million).
The outflow also affected the transfer deposits in Belarusian rubles. In March, individuals withdrew 7.7% (BYN 262.3 million) from such accounts, while legal entities pulled out 7.9% of all funds (BYN 314.8 million). Yet, term deposits in BYN remained relatively stable. This stability can be attributed to the existence of non-redeemable BYN deposits, as well as the mindset of the typical BYN depositor, who seemingly has a greater trust in both the BYN and the banking system than those with foreign currency deposits.
Banking system avoided collapse
Even with the implemented restrictive measures, banks faced liquidity shortages in March. This compelled the National Bank to hold credit auctions to supply banks with the requisite funds. In just one month, the regulator held six such auctions, dispensing BYN 2.9 billion, even though the banks’ demand reached BYN 7.9 billion.7 The APRs for some of these loans surged past 30 percent despite a 12 percent refinancing rate. The interbank lending market also saw annual rates above 30%, further emphasizing the liquidity crunch.
Yet, mirroring the currency market dynamics, the initial panic subsided, and the banking system began to stabilize in April. Interest rates declined, deposit outflows slowed down, and occasionally, there was even a noticeable influx of funds into banks. Consequently, the National Bank resumed its regular practice of holding deposit auctions8 as banks rebalanced their liquidity surpluses. Unfortunately, from mid-summer onwards, the regulator ceased publishing reports on liquidity support activities, leaving us without a comprehensive view of the entire year of operations.
Summing up 2022, individual term deposits in BYN grew by 22.2% (or 1.14 million), set against an annual inflation rate of 12.8%. Meanwhile, individual transfer deposits expanded by 11.9% (451.4 million). Legal entities bolstered their BYN holdings in transfer accounts by 55.5% (or 2.24 billion) but reduced their term deposits by 6.0% (318.2 million).
The situation concerning foreign currencies held in bank accounts is less favorable. By the end of 2022, the general populace withdrew a total of $516 million from checking and term accounts, which equates to 9.8% of the entire foreign currency holdings of individuals that were deposited in banks at the beginning of the year. Legal entities, however, increased their foreign currency reserves by 5.7%, or $316 million, primarily by shifting funds from term deposits to current accounts. This means that the influx of foreign currency from legal entities failed to offset the significant withdrawals initiated by the population.
The volume of cash and loans in Russian rubles is growing
In 2022, the broad money supply - all money in the economy, including rubles, foreign currency, both in cash and deposits, experienced a modest growth of 6.8%. This reflects the National Bank’s intention to uphold a relatively strict monetary policy, aiming to mitigate further inflationary pressures through excessive monetary issuance.
A notable trend within the year’s broad money supply was the surge in cash circulation. Between January and December, the total cash volume swelled by 38.3%, reaching an all-time high of BYN 6.611 billion. This trend confirms the diminishing trust in the banking system and potentially points to the expansion of the shadow economy.
Interest rates returned to normal in 2022. Throughout January to December, the average APR on new bank deposits in BYN stood at 8.4%, which is even lower than the rate in 2021 (11.4%). At the same time, the average rate on new foreign currency deposits reached 4.6% compared to 2.1% in 2021. This demonstrates the banks’ sustained demand for foreign currency, even in the face of a stable currency market and the declared ambition to de-dollarize the economy.
During the year, the average interest rate on new BYN loans was pegged at 14.6%, a jump from 12.7% a year earlier (excluding preferential loans). Simultaneously, there was a pronounced spike in foreign exchange loans: the average APR on new loans in foreign currency stood at 13.2%, compared to 6.9% in 2021. The secret behind this growth is the transition in 2022 to the Russian ruble as the main foreign currency for lending, diverging from the previous trend of primarily lending in dollars and euros.
The mean rate on ruble loans and deposits within the interbank market hovered around 8.3%. However, during the second half of the year, the interbank rates were limited to merely 1-2%, signaling a significant liquidity surplus. The high annual average can be attributed to the spike observed in March.
Conclusion
The year 2022 was relatively stable for the foreign exchange market and the banking system of Belarus. Surprisingly, several indicators even appear to look positive. This stability can be largely attributed to the significant reinforcement of the Russian ruble mid-year, propelled by severe foreign currency restrictions and a serious reduction in imports. Belarusian banks have also played a crucial role by preventing a massive exodus of funds, albeit through breaching contractual terms with their clientele.
Factors like the general economic downturn, declining credit activity, and manual price regulation aided in stabilizing interest rates. While the numerous sanctions did not lead to immediate catastrophic damage, they persist, casting a shadow on the prospects for 2023.
With the Russian ruble experiencing another decline in late 2022 and no signs of recovery in 2023, it is likely the Belarusian ruble will follow suit. This devaluation, coupled with an unfavorable pricing landscape and ongoing sanctions, will strain the balance of payments and exert additional pressure on the national currency. Furthermore, the limited foreign currency reserves at the disposal of the National Bank might prove insufficient for tangible currency interventions to support BYN.
In response to the economic downturn, both the government and the National Bank may opt for a more lenient monetary policy to stimulate the economy. This may involve turning to currency issuance, potentially igniting inflation in the second half of the year and causing a subsequent surge in interest rates.
The continued drain of foreign currency from accounts will further destabilize the banking system. Both the ruble exchange rate and the banking system remain susceptible to considerable risks. Any potential shocks can lead to the unfolding of highly unpredictable and pessimistic outcomes.