As Leo Tolstoy said in the opening lines of Anna Karenina: “Every happy family is the same, but every unhappy family is unhappy in its own way.”

Everyone in the world had a terrible 2020, ravaged by the coronavirus (COVID-19) pandemic and hurt by multiple economic shocks, including a collapse in the oil price last March. But Belarus had it worse.

Several factors weighed on Belarus’ economic performance in 2020. The mass demonstrations and the economic dislocation they caused were only the most visible of Belarus’ unique problems. And Belarus' President Alexander Lukashenko’s decision to ignore the pandemic, because of the economic impact a lockdown would have on the heavily industrialised output of the economy, was another obvious one.

More insidious was a slump in the prices of exports, and potash in particularly. And even before international prices of oil slumped, Belarus’ oil sector problems were made worse by a bitter dispute with Russia over the so-called tax manoeuvre – a change in the way oil and gas exports are taxed – that effectively removes Belarus’ generous energy subsidies. As part of this row deliveries of crude to Belarus’ two modern refineries were reduced, depressing in turn the exports of refined products and so adding further pressure to the economy.

“Even the gradual restoration of Russian oil supplies in April and May did not lead to 2020 ending with positive economic growth figures,” Kamil Klysinski, an analyst with East West Institute (OSW), said in a recent paper, as those were the months that the double whammy of the oil price collapse and the start of the pandemic kicked in.

The contamination of a significant amount of crude with chemicals that caused the shutdown of the refineries for repair was an additional blow to Belarus’ oil business.

Trade imbalance and falling industrial production

The headline damage to the Belarusian economy was deceptively mild.

Belarus’s GDP fell just 0.9%, but the country found itself in an extremely difficult situation due to the backing up of all the other problems, which like London buses, all arrived at once.

Belarus’s inability to effectively refinance its foreign debt using funds offered by Western institutions, its significant budget deficit, which appeared in 2020 for the first time in years and now amounting to an estimated 30% of GDP – on a par with the level recorded in the crisis years of the 1990s – has hobbled the government’s ability to respond to the crisis. It is also already heavily exposed to the local banking system, which the government and state-owned enterprises (SOEs) tapped for funds that are now “largely unpayable”, according to Klysinski.

“The crisis started as early as January 2020, when a 1.9% decline in GDP was recorded. This was caused by a fall in the volume of Russian oil supplies to the Belarusian petrochemical sector recorded at the beginning of the year (a drop of nearly 80% in Q1),” Klysinski said. “This decrease was caused by a bilateral dispute over what shape the two states’ integration under the Union State of Russia, and [what shape] Belarus should take in the future. The reduction in supplies was a major blow to one of the most important branches of the Belarusian industrial sector, which generates around 10% of the country’s GDP, 25% of its exports and 20% of its state budget revenue.”

Separately and independently the price on the potassium fertiliser market also slumped, which makes up another 20% of the republic’s exports and is a major source of budget revenues.

“This meant that in Q1 2020 the volume of foreign trade shrank by almost 15%, or $1.3bn. 2020 as a whole saw a decline in foreign trade of $10bn (to $62bn),” Klysinski concluded.

Falling export revenues are bad news, as the country remains heavily reliant on imports for most consumer goods and equipment. The trade deficit fell by $2bn to $4bn in 2020 as the crisis, and associated devaluation of the Belarusian ruble, comes with the built-in hedge of depressing the increasingly expensive imports, but even the remaining deficit further undermines the value of the currency. The fall in exports was made worse by the parallel crisis in Russia which depressed its imports of oil refined oil products from Belarus back to Russia; the fuel sector accounting for more than half of this decrease.

Exports in general fell as the world’s economy slowed and one of the remarkable features of the Belarusian economy is it is almost unique amongst the Commonwealth of Independent States (CIS) countries to have built up a diversified export-orientated economy, which accounts for 61% of production, according to OSW. Russia takes half of those exports, linking the two economies at the hip. And Belarus’s relations with Russia had become increasingly unstable.

The Belarusian ruble weakens

By March last year the Belarusian ruble began to crumble, as the first of two waves of regular Belarusians rushed to the ATMs to change their savings into dollars. Free convertibility of the Belarusian ruble to dollars is a relatively recent innovation and the crisis-weary population increasingly avails itself of these conversions when the future looks uncertain.

The second wave of cash machine conversions came in August, after the disputed presidential elections, and the subsequent mass protests that followed. In that month alone the population withdrew $1.4bn from ATMs, two thirds of a total of $1.9bn taken out of bank accounts as foreign exchange during the course of 2020. As a consequence, by the end of 2020 the Belarusian ruble had lost 34% of its value against the euro and 22% against the US dollar.

“In addition, it should be noted that the income earned by Belarusians has remained unchanged for many years – it stands at around $500–600 monthly, which is similar to the average salary level recorded during Lukashenka’s election campaign in 2010. This, combined with an annual rate of inflation of several percent, has resulted in a gradual decline in the Belarusian people’s living standards,” Klysinski said.

Corporate debt woes

The weakening economy and the labour disruption caused by strikes and protests hurt the ineptly managed and outsized state-controlled industrial sector, which still accounts for 75% of Belarus’s GDP. Many of these companies saw production fall off to a trickle during the summer as workers instituted an “Italian strike” regime: turn up for work so you don't get sacked, but don't do anything while you are there.

The state stepped in and lent the companies money to deal with rising liquidity problems and mounting debt. During the summer many state-owned companies reported they were close to being unable to make payroll, which in the tense political atmosphere the state was keen to avoid at all costs.

And the backward SOEs are already a burden on the state. In 2020, unprofitable companies accounted for more than 15% of all Belarusian companies (both privately owned and state-controlled), and the total value of their losses was nearly $2.5bn, i.e. 3.5 times more than in 2019, according to OSW. The total profit generated by the manufacturing sector decreased by more than 40%, with state-owned companies accounting for a major portion of that decline.

“The genuine scale of this problem has partly been underestimated due to the government’s “creative accounting”. In a special decree, the government approved shifts in some items of the financial statements companies compiled, enabling them to report their losses resulting from the devaluation of the ruble in 2022,” Klysinski said.

“In addition, in 2020 the government abandoned its practice (in place since 2016) involving the reduction of so-called forced lending to companies, i.e. offering them economically unviable loans to sustain the operation of their unprofitable businesses,” Klysinski added.

The value of these loans granted in 2020 exceeded the planned limit threefold, and stood at almost $1bn. As a consequence, the number of non-performing loans (NPLs) soared: at the beginning of 2021 the share of NPLs in Belarus’s GDP was as much as 14%, and that in turns puts pressure on the banking sector, which has to tie up capital to make provision for the bad loans and in effect subsidise the industrial sector.

In addition, the gobs of cash banks threw at state-owned companies feeds through to fuel inflation, which has also risen dramatically over the course of 2020 and stood at 7.4% at the end of the year – the highest since 2017.

Budget in the red

Despite its backward nature, during his 27 years in office Lukashenko has built up a sustainable neo-Soviet model that provides much of the cradle-to-the-grave services that are one of the most missed features of the old system. He also provides full employment and relative stability while the countries surrounding Belarus have been rocked by economic crises, hyperinflation, political revolutions and a rapacious oligarch class.

But the system doesn't work without Russian subsidies, which have run to an estimated total of $100bn, according to expert estimates.

That means the Belarusian budget has been surplus for years, but in 2020 it went into the red for the first time since 2013.

Despite cuts in several spending categories, including social security benefits, education, culture and sports, the deficit amounted to over $700mn (almost 2% of Belarus’s GDP), OSW reports, as the government scrambled to put out multiple fires. And one of the items burning a big hole in the budget was vastly expanded spending on the security forces.

Russian subsidies in 2012-19 were worth $45bn, but these have fallen in the last two years from $11bn (17% of Belarus’s GDP) in 2012 to $3bn (4.8% of GDP) in 2019, OSW reports.

Another important challenge is posed by the mounting foreign debt, which in 2020 increased by $1.4bn (8.4%) to $18.6bn, accounting for more than 30% of Belarus’s GDP.

The blessing, as far Lukashenko is concerned, is almost exactly half of this amount is owed to Russia, which can be relied on to restructure it before Belarus is forced to default. Indeed, most of the financial help Moscow has given Minsk has been debt relief; the first deal done in 2020 was to move $1.5bn worth of Belarusian government debt to leading Russian companies like Gazprom off the company books and onto the public balance sheet and prolong the redemption dates.

Belarus’s biggest creditors as of 2019 include Russia (more than $8bn) and China ($3.4bn) but Belarus also has $2bn of sovereign Eurobonds outstanding with international investors that will have to be refinanced somehow.

As it was, Belarus had $1.6bn of redemptions that it had to meet in 2020 and the National Bank of the Republic of Belarus (NBRB) had to intercede on the domestic market after the population took out $1.4bn from ATMs.

As a consequence, in 2020 the value of foreign currency reserves fell by $1.9bn to $7.5bn (i.e. by 20.5%), bringing the level of import cover to 2.5 months – less than the three months' minimum economists recommend to ensure the stability of the national currency. Unable to receive loans from the West, the government needs to find funds to repay the $3.3bn of foreign debt due in 2021.  

“In the first half of 2020, Minsk continued to maintain its relative credibility on financial markets, enabling it to choose the most favourable foreign debt refinancing facilities relatively freely,” Klysinski reports.

And indeed, Belarus managed to issue a $1.25bn Eurobond in June, just two months before the presidential elections, bought mainly by European and US investors. Since the August 9 vote the international markets are now completely closed to Minsk, leaving Russia as the only viable source of government funding going forward.

Minsk has managed to tap the Russian bond market, issuing its first ruble bonds there last year, and in May Lukashenko signed off on a decree to issue RUB100bn ($1.35bn) over the next two years – but this is about half of what Minsk will probably need just to fund this year’s budget deficit.  

The decline in Belarus’s credit rating has been accompanied by a reduction in its investment attractiveness: the value of foreign investments has halved (to $320mn) and the value of foreign currency loans granted by foreign banks to domestic businesses has decreased by more than 50% (to $70mn).

That’s bad news for Lukashenko, as Russia’s foreign policy has taken on a much more pragmatic line in the last year, as Dmitri Trenin of the Carnegie Moscow Center, argued in a comment for bne IntelliNews.

Moscow has narrowed its scope and is more fully focused on its own national interests and is no longer willing to buy favours with cash. That gives its partner states more wiggle room to make their international relations as they see fit; in Lukashenko’s case, where he has no wiggle room left, his system is founded on getting cash from Moscow. Nevertheless, Moscow is not prepared to pull the rug out from under him yet, but it has only extended just enough support to stop the economy from collapsing and to prevent a popular colour revolution it can’t control.

Since the beginning of 2020, Russia has only offered a mere $1.5bn, including $500mn extended by the Russian-controlled Eurasian Fund for Stabilisation and Development. Thus far, Belarus has received a total of $1bn from the sum pledged; the second tranche was dolled out last week during the Sochi meeting between the two heads of state.

China, which Minsk is presenting as its strategic ally, has failed to express any interest in providing additional credit to the Belarusian economy other than the loans it offered in previous years.

“The international isolation of Lukashenka’s regime in the wake of rigged elections has reduced Belarus’s choice of lenders to Russia alone. Russia, for its part, is expecting complete subordination from Belarus, and is making the actual amount it lends conditional on the scale of Minsk’s political concessions,” says Klysinski.  

Outlook  

As a result of all these problems the economy is close to collapse, and probably would if it were not for Moscow’s support.  

The preliminary data from the first two months of 2021 show a budget deficit of more than $520mn compared with a budget surplus of around $220mn for the same period a year earlier.

“This was the first instance of such a major deficit in public finances being recorded as early as the beginning of the budget year since the 1990s,” says Klysinski. In addition, this sum already accounts for a quarter of the exceptionally high annual budget deficit planned in the 2021 budget of more than $2bn, or 3.5% of GDP. In addition, Q1 2021 saw a further fall in foreign currency reserves by $520mn.

The cost of supporting Lukashenko’s regime could also be his undoing. Tadeuz Giczan, the editor-in-chief of the opposition Nexta Telegram channel, says currently Lukashenko is costing Russia about $2-3bn a year, which it is willing to pay. But if that cost were to increase to say $10bn, which would accompany the stringent EU sanctions currently being considered, then at some point Giczan argues the Kremlin may reconsider. The alternative is that if the Kremlin is backed into a corner then it may simply decide to annex Belarus too as the cheaper option, argues bne IntelliNews columnist Mark Galeotti.