Gripped by mass protests and a general strike, Belarus will struggle to meet its debt obligations this year and faces a serious economic crisis, reports the Institute of International Finance (IIF) in a paper released on September 2.

“Widespread protests, which began in the aftermath of the disputed presidential election on August 9, have now entered a fourth week, and the ultimate outcome of the stand-off remains uncertain,” Elina Ribakova, deputy chief economist with the Institute of International Finance (IIF) and economist Benjamin Hilgenstock said in a paper IIF shared with bne IntelliNews. “After some concessions in recent weeks, authorities have reverted to a tougher stance, likely emboldened by Russian promises of support to Lukashenko.”

The EU has threatened to impose sanctions on government officials but so far only the Baltic states have imposed any new measures – mostly personal travel bans and asset freezes targeting the individuals organising the torture and repression in Belarus.

US Deputy Secretary of State Stephen Biegun met with opposition candidate Svetlana Tikhanovskaya this week but did not comment on whether similar steps were being considered by the US.

The international response to the events in Belarus has been loud condemnation, but very limited action, part at the request of the opposition themselves, who are wary of being dragged into the geopolitical stand-off between Russia and the West.

Russia’s continued support is essential for Belarus, as it holds almost half of the country’s $17bn of public external debt (47%). In addition, Minsk is highly dependent on Russia’s energy subsidy, as well as exports to and imports from its eastern neighbour. About 40% of Belarus’ exports go to Russia, which also accounts for 40% of all the inbound investment. The true share of Russian inbound investment rises to more than half if the investment from Cyprus and the Netherlands is assumed to be Russian money too.

As bne IntelliNews reported, the Belarusian ruble (BYN) has already lost some 11% of its value against the dollar in the last month and the government only has about $8.9bn of reserves ($4bn in dollar cash and the rest in gold and assorted assets), or equivalent to 2.4 months worth of imports. Economist say that a country needs a minimum of three months of import cover equivalent to ensure the stability of the national currency.

“While the National Bank of the Republic of Belarus (NBRB) denied rumours of FX shortages as it tightened liquidity to prevent further pressure on the currency, external financing stress could reach precarious levels,” warn Ribakova and Hilgenstock.

“In our baseline scenario, which assumes a drawn-out political stalemate in the context of $2.3bn in upcoming public external debt service, reserve losses would reach $3bn in 2020 – almost 1/3 of Belarus’ total reserves of $8.9bn,” the economists add.

Year-to-date, the currency has weakened by 26%, according to IIF, reflecting not only political uncertainty but also disruptions as a result of the coronavirus (COVID-19) epidemic that has raged unchecked due to Belarus' self-appointed President Alexander Lukashenko's unwillingness to take it seriously.

“This follows a period of a broadly stable BYN/USD exchange rate over 2016-19. As FX shortages appear to mount, high dollarisation is limiting the NBRB’s ability to step in as lender of last resort. Further dollarisation, for example as a result of attempts to ‘buy-off’ striking state-owned enterprise (SOEs) employees through the printing of money, could put significant pressure on already-limited reserves,” Ribakova and Hilgenstock said.

While it appeared that Lukashenko could be swept out of office by the popular uprising that has engaged almost the entire population from the liberal middle class to the blue collar workers in the SOEs, Lukashenko traditional base, that all changed following Russian President Vladimir Putin statement that he was willing to send a special military unit to quell the protests “if necessary” on August 27. The result of this statement was to significantly bolster Lukashenko's position and will almost certainly lead to the standoff being protracted. 

“In this scenario, the Lukashenko regime will reject demands for a peaceful and organised political transition, but also refrain from any major escalation of its response to ongoing demonstrations. As a result, Western countries will likely limit sanctions to specific individuals and entities directly responsible for acts of oppression and hold back with respect to measures targeting major SOEs,” said IIF.

With the current regime remaining in power, Russia is expected to roll over existing debt and provide additional funding, thereby alleviating external financing stress and allowing Belarus to avoid a financial crisis, according to IIF. “Nevertheless, pressure on Belarus’ already-low reserves would be significant, even if manageable over the near term,” IIF added.

IIF considered two additional scenarios: one that assumes a peaceful transition of power leading to an opening-up of the economy (upside scenario); and one that assumes a deterioration of the political conflict and eventual escalation of violence (downside scenario).

“In the former, Belarus would attract inflows from international financial institutions (IFIs) and bilateral partners in the West, while maintaining its strong relationship with Russia,” say Ribakova and Hilgenstock.

In the positive scenario higher non-resident inflows, together with lower resident outflows, would allow for reserve gains of $1.75bn in 2H20 (and $1bn for the full year), according to IIF estimates.

In the negative scenario sanctions would be extended to SOEs and IFI support becomes out of the question. As a result, resident capital flight would accelerate to $3.5bn and surpass the record of $2.6bn in 2011, when Belarus had its last crisis and deep devaluation.

“Not included in our scenarios are additional risks to the [current account], which could partially stem from the loss of IT service revenues (over $2bn in 2019),” Ribakova and Hilgenstock say.

The IT industry has been the main driver of the economy in recent years, and in addition to bringing in export revenues equivalent to a quarter of the country’s entire hard currency reserves it also continues to grow at over 30% a year, industry experts told bne IntelliNews in a recent podcast. However, both Japanese-owned Viber and Russian-owned Yandex have already closed their offices and an exodus of IT companies is anticipated after over 300 IT CEOs signed a letter warning they would leave the country if Lukashenko did not end the repression after the police crackdown began in the first week of protests.

The outlook for the Belarusian economy is now highly uncertain. Russia has stepped in with financial aid before in times of political or economic crises but used it to exert pressure on the Lukashenko regime. The same is likely to happen again now. Putin has invited Lukashenko to Moscow in the near future where the Union State deal, that was agreed in principle in 1999, could be signed into existence that will bring the two countries much closer together, creating an eastern version of the Eurozone, including a single currency.

“However, the scale and persistence of the current protests is unprecedented. In the absence of meaningful external pressure, with protesters undeterred and the regime’s ability to suppress the opposition largely remaining in place, we see no reason to expect an end to the prevailing political stalemate,” say Ribakova and Hilgenstock.