Rupinder Singh, Timothy Ash: Belarus and economic sanctions
Last August, Rupinder Singh wrote about the crisis in Belarus and the possible European Union and United Kingdom policy responses and the two possible reactions from Alexander Lukashenko – put simply to accept the election results (flight) or dig in and use the security apparatus to retain power (fight).
Autocrats rarely relinquish power voluntarily, and Lukashenko’s choice is clearly to stick it out as seen in the brutal suppression of the opposition seen since rigged presidential elections in August 2020. While this has been his modus operandi for most of these 20-odd years in power, he seems to have stooped to new lows in his decision to apparently force a Ryanair plane flying between two EU and NATO countries to land on May 23 to capture an opposition blogger, Roman Protasevich, took things to a new level, and refocused the world’s attention on the crisis in Belarus which has been rumbling on now for close to a year.
Lukashenko and his advisors may have underestimated the potential shock of the incident, in the EU in particular, and the robustness of its likely response. One key difference to last year is that the US is now re-engaged and co-ordinating with the EU on sanctions, ramping up the somewhat symbolic measures the EU took in 2020.
Another is that previously Lukashenko had restricted his actions to within Belarus, with limited actions against countries or agents. However, the action against the Ryanair flight broke numerous norms, acting against an EU registered plane, acting to disrupt a flight path between two EU member states. And finally, by showing a willingness to force a plane to land with the specific intention of detaining a political opponent, a Rubicon was crossed with a dangerous precedent now appearing for other autocrats to force down airliners crossing their airspace in order to detain political opponents. Who might be next to use the example set by Lukashenko.
With the expectation of a much more robust response from the West to the Ryanair incident, this article considers the likely economic scenario facing the Belarussian economy.
In a nutshell, we argue that the Belarusian economy is close to a tipping point, with an already fragile external financing position appearing as the Achilles heel, and leaving it vulnerable to significant Western sanctions. There is a reasonable risk of a significant economic crisis amplified by the likelihood of rapid devaluation of the Belarusian rouble with spillovers into inflation and the near-bankrupt real economy that remains largely unreformed and in state hands – in effect a re-run of post-Soviet experience but with the added risk of bank runs and default on external debt payments.
Perhaps in reflection of the risks and vulnerabilities, Lukashenko was quick to jet off to Sochi to meet his ultimate backer, Vladimir Putin, with the clear aim of securing a bailout to forestall the forthcoming economic travails, since the credit lines will quickly become binding from conventional multilateral and private sources of finance.
EU and US economic sanctions on 8-9 key state-owned entities will impact if, as expected, they target the export into the EU of potash, oil products, and timber – key currency earners. Before the Ryanair event last week, economic growth in Belarus was expected to be pretty modest for 2021 at 0.4% and buoyed by base effects from 2020 when the economy contracted by almost 1%.
Economic sanctions will mean reduced net exports (even with an attempted pivot to Asian markets for potash), lower domestic consumption on the back of falling real wages and rising unemployment, and significantly reduced public investment by the Ministry of Finance. Given that it’s a $65 billion economy, these shocks will mean negative real growth for 2021 that can easily imply a hit of 10% or more, especially if the new sanctions mean freezing of internal finance institution monies, including planned disbursements from the 13 EBRD projects with a €1bn portfolio and a freeze or recall of external bank financing to the 19 domestic banks including the five big banks in Belarus.
Inflation and monetary policy? Expect rising inflation and devaluation, although I expect Belarus to meet public debt obligations upon resort to bailouts from Russia.
Belarus was already facing a significant liquidity crisis. International reserves remain low and were just over two-month import cover at the start of 2021. With a debt repayment requirement of $2.8 billion in 2021, it paid $88 million in Q1 of this year, leaving around $2.39 billion of which the bulk is to Russia – directly 45% and indirectly through the Eurasian Fund for 17% and another chuck of 22% due to China. Purportedly the Belarusians will issue Russian rouble debt for at least $1.5 billion, more de-facto Russian support…still leaving a chunky financing gap shy of $1 billion.
Inflation was around 9% in April, with both food and regulated prices around this level. With evidence of rising deposit withdrawals and increasing levels of bad debt (primarily to State-owned firms), there is a real possibility that the economic impact of sanctions will quickly transmit to the banking sector. A run on the currency would test the country’s ability to honor FX external debt and further exacerbate inflation.
The implication of the sanctions shock could therefore mean that the financial costs of sanctions could quickly become a burden of anywhere from $6-10 bililon directly on Russia. Will Vladimir Putin be willing to continue to provide financing at elevated levels when he is already having to provide bailouts to support other foreign adventures in Syria, Crimea, Donbas, Transdniestr, Abkhazia and South Ossetia?
Will China want to provide further financing? It seems unlikely that China will want to further annoy the US, and Europe, when it is focused on trying to calm tensions around trade.
To summarise, from the vantage of the EU and the US, the potential impact of the sanctions is clear. A credible package will have a very strong negative effect on the Belarusian economy and the Belarusians know this very well.
Still, equally, the pass-through to consumers cannot be avoided: over-employment and the build-up of inventories will not disguise the rising cost of living or a cut in real wages. Opposition politicians seem to suggest that they and the local population are willing to bear the burden if it ultimately helps bring eventual political change.
The key question is will force Russian policy-makers to consider the cost-benefit of continuing to support Lukashenko, purely from the financing costs and the rising concern in Russia about the financial transfers that would be required to absorb Belarus into Russia. Ultimately Lukashenko’s fate may well now be decided in Moscow – is Putin willing to pick up Lukashenko’s tab?