Analysis
The financial ratings agency Moody’s downgraded the ratings of six Belarusian banks April 4. Moody’s also downgraded the local-currency deposit ratings of three more Belarusian banks which are state-owned: Belarusbank, Belagroprombank and Belinvestbank. These downgrades follow a string of economic setbacks for Belarus in recent weeks, as the country faces growing financial pressures due to high energy prices and growing isolation from the European Union and the United States.
These financial troubles have forced Belarus to turn to Russia to help shore up Minsk’s finances. While Belarus has been a stalwart ally to Russia on security and military matters, it has been more fickle on economic and energy affairs. Belarus’ financial problems will give Russia an opportunity to strengthen its grip on Belarus economically and could severely dampen EU hopes to bring Belarus closer to the West.
The recent economic problems in Belarus can be traced to moves made by Belarusian President Aleksandr Lukashenko before the country’s presidential election in December 2010. Lukashenko initiated several populist measures in order to strengthen his position ahead of the vote, including expansion of credit and increases in wages and pensions. While these measures helped secure re-election for the long-serving president, the boost in spending has depleted the country’s foreign exchange reserves, which are down by nearly 20 percent since the end of the 2010 and stand at approximately $4 billion. In addition, the controversial re-election and ensuing crackdown on opposition leaders and protesters caused the European Union to enact sanctions on Belarus targeting leading political and economic officials as well as several Belarusian state enterprises. The United States, in a show of solidarity with the European Union, also passed sanctions against a Belarusian energy firm.
All of these factors, combined with high oil prices as a result of Middle East unrest and global instability, have created serious problems for Belarus, not the least of which is rising inflation and a growing current account deficit. While Belarus had sought to secure loans from the International Monetary Fund (IMF) and the Eurasian Development Bank (EDB), these have not moved forward as a result of the West’s sanctions and economic isolation of Lukashenko’s regime.
Minsk has thus had to find alternative means recently to stem the negative effects of its economic and financial moves. On March 29, The National Bank of Belarus — the country’s central bank — allowed local lenders to sell foreign currency at up to a 10 percent devaluation of the Belarusian ruble, significantly widening the previous spread of 2 percent. The move was intended to increase the flow of foreign currency into the country and stimulate Belarusian exports. However, Belarusian authorities admitted that such a move would not be enough to assuage the country’s financial problems. Minsk requested a $1 billion loan from the Russian government, as well as a $2 billion loan from the anti-crisis fund of the Eurasian Economic Community (Eurasec), an economic organization of former Soviet states dominated by Moscow. On March 31, the National Bank Board of Belarus announced that it would not make any changes to its exchange rate or monetary policy for a period of 20-30 days as Russia considers Belarus’ loan request.
From Russia’s standpoint, Belarus’ request for financial assistance could not come at a better time. As a major oil and natural gas producer, Russia is flush with cash because of the higher energy prices (the same prices that are hurting Belarus economically) and has more than enough funds to assist its neighbor. Russia has already shown its willingness to take advantage of the West’s isolation of Belarus to advance its own interests, as seen in the $9 billion deal for Russia to build a nuclear power plant in Belarus. Moscow also agreed to discuss the $1 billion loan Minsk requested and is currently negotiating the terms for such a loan to keep Belarus’ finances from deteriorating further.
But Russia has proven that its financial assistance comes with strings attached, and this time is no different. While Belarus has proven itself as a reliable ally to Russia in the military and security realms, it has not been as cooperative economically (particularly where energy is concerned), despite its membership in the customs union with Russia and Kazakhstan. Belarus has signed oil deals with Venezuela and attempted to strengthen trade ties with the European Union while frequently clashing with Russia over economic issues. Though Russia already controls significant parts of the Belarusian economy, most firms in Belarus are state-owned and, with a few key exceptions, Moscow does not hold majority ownership in these firms.
Belarus’ current economic position presents Russia with an opportunity to gain such ownership by purchasing strategic assets in exchange for issuing the loan that Minsk needs. Russia has already expressed its desire to increase its ownership in strategic Belarusian firms, such as potash producer Belaruskali and automobile manufacturer MAZ, two of Belarus’ biggest companies. Lukashenko has shown he is willing to part with his state’s ownership in certain enterprises, as he recently offered a stake in the Belarus MTS mobile operator for $1 billion, but that price is inflated and not likely to placate Russia. Since Belarus’ financial situation weakens Lukashenko’s bargaining position, Russia is likely to have more of a say on how such deals would go down at this time. This could be Russia’s chance to strengthen its grip on Belarus economically and therefore politically, solidifying Moscow’s ties to Minsk as it drifts further away from the West.
