An Economy As Broken as Democracy
After the fall of the Soviet Union, Belarus had retained its finely developed industrial base from its former inclusion with the Soviet Union. As crisis doomed on all the former Soviet republics, Belarus too faced deep economic downfalls. However, compared to others, Belarus adapted the most Soviet-style economy wherein most of the enterprises, services, and public utilities are tightly owned by the state. Initially, after the break-down of the Soviet Union in 1991, there were reforms to privatize the economy- by creating private property rights, encouraging private ownership and entrepreneurship, and privatizing state enterprises. However, by 1994, this effort was reversed as 80% of the industry became state-owned, foreign investments were non- existent and businesses had been renationalized. Moreover, 70%-75% of the GDP is accounted for by state entities and 75% of the banking sector consists of state-owned banks.
In 1994, after the first elections were held since the disintegration, President Alexander Lukashenko introduced the policy of ‘Market Socialism’ as a path for Belarus. With this, control of the administration over price as well as currency exchanges was also introduced. The state’s rights to intervene in the workings of business enterprises were also expanded.
Russia, Belarus’s fellow EAEU (Eurasian Economic Union) member, has been exporting oil and gas to Belarus at a subsidized rate. Belarus in turn refines this energy and sells it at market price. This is either used for domestic consumption or re-exported which finally accounts for about 10% of the GDP. Moreover, other exports of Belarus are mostly directed towards Russia and in 2012, 40% of the country’s export trade had Russian involvement. The dependency on Russia has been at an all-time high for Belarus in terms of its energy needs and economic growth in general, making Russia its largest trading partner so far. Due to unfavorable investment and financial climate, in the past few years non- Russian foreign investment in Belarus has been barely existent.
In the year 2011, the country was hit by a financial crisis that resulted in the devaluation of the Belarusian Ruble by three-folds. The most prominent reason leading to the crisis, was the increase of average salaries by $500 per month by the government, right before the 2010 Presidential elections. Other reasons had to do with the state’s tight control over the economy, having a budget deficit, and a lower than inflation discount rate. The economy was deeply affected as inflation rose to 108.7%, average salary shrunk to $330 in May 2011 from what was $530 in December 2010, then reached $436 in May 2012. Interest rates of several banks reached 120% in November 2011, whereas the refinancing rate fell to 32% in June 2012. The crisis in turn led to the triggering of around 40% devaluation of the Belarusian ruble in mid-December 2014.
Presently, Belarus is yet again facing a political crisis that is very well leading to an economic one. As widespread protests cover the roads of Belarus to speak against President Lukashenka’s ‘win’ in the 2020 Presidential elections, people are also starting to line up to withdraw and buy foreign currency. This is due to concerns that the current administration will not able to manage the country's economy and worst - lead to its doom. A shortage of US dollars and euros have been seen in ATMs and banks in many cities. The Belarusian ruble has been devalued by 11% since mid-June and is now at a historic low of 2.58 per $1 (as reported on September 22).
Demand for foreign currency has now increased five folds in ATMs, thus going above the normal supply rates. Due to the distrust of people over the government and Lukashenka's words, they expect the economy to get worse and hence are hoarding foreign currency. However, some banks are selling foreign currency at higher rates. People seeking to buy dollars on the western border with Poland are having to pay 10% above the official rate. Some places are also posing limitations in the amount of foreign currency that can be bought.
Another consequence of the current political unrest is the exiting of workers from some of the country's largest companies - many state-owned, to show solidarity with the protestors. However, an extended strike of workers in these enterprises can bring a grave economic crisis for the country as operations and production will remain halted, and budget revenues jeopardized. Belarusian export revenues would suffer and thereby ultimately the Belarusian ruble. Inadequacies of the central bank with regards to its reserves to defend the domestic currency has been reported by economists. It is predicted that the rubble can weaken up to 20% by the end of this year due to prolonged political unrest. But apart from this, the national currency is also suffering as more than 50% of corporate loans are denominated in foreign currencies (as reported by the IIF). This is due to Belarusian firms fearing a sudden increase in their debt levels. However, if President Lukashenka decides to repeat his mistake of increasing salaries, the situation can be turned into a proper and much bigger crisis for the country.
An economic system that is known to be the last Soviet-era style driven, the large state-owned industrial and agricultural economy, with heavy reliance on Russia has proved time and again to be inefficient as well as dated. Belarus's dependency on Russia for its subsidized energy requirements is being questioned as President Vladimir Putin ordered a phasing out of the process by the year 2024. This has been a way for Russia to exert political and economic pressure and to make the union tighter between both countries. The opposition has called for withdrawing from the Eurasian Economic Union, a single market with Russia and other ex-Soviet states.
Even before the start of the ongoing Covid-19 pandemic, Belarus was on a decline in terms of economic growth. But now, with the situation of a health crisis, the widespread protests and political unrest, the growth of the economy is set to contract by many percentage points. Due to the onset of Covid-19 and temporary oil blockade to Belarus, the World Bank reported that the country's economy was already set to go on a 2% decline.
While the pandemic has led to unpredictable times for the whole world, the political unrest in Belarus has been an ongoing issue due to the 26-year tenure of President Alexander Lukashenko and his alleged rigging of elections. This adds to the hardships of the people and the country overall. Economically, reforms have been a long- time need for Belarus. And so, modernization of the system can be an important aspect to take the economy on a favorable path for the future. The protests of August 2020, where people were even willing to lose their jobs to show solidarity, certainly show that they have been tired of the administration for long enough. These matters need to be addressed - internally, internationally, and immediately. As the negative connotations continue to pile on, making the situation uncontrollable and adding to the people’s sufferings, the government needs to shift its sole focus from holding on to power, and also keep in mind the larger issues of the Belarus’s internal as well as geo- political concerns. More importantly, it needs to act foremost on catering to its health and economic crisis.
This article is part of our Special Report on the crisis in Belarus. You can view the complete catalog of articles on this subject here.
Views expressed are solely those of the author.
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The author is a student of the Indian Institute of Governance and Leadership, and part of the National Team UN75 Initiative - CYL at United Nations.