Page 59 - BNE_magazine_10_2020

bne October 2020
The Belarusian economy is currently in decline due to structural deficiencies, which are being exacerbated by the coronavirus (COVID-19) pandemic, the civil unrest, and reputational decline in international credit markets. State- owned enterprises, especially in the industrial sector, face long- standing productivity issues arising from economic policies that prioritise full employment and wage increases, which have been sustained through preferential lending by state-owned banks – with the central bank subsidising the interest rate differential. Distorted markets, restructuring disincentives, and subpar asset quality, combined with the corresponding currency instability and high levels of foreign debt, have been the result.
The integration of Belarus into a Rublezone would provide a more robust currency; outsource and improve macroeconomic management; temporarily eliminate dysfunctions within the banking sector; and enable the financial transfers implicit in
a currency union.
A banking union would also be likely, not least because Russian banks occupy around a 30% share in the Belarusian market.
Joint liability, secured by the strongest anchor of the monetary union, is also an important part of such a set-up. In the euro area, it has taken decades of slow progress. With regard to
the potential Rublezone, Russia already holds about 50% of Belarus' national debt.
And it doesn't have to stop there. There are other slower moving steps towards integration that could be achieved over the next six-month, nine-month and two-year periods.
The Belarusian ruble (BYN) has so far devalued by just under 20%, compared with 30-60% in previous crises. Time is on Russia’s side, as the longer it waits with its union the more pressure Lukashenko will be under. Hard currency reserves have fallen by $1.4bn in just the last month from $8.8bn to $7.4bn as of September 1, according to the National Bank of the Republic of Belarus (NBRB). And monetary integration certainly needs preparation.
But rapid monetary integration would quickly contribute to economic stabilisation. And it remains unclear how the West should respond to a deepening economic integration between Belarus and Russia. Will it impose sanctions? Can it impose sanctions? After all, there is a legal basis to further integration between the two countries that goes back over two decades.
From an investor’s point of view countries whose financial markets are characterised by higher risk premiums tend to benefit from participation in currency unions; Belarus will be no different. Yet, as the convergence in trades in government bonds between southern European states and Germany (the anchor of the euro area) in the 1990s and 2000s showed, monetary integration and positive headline data can produce a “convergence fantasy” into which investors are drawn. Such trading strategies may include some elements of moral hazard, but participation in a Rublezone would push the Belarus
Opinion 59 country risk premiums much closer to the much lower Russian
levels and make borrowing a lot cheaper for Minsk.
In this scenario Belarus could avoid the classic shock therapy thanks to its increased borrowing power. That would allow for a more cautious approach to economic reform in which ownership changes and partial liberalisation are phased and better controlled. That should prevent the sudden emergence of a domestic oligarchy, which has so distorted the other two economies in the neighbourhood of Russia and Ukraine. In exchange, Moscow would gain oversight and control of the these transfers, thereby deepening its geostrategic footprint. With Belarus internationally isolated thanks to Lukashenko’s presence, it would also stall, and maybe reverse, the tentative diversification of foreign, trade and investment relations that has taken place over the past 5-10 years. New economic opportunities will present themselves in due course, however, not least through partial privatisation, which would effectively amount to an open call for Russian capital.
The limits of band-aids and steroids
But even if a well-thought-out Rublezone was set up, even in the short to medium term the economy is going to suffer a lot of pain. High quality foreign direct investment from the EU is very likely to dry up. EU sanctions targeting politically exposed individuals in state-owned companies will likely precipitate legal reshuffling by investors. Investors engaged in joint ventures with state-owned enterprises may face contract revisions, especially if
“Participation in a Rublezone would push the Belarus country risk premiums much closer to the much lower Russian levels and make borrowing a lot cheaper for Minsk so Belarus could avoid the classic shock therapy”
Russian corporates or state-owned enterprises take ownership of privatised shares. The industrial sector faces elevated risks in this regard. Another layer of complexity will be added for Western investors if Russian buyers are on US/EU sanctions lists.
Elsewhere, the jewel in the cumbersome crown of the Belarusian economy – the IT sector – is being chipped out by the king himself. Amid Lukashenko’s crackdown on the opposition, some 300 CEOs of IT companies have threatened to shift their operations elsewhere. This is not an empty threat: twelve companies are already in the process of packing their bags; 59 have already moved staff; and another 112 are actively examining options.
Beyond the immediate impact, Belarus would lose its attractiveness as a gateway to the Russian market and/or the
www.bne.eu