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14 I Companies & Markets bne September 2022
However, the sanctions on machinery exports to Belarus have long-reaching effects on the economy.
An official from the state development bank recently admitted in an interview on state TV that Belarus’ tractor production, a flagship industry for the regime, is facing major delays in production due to problems with payments, supply lines and finding buyers. While a tractor was previously assembled in 90 days it now takes up to six months according to the official.
Due to this, the state development bank had begun lending money to the country’s mechanical engineering industry to support its production.
At the same time, Belarus’ only promising sector, the IT sector, is stagnating as Belarusian IT companies are unable to close new deals for several reasons: Belarusian banks disconnected from SWIFT; Western companies don’t want to get involved with Belarusian companies; and, the qualified workforce is leaving the country due to political repressions. bne IntelliNews reported on this problem in July in two separate articles (Part I and Part II).
Trade balance
After February 24, the Belarusian ruble plummeted against the US dollar. On June 11 it reached its lowest point against the US dollar, having decreased by 26% compared to its exchange rate on February 19.
On July 7, the Belarusian ruble bounced back, and currently has a higher exchange rate to the US dollar than it did before February 24. While this increase could be the result of undisclosed financial operations conducted by the Belarusian National Bank, a large part of it most likely pertains to Belarus’ managing to redirect its supply chains during this year.
Belarus’ response to the Western sanctions was the rapid implementation of an import substitution programme, which is coordinated with Russia. It also implemented a number of lending and forced rehabilitation programmes for companies facing bankruptcy.
As a result of being disconnected from SWIFT, lower domestic demand due to economic stagnation and this import substi- tution programme, Belarus is also decreasing its imports, which improves the country’s trade balance.
According to a recent report by the Eurasian Development Bank, Belarus’ exports decreased by 30% in the first half of 2022. The decrease peaked in April with a 22.9% year-on-year decrease, before slowly recovering in June, when exports decreased by only 0.4% y/y.
However, imports are decreasing faster than exports. While Belarus’ trade deficit was $1.1bn in January-June 2021, it was estimated to be $0.05bn in January-June 2022.
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It’s worth keeping in mind that large and fast changes in the structure of imports also have other effects besides improving the trade balance.
The import substitution programme’s aim to source more components and products domestically means that many small and medium sized companies will need to rapidly scale up their production to meet the demand from large state owned manufacturers.
This will not only mean production delays (such as in the case of the tractors) but it also means that many more people rapidly need to be employed in these industries. While decreasing unemployment is also good, such fast changes will certainly push up salaries and the inflationary pressure in the economy.
Belarus' inflation in June has been estimated at 15.9% y/y, and the rapid scale-up of domestic production accompanied by the high demand for domestic products can be expected to push up the inflationary pressure even more.
Expectations
So, what is the current outlook for Belarus' export sector? Firstly, a few things must be presupposed: current Western sanctions remain, are increased and/or tightened while Belarus continues to implement its import-substitution programme with Russia, while at the same time the IT sector stagnates, and qualified workforce continues to leave the country.
All this considered, Belarus’ import-substitution programme will dampen some of the negative effects from the Western sanctions regime. As a result of increased trade with Russia, the Belarusian ruble may remain on
a stable level against western currencies but fall against the Russian ruble as the trade balance will most likely be tilted in Russia’s favour.
Many more Belarusian companies will have to take loans from the state or be transferred to state control so as not
to declare bankruptcy. Belarus’ mechanical engineering industry, potash producers, petroleum refineries and most recently the Miory Steel Rolling Mill are all standing in line for massive state subsidies or state takeovers.
Belarus needs to find new business partners that can sell its companies the components they need for their production. Belarus needs to find new transit routes for its commodities to increase the inflow of foreign currency to its state coffers. Qualified workforce needs to stop leaving Belarus so that its IT sector doesn’t stagnate.
Unless Belarus manages to fix these problems, the economy will merely stagnate while inflation levels continue to rise.