Belarus Currency Crisis: Is It Over Or Just Beginning?

Publication: Eurasia Daily Monitor Volume: 8 Issue: 214

National Bank of Belarus (Source:

On October 20, the National Bank of Belarus decided to dispense with a system of different exchange rates by restoring a single rate and in the process devaluing the Belarusian ruble (BLR or Zaichik) from 4,930 to the dollar to 8,680 to the dollar, a move that had been widely predicted, though experts were divided as to whether this was a stopgap measure or the beginning of a more responsible economic policy on the part of the authorities.

The devaluation of 189 percent reduced salaries, which had been hiked prior to the presidential elections last December, led to a monthly average of $260. The chair of the National Bank, Nadezhda Ermakova, expressed her belief that the move would strengthen the currency and lead to a rise in the circulation of foreign currency since the two factors impeding it have now been removed, namely the need to sell foreign currency at levels lower than market rates and taxation of the difference between market and official rates. In theory, the currency level is now determined by supply and demand, with the National Bank standing on the sidelines. Currency transactions, Ermakova maintained, could now be conducted freely, although those buying foreign currency would be required to show identification (, October 24-30).

Earlier in 2011, when the currency was also devalued, the National Bank tried to circumvent a crisis by simply printing money, but this only produced high inflation rates that are expected to reach 118 percent over the year. In 2008-2010, the exchange rates could be maintained with the help of external loans from Russia and the International Monetary Fund, but these funds had dried up by 2011, and the single source of revenue was the Eurobond sale last January. The government now seeks to keep inflation to around 20 percent in 2012. Bank officials also believe that the government will need to freeze wage increases and revisit the issue of supporting weak state enterprises and public projects (, October 21). In short, the Lukashenka experiment of maintaining a state-run economy based on subsidies and favored treatment from Russia would appear to be over.

Several questions arise. First, why did the bank take so long to introduce a single rate? Second, will the exchange rate now stabilize or is it likely to see further wild fluctuations in one direction or another? Third, will the introduction of a single currency rate really ensure economic revival or even survival – keeping in mind the recent doomsday scenarios offered by Western economic experts?

Ermakova commented on the need to prepare psychologically for such a move, the focus on financing state programs, and the more obvious decision to wait and see how the April experiment of multiple rates might work. Success also depended on the government obtaining more loans to bolster the foreign currency reserves, as they had become practically depleted. Belarus is reliant on the remainder of a $3 billion loan from the Eurasian Economic Community, $1 billion from Russia’s Sberbank, and some $2.5 billion for the sale of the remaining 50 percent share of Beltransgaz to Russia’s Gazprom, which is anticipated to take place in November. Meanwhile, the general public will suffer the consequences of the salary reduction, which according to analyst Uladzimir Tarasou, is a consequence of the government seeking to apply the minimum salaries on which the population can survive (, October 24-30).

Economic analysts’ prognoses on the future rate are mixed. Syarhey Chaly assessed the devaluation as a positive move as the rates are now determined by market factors rather than the National Bank. The rate of devaluation was in fact more than was needed for macro-economic equilibrium and now exports are rising and currency revenues increasing. The ruble is likely to strengthen. Barys Zhaliba also sees the development as positive, but believes that the potentially negative consequences could be price rises for gas and imported medicines. Much now depends, in his view, on the anticipated incoming loans and revenue and whether they materialize (, October 21).

Irina Krylovich maintains that the exchange rate could fall to 8,000 BYR by the New Year, noting the importance the Eurasian Economic Community loan, the way the rates of exchange are formed on the Stock Exchange, and the results of the forthcoming meeting between Presidents Alyaksandr Lukashenka and Dmitry Medvedev (in Moscow in the second half of November). Leanid Zayko of Strategiya considers that the future is highly unstable and that in uncertain situations, people tend to buy foreign currency. Leanid Zlatnikau, another well-known economist, considers that the rate could rise to 12,000 BYR to the dollar if loans are not forthcoming, but could drop to only 7,500 if they arrive as anticipated (Belorusskaya Delovaya Gazeta, October 28).

Mikhail Kavaliou, Dean of the Faculty of Economics at the Belarusian State University, offers another evaluation. He advocates a strict monetarist policy that is not sidelined by a focus on increasing imports, which, along with consumer loans, could lead to further devaluations. He also does not exclude the possibility that the National Bank could sell more gold reserves to stabilize the exchange rates and stresses that printing of money should end (Zvyazda, November 1). Most analysts thus appear to accept that the second devaluation of the year was necessary and that a single exchange rate is to be preferred to the chaotic situation that prevailed over the summer

Another factor to be considered is the new prices for imports of Russian gas that need to be established for 2012 and subsequent years as the current agreement ends on December 31. The ideal for the Belarusian government would be a reduction of the price to $180 per thousand cubic meters (tcm), a decrease of around 25 percent. Belarus would also like to see the price for Russian oil dropped from around $40 to $45 per ton to around $20. These prices would allow for an accumulation of foreign currency reserves to as much as $6 billion, as compared to current holdings of $4.7 billion and the government’s ideal target of $10 billion. This accumulation would assist with the rise in payments of external debt by 2013 (, October 28). It seems unlikely, however, that Moscow would be so accommodating without some returns, such as the sale of coveted Belarusian companies at favorable prices. Russia may also soon have the Nord Stream pipeline as an option to supply gas to EU countries that could circumvent Belarus altogether –perhaps even eliminating the need to purchase the remainder of Beltransgaz (Belarusskiy Partizan, October 28).

Thus, at present, there are far too many imponderables to state unequivocally that Belarus can overcome its financial predicament. The situation is grave, but not yet terminal. The old system has essentially fallen apart but it is unclear with what it will be replaced, or whether the government will choose the path recommended by economic advisers at home and abroad, namely a more stringent policy that could bring considerable hardships to a population that has already suffered a very difficult year.