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Zombie EconomyThe recession has pulled the curtain back on Belarus’ unusual economic model as it limps along with cash injections from international organizations and Russia. On the face of it, the economic crisis could be going worse for Belarus.Although the country went through the same decline in production and currency pressures common to its neighbors, it is fairing better against the regional background. The banking system is not collapsing, as in Ukraine, nor is there double-digit economic decline, as in Lithuania and Latvia, nor even waves of layoffs as in Russia – all aspects that the Belarusian government’s propaganda machine will not fail to exploit. Yet, it has become obvious to official Belarus and ordinary citizens that the crisis marks a turning point not only for the economy but for politics as well. Already, economic pressures stemming from changed global financial conditions have led to previously unthinkable events such as a loan from the International Monetary Fund, talk of liberalization and market reform, devaluation of the ruble, and even the possibility of a political thaw between the nation’s estranged leadership and the European Union. Today, Belarus seems to be a strange mix of a relatively benign economic climate and a noticeably changed political one. NEW MODEL ECONOMY To understand the country’s path through the crisis and imagine its probable futures it is important to remember just how unusual the Belarusian economic model is, once proudly described by President Alyaksandr Lukashenka as the Belarusian Economic Miracle. The model was inherited from the Soviet planned system and little has changed since then. Unlike those of its neighbors, Belarus’s economy is almost entirely state-owned, with only a thin layer of private enterprise, mostly in the service sector. The bulk of the country’s GDP comes from a handful of extremely large state-owned conglomerates organized in a vertical hierarchy ultimately managed by the president himself. The Minsk tractor and truck factories, Hrodna and Homel chemical producers, Mahileu agricultural equipment maker, and most importantly the Mazyr and Navapolatsk oil refineries represent an industrial complex built from the 1940s to the 1970s as a Soviet version of “offshore” manufacturing – where raw materials and parts arrive from afar to be sent back in the form of finished goods or refined chemicals. All that industrial might was designed for the vast economic space of the USSR and the Warsaw pact countries. It cannot, under any circumstances, survive by relying solely on the domestic market. The heavy reliance on foreign markets – exports amount to over 60 percent of GDP – puts Belarus among the top 10 most trade-dependent economies in the world, alongside such export kings as Singapore. Like Singapore, Belarus also relies heavily on imports, with a similarly high ratio of imports to GDP. Unlike the Asian trade hub, however, the Belarusian industrial complex lacks both savvy management and a technological edge, not to mention being hopelessly outdated. But it employs 4 million Belarusians and must be kept running at the risk of a political backlash like the one that brought Lukashenka to power in 1994. Lukashenka was elected with a mandate of keeping the system running, and in this respect he fulfilled his mandate. This was possible due to his ability to preserve a deep discount on Russian oil and gas, which are used domestically to power enterprises and heat Belarusian homes or are turned into diesel and gasoline for supplies to Europe. Before the global slump, Belarus was able to export over 5 billion euros in fuel per year, sold at world prices, while buying the raw crude at 30 percent to 50 percent below the market price, amounting to a giant subsidy from its eastern neighbor. Any economy would become a miracle if it were to receive a “bailout” that amounted to 20 percent of its GDP. But even with that subsidy the model was already showing signs of distress well before the financial crisis, especially after New Year’s Eve 2006, when Russia began implementing a program to gradually eliminate the fuel discount. The economy moved on, however, at an impressive rate of growth, thanks to peak prices for its petroleum exports and peak demand for manufactured goods from the Russian market, which itself was experiencing an oil fueled boom. Belarusian factories were working at full capacity in response to mounting orders from the East and also increased production of diesel fuel for purchasers in the U.K. and continental Europe. A LONG-RUNNING CREDIT CRUNCH The main problem at that time was the increasingly pressing need to find financing to keep the pipeline economy running. The Belarusian import-export model is so inefficient that it was losing money even with the subsidy, so that the gap between exports and imports grew to over 10 percent of GDP. In 2007, at the peak of the boom, the trade deficit exceeded $2 billion, which the state had to finance from abroad. Initially, financing was obtained from British and Swiss banks, who, in the days of global low returns on investment, were willing to provide over $3 billion in short-term financing for banks and enterprises despite Belarus’ very low B credit rating. Belarusian importers received even greater loan amounts from foreign companies in the form of extending payment terms or straight cash. But even that was not enough to cover the growing gap, and the government started to look for funds by selling state-owned assets, beginning with the pipeline operator Beltransgas. The mounting problems were known to officials but hidden from the population. Factories ran at full capacity, cash from oil exports was flowing in, and proceeds from export tariffs plumped the state budget. The funding problem was being addressed one day at a time – by measures such as asking Russia for a $1.5 billion credit in 2007. The global downturn brought matters to a head. First, the sources of foreign revenue shrank as prices for oil products and demand in Russia both fell dramatically during the second half of 2008. Belarusian exports peaked at about $3 billion a month in June 2008, and then started to plummet, dropping to $1.6 billion this February. Imports fell too, but they proved less flexible because a lot of the imported energy is used domestically to produce heat and basic necessities. This accelerated the pace of the rising trade deficit, which reached $4 billion in 2008 and showed no sign of slowing in the first two months of 2009. Meanwhile, production has fallen as both prices and demand have decreased. GDP fell in the first quarter of 2009 while the trade deficit – and thus the need for financing – continued to increase. This brought the government to again seek Russian support, but it was only partially available. The $2.5 billion IMF credit line was no less timely than it was unexpected by both domestic and external observers, coming at a time when foreign currency reserves were dropping by a quarter and the currency was devalued. Even more important, the mountain of short-term debt under the Belarusian import-export enterprise exploded together with the global liquidity crisis. Lending to Belarusian borrowers was looking like another form of subprime credit and it dried up fast. Also, buyers of Belarusian exports began to delay payment while sellers of imported components were demanding prepayment – a phenomenon known as the liquidity squeeze, when a shortage of cash forces a decrease in production. TIME TO FIX THE SYSTEM The global crisis has forced out into the open things that were percolating under the surface even during the boom times. Industrial output is down, the trade deficit up, foreign financing squeezed. The government had to accept the IMF loan, look for more Russian credit, and seek friendlier political terms with Europe. The problems are exposed even to the economically oblivious population. The Belarusian model is in obvious need of repair. Hopes that such repair is immediately forthcoming, however, would be naïve. For a decade and a half Lukashenka’s smart political management, fending off all predictions of imminent collapse, has kept the Belarusian model functioning in the same space that was allotted to it by Soviet central planners: as an assembly line attachment to the Russian economy. And the Russian economy, while weaker with oil at $50 per barrel, is still far from going into free fall. With his knack of manipulating the Russian sense of geopolitical insecurity to obtain tangible economic benefits, the Belarusian leader can still harbor reasonable hope of weathering the region-wide recession. Also, his subjects have traditionally expressed much greater sensitivity to the relative rather than absolute level of living, and the plight of Ukraine, Latvia, Lithuania, and even Russia offers rich material for comparative propaganda. Similarly, the IMF may learn at first hand the Belarusian president’s outstanding ability to avoid delivery on promises and conditions. Secretly, he must be hoping for a global recovery and a return to more favorable trading and financing conditions for the company whose CEO he has been with impressive success since 1994: Belarus, Inc. The fact that that firm is loss-making and outdated does not in itself imply its imminent bankruptcy – the financial crisis is producing similar “zombie companies” getting by on subsidies and cheap credit in the West, with the American auto industry being a prime example. Similar precedents can also be seen during the long Japanese recession of the 1990s. In the longer run, one hopes the crisis has made a sufficient dent to warrant a gradual integration of the Belarusian economy into the global one on more open, market-friendly terms. This observer’s personal forecast is that the country will now move closer toward welcoming foreign investment, creating private or mixed-capital companies, and begin an uneasy, convoluted but ultimately unavoidable path toward liberalization and integration – as did its fellow export-import based economy, Singapore, five decades ago. This would fall far short of the standards set by the Central European countries in the 1990s, and very far from their political achievements, but it offers hope that this is at least Churchill’s “end of the beginning” for Europe’s last dictatorship. Siarhiej Karol is a U.S.-based financial executive This article appeared in Belarusian Review, Vol. 21, No. 2 --------------------------------------------- Copyright 2009 Belarusian Review All rights reserved. belarusianreview@hotmailcom
Siarhej Karol
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Belarusian Culture
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Contents
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Thoughts and Observations
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