Bankruptcy and privatisation: the end of Lukashenka’s Belarus?


A failed economic model and falling transit subsidies from Russia have propelled the Belarusian economy to the brink. The harsh reality of stopgap sales and emergency loans that awaits will only delay the inevitable, writes David Marples.

David Marples
25 October 2011

Two prominent commentators on Belarus have recently predicted that the economy, once touted as one of the success stories among the post-Soviet states, is about to collapse. Are they correct? What does this mean for the future of the Lukashenka regime that has been in power since July 1994?

Skyrocketing inflation has sent President Lukashenka's approval ratings in precisely the opposite direction. According to a recent poll, just 21% of Belarusians rate the job he is doing. The sociologist who conducted the poll was arrested soon after the results were published. 

The two reports appeared on successive days. The first, by Anders Aslund of the Institute for International Economics, was published on the opposition website Charter 97. It comments on the lack of international currency reserves ($2.2 billion remaining on 1 October) and rampant inflation (80% in that same month). Aslund maintains that the main cause is the reduction of energy subsidies from Russia, which now comprise 7% of GDP compared to 15% previously. Neither Russia nor the West, in his view, is willing to help Belarus. Russian demands the privatisation of the most profitable companies, the free exchange of the Belarusian rouble, and liberation of prices. The West, meanwhile, wants nothing to do with the Lukashenka regime until all political prisoners are freed and pardoned; and the IMF wants to see a clear commitment to economic reforms before any further loans are forthcoming. The country, according to Aslund, is heading for default.

“In less than three years, the currency has declined by almost 400% against the dollar. In this same period, hard currency has been scarce, goods have disappeared from stores, and real wages have declined accordingly”

Writing in Belarus Digest, Siarhei Bohdan, a member of the Belarusian Popular Front, notes that actual reserves are even lower than previously thought, and constitute only $1.2 billion as the remainder has been borrowed from Belarusian banks, some of which may default if the funds are not returned. Essentially, he claims, “the country is on the verge of bankruptcy.” Not only are Lukashenka and the chair of the National Bank Nadzeya Yermakova unlikely to receive more loans from the IMF, but also Belarus will need to begin repayment next year of earlier loans from the IMF, Venezuela, and Russia. 

Like Aslund, Bohdan believes that the current economic crisis in Belarus is not a consequence of the global recession, as the authorities in Minsk like to point out, but is for the most part home-made. Lukashenka exploited the former Soviet system of subsidies in order to re-export Russian oil and “redistribute rents from reprocessing,” which allowed him to accumulate $6-7 billion in profits annually, thereby bringing about what the president likes to term his “economic miracle”.

Narrowing possibilities

Foreign lenders are clearly running out of patience with the stubborn regime of Lukashenka. In early October, Russian Prime Minister Putin outlined his vision of a new Eurasian Union by 2015, anticipating much tighter integration of the economies and currencies of Russia, Belarus, and Kazakhstan, which formed a new Customs Union at the beginning of the year. In June, through the Eurasian Economic Community, which is dominated by Russia, Lukashenka acquired a $3 billion loan, though only about a quarter of that amount was released initially. 

Belarus has devalued its currency by more than 50% since September, and by 23 October, it had established a single rate, rather than a system in which the official rate and the black market one fluctuated wildly. The result is a currency valued on 23 October 2011 at BR 8,660 to the dollar. On 24 May, the rate was BR 3,000, the result of the previous devaluation on 1 January 2009, when the official rate rose from BR 2,200 to BR 2,650, a move that had taken many residents by surprise (SB-Belarus’ Segodnya, 10 and 11 January 2009). Thus in less than three years, the currency has declined by almost 400% against the dollar. In this same period, hard currency has been scarce, goods have disappeared from stores, and real wages have declined accordingly. Without doubt, as Aslund notes, the wage rise of 50% ordered prior to the December 2010 elections, was a contributory factor to the current financial crisis. 

“The family silver will be [sold at] cut-price; a stopgap operation to amass funds rapidly for a beleaguered regime. While privatisation in itself may seem to be long overdue, most Belarusians are united in the wish not to become an economic colony of the Russian Federation.”

After those elections, the road to Europe was essentially closed. The travel ban on the president and the leading members of his administration, lifted in 2008, was re-imposed and expanded to some 160 persons. The new list contains those judges and lawyers who prosecuted political prisoners, which included the three presidential candidates sentenced to prison, Andrei Sannikau, Dzmitry Uss, and Mikalay Statkevich, and the Youth Front leader Dmitry Dashkevich, who was arrested the day before the elections took place (Uss has since been released). The United States, in turn, has targeted major companies such as Belnefttekhnim, and its subsidiaries in the towns of Lida and Polatsk, prompting angry responses from Belarusian leaders. Virtually the only major figure at liberty to travel to United States and address the UN, Foreign Minister Syarhey Martynau, has maintained that sanctions are unjust and undermine people’s right to choose their own leaders (telegraf.by, 28 September 2011). In fact, the European Union offered plenty of carrots in the shape of EU loans to Belarus to conduct free and fair elections, which to a limited extent were followed. But the crackdown on the days of 18-19 December and following months infuriated EU leaders, who lost interest in negotiating with Lukashenka. 

That left the relationship with Moscow as the main alternative for Belarus. Relations did in fact improve somewhat after a 9 December 2010 meeting between Russian president Dmitry Medvedev and Lukashenka in Moscow, but Russia has since exploited the weakness of its “Union partner” in Minsk. Lukashenka has abetted integration by suggesting that the troops of the Collective Security Treaty Organization, a body currently chaired by Belarus, might be used to intervene in domestic crises. The statement came following the terrorist attack at the Kastrichnitskaya metro station last April, for which two young men from Vitsebsk are currently on trial (Belarusian Telegraph Agency, 12 April 2011). However, although the president may be fearful of a domestic uprising, he has never been in favour of selling off his most profitable companies to the Russians. In the past he has successfully played off his potential partners, avoiding commitment in either direction. Today he has little choice. And the Russians have been quick to take advantage. In mid-October, a Belarusian delegation was in Moscow to finalise the sale—for $2.5 billion—of he remaining 50% of the transit company for Russian gas through Belarus, Beltranzgas. Finalisation of the sale is expected in November (Belarusian Telegraph Agency, 19 October 2011).

Selling the family silver

Such emergency measures, however distasteful to the president and many Belarusians, hardly signify impending default. Rather they constitute what several analysts have referred to as “selling the family silver.” In the absence of any further loans, the Belarusians could conceivably raise something in the region of $25 billion by privatising major companies such as the potash giant Belaruskali in Salihorsk, as well as its MAZ trucking company and the mobile phone enterprise MTS Belarus. The problem is that Belarus is unlikely to receive a fair price given its obvious anxiety to make quick sales. In particular, the president’s offer to sell his potash company for $30 billion (udf.by, 23 September 2011) seems unlikely to be fulfilled. In short, the family silver will be cut-price; a stopgap operation to amass funds rapidly for a beleaguered regime. But while privatisation in itself may seem to be long overdue, most Belarusians are united in the wish not to become an economic colony of the Russian Federation. At present, with the possible exception of China, it is exclusively Russian firms that are pursuing the Belarusian market. Integration with Russia, which has been a paper fiction during the Russia-Belarus Union, could thus become a reality if Russian oligarchs control the key sectors of Belarusian industry. 

On the other hand, that situation would surely suit a new Russian presidency under Vladimir Putin, who has always sought closer integration with both Belarus and Ukraine in particular. Belarus would survive economically, maintaining Lukashenka in power for the immediate future, but his popularity among the public—currently at all-time lower of 20.5% according to a recent poll (http://www.iiseps.org/ebullet11-3.html) — would likely fall further if, as expected, the sale is followed by wage freezes and more stringent financing at home. The consequences of the current trend, should it continue, would be a “lame duck president” clinging to power on the coat-tails of Russia and shunned by the West. It is a situation that will cause little consternation in the Kremlin, but reflects the sad failure of the Lukashenka administration to implement earlier reforms and the political, if not economic, bankruptcy of his policies. For the Belarusian public, it would constitute the end of the experiment started in 2004, one that was dependent on a social contract between the president and his “people”, namely restrictions of liberty but a guaranteed standard of living and lack of civil strife (see Janek Lasocki, Springtime for Lukashenka, OD Russia, 29 June 2011).

Unfortunately that contract was always based on false premises, namely that there was a viable economic policy in place. Clearly there wasn’t and now citizens of Belarus are facing the harsh reality of a state economy dependent for survival on foreign loans and stopgap measures that only delay the inevitable. 

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