How the ‘Model’ of Lukashenka Decayed

Sasha's 3% has run out of all resources.

Denis Lavnikovich writes on the Delovaya Stolitsa website that not only the opposition but also the economy is against Sasha 3%.

"There are three factors why Belarusians have been joining spontaneous protests since May and support any alternative candidates. Firstly, they are sick and tired of the irreplaceable ruler with his boorish behaviour. Secondly, they have fear for their lives because of the extreme morbidity of Covid-19 (the ruler rejects the coronavirus). Thirdly, the collapse of the economy, as well as people's income. It's the first time before the elections when Lukashenka has no financial reserve to raise salaries and pensions and mollify the electorate," said Sviatlana Hrechulina in her commentary to DS.

Polls conducted by the media show that Lukashenka would win only a few per cent at free elections.

For the first time, not only dissatisfaction with mass and poorly concealed deaths from the coronavirus but also the collapse of the economy stand behind a record-high growth in protest activity of Belarusians. So far, the collapse of the economy shows as rising prices and falling incomes, as well as huge hidden unemployment. However, economists report the enormous decline in income in the first half of the year and the operation of the economy by inertia.

Together with Russia

Over the past 10 years, the Belarusian economy has stagnated together with the Russian one. The countries have a statistical similarity: since 2011 the average GDP growth rate in Russia has amounted to 1.5%, in Belarus - 1.1%. A five-year record-high for Belarus was GDP growth of 3% in 2018, while for Russia - of 2.3% at the same time.

Ukraine's northern neighbour is a country with almost no natural resources, except for potash salt. However, exports make up more than half of the Belarusian GDP. Russia is an amazing resource of Belarus. Until recently, this resource allowed the country with insignificant 1.2 million tons per year of its oil production to enter the world's top 30 exporters of oil products.

Belarus has been buying in Russian oil for decades at great discounts or without export duties, refining it at its two powerful refineries and selling it. The chemical industry and mineral products (these categories include everything that Belarus produces from oil) account for over 40% of Belarusian exports. Another 17% is food (95% of exports go to Russia).

However, Belarusian foreign debt is growing rapidly: since 2007, it has grown three and a half times, from less than 10% to 34% of GDP. According to Moody's, the country's credit rating has also declined from B1 to B3 (both are high-risk speculative categories, but the latter case is higher). In 2015 it dropped to Caa1 (the next category is already pre-default). Fitch and S&P ratings of Belarus are also at B level.

Over the past five years, the money was spent on the modernization of state enterprises (85% of the Belarusian industry). The program has failed. Nevertheless, the Belarusian government still believes in the controlled economy and preserves the collective farm system in the agro-industrial complex. As a result, unlike the state debt, productivity and budget revenues have not been growing all these years.

The export of potash fertilizers (Belarus occupies a quarter of the world market of potassium chloride) and oil products, produced from duty-free Russian oil contributed to the major hard currency inflow. Then comes the exports of engineering products, meat and dairy products to Russia and other post-Soviet countries.

However, by the beginning of this year, Minsk failed to reach an agreement with Moscow on key economic issues (primarily on oil). First, the Russian Federation suspended duty-free oil supplies, which caused the dissatisfaction of Lukashenka. Later, world prices for oil collapsed, and, accordingly, for oil products. At that, their consumption sharply reduced. The huge Belarusian oil refineries, the "budget breadwinners", became unprofitable in no time.

China, India and Brazil were the largest consumers of Belarusian potassium chloride; other countries also bought it, but in smaller amounts. However, the contract was concluded only with China at prices 20% lower than those of last year. The rest have refused to buy it so far because of the coronacrisis.

At the same time, Russia rushed to protect its producers. To do this, it closes the market for Belarusian dairy and meat. The same happens to industrial products: Russians no longer want to let the country-competitor to its country. Europe does not buy Belarusian equipment, which is still produced according to 1980s technologies.

By April it became clear that Lukashenka was entering the presidential election under the conditions of the Belarusian ruble collapse and the large-scale economic crisis. The fall of the Russian currency aggravated the situation; the majority of Belarusian enterprises work for the Russian market, selling their products for rubles.

This happened in December 2014: the Russian ruble dropped and the national currency immediately collapsed in Belarus. In 2014-2015, the Belarusian ruble has almost halved following the Russian ruble. 2020 also began with a 30% drop in the Belarusian currency amid oil prices decline. Thus, an attribute of Minsk city landscape is queues at exchange offices: people buy up dollars and euros.

However, economic relations between Russia and Belarus are not reduced to trade. Direct and hidden subsidies made from 2005 to 2015 come first. Russia has invested about $106 billion in the Belarusian economy, according to IMF calculations. In different years, Russian support accounted for 11 to 27% of Belarusian GDP.

Belarus is also Russia's largest debtor on interstate loans: as of 1 June 2020, it makes up almost $8 billion.

The "Belarusian Model" of Building a Void

In 2002-2008, when the economy of Belarus had a stable and rapid growth, Lukashenka and his entourage enjoyed speculating about the "unique economic model" created in the country: the industry and the agro-industrial complex remained under full state control and in state ownership, with the controlled system preserved.

However, when the Belarusian ruble dropped by 30% in 2009, having depreciated the savings of the country's citizens, it became obvious that the key to the success of the "Belarusian model" was the support from the Russian Federation, mainly with very cheap hydrocarbons and other subsidies. Lukashenka paid for it with the political union, military cooperation (the Belarusian army was about to fall under the actual control of the Russian General Staff) and endless promises of "close integration" up to the accession of Belarus to Russia.

Due to constant devaluations, Lukashenka has always broken his promise, made back in 2010, to raise the average salary in the country to $500 per month. As a result, it turned into a meme - "papitzot"(500$ salary) - symbolizing the failure of the Belarusian economic model. The country's authorities found themselves in a vicious circle: wages were raised (by a presidential decree), then the exchange rate dropped, and Lukashenka re-promised to raise wages to $500.

In 2020, the Belarusian economy faced new problems even before the Covid-19 pandemic. At first, Belarus had to start buying Russian oil at world prices because of the Russian oil tax manoeuvre. Minsk estimates its losses in 2019-2020 due to the manoeuvre at $800 million - a little under 1% of annual GDP.

In the first quarter of 2020, Belarusian GDP fell by 0.3%, while export revenues fell by 16% year-on-year. Following the Russian ruble, the Belarusian one depreciated by almost 19% against the dollar. This is a serious problem for Belarus: almost half of the corporate loans are in foreign currency, the report of the World Bank (WB) noted in May.

Virus vs. Elections

Despite all the problems, the World Bank forecasted the Belarusian economy several other years of stagnation even before the coronary crisis and saw no reason for a steep decline. However, the "virus attack" has drastically worsened the situation. Lukashenka keeps pretending that no pandemic exists. However, it did not work. According to the new assessment of the World Bank, in 2020 Belarus is expecting the greatest fall in 25 years: by at least 4% after growth of 1.2% in 2019. Other forecasts are even worse: the Fitch agency - minus 5%, the IMF - minus 6%.

The Belarusian economy is more dependent on external demand than Europe, the U.S. or Russia, while demand for Belarusian products has dropped due to the crisis. As a result, industrial production in Belarus fell by 7.1% year-on-year in April 2020. This is only according to official data (Belarusians usually do not trust it). The greatest decline - by 32.3% - is observed in the production of coke and petroleum products.

At the same time, many enterprises work mainly "for a warehouse". This is a feature of the controlled system: the plants are ordered to produce products, even if they are not sold.

The enterprises keep working because they perform a social function: workers receive at least some salary, even at highly unprofitable enterprises subsidized by the state budget.

Official unemployment is very low, about 4.2%. But there is huge hidden unemployment: people do not register at the labour exchange. The reason is simple: the unemployment allowance equals to $11, you have to attend unpaid public works. The allowance itself is paid for no more than six months and the person must agree to any job offered.

As for the private sector, the BEROC survey shows that 59% of small and medium businesses have faced a decline in demand in the domestic market amidst the pandemic. Revenue fell to 64% of companies.

Introduction of no quarantine has become the only serious measure of state support for business in Belarus. The government adopted one modest anti-crisis package of supporting measures: provided rental installments for those, eased the requirements for banks, reduced the key rate. There was a minimum for business, nothing for people.

Today, the Belarusian authorities have no reserve fund before the presidential elections. Borrowing on foreign markets under the Belarusian credit rating is very expensive (6-7% in foreign currency). The IMF and EBRD do not want to lend money for political reasons (persecution and imprisonment of political activists), while Lukashenka cannot borrow from Russia because of contentious relationships with Putin. Even relations with China have cooled down after the failure of several Chinese investment projects in Belarus.