The Republic of Belarus with a population of 9.7 million is enjoying its best economic performance over the last couple of years since independence in 1991 from the former Soviet Union. However, the key question is will this economic gain continue?
After obtaining independence, the Belarusian ruble collapsed in value relative to hard currencies as the economy for the most part remains in a flawed Soviet style command economic model. To illustrate the ridiculous exchange rate values: in year 1999, five million rubles was equivalent to 10 US-dollar (USD) and it continued to fall even with currency reform that came in and redenominated the ruble notes in year 2000. The major national issue in Belarus that is garnering the majority of attention is Belarus’ interest in reuniting with Russia of which a Treaty was drafted. One of the most important developments of the proposed merger is in the area of currencies where the Belarusian ruble would cease to exist and the Russian ruble would be the new currency for Belarus. The merger discussion has been stalled with no immediate plans to ratify this currency proposal.
Belarus’ attempt towards a free market economy from the communist state command control economy has not worked well as many of the old guard Belarusian citizens do indeed support state interference as state controls have returned to some degree. Although economic transition can be a challenge, other transition countries have achieved success from the painful economic and social reforms that are required to restructure the economy. The political leaders in Belarus would describe their country as a socialist democracy, although in reality, state interference is very prevalent with nationalization of private companies returning to the economic landscape.
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ECONOMY: improving but difficult conditions may again cloud on the horizon. The socialist Belarusian economy is similar today of its former communist command economy then under the rule of the Soviet Union. The supply of Russian energy is a necessity for Belarus to stay afloat hence it reliance on moving Belarus closer to the Russian Federation. Russia benefits from the use of military bases within Belarus, air space and an energy distribution network to Europe. Belarus has benefited greatly from receiving discounted energy from Russia and re-exporting at market prices. Over the last several years, windfall energy revenues has helped to fuel economic domestic growth within Belarus. However, this is set to change as Russia has demanded market prices for its oil & natural gas which is to be gradually implemented up until year 2011. In addition, Russia has also demanded changes to an export duty revenue sharing agreement which will result in less monies for Belarus from energy re-exports.
Belarus is strategically located between markets in Russia and Europe. Russia accounts for 36 percent of Belarus’s exports. In 2007, Belarus signed a natural gas contract with Russia’s Gazprom whereby Gazprom has agreed to buy 50 percent of the shares in Beltransgaz, the Belarusian pipeline network while Belarus has agreed to a five year contract for natural gas cash purchases. Exports also include machinery, transportation, equipment, chemicals and food products. Imports include fuel, oil & natural gas (re-export), raw materials, textiles and sugar. Belarus must focus to develop new industries and products that are in demand by foreign countries. Further, Belarus should create an environment where entrepreneurs can earn a fair market return for their investment. At present, the regulatory and tax situation is unfavorable for foreign investors, hence the reason for the low level of foreign direct investment.
Economic Statistics
Total GDP as measured by purchasing power parity stands at $81 billion USD (2006) with corresponding GDP/Capita at $7,800 USD. GDP at market prices stands at $28.56 billion USD (2006). GDP growth rates include year 2005 at a buoyant 9 percent of GDP due to favorable energy import pricing, year 2006 at 8.3 percent, year 2007 estimated at 5.5 percent, 2008 at 3.9 percent. Inflation quotes include year 1997 at 63 percent, 1998 at 182 percent, 1999 at 251 percent, early 2000 at 54 percent, December 2000 at 108 percent, October 2001 at 48 percent, year 2002 at 42.6 percent, 2004 at 18.1 percent, 2006 at 9.5 percent, year 2007 estimated at 11.4 percent, 2008 projected at 13.7 percent. The current account deficit came in at $511 million USD (2006), year 2005 was in surplus at 1.6 percent of GDP. Total external debt stands at $6.87 billion USD (January 2007). Gross international reserves are very low at $1.56 billion USD equivalent (May 2007). Near full employment. Major trading partner: Russia.
POSITIVE: potential of labour force, strategic location for Russian and their defense needs. CONCERN: low levels of foreign direct investment - challenging investment climate for foreign corporations, declining population rate, inadequate telecommunication system, infrastructure, net energy deficit.
CURRENCY: ISO Symbol ‘BYR’, Belarusian ruble. At time of review on June 4, 2007, the Belarusian ruble had an official exchange rate value of 2145.1 BYR to the US-dollar (USD) and/or 2893.3 BYR to 1 Euroland euro (EUR). Exchange rate follows that of a managed float in parallel markets up to year 2000, this format did not work well resulting in a massive devaluation. The Belarusian ruble is now under a crawling band exchange rate system targeting the Russian ruble as the nominal anchor currency. It should be noted that the currency framework for Belarus is highly regulated, currency controls in relation to exchange value. There are very few US-dollars in circulation within Belarus as the authorities have made it illegal to use the USD, currency substitution with the Russian ruble is prevalent.
CURRENCY HISTORY: stable to the USD over the last few years. The original Belarusian ruble (ISO Symbol ‘BYB’) came into circulation in May 1992 when it replaced the former Soviet Union ruble at an exchange rate of 1 BYB to 10 Soviet rubles. High inflation rates during the 1990’s destroyed the value of the former Belarusian ruble. On January 2000, the Belarusian ruble was redenominated at one ruble to 1000 old rubles. On December 2000, the ruble was valued a market rate of 1180 BYR to 1 USD. Historical official exchange rate quotes include: year 2006 at 2144 BYR to the USD, year 2005 at 2150, 2004 at 2160, 2003 at 2051, 2002 at 1790, June 2000 at 675, 1999 at 319, year 1998 at 107, official rate in 1997 at 31 rubles to 1 USD. Conversely, market exchange rates show a dramatically different picture including December 1999 at 730,000 BYR to 1 USD, January 1999 at 139,000, January 1998 at 31,000, year 1997 average at 26,000, December 1996 at 15,500, December 1995 at 11,500, December 1994 at 10,600, December 1993 at 699.
CURRENCY FORECAST: theoutlook for the Belarusian ruble remains vulnerable due to the change in the energy revenue framework with Russia which is expected to be completed by year 2011. Less subsidized energy imports from Russia will impact Belarus negatively. In the long term, the potential for outright dollarization with the Russian ruble may offer Belarus a viable option and possibly result in a greater standard of living for Belarusians. Russia and Belarus have had discussions for a common currency, but the concept seems to be moving cautiously towards a potential currency transition. The Russian ruble may ultimately may prevail after 2011 unless Belarus can fundamentally change its policies towards a free market approach similar to the West. That is, the country needs to attract foreign direct investment and provide for products & services in demand by the world. As a landlocked nation, Belarus may have no choice but to look to Russia for economic and energy security. Conversely, Belarus can provide Russia with strategic geography for their defense needs. The Russian ruble is becoming a much sounder currency within the global market place and looking more like a currency that will work well for Belarus. Hard currency is difficult to obtain, the Belarusian ruble will remain vulnerable to depreciation. Currency risk remains high for the BYR.
