The Global Recession and the Belarusian Economy: Revealing Cracks in the Model

Abstract

In resolutely pursuing their own rigid economic policies, rather than engaging with international financial agencies and mechanisms and adopting market economic measures in common with their neighbours, the Belarusian authorities seem reluctant to part with the use of administrative measures to govern the economy and have become hostage to this dogma. At the same time, in the global crisis, the general worldwide tendency to increase the role of the state in the economy, including tightening of financial regulation and resorting to trade protectionist measures, provides some justification for the Belarusian authorities' actions in delaying policy reforms. However, in the light of the worsening economic situation in the first half of 2011, privatization of some strategic assets seems to be inevitable in the near future to address severe liquidity gaps.

Notes

Marek Belka, former prime minister of Poland, former director of the IMF's European Department and head of the National Bank of Poland since June 2010, quoted in Camilla Andersen, ‘IMF Helping Counter Crisis Fallout in Emerging Europe’, interview with Marek Belka, IMF Survey Magazine, 14 Jan. 2009 (Washington, DC: IMF), available at <http://www.imf.org/external/pubs/ft/survey/so/2009/int011409a.htm>, accessed 25 July 2011.

Julia Korosteleva and Colin Lawson, ‘The Belarusian Case of Transition: Whither Financial Repression?’, Post-Communist Economies, Vol.22, No.1 (2010), pp.33–53.

International Monetary Fund (IMF), ‘Republic of Belarus: 2011 Article IV Consultation – Staff Report: Staff Supplement; and Public Information Notice on the Executive Board Discussion’, IMF Country Report, 11/66 (Washington, DC: IMF, March 2011).

See Mark Knell and Martin Srholec, ‘Diverging Pathways in Central and Eastern Europe’, in David Lane and Martin Myant (eds.), Varieties of Capitalism in Post-communist Countries (Basingstoke: Palgrave Macmillan, 2006), pp.40–64. The sample of countries used in the study covers most of the post-socialist economies of Europe and Asia and the advanced economies. The composite co-ordination index is calculated on the basis of indicators characterizing the three different types of institutional arrangements of social cohesion, labour market regulation and business regulations. Note, however, that Turkmenistan and Tajikistan are excluded from the sample owing to limitation of the data; Uzbekistan is included in the sample, but it emerges as less co-ordinated than Belarus, scoring 4.1 on co-ordination index against 8.9 in Belarus.

For a definition of ten policies proposed by the ‘Washington Consensus’, see John Williamson, ‘What Washington Means by Policy Reform’, in John Williamson (ed.), Latin American Adjustment: How Much Has Happened (Washington, DC: Institute for International Economics, 1990), Ch.2.

Julia Korosteleva, ‘Belarus: Heading Towards State Capitalism?’, in Lane and Myant (eds.), Varieties of Capitalism, pp.221–38.

Ibid.

Korosteleva and Lawson, ‘The Belarusian Case of Transition’.

Oxford Analytica, ‘Belarus/Russia: Minsk Must Accept Higher Gas Prices’ (Oxford: Oxford Analytica, 19 April 2006).

When referring to CIS countries, we specifically mean Russia, which accounts for over 90 per cent of exports with CIS countries.

CIS countries constitute 46 per cent of all Belarus's exports.

Oxford Analytica, ‘Belarus/Russia: Oil Exports Shift Towards Market Terms’ (Oxford: Oxford Analytica, 17 Feb. 2010).

IMF, March 2011 (see Note 3).

Ibid., p.7.

One should note that the terms of crude oil supply have improved recently, following Belarus's signing in Dec. 2010 of the agreements on the establishment of Common Economic Area with Kazakhstan and Russia. In accordance with these agreements, Belarus will benefit from lower oil import prices with effect from January 2011 as a result of the elimination of any trade restrictions between partners, including oil export duties imposed on Belarus by Russia. However, Belarus will be obliged to transfer any export duties obtained from exporting refined oil products (using duty-free oil from Russia) to the Russian budget: this seemed to be an unacceptable deal back in 2007. Even though Russian oil companies have increased crude oil export prices from US$11 to US$46 per tonne in January 2011, Belarus is still expected to benefit from this deal with the total net gain (free of the transfer to the Russian budget) estimated to be 2 per cent of GDP in 2011 (see IMF, March 2011, Note 3).

In 2001–4, Belarus benefited directly from the growth in oil prices, through the expansion of oil-processing exports, and indirectly through accelerated growth and demand in Russia, which remains Belarus's main trade partner: see World Bank, ‘Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth’, Country Economic Memorandum for the Republic of Belarus, 23246-BY (Washington, DC: World Bank, 2005).

In the absence of sovereign rating, international lenders tend to charge a high risk premium. Although the issue of acquiring an international sovereign credit rating had been discussed since 2001, it was not until late 2006 that the authorities made an active move on acquiring such a rating. This was largely driven by intensified tensions in Russia–Belarus relations which signalled a shift towards more market-based co-operation (e.g. new energy terms discussed above) between the two countries, with further adverse implications for the balance of payments: see Oxford Analytica, ‘Belarus: Credit Rating Alone Will Not Support Growth’ (Oxford: Oxford Analytica, 21 Nov. 2006). Furthermore, these tensions were expected to limit Belarus's capacity to borrow from Russia.

Available at <http://unctadstat.unctad.org>, accessed 18 April 2011; for comparison, in neighbouring Ukraine, this figure stood at 6.93 per cent of GDP in 2007.

On 1 Jan. 2009, this figure reached 400 per cent: see Irina Yeremeyeva, ‘The Impact of the Global Financial Crisis on Belarusian Economy’, electronic publications of Pan-European Institute 23/2009 (Turku: Turku School of Economics, 2009), available at <http://www.tse.fi/FI/yksikot/erillislaitokset/pei/Documents/Julkaisut/yeremeyeva_economic_crisis_belarusian_economy_2309%20web.pdf>, accessed 7 May 2011.

Institute of Privatization and Management (IPM), Yezhemesyachnyi obzor ekonomiki Belarusi [Belarusian Monthly Economic Review], 2009, No.9 (84), produced by the institute's research centre, available at <http://www.research.by/rus/nmer2009r09>, accessed 7 May 2011.

Ibid.

IMF, March 2011 (Note 3), p.27.

European Bank for Reconstruction and Development (EBRD), Transition Report 2009: Transition in Crisis, available at <http://www.ebrd.com/downloads/research/transition/tr09e.pdf>, accessed 7 May 2011.

Yeremeyeva, ‘The Impact of the Global Financial Crisis’.

IPM, Sept. 2009 (Note 20).

Standard and Poor's Country Sovereign Ratings, available at <http://www.standardandpoors.com/prot/ratings/entity-ratings/en/eu/?sectorCode=SOV&entityID=281162>, accessed 25 July 2011.

In mid-2009, the reserves stood at US$2.6 billion, which was only sufficient to cover four weeks of exports: see European Commission, European Economy. The EU's Neighbouring Economies: Emerging from the Global Crisis, Occasional Paper 59 (Brussels: European Commission, April 2010).

IMF, March 2011 (Note 3).

EBRD, Transition Report 2010: Recovery and Reform, available at <http://www.ebrd.com/pages/research/publications/flagships/transition.shtml>, accessed 7 May 2011.

Note that although Table 4 reports the 2011 Doing Business indicators, they should be treated with caution since they do not take into account the most recent changes, including increase in VAT from 18 to 20 per cent and abolishing local and turnover taxes: see EBRD, Transition Report 2010: Recovery and Reform.

EBRD, Transition Report 2010: Recovery and Reform.

IPM, Belarusian Monthly Economic Review, No.1(100) (Minsk and Warsaw: Research Centre of the Institute of Privatization and Management, Jan. 2011), available at <http://www.research.by/rus/bmer>, accessed 7 May 2011.

BEEPS is a survey of firms in transition economies undertaken jointly by the EBRD and the World Bank. The 2008–9 survey was the fourth wave. The number of Belarusian firms that took part in this wave was 166, 87 per cent of them being small and medium businesses with employment under or equal to 250 employees. Firms were asked to rate the degree of severity of a number of potential obstacles to doing business on a five-point scale with ‘0’ denoting no obstacle, ‘1’, minor; ‘2’, moderate; ‘3’, major; and ‘4’, very severe. For further details, see <http://www.ebrd.com/pages/research/analysis/surveys/beeps.shtml>, accessed 18 April 2011.

EBRD, Transition Report 2010: Recovery and Reform.

Daron Acemoglu and Simon Johnson, ‘Unbundling Institutions’, Journal of Political Economy, Vol.113, No.5 (2005), pp.943–95.

The property rights protection index is published by the Heritage Foundation–Wall Street Journal index (available at <http://www.heritage.org/index/explore>, accessed 7 May 2011) and it integrates two dimensions of property rights: protection from arbitrary government and protection of private contracts; it scores from 0 to 100, with 100 denoting the highest level of quality of property rights. For further details, see William W. Beach and Tim Kane, ‘Methodology: Measuring the 10 Economic Freedoms’, in Kim R. Holmes, Edwin J. Feulner and Mary Anastasia O'Grady (eds.), 2008 Index of Economic Freedom, 14th edn (Washington, DC: Heritage Foundation, 2008), Ch.4. According to the 2011 data, Belarus scores 20, whereas neighbouring Russia and Ukraine score 25 and 30, respectively.

F. Welter and D. Smallbone, ‘Institutional Perspective on Entrepreneurial Behaviour in Challenging Environments’, Journal of Small Business Management, Vol.49, No.1 (2011), pp.107–25.

Andrei Shleifer and Robert W. Vishny, The Grabbing Hand: Government Pathologies and Their Cures (Cambridge, MA: Harvard University Press, 1999).

EBRD, Transition Report 2010: Recovery and Reform.

Jonathan D. Ostry and Others, Capital Inflows: The Role of Controls, IMF Staff paper SPN/10/04 (19 Feb. 2010), available at <http://www.imf.org/external/pubs/ft/spn/2010/spn1004.pdf>, accessed 7 May 2011.

In Dec. 2009, the government completed the privatization of one of its largest system-forming banks, Belpromstroibank, selling its 93 per cent stake to Sberbank of Russia: see EBRD, Transition Report 2010: Recovery and Reform; further privatizations in the banking sector are expected to follow in the near future.

Additional information

Notes on contributors

Julia Korosteleva

Julia Korosteleva is Lecturer in Business Economics at the School of Slavonic and East European Studies, University College, London. She specializes in entrepreneurial entry, entrepreneurship and innovation, high-growth entrepreneurship, start-up finance, regional entrepreneurship and financial development. Her publications include articles in the Journal of Common Market Studies, Emerging Markets Finance and Trade, Eastern European Economics and Post-Communist Economics and contributions to edited collections.