Alexander Lukashenko revealed an action plan

On 30 August Lukashenko went public with a package of measures designed to stabilize the currency market.

The main consequences of the plan of action made public by Luakashenko are: to preserve the multiplicity of exchange rates for economic players for an indefinite period of time and currency devaluation for the population. Lukashenko also promised compensations to the population, therefore the implementation of the plan will only delay the decision-making and provide for (in the best-case scenario) further “soft landing” of the economy.

Lukashenko also promised compensations to the population, therefore the implementation of the plan will only delay the decision-making and provide for (in the best-case scenario) further “soft landing” of the economy.

The plan envisages the following measures:

• Conservation of the mandatory sale of foreign currency proceeds (30%) at a fixed exchange rate per USD (Br 5000 + / -2%) to pay for critical imports (fuel and medical supplies);

• Additional (optional) session at the Interbank Stock Exchange will be introduced, designed to determine the market exchange rate of the Belarusian ruble;

• Abolition of all privileges for the mandatory sale of foreign currency proceeds;

• Free sale of currency to the population via currency exchange offices and the ability to convert ruble deposits into foreign currency deposits at market exchange rates. All buyers of foreign currency will be registered in a special database;

• Prohibition of emission loans to finance state programs;

• Return of hard currency proceeds of companies: “dishonest” exporters and banks are threatened with a carte blanche issued to the State Control Committee and other regulatory authorities to conduct inspections (the moratorium on unscheduled audit revoked).

The plan is not entirely new or market oriented. The Belarusian authorities delayed the decision making as long as they could. However, by the autumn the imbalance of the economy has become threatening, inflation and devaluation on the black market went out of control, even state-owned enterprises started hiding currency proceeds, refusing to sell it at the only legal exchange rate “NBB +/- 2%”. The gap between the official and unofficial rate reached almost 100%, making all relevant incomes going past the National Bank.

Privatization plans of the authorities so far remained plans only, while the availability of the second tranche from the Anti-crisis Fund of the EurAsEC had been linked to criticism of the Belarusian authorities by Kudrin. In the given circumstances the window of opportunities for Lukashenko was minimal: he had to choose between closing the country and market or opening.

A complete shift towards market economy would be impossible for the Belarusian authorities. As a result, the adopted program of action is better than doing nothing or continuing the “crackdown” on the economy, however worse than liberalization.

A complete shift towards market economy would be impossible for the Belarusian authorities. As a result, the adopted program of action is better than doing nothing or continuing the “crackdown” on the economy, however worse than liberalization.

Proposed measures will be enacted as of 12-14 September, which is most likely linked to the hopes to receive additional funding by then, as reported by the Head of the National Bank Ermakova. By then the authorities plan to increase the flow of foreign currency proceeds via reduction of receivables (as of 1 July up to 50%) using voluntary-administrative measures (by the supervisory bodies) in order to increase the gold reserves.

At the moment it is difficult to predict what authorities would succeed in, while trying to achieve a balanced exchange rate in the coming months, what would be the mechanisms of the additional session at the BSCE and what would be the result of the trading session. Authorities hope that the exchange rate will not exceed Br 10,000 per USD.

There are a few challenges and problems the NBB will face in the near future, inter alia:

1. Dual exchange rate policy contradicts the requirements of Russian and the IMF loans;

2. Due to the existence of a low administrative exchange rate at which 30% of the country’s foreign currency proceeds would be sold, the second, market exchange rate would be overstated due to the so-called “confiscatory tax on exporters” (the administrative rate), and to speculative and inflationary factors;

3. Large-scale dollarization of the economy will continue due to the distrust to the national currency and policies. Increased repressions have never been effective in the past and today almost no one is afraid of repressions, therefore “gray” (legal and illegal) schemes of withdrawal of foreign currency out of the country will be used;

4. Due to speculative factor and a so-called pent-up demand for foreign currency (ruble deposits of the population, “white” imports, etc) it is likely that the exchange rate at the second session will be Br 10,000 and higher per USD (the authorities hope for Br 8000), which would compel the authorities to either making significant interventions, or to administrative regulation of the demand (via “recommendations”, etc.). That would immediately result in the existence of parallel “black” exchange rates. Moreover, the very existence of the exchange rate higher than Br 10,000 per USD will be a major challenge for the authorities in terms of dollar equivalent salaries, prices, etc.;

5. NBB demand for foreign currency will keep on. That would require either foreign borrowing or selling of major assets;

6. Inflation outbreak with all economic and social consequences;

7. Artificial control over energy tariffs (due to undervalued ruble) and fuel prices will result in the failure to fulfill the requirements of creditors, namely, to finance 30% of utility bills and in major challenges with adequate increases of tariffs in the future (when a balanced exchange rate is achieved) and in social protests;

8. Banks will face additional pressure concerning attracting more credits, as a consequence, risks in the banking sector will grow and their ratings and financial performance will deteriorate in the medium and long term;

9. Current “soft” monetary policy aimed at income growth would defeat the authorities’ purpose to stabilize the currency market.