Devaluation on cards, poor economic model to blame

On November 6^th, the National Bank published the latest data on Belarus’ international reserves.

Belarus is rapidly approaching devaluation: in October, international reserves were the lowest since 2011. While selling off assets may keep devaluation at bay, it will not address the root cause, i.e. an inefficient economic model.

As of November 1^st, Belarus’ international reserves were USD 6.8131 billion, a decrease since October by USD 574.6 million. In October, public debt repayment in 2013 peaked. Belarus repaid more than USD 260 million to the IMF on the principal loan, as well as other liabilities. The domestic foreign exchange market was a net buyer of foreign currency, which has led to a substantial decrease in gold reserves.

Belarus’ gold reserves were lower than in October 2013 only three times before: in June 2009, December 2010 and January 2011. In 2011, the drop in the international reserves resulted in the Belarusian ruble devaluing by 300%. The current level of international reserves is worth around 1.7 months of imports. In December the demand from individuals and corporations for foreign currency is likely to increase due to Christmas and New Year celebrations. Around the same time, Belarus is anticipating the fourth and the last tranche (USD 440 million) from EurAsEC ACF, but its disbursement might be delayed depending on the situation with the Baumgertner case (CEO of the Russian potash company, Uralkali).

Belarus may avoid devaluation only if it starts selling its assets and spending the proceeds on servicing the public debt and the population’s growing needs. However, only profitable Belarusian assets are of any interest to investors, and if they are sold, Belarus’ budget revenues will drop and the need to devalue BYR will arise once again.

The problem is rooted in Belarus’ economic model which is based on rigid centralized management, consumerist approach to foreign investment, corruption and fear of economic reforms, misappropriation of available funds, bureaucratized decision-making and the lack of real interest from international investors. Belarus is not yet sure if it can count on Russia’s support, and without it Belarus might go bankrupt overnight.

Belarus faces the devaluation of the Belarusian ruble in the near future. The vicious circle might be broken only if Belarus reforms its management structure.