Sanctions against Russia and low oil prices block industrial growth in Belarus

In January-April 2015, industrial production in Belarus scaled back by 7.5%. The main culprit in the decline was recession in Russia, which had occurred from falling oil prices and sanctions. Assuming that Russian economy is unlikely to recover this year, and Belarus is lacking funds to stimulate production growth, industrial growth is hardly attainable by the year-end.

According to the National Statistics Committee, in Q1 2015 industrial production volume in Belarus totalled BYR 229.8 trillion roubles, which is 7.5% less than in Q1 2014. With the exception of oil refining and chemical industries, all other economic sectors have reported a decline in production. Production of machinery and equipment has shrunk right up to 28.2% compared with 2014. Amid cutback in production, warehouse stocks have grown by 20% on average. At some enterprises, their volume has exceeded the annual production volume.

The situation on the Russian market had a huge impact on the industrial production in Belarus. In addition, Belarus lacks the resources to stimulate domestic demand for domestic products. Production capacities of Belarusian enterprises are much higher than domestic demand. For instance, of 65,000 tractors produced annually only 20,000 will fully cover the domestic market needs. Russia accounts for 60% of Belarusian exports of tractors. In Q1 2015, the decline in exports of tractors to Russia decreased by 40%. Other machinery and engineering manufacturers are facing a similar challenge. After the crisis of 2009 and 2011, the cutback in production was offset by boosting domestic demand with issuing preferential loans for equipment purchases. In 2015, public debt repayments limit Belarus’ financial capacities.

The Russian market creates the largest demand for Belarusian industry products. The sanctions against Russia are unlikely to be lifted in the short term, thus depriving Russian banks from access to cheap loans and increasing the cost of borrowing for both, producers and consumers. Amid low oil prices, Russia’s budget might experience a chronic shortage of funds for state programmes aimed at stimulating economic growth, leading to a further decline in production and cutbacks on imports. That said, Belarusian budget revenues would shrink too, as they are heavily relying on revenues from export duties on oil and oil products. Low oil prices have a negative impact on the incomes of Russians, which reduces the demand for Belarusian produces, such as foodstuffs and consumer goods. Provided, that 35% of the total volume of Belarusian exports is to Russia, and that another 32% depends on oil and oil products, low oil prices and sanctions against Russia are very likely make industrial production growth in Belarus impossible.

Belarusian industry has shrunk due to its dependence on the Russian market. The decline in production in Belarus will persist until oil prices reach the benchmark of USD 80 per barrel and sanctions against Russia are softened.