Belarus: Interview Renaissance Capital and the Polish Chamber of Commerce

• FE: To what extent will the Belarussian economy be affected by the June sanctions, and which sectors do you expect to be hit the most?

AM: The most sensitive among the sanctions imposed on Belarus in June are restrictions on the export of petroleum products and access to financial resources introduced by the EU. Restrictions on the export of potash fertilizers are somewhat delayed and limited (only part of potash fertilizers are subject to sanctions, long-term contracts remain in effect as late as 2023). The inclusion in the sanctions list of such large industrial enterprises as MAZ and Belaz is not significant due to the low share of supplies of the latter to the EU. In this regard, the oil refining and transport sectors will be the most affected.

PS: June sector sanctions will be important for the Belarusian economy. However, they will not be critical. The following industries will face problems: oil processing, chemicals, fertilizers, tobacco products. The deterioration in the operating conditions of the banking sector will also be important. This will indirectly affect the entire economy.

• FE: How big would you say the risk to exports is (and why)?

AM: The EU is the second largest export market for Belarus, but if we take into account the categories of goods subject to the embargo, the influence is not so great. We estimate the upper bound for the negative effect of the sanctions at 2% of GDP, due to a potential loss of $1.3 billion, or 4% of total exports. The EU accounts for less than 10% of potash fertilizer exports. The main sales market is China, Brazil and India, thus Belarus will most likely be able to successfully deliver the released volume to other markets while long-term contracts in the EU expire. The main consumer of Belarusian oil products is Ukraine, which has not yet expressed a desire to join sectoral sanctions. A decrease in oil product exports to the EU (accounts for 20%) could be offset by the increase in the export of oil products to Ukraine, we believe.

PS: The EU-27 has a small share in Belarus’ exports. The key countries for Belarus are Russia, Ukraine, Great Britain and Asian countries. The industries subject to sanctions do not dominate the Belarusian economy. Belarus will manage to sell some of the sanctioned goods in other countries (e.g. fertilizers). Belarus will sell some of the sanctioned goods through intermediaries. Part of the goods will be transported by Belarus by roads other than before. The key question is how long the sanctions will last. For the full year of the sanctions being in force, their impact can be estimated as follows: Total exports will decrease by about 5%–7%, and the total export margin will decrease by 1/10 from the current level.

 

• FE: What do the sanctions mean for the country’s external debt position?

AM: The new sanctions will limit Belarus’ access to external funding sources, further increasing its dependence on financial support from Russia. External debt continues to dominate the structure of the republic’s public debt (with с. 80%), but most of it (c. 75%) falls on loans from Russia (including under the EFSD) and China. While the redemption of eurobonds for $800 million is scheduled only for 2023, Belarus will most likely be able to refinance its debts from its main creditors. In terms of this year’s budget, in 2021 Belarus planned to attract $1.4 billion in foreign markets. But taking into account the current dynamics ($200 million was raised in May) Belarus can concentrate on internal sources, including substantial fiscal savings of c. 10% of GDP.

PS: Belarus’s access to international financing, both private and institutional, will drop significantly. The ability to refinance the current debt will decrease. Debt servicing costs will increase. The risk of liquidity will increase.

• FE: Is there room for additional aid from Russia, and how would extra aid impact the economic recovery/external debt position?

AM: Russian support has become crucial for Belarus in the current realities. We believe that Russia will continue to refinance the republic’s debts, as well as compensate (at least partially) for the republic’s losses from the tax maneuver in Russia. We do not expect a significant increase in financial support from the budget, but the Russian stock market and Russian banks should compensate for the EU borrowing restrictions. The scale of Belarus’ potential borrowings […] remains relatively small for Russia (with its international reserves of c. $600 billion), which should facilitate the financing decision-making.

PS: Russia will support Belarus in many ways. It will buy some of the goods that are subject to sanctions. It will act as an intermediary in the sale of some sanctioned goods. It will make additional transport channels available. It will provide the funds needed to refinance debt and secure liquidity. It will do all this forcing Belarus to be more dependent on Russia (both politically and economically).

• FE: How will relations with the West evolve going forward?

AM: Now, we see no easy way to a de-escalation, given that Lukashenko is unlikely to make any changes in his position (and basically lacks options to leave office safely). We, however, do not see any immediate triggers for an escalation either. The probability of the spike in domestic protests is very low at this point, we believe. Meanwhile, Belarus was never a threat for the safety of the EU, as the activity of Lukashenko was purely focused on domestic politics. On the positive side, constitutional amendments, if implemented, could drive some improvement in relations (even if they are of the cosmetic nature). On the negative side, the unpredictability of Lukashenko’s policy has increased, creating additional uncertainty.

PS: Belarus is currently very politically and economically dependent on Russia. This addiction is increasing. Probably some of Belarus’ actions both internally and externally are inspired by Russian pressure. These pressures are being conducted to distance Belarus from the West.

• FE: How will the currency be affected?

AM: A decrease in exports, if it happens, will be deferred, and offset by a decrease in imports, we believe. However, a decrease in the inflow of external financing, and a deterioration of the terms of trade could drive a gradual depreciation of the Belarusian ruble in the medium term.

PS: The key factor here will be the impact on the financial environment. State debt problems. Limiting the access of Belarusian banks to the international financial market. Increased aversion to foreign investors. All this will reduce investors’ sentiment towards Belarus and may have an impact on the currency valuation. However, the key issues will remain the mutual valuation of the currencies of Russia and Belarus and the valuation of the Russian currency to the euro and the dollar.