Does the application for the Russia’s loan prove that the Belarusian economy is falling apart? Does it make Belarus vulnerable to some loss of its sovereignty? Not very likely, say the BISS experts. The possible provision of a two billion loan by the Russian government seems not to endanger the Belarusian economy (given the current volume of the country’s foreign indebtedness). Moreover, the political side of this issue could also be managed rather unproblematically by the government of Belarus. At the end of June, another round of negotiations between the governments of Belarus and Russia had been held concerning the provision of a loan by the Russian government. At first sight, it seems that Belarus seeks for money because its economy is adversely impacted by gas price hike. The funds are needed to avoid some sort of a large-scale failure. The size of the loan (initially USD 1.5 billion) appears to exactly offset possible losses emanating from the new terms of energy trade with Russia (USD 1.2 bn as calculated by the IPM Research Center) plus the losses to be incurred due to Belarus’ withdrawal from the EU’s Generalized System of Preferences (unofficially, the government experts estimated that at USD 200 million). Recently, the Deputy Prime Minister Viktar Bura, said that over January–May 2007, Belarusian budget was deprived of as much as USD 430 million due to the imposition of oil duties, while the Prime Minister of Belarus Siarhiej Sidorski said that in the course January–April 2007, the price of gas imports cost the Belarusian economy another USD 458 million). If one merely extrapolates these figures for the whole year, it appears that Belarus would be confronted with a loss at about USD 1.8 billion in total. Indeed, the government of Belarus has requested to increase the initial volume of the loan to USD 2 billion (and that appears to fit the logic of 1.8 billion plus 0.2 billion of above-mentioned losses due to the EU decision), although the Minister of Finance of Russia, Mr. Alexei Kudrin has not confirmed that so far. It is feasible to claim that the growing appetite of the Belarusian authorities is very likely fomented by the virtual absence of reforms to meet these new economic challenges. A range of Belarusian analysts stress that the Belarusian government has not made any necessary steps in that direction. Instead of the needed increase in savings and investment, there is a consumption boom indicating that domestic bureaucracy is either confident in the strength of the economy or simply reluctant to introduce any change in the established system (that is based on a continuous provision of subsidies and preferences to certain economic actors, maintenance of employment at loss-making enterprises, etc.) There might be a ground for worries about that money coming from Russia could threaten the sovereignty of Belarus. For some representatives of the alternative political forces, a loan might be a sign of dependency of the Belarusian economy on the Russian subsidies. The politics of foreign debts say that unequal power relations between creditor and debtor imply that the former could attempt to gain more political leverage against the latter. For Russia, a very good chance to do so seems to be available now. For instance, one of the conditions for provision of this loan has been to rearrange the Belarusian budget in such a way that the financial assistance from Russia would no longer be needed. However, it seems that the situation should not be dramatized so much. First of all, the economy of Belarus is not in a terrible shape to be bailed out by just USD 2 billion from Russia. It has to be recalled it is the inter-governmental loan that was requested. If provided, the foreign debt of the government would be increased by USD 2 billion, or by approximately 4.5% of Belarus’ GDP forecasted for 2007. So far, Belarus has been indebted rather moderately. The National Bank of Belarus provides the following figures. By January 1, 2007, the volume of foreign debt amounted to USD 6.8 billion (18.6% of GDP), what is much less than in the transition economies of East-Central Europe, where external debt/GDP ratio varies from 36.8% in the Czech Republic to 75.5% in Hungary and even 101.1% in Latvia. In addition, the share of government debt in total debt in Belarus is 8.6%, while it is ‘commercial banks’ and ‘other sectors’ are indebted most heavily (their joint share in the total volume of debt is about 86%). Also, the debt situation is far from being even slightly worrisome. The ratio of external debt to exports is also rather low in Belarus (about 35% by the end of 2006), while other transition economies are indebted with about more than a half (51.4%) of their annual exports (Czech Republic) to 104.7% and 109.1% of it (Slovenia and Hungary, respectively) and even 214.4% (Latvia). In general, over the last two years, external government debt has been declining in Belarus. What would happen if this two billion loan is accepted by the Belarusian government? First of all, the rate of growth of foreign indebtedness of the Belarusian has already accelerated over January–April 2007. On the one hand, in case the dynamics are retained, the volume of foreign debt of Belarus could reach about USD 10.5 billion or about 24% of the country’s GDP in 2007 (giving the GDP forecast made by the IPM Research Center). This year Belarus plans to attract at least as much as USD 1 billion of Russia’s money. As a result, the government debt might increase by 2.8 times, while the total volume of debt might reach USD 11.5 billion or 26% of GDP. Again, this does not appear to be an alarming figure, especially when compared with the data from other transition economies. One can nevertheless argue that the economies of East-Central Europe have heavily indebted corporate sectors attracting substantial foreign capital inflows on the basis of firm expectations that in the future their economies and incomes of their populations would be growing continuously. Therefore, no troubles with payment of debts can be expected. However, the Asian Crisis of 1997 shows that growing economies are not fully immune to capital outflows, while private borrowers are not better than the government ones. As for Belarus, the fears could come from the slow reform progress in the Belarusian economy (see the recent Transition Report prepared by the European Bank for Reconstruction and Development for that matter). The government displays no serious commitment to meet the challenges of higher energy prices and deteriorating competitiveness at traditional Russian market. Even the announced plans for privatization have not been discussed any further. This might be the sign that economy is still properly managed (in order to avoid crisis). For instance, there had been a record level of the budget surplus reached by the end of the 1st quarter of 2007, namely 10% of GDP (or 4.2% a year ago). In case the surplus is reserved (be it even down to one-third of its current rate) until the end of 2007, no troubles with paying the Russia’s loan back could be expected. As the Minster of Economy of Belarus, Mr. Mikalai Zajchanka, explained, the intergovernmental credit is ‘a better solution’ than ‘resources available [to us] today’ since the latter ‘could be directed to fulfill other goals’. Why does the government opt for Russia as a source of funds at all? The former Chairman of the National Bank, Prof. Stanislaw Bahdankievich notes the IMF could provide Belarus with much better conditions (in terms of interest rates) than the government of the Russian Federation. The latter could charge up to 12% per year for its loan (translating into USD 240 million interest rate payments) in contrast to, say, 5% by the IMF (implying USD 140 million less debt service). The 140-million difference is a very small price for convenience in negotiations. And it goes down in case the IMF conditionality policy is considered. The fact is that the IMF provides conditional loans by demanding to conduct large-scale market reforms. But, fundamentally, Russia is a very different partner. It has a record of provision of political credits that are not always paid back on time or even at a full scale. A Russian magazine ‘The New Times’ provides a somewhat intriguing evidence that ‘geopolitical’ allies of Russia located at ‘strategic’ routes of the world political map are often loosed their debts. There are such cases as Syria and Algeria before the collapse of the Soviet Union, and, more recently, Venezuela, not to mention Belarus bordering the enlarged EU, who is seen as not ‘cultivating suspicion to Russia’, as the Russia’s Minister of Foreign Affairs claimed recently. The journalists of The New Times discover that recent Russia-Venezuela military contracts are full of barter exchange, and not the money transfer. In this connection, it does not appear illogical that Belarus might try to play a somewhat similar role. It could continue to blackmail Russia with its (arguably intensified) cooperation with the EU, while the latter is not hiding its suspicion to the Russia’s political order. In the end, USD 2 billion is very small price for having great geopolitical plans (informed by the undying imperial ambitions) realized. If so, the loan for Belarus and the negotiations surrounding its provision could be seen, to put it crudely, as a mere money tapping action. However, government debts appear to be low-profile in case changes in and the dynamics of foreign indebtedness are considered. Indeed, there is a lot of buzz about the government negotiating the loan with Russia so many commentators are ready to interpret this as a sign of growing problems of the Belarusian economy the government should deal with. The President of Belarus confirmed early in March 2007 that ‘Russia’s loan’ is in fact beneficial for Russia itself since it would not allow the Belarusian economy ‘to be destabilized’ in the future. But the dynamics and the structure of foreign indebtedness indicate that it is commercial banks and other sectors of the economy (i.e. enterprises of the ‘real sector’) that borrow abroad. But the dynamics and the structure of foreign indebtedness indicate that it is commercial banks and other sectors of the economy (i.e. enterprises of the ‘real sector’) that borrow abroad. Between January and April, Belarusian banks increased the volume of their foreign debts by 34.3% (in contrast to reduction by 3.4% over the same period of the last year). As for other sectors of the economy (that typically incorporates enterprises), the volume of foreign borrowing went up by 35.2% during the first four months of 2007 (in contrast 0.7% in January-April of 2006). In fact, it is ‘other sectors of the economy’ that hold more than 65% of foreign debts of Belarus (according to the data provided by the National Bank). For instance, Belarusian refineries plan to rely on foreign loans since the domestic banking system is incapable of providing substantial amounts of money necessary to conduct modernization of these companies. More substantially, the domestic loans are more expensive than foreign ones, and this is important factor for producers . As for commercial banks, some operations can also be recalled. In particular, ‘Belagroprombank’ has attracted RUR 1 billion (from the Russian ‘Vneshtorgbank’, while during the opening of its affiliate in Milan it has been agreed that foreign banks would provide their Belarusian counterparts as much as EUR 210 million to finance the real sector of the economy). Also, the Dutch ‘ABN-Amro’ would provide about USD 1 billion. Earlier this year, ‘Belgazprombank’ and ‘Belarusbank’ have announced that German banks are ready to provide them with USD 35 million and USD 38 million, respectively. It has to be reminded that two Russian banks came to buy two Belarusian banks (‘Mesztorgbank’ and ‘Slavneftebank’). Finally, ‘Priorbank’ has attracted USD 100 million from ‘VTB Bank Europe’. To summarize, it appears that the government does not rely too much on inter-governmental loans. Rather, the issue of attracting Russia’s loan was raised right in the course of Belarus-Russia ‘oil and gas war’. It was presented as a relief necessary for the Belarusian economy, and the ‘political flavor’ of this loan should be taken into consideration. Overall, Russia is far from being the only source of funds for the Belarusian economy, given the above-mentioned information and also the intensified cooperation with the countries of the Middle East (although the volume of bilateral deals is not yet known). But as it could be seen both from the data and some news, foreign borrowing has started to grow more dramatically, and a different sector of actors (both banks and enterprises) is actively involved in this process. The future developments depend very much on how these resources would be utilized. The situation with foreign debts could become alarming as soon as these actors would be unable to pay their loans back. But this could hardly be expected in the short-run given both the insignificant amount of borrowing the projects financed (that often concerns modernization of Belarusian companies).