Russia Business Report: Belarus Looks for Ways to Get More Hard Currency

The Belarusian government closes a loophole in order to get its hands on a bit more foreign cash amid an extremely stubborn currency crisis.

Russia’s Prime Minister Vladimir Putin predicts that the country could cover its budget gap this year so long as the price for oil stays high, and that’s something commodity traders seem to be betting on.

A slowdown in inflation has led to a pickup in consumer spending and retail sales, but will that be enough to ensure stable economic growth?

A late-day rally saved Moscow’s indices from sizable losses yesterday.

We’re going to do things a touch differently today here on Russia Business Report. Normally we start off with the latest news coming from Russia itself, but this time, I’d like to start with Moscow’s troubled neighbor to the west, Belarus. It looks like it’s time to tighten belts and close the loopholes in Minsk. It’s recently come across the wires that the Belarusian government was taking many state-run companies off the list of firms that received preferential exchange rate regimes. You see, in Belarus exporting companies are required to sell 30 percent of foreign currency earnings to the central bank at the overvalued official exchange rate. For the authorities, it’s been a way for them to get their hands on hard currency at a much cheaper price than otherwise possible. However, until President Alyaksandr Lukashenka’s order the other day, many state-run corporations were given some kind of exemption from this requirement. It’s been reported that many had only been selling 20 percent of their earnings to the central bank. Now the reason for the clampdown in terms of policy is that Minsk has found itself exceptionally short of cash. The country has seen its current-account deficit balloon in recent years, especially in the run-up to the presidential election last December. Additionally, the central bank placed very harsh restrictions on the rate at which currencies can be swapped back in May, which has contributed to the hard cash shortage. Those tight restrictions were put into place after the National Bank of Belarus devalued the ruble by more than 30 percent.

Now just in case you don’t know, the authorities had to move to devalue the currency amidst a worsening crisis that so far shows no real sign of abating. Spurred on by that widening current-account deficit I mentioned earlier, bond market investors started getting a bit jittery about Minsk’s ability to repay its obligations. At that same time, due to a shortage of cash, the government temporarily suspended currency market interventions and for a time let the ruble float significantly more freely. But so far, the government’s moves, including that 36-percent devaluation, haven’t fully righted the ship. Minsk has had to appeal to international lenders like the IMF and the Eurasian Economic Community for bailout funds. Last month the latter dished out the first 800 million dollar installment of a 3 billion dollar loan. In exchange for the cash, Belarus had to agree to sell off a handful of state assets, which should at least help bring in some additional revenue. However, what most analysts have been saying is that more structural changes are needed. It’s thought that the IMF would demand many of those changes if it were to offer any new loan to Minsk. But given how reluctant the government has proved to such changes in the past, it seems rather unlikely that anything would change now. I should also note that many of the reforms would end up hitting the population pretty hard, and given how dependent the ruling regime is on buying support via the unreformed economy, that is certainly something the authorities are likely wont to avoid. That being said, Belarusians have already had to endure the world’s steepest rate of inflation in the first half of 2011, with prices jumping more than 35 percent. Anyways, now to get a little more insight into the situation, here's Elina Rybakova. She's Citi Group's Chief Russia/CIS Economist over in London.

What's good for the price of oil is good for Russia, or so many observers say. And Prime Minister Vladimir Putin appears to be one of that mindset. Speaking at a governmental meeting recently, the Russian PM argued that the country would likely be able to bring the budget back into balance much sooner than previously anticipated. In fact, based on the much huger than expected price for oil this year, Mr Putin predicted that 2011’s planned revenue shortfall might end up coming to naught. "We hope the deficit this year will be minimal, and perhaps we'll be able to make it through this year without one," Mr Putin was quoted as saying. That would be quite a change in fortunes as heading into the year, the government's official deficit prediction exceeded 3.5 percent of GDP. Last year the Kremlin spent nearly 4 percent of GDP more than it took in. However, on the back of oil costing more than 100 dollars for much of the year, the Finance Ministry now expects a much larger windfall than it had foreseen. In fact most analysts expect the average price for crude globally to exceed 110 dollars per barrel. When Russia's budget for this year was drawn up, government economists anticipated an average price of just 75 dollars per barrel. Not only does the higher price tag mean more profits for government-run oil firms to take in, but it means the royalty rate all companies pay into state coffers is on the rise as well.

Turmoil in the Middle East and North Africa are partly responsible for the significant uptick in the cost for crude, but also more robust demand worldwide has also pumped up pressure on prices. While more developed areas like Europe and the US are having some trouble shaking off the aftereffects of recession, the developing world is taking up the slack, and then some. And going forward, that's probably only going to increase. The International Energy Agency, or IEA, recently said that in the coming years, almost the entirety of demand growth will come from the developing world. And 41 percent of all growth will come from China. As such, the IEA noted price growth has mostly been and will continue to be driven by supply-demand dynamics.

So anyways, as I was saying, according to Russia's PM, at least, this oil-related windfall could bring the country's fiscal house into order sooner rather than later. In fact through the first six months of the year, the government saw a surplus of more than 20 billion dollars, equal to nearly 6 percent of GDP. However despite such seemingly positive data, I should note that official line from offices like the Finance Ministry is that Moscow still expects to run in the red. Officials there have repeatedly revised their deficit forecasts downward this year, but still expect to finish the year somewhere around 1 percent of GDP short of balanced. And looking forward to 2012 and beyond, the Kremlin, and Mr Putin as well, anticipate larger deficits, on account of massive new spending programs set to be launched.

And there’s one last bit to this story, concerning whether or not oil will remain as expensive as it is now. Recently the price for black crude has been sliding some, partly as a result of the inability of US policymakers to agree on a deal to raise the country’s borrowing authority. It’s feared that the sides remain so far apart on the issue that for the first time in modern history that the US may not meet its financial obligations. That concern has led some to think that a renewed economic slowdown could be on the horizon. And that could lead to a noticeable drop in demand for black gold. Despite the current slippage, oil futures traders in the US are expecting quite a sizable increase before the end of the year. In fact, the two most popular December contracts for West Texas Intermediate on the New York Mercantile Exchange, were going for 120 and 125 dollars a barrel. If that’s the case, it should certainly exceed the 115 dollars per barrel mark that’s thought to be what it needs to average over the year if Russia is going to balance its books in 2011.

And branching off from that last story, Prime Minister Vladimir Putin also credited the nation's growing economy for his improved budget deficit outlook. Now while yes, the economy is growing, it isn't surging the way many people would like and expect. In that often-identified BRIC grouping, Russia is by far the laggard, trailing Brazil, India and China by leaps and bounds. The others have been experiencing post-crisis growth rates close to 10 percent. At the same time, Russia's economy has only been expanding by about half that. In the first half of the year, the country's GDP grew by only 3.9 percent; and the official growth forecast sits between 4 and 4.5 percent. That being said, the IMF's mission to Russia recently said that it was anticipating economic expansion below 4 percent. Such figures have led many to doubt just how solidly the Kremlin is pulling the country out of the global economic downturn that hit just about every country a few years ago. Anyways, I should note that in e-mailed note from Renaissance Capital, economists and analysts there argued that more subdued levels of growth actually may not be such a bad thing. Anyways, the e-mail included their replies to a handful of questions posed at an investment conference. Basically, their argument was that prior to the 2009 crisis, growth in Russia, while appearing far more robust, was actually driven almost exclusively by rising crude prices and was not sustainable. So what's changed you may be asking? Well certainly increasing oil prices are helping stimulate things, but this time around the Kremlin seems to be making more of an effort to go through with certain reforms and diversification programs. We'll have to wait and see if Moscow can finish the job and turn ideas into action on many of these programs, but I would say that President Dmitry Medvedev does appear more serious about many of the changes than governments prior.

Additionally many analysts have pointed out that surging consumer spending in Russia has contributed largely to the rebounding economy this time around. For those that have cited such things, it should come as very good news that inflation in the country has been brought mostly under control. You may recall that at the start of this year, price growth shot up, surging more than 3 percent before the end of February. That led many to worry about how that would damage consumer confidence and spending. But in recent weeks, the inflation rate has slowed down to an imperceptible crawl, growing 0.0 percent in the past two weeks. That, coupled with growing employment, has led to a rise in real wages and disposable income for most consumers. The improved outlook in terms of price growth has recently caused economic policy makers to be a bit more bullish about prospects in the second half of the year. Deputy Economy Minister Andrey Klepach said, "We expect a pickup in growth in the second half, in part thanks to demand-driven investment." Furthermore, analysts from Unicredit have argued that in addition to the pickup in retail sales, rising government expenditures ahead of two election cycles ought to drive economic expansion as well.

Despite some early-morning losses, both the MICEX and RTS finished Monday very close to where they started things off. When we recorded yesterday at 11:00 the ruble-denominated MICEX had already parted ways with most than a whole percentage point, but at the closing bell the index had scraped its way back up to within a tenth of a percent of the day’s opening mark. And the RTS fared even better. After dropping 20 points, it finished a touch higher than where it started the day. The late-day gains were pushed by E.On Russia, a power generating company, and precious metal firms. Despite no deal on the US debt ceiling, traders still haven’t completely panicked. However as the days go by with no agreement on the books, expect markets to get increasingly nervous. And in today’s movements, both bourses are riding yesterday’s closing momentum. The MICEX is up a quarter of a percent as of 11:30 while the RTS has added nearly a whole percentage point.
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