How Emerging Europe Came Through the 2008/09 Crisis

Chapter 9. Belarus: A Tale of Missed Opportunities

Bas Bakker, and Christoph Klingen
Published Date:
August 2012
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Throughout the two decades following the breakup of the former Soviet Union, Belarus retained many elements of the central planning system. It reported rapid growth during 2000–08, as capacity utilization at state-owned enterprises increased with the reestablishment of economic linkages with Russia, as ample credit was allocated to investment, and as low-priced energy resources from Russia helped underpin the viability of enterprises and public finances alike. As exports slumped in the wake of the global financial crisis and Russia cut back energy subsidies, a looming balance of payments crisis was averted through a program supported by a $3.5 billion stand-by arrangement with the IMF (January 2009–March 2010). Growth slowed sharply but remained positive in 2009, and inflation was contained. However, significant policy loosening after the end of the program triggered a major currency crisis in 2011 which raged through much of the year.


Belarus enjoyed one of the highest living standards in the former Soviet Union. Belarus authorities prevented economic collapse after independence in 1991 by preserving and extensively supporting the system of state-owned enterprises. Their support included the supply of cheap credit from the state-owned banks and the National Bank of the Republic of Belarus (NBRB), resulting in high inflation. Subsequently, tighter monetary policy and liberalization efforts improved the macroeconomic environment. Following the exchange rate unification in 2000, the NBRB effectively started targeting the exchange rate with the U.S. dollar, and the de facto peg to the dollar was maintained until the end of 2008.

However, Belarus retained many elements of the central planning system, and as a result state involvement in the economy remained pervasive. The government still exercises strong control over production through a system of five-year and annual plans specifying quantitative targets at all levels of production and a system of directed credit delivering resources to “priority” sectors. The majority of industrial output still comes from large state-owned or state-controlled enterprises. State-owned banks account for three-quarters of banking assets. In agriculture, state land ownership and government-controlled collectives were preserved. The government retains extensive powers over price formation via state-owned suppliers and control of selected retail prices or profit margins.

Energy subsidies from Russia provided critical support for the economy. Russia supplied Belarus with oil and natural gas at prices that were only a fraction of international or western European levels—an implicit subsidy corresponding to 10 percent of GDP for gas and 6.7 percent of GDP for oil per year during the 2001–08 period (Figure 9.1). Subsidies were largely passed on to companies and households in the form of low energy prices at no budgetary cost. This helped companies remain viable and expand. Refining imported Russian oil into petroleum products to be sold on western markets at international prices became a lucrative business. Belarus also earned significant transit fees from Russian energy exports to western and central Europe that passed through its pipeline system.

Figure 9.1Belarus: Implicit Gain from Below-Market Prices for Crude Oil and Natural Gas

(Percent of GDP)

Source: IMF staff calculations.

The Run-Up to the Global Financial Crisis

The Belarus economy expanded at a rapid pace of 9½ percent a year during 2003–08, mainly on account of Russia’s implicit energy subsidies and rising domestic demand later in that period. In the early years, the implicit energy subsidies increased as the prices of oil and gas imported by Belarus lagged behind rising international prices. This loosened the balance of payments constraint and increased opportunities for high levels of investment. However, when Russia embarked on a policy of gradual withdrawal of subsidies, domestic demand policies failed to adjust, stimulating high investment at the price of increasing the current account deficit. Russia doubled the price of the natural gas it exported to Belarus in 2007—a cut in the implicit subsidy equivalent to some 2½ percent of GDP—but double-digit domestic demand growth continued in 2007 and increased to nearly 18 percent in 2008. The high level of investment stimulated GDP growth: the investment-to-GDP ratio rose from some 23 percent of GDP in 2003 to 33 percent of GDP in 2008.

Loose financial policies and the reduction of energy subsidies under a fixed exchange rate regime led to external imbalances and currency overvaluation. The current account deficit widened to 6.7 and 8.2 percent of GDP in 2007 and 2008, respectively. Inflation, which peaked in August 2008 at 16 percent in year-over-year terms, and rapid wage growth eroded competitiveness under Belarus’s fixed exchange rate regime. Lacking integration with international financial markets, Belarus relied mainly on loans from Russia and Russian foreign direct investment into its pipeline network to finance its external deficit. International reserves remained low.

On the eve of the global financial crisis, Belarus was therefore highly vulnerable. Its economy was overheated, and financing its large current account deficit was difficult. In September 2008, international reserves covered 1.6 months of imports of goods and services.

Impact of the Global Financial Crisis

When the global financial crisis intensified in the fall of 2008, Belarus was faced with a collapse of its exports. Its main trading partner, Russia, fell into deep recession. Moreover, with the depreciation of the Russian ruble and the Belarusian ruble pegged to the U.S. dollar, the real exchange rate appreciated substantially. Export volumes declined by 15 percent in year-over-year terms in the fourth quarter of 2008 and by close to 50 percent in the first quarter of 2009.

Although the crisis was transmitted to Belarus mainly through the trade account, Russia’s reduced willingness to provide external financing also played a role. Unlike most of emerging Europe, Belarus had not relied heavily on capital inflows from the west and was therefore not directly affected when western liquidity dried up. However, financing from Russia was on a declining path: Belarus received the equivalent of US$1.5 billion in 2007, US$1 billion in 2008, and only US$0.5 billion in 2009.

Over the course of 2009, Belarus was hit by further adverse developments. The prices of its major commodities exports—refined oil and phosphates—fell sharply, causing a worsening of the terms of trade by 9 percent. In December 2009 Russia announced that it intended to impose an export duty on oil imported by Belarus for refining and re-export, implying a worsening of the oil trade balance by the equivalent of US$2 billion (about 4 percent of GDP).

Policy Response

Faced with an acute shortfall in external financing, Belarus approached the IMF in the fall of 2008 for a program to help it adjust to the external shocks and redress its pressing vulnerabilities. A 15-month stand-by arrangement was approved in January 2009—the first arrangement for Belarus with the IMF, apart from a short-lived program in 1995. The 2009 program was seen as setting the stage for further reforms over the medium term, with a successor program being considered from the outset. However, a successor program was not agreed upon. The major planks of the stand-by arrangement were these:

  • Exchange rate adjustment. Belarus devalued its ruble by 20 percent against the U.S. dollar and introduced an exchange rate band of ±5 percent centered on a basket of U.S. dollars, euros, and the Russian ruble. In response to a further deterioration of the external environment, the band was widened to ±10 percent in May 2009 and recentered at end-2009. After the devaluation, the ruble gradually depreciated by 10 percent against the basket of currencies during the program period.
  • Macroeconomic tightening. Exchange rate realignment was supported by tight domestic demand policies. The government committed to a balanced budget. A government wage increase of 20 percent, granted just before the end of 2008, was rescinded. The wage freeze was subsequently extended. Other fiscal measures included a cut in traditionally high public investment, various other expenditure reductions, and an increase in the value-added tax. Overall, fiscal measures amounted to about 3 percent of GDP. The government also agreed to eliminate the practice of using government deposits with commercial banks to finance “lending under government programs,” a practice that had been widely used for supplying resources to priority sectors through presidential decrees and government resolutions. In August 2009, the government committed to limit such lending, which at that time was financed by credit at below-market rates from the NBRB.
  • Structural reforms to reduce financial sector risks and promote transition. The legal and institutional framework for privatization was improved by amending the Privatization Law and passing a decree on establishing the National Investment and Privatization Agency (NIPA). An enabling business environment and private sector development was facilitated by a new Presidential Directive (“On development of entrepreneurial initiative and promotion of business activities in the Republic of Belarus”). Advances in price liberalization were made by eliminating the right to introduce mandatory ceilings on price increases, reducing the number of goods and services subject to price regulation, and repealing mandatory justification of price increases. The program also envisaged creation of a Special Financial Agency—eventually to become a development bank—to remove “lending under government programs” from the banking system, but the development bank is still being set up.
  • Large up-front financing from the IMF to boost reserves and avoid excessive contraction. About one-third of the US$2.5 billion stand-by arrangement was made available upon program approval. In June 2009, in response to the worse-than-projected fall in demand for Belarus’s exports, the amount of IMF financing was increased to US$3.5 billion.

Economic Outcomes in 2009–11

In 2009, real economic activity held up relatively well. Belarus avoided an outright contraction in output except for a few months in early 2009. For the year as a whole, GDP grew by 0.2 percent, followed by a very strong expansion of 7.7 percent in 2010. Official registered unemployment remained low, as state-controlled firms retained workers and the work week was shortened. Twelve-month inflation eased to around 10 percent, despite the devaluation and hikes in administered prices for utilities. This outcome owed much to the fall of economic activity below potential and to the tightening of policies under the program.

However, external adjustment was limited. While the program worked largely as intended on the fiscal and exchange rate fronts, credit growth was only belatedly and partially brought under control (Figure 9.2). Imports fell, but not enough to offset the loss of export earnings, which suffered due to the additional adverse shocks during 2009. Consequently, the current account deficit widened to 12½ percent of GDP in 2009.

Figure 9.2Belarus: IMF-Supported Program and Beyond

Sources: Belarusian authorities; and IMF staff calculations.

Note: SBA = stand-by arrangement.

When the program ended in March 2010, the government quickly loosened macroeconomic policies instead of proceeding with a successor adjustment program to deepen reform. In the run-up to the presidential election of December 2010, emphasis was placed on support for domestic demand and economic activity in an effort to deliver the macroeconomic objectives set out in the annual plan for 2010. Credit growth accelerated to nearly 40 percent toward end-2010. The “first grade wage,” which anchors the wage system in the public sector, was increased by 46 percent between March and December 2010. Fiscal deficit targets for both 2010 and 2011 were loosened to accommodate the wage increases. While 12-month inflation fell to a single-digit level at the end of 2010, it started to pick up again rapidly in the spring of 2011.

Expansionary policies aggravated external vulnerabilities further. Imports rebounded and the current account deficit widened to 15 percent of GDP in 2010. Initially, Belarus was successful in mobilizing external financing. With economic activity seeming to be only temporarily dented by the crisis, Belarus won the confidence of markets and managed to make a debut on the Eurobond market with a US$600 million issue in July 2010, followed by a US$400 million placement in August and a US$800 million placement in January 2011. Russia’s decision of December 2010 to restore some of its oil subsidies offered the prospect of an improvement in the oil balance in 2011.

External vulnerabilities came to a head in March 2011, and Belarus went into a foreign exchange crisis. The ever larger current account deficit in the first quarter of 2011 swamped available foreign financing. As expectations of a renewed depreciation took hold, dollarization intensified, putting further pressure on international reserves. A widening of the exchange rate band, hikes of policy interest rates, and administrative measures proved insufficient to arrest the momentum. After reserves had fallen by a quarter to less than one month of imports, the NBRB suspended its foreign exchange intervention and a parallel “street” foreign exchange market emerged. In a failed attempt to unify the exchange rates, the authorities devalued the official exchange rate by 35 percent against the U.S. dollar on May 24. This did not solve the problem, however, as the authorities wished to maintain the fixed exchange rate without intervention. The rate on the street market depreciated rapidly during the summer. With insufficient monetary tightening, inflation surged to triple-digit levels in late 2011. GDP growth, which had been in the double digits in the first half of the year, slowed to 5.3 percent for the year.

The economy began to stabilize only in late 2011 after the authorities undertook necessary stabilization measures. The NBRB unified the exchange rate in October and moved to a flexible exchange rate regime, committing to use intervention sparingly and only for limiting excessive short-term volatility. Monetary policy has been significantly strengthened: the policy rates have been raised and liquidity tightened. Improved relations with Russia helped as well: a new gas contract with Russia nearly halved import prices for natural gas (a benefit of some 5 percent of GDP for 2012) and significant privatization proceeds from selling the government’s remaining 50 percent stake in Beltransgas as well as additional financing from Russia and the EurAsEC’s Anti-Crisis Fund boosted international reserves to nearly two months of imports of goods and services at the end of 2011.

In retrospect, the latest crisis was the result of missed opportunities. At the conclusion of the IMF-supported program in March 2010, the path needed for adjustment to work was clear. Maintaining tight domestic demand policies, using the flexibility available to the NBRB under the exchange rate band, and accelerating structural reforms would have paved the way to sustainable growth. Instead, the Belarus authorities chose to spur domestic demand by increasing credit growth and raising wages paid by budgetary institutions and preferred to maintain a de facto exchange rate peg against the U.S. dollar. Only recently have the authorities begun to rectify the imbalances by tightening monetary policy and liberalizing the exchange rate.

Challenges Ahead

Solidifying Belarus’s nascent stabilization requires strong policies—the authorities need to implement tight fiscal and monetary policies and tight wage policy while maintaining the flexible exchange rate regime. The lessons from the recent crises suggest that the best insurance against macroeconomic instability is a coherent macroeconomic framework with realistic targets for economic growth and real wages, underpinned by ambitious fiscal adjustment measures, strong monetary policy (including tight control over lending under government programs), and exchange rate flexibility.

More broadly, Belarus needs to adjust its economy to the new conditions. It is difficult to see how a rigid state-controlled system can underwrite sustained improvements of living standards over the longer run, especially if the economy is to overcome its dependence on energy subsidies from Russia. The 2008/09 crisis and the subsequently intensified dialogue with international financial institutions prompted the authorities to accelerate economic liberalization in many areas, including fiscal management, price formation, and financial system reform. However, several reforms were slowed down or even reversed afterwards. The authorities should embark on a course of strong structural reforms and take the opportunity to put the economy on a sustainable development path.

Belarus: Principal Economic and Financial Indicators, 2003–11
Real Sector Indicators
GDP (real growth in percent)
Domestic demand (real growth in percent)8.811.410.515.111.617.8−
Net exports (real growth contribution in percent)3.37.3−13.5−7.9−1.3−9.21.3−3.73.8
Exports of goods and services (real growth in percent)10.915.3−−9.07.728.4
CPI (end-of-period change in percent)25.414.47.96.612.113.310.19.9108.7
Employment (growth in percent)−−−4.15.8−0.5
Unemployment rate (percent)
Public Finances
Fiscal balance (percent of GDP)−1.00.0−−0.7−1.83.1
Government revenue (percent of GDP)45.946.947.449.149.550.645.741.642.0
Government expenditure (percent of GDP)46.046.347.247.447.
Government primary expenditure (percent of GDP)45.645.846.847.046.846.745.342.737.3
Government primary expenditure (real growth in percent)13.412.111.910.48.110.0−2.81.7−8.1
Public debt (percent of GDP)9.78.413.418.321.734.941.050.6
Of which foreign held1.
External Sector
Current account balance (percent of GDP)−2.4−5.31.4−3.9−6.7−8.2−12.6−15.0−10.5
Net capital inflows (percent of GDP)12.25.0−0.14.611.66.89.611.013.4
Other investment1.24.1−
Exports (percent of GDP)64.969.
Exports (US$, growth in percent)24.435.515.922.324.234.2−32.920.356.1
Global export market share (basis points)
Remittances (percent of GDP)
Imports (percent of GDP)68.775.659.164.367.268.661.867.787.1
Imports (US$, growth in percent)−27.022.829.3
External debt (percent of GDP)21.820.215.817.426.525.045.651.161.1
Gross international reserves (US$ billions)
Gross international reserves (percent of GDP)
Reserve coverage (GIR in percent of short-term debt)
Monetary Sector
Broad money (end of period, growth in percent)54.350.042.239.340.026.323.131.9121.2
Monetary base (end of period, growth in percent)51.141.973.719.838.411.7−11.549.584.1
Private sector credit (end of period, percent of GDP)11.714.115.519.523.727.235.342.341.5
Of which foreign currency denominated5.
Of which foreign currency indexed
Cross-border loans to nonbanks (Q4, percent of GDP)
Private sector credit (end of period, real growth in percent)44.541.334.643.932.935.624.930.4−21.2
Financial Sector
Assets (percent of GDP)24.327.029.134.440.646.056.773.890.0
ROA (percent)
ROE (percent)
CAR (percent of risk-weighted assets)
NPLs (percent of total loans)
Loan-to-deposit ratio0.
Cross-border claims by foreign banks (all sectors, percent of GDP)
Financial Markets
Interest rates (end of period, one-year government bond, percent)
CDS spreads (sovereign, end of period, basis points)
EMBIG spread (sovereign, end of period, basis points)
Exchange rate (end of period, domestic currency/US$)2,1562,1702,1522,1402,1502,2002,8633,0008,350
NEER (index, 2003 = 100)100.088.987.485.680.477.769.864.442.8
REER (CPI-based, 2003 = 100)
REER (ULC-based, 2003 = 100)
Memorandum Items
GDP (nominal, in billions of domestic currency)36,56549,07265,06779,26797,165129,791137,442164,476274,282
GDP (nominal, in billions of US$)17.822.730.237.045.360.849.255.255.5
Source: IMF staff.Note: CAR = capital adequacy ratio; CDS = credit default swap; CPI = consumer price index; EMBIG = Emerging Markets Bond Index Global; FDI = foreign direct investment; GIR = gross international reserves; NEER = nominal effective exchange rate; NPLs = nonperforming loans; REER = real effective exchange rate; ROA = return on assets; ROE = return on equity; ULC = unit labor cost.

Financial and capital account balances excluding EU balance-of-payments support, use of IMF resources, and SDR allocations.

Short-term debt at original maturity.

Source: IMF staff.Note: CAR = capital adequacy ratio; CDS = credit default swap; CPI = consumer price index; EMBIG = Emerging Markets Bond Index Global; FDI = foreign direct investment; GIR = gross international reserves; NEER = nominal effective exchange rate; NPLs = nonperforming loans; REER = real effective exchange rate; ROA = return on assets; ROE = return on equity; ULC = unit labor cost.

Financial and capital account balances excluding EU balance-of-payments support, use of IMF resources, and SDR allocations.

Short-term debt at original maturity.

The main authors of this chapter are Eliza Lis and Dmitriy Kovtun.

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