Belarus crisis set to strengthen Russian hand

Washington Examiner reported that Belarus is running out of cash with people waiting in day long lines to exchange rubles as they prepare for devaluation. But since the country known as Europe's last dictatorship alienated the West, Russia now has a free hand to set its own terms in exchange for a lifeline.

As Moscow draws up the papers to give as much as USD 3 billion to the government of President Mr Alexander Lukashenko, it will be eyeing Belarus' most lucrative assets, particularly its oil refineries and chemical plants.

Mr Stanislav Bogdankevich former head of Belarus central bank said that "Lukashenko is beginning to understand that having slammed the door on the West with his foot he has doomed himself to conditions set by the Kremlin. There is no doubt Belarus needs help. Reserves of hard currency fell 20% in the first three months of the year to just USD 3.76 billion. To staunch the flow the government has made it difficult for people to buy dollars and euros.

The official exchange rate is fixed but a significant devaluation seems to be only a matter of time. During the period of uncertainty, major car dealerships have stopped selling foreign vehicles. Foreign food and alcohol brands have begun to disappear from store shelves as imports are suspended and shoppers stock up.

A big part of the problem is that the Belarussian economy has seen little development under Mr Lukashenko, who during 17 years in power has run a quasi Soviet state. He has stifled private enterprise and kept about 80 percent of industry under state control, but his promises of stability and efforts to maintain the Soviet era social safety net have kept him popular with the elderly and working class. He raised public sector salaries ahead of the December presidential election, a landslide win widely seen as rigged. The International Monetary Fund has now urged him to lower wages to adjust demand to a weaker economy.

An alternative would be to devalue the ruble as most economists recommend by as much as 40%. The government took a first step last week when it allowed banks to trade the ruble at 10% below the official rate. Any sharper drops would be extremely unpopular however, even though confidence in the currency is already plummeting. After violently dispersing election night protests and arresting hundreds of demonstrators, Mr Lukashenko launched a broad crackdown on the opposition in an apparent effort to prevent further street protests as the economic troubles deepen.

Mr Alexander Klaskovsky political analyst said that Mr Lukashenko used repression to win the fight for power, but these methods don't work in the economy. So Belarus is now in the position of having to ask Russia for USD 1 billion credit and the Eurasian Economic Community, a Russia dominated grouping of former Soviet states for USD 2 billion more.

Belarus' central bank said last week that it was confident the credit would be forthcoming within the next 20 to 30 days and until then planned no further changes to its currency policies. The Belarussian government said that talks with Russia were under way but gave no specifics about what Minsk was prepared to offer Moscow in return. Russia has been pushing its western neighbor to put up for sale some crucial assets such as oil refineries and chemical and machinery plants.

Mr Alexei Moiseyev chief economist at VTB Capital said that the only long-term solution is for Belarus to restructure its economy. It was OK to have this kind of economy when they were able to buy cheap oil and gas from Russia and get cheap loans from the West. Now that both sources of their wealth have dried up, the economy cannot function properly.

Citing Belarus' dwindling reserves, Standard & Poor's has downgraded its credit rating to B putting it deep into junk status and making it difficult to borrow abroad. The IMF provided a USD 3.5 billion credit in 2009 to help Belarus during the global financial crisis but no further aid is expected. The IMF stressed in a March report that it would first want to see a credible commitment to strong stability oriented policies and an ambitious structural reform agenda.

Mr Valery Karbalevich analyst of Belarus said that "Lukashenko openly spit on the West, since for him the most important thing is to maintain control over the situation inside Belarus. He does this in the usual way with an iron fist. The key to the future of Belarus lies in the Russian money pit in which President Mr Lukashenko now has to dig deeper and deeper."


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