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Economy of Belarus: Between Western Sanctions and Union With Russia – Valdai Discussion Club

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The key task for the Belarusian economy in the medium term is reforms aimed at preserving and modernising the industrial potential of Belarus. We are not talking about a radical breakdown of the economic system — it is necessary to progressively modernise economic management, change legislation and unify it with that of Russia, optimise the role of the state in the Belarusian economy, and develop its monetary and financial system, writes Valdai Club expert Vyacheslav Sutyrin.

The migration crisis on the Polish-Belarusian border is only the latest episode in the political conflict between Belarus and the European Union. Earlier, Brussels approved the toughest sanctions against the republic’s economy in the history of their diplomatic relations. The stability of the Belarusian economy is one of the key factors that will influence the dynamics of the crisis, which creates risks for Russian interests. Real economic integration with Russia is necessary to maintain social and economic stability in Belarus.

State of the Belarusian economy

The economic performance of Belarus during the first half of 2021 is generally positive, but serious internal problems persist. Significant price inflation has been observed in connection with the post-pandemic recovery and prices are on the rise in external commodity and food markets. At the same time, the Western sanctions, introduced in 2021, have not yet begun to have a profound impact; their effect will fully manifest itself in 2022-2023.

In January-September 2021, the economy of Belarus grew by 2.7% compared to the same period in 2020. These data are consistent with the statistics of the Eurasian Economic Commission (EEC). In the first half of 2021, the volume of Belarusian exports amounted to more than $21 billion, exceeding the indicators for the same period in 2020 by 30%. Foreign trade with the countries of the Eurasian Union grew by 22%, and with third countries — by 30.6%. This is largely a recovery from the downturn in trade witnessed over the past two years.

There are also negative trends. According to the EEC, cited by economist Elena Kuzmina, in January-July 2021 investments in fixed assets decreased by 7.6% and the volume of construction work ebbed 15.9%. The downward trend in traffic volumes in 2019-2020 continues. In the first half of 2021, freight (-1.2%) and passenger traffic (-4.5%) decreased. The real incomes of citizens of Belarus increased 3.1% during the first 7 months of 2021 increased, while the consumer price index increased by 5.1%.

The debt of the flagship enterprises of the Belarusian industry continues to grow, while the number of their employees is decreasing. The government’s ability to stimulate the economy at the expense of the state, including lending to flagship enterprises, will be limited in the next few years, given the large, upcoming payments on external public debt.

Impact of Western sanctions

In 2021, the European Union, Britain and the United States introduced the toughest sanctions against Belarus in the state’s 30-year history. They target the main taxpayers to the Belarusian budget and the state’s main sources of foreign exchange earnings — the potash and oil refining industries. These steps exacerbate the internal problems of the Belarusian economy associated with government lending to large enterprises. Their effect will become noticeable in the next 1-2 years, affecting new contracts.

The EU sanctions package is in many respects similar to the sanctions initiated against Belarus by the UK and the US, and includes:

• a ban on European business cooperating with Belarusian exporters of potash fertilizers (in terms of nomenclature items), oil products and tobacco, as well as banking sector companies;

• restricted access to the European capital market, including a ban on the purchase of Belarusian securities with a maturity of more than 90 days;

• a ban on European banks providing insurance services and loans to the Belarusian government and state bodies, including the suspension of lending through the European Investment Bank;

• a ban on European air carriers flying through Belarus, and Belavia flights over the EU;

• individual sanctions (more than 160 citizens of Belarus are included in the so-called “black lists”), mean a ban on visits to the EU, business interaction and the “freezing” of accounts in EU banks.

Predictions of the future of the Belarusian economy under the pressure of sanctions are complicated by the fact that the real scale of sanctions, first of all, of American sanctions is not yet known: namely, how forcefully the extraterritorial principle of their actions will be imposed on countries which are dependent on the United States.

The World Bank forecasts 1.2% GDP growth in 2022 and 2.3% GDP growth in 2023. According to the Eurasian Development Bank, GDP growth in Belarus in the coming years will be limited to 1 – 1.5%.

Estimates of the damage that sanctions have dealt the economy of Belarus vary, ranging from 3% of GDP per year (estimated by the Belarusian government) to 7-13% (expert estimates). The real losses depend on whether the transit of Belarusian potash fertilizers through the Baltic states is blocked, and whether the United States uses the mechanism of extraterritorial jurisdiction as part of its adopted sanctions package. The main consequence of this decision is the ban on purchases of Belarusian oil products by Ukraine, which has become their largest importer. Under this item alone, the losses of Belarus can exceed $5 billion (about 8% of Belarus’ GDP) — these are the volumes of foreign exchange earnings that have accumulated through the export of oil products to the EU, Britain and Ukraine in recent years. This will entail a “radical” scenario of the West’s sanctions policy.

So far, a moderate scenario is playing out. The US is in no hurry to force Kiev to abandon Belarusian oil products, and EU restrictions are coming into force gradually. At the same time, a high probability remains that Brussels will continue to tighten sanctions, including in connection with the migration crisis on the Polish-Belarusian border, for which the EU blames Belarusian leadership. The possibility of accidents or provocations that could lead to an uncontrolled escalation of the situation on the border between Poland and Belarus cannot be completely ruled out. This increases the further unpredictability of the situation in which the Belarusian economy will exist in the coming months and years.

Relations with Russia and prospects

However, the unpredictability of the conditions for the development of the Belarusian economy has its limits. The Russian market and Moscow’s economic support continue to be a key factor in ensuring the stability of the Belarusian economy. Investments and direct lending to Belarus are not the only form of support. According to expert estimates, the difference between the price of Russian oil for Belarus and the world market over the past 10 years has been worth about $5 billion annually to Minsk, while gas benefits have averaged $2 billion per year. For comparison’s sake, over the same period, the average annual wage fund in the budgetary sphere of the republic was $4.1 billion.

The approval of 28 union programmes — the first large package of Russian-Belarusian integration agreements in more than 10 years — has already allowed Minsk to receive bonuses from the European energy crisis. Thus, Belarus’s gain from low prices for Russian gas compared to European ones only by the end of 2021 may exceed $5 billion.

The support of the Belarusian economy by Russia in the foreseeable future will remain the main factor in its development, especially in the context of growing sanctions pressure. Close interaction with Russia offers Minsk the potential to circumvent European sanctions on trade in Belarus’ main export commodities — oil products and potash fertilizers.

In fact, Western sanctions against Belarus create additional costs for Russia, which provides support to the republic. This raises the question of justifying the increase in costs in the eyes of Russian citizens — the reciprocal steps of Minsk in the field of economic, political, and defence integration. At the same time, military and political risks in the region are increasing due to the growing antagonism between Belarus and neighbouring Poland and Lithuania, which are members of NATO.

Economic cooperation between Belarus and China is progressing slowly. The volume of Belarusian exports to China in the first quarter of 2021 amounted to $300 million, while the trade balance is negative: $940 million. For comparison, Belarusian exports to Kazakhstan over the same period were worth $255 million, exports to Lithuania were worth $411 million, and exports to Poland — $592 million. In recent years, support from China has been minimal.

The key task for the Belarusian economy in the medium term is reforms aimed at preserving and modernising the industrial potential of Belarus. We are not talking about a radical breakdown of the economic system — it is necessary to progressively modernise economic management, change legislation and unify it with that of Russia, optimise the role of the state in the Belarusian economy, and develop its monetary and financial system.

To preserve the stability of the industrial flagships of Belarus, it is necessary to consider the possibility of creating joint ventures with Russia, including not only oil refining and industry, but also construction, logistics, pharmaceuticals and other industries. The merger of large enterprises is necessary where it is profitable. It is advisable to transfer to the territory of Russia some of the Belarusian industries, for example, the defence industry.

In the medium term, the launch of real economic integration between Russia and Belarus means that interaction should reach the sectoral level, which was not achieved in previous years. This will prevent a sharp drop in the standard of living of Belarusian citizens in connection with Western sanctions. The key point is not to allow the implementation of the union programmes to be “wrapped up” on a rhetorical level against the background of Minsk’s confrontation with its western neighbours. It is important that the integration process moves according to the plan with the government’s report every six months, in accordance with the reached agreements.

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Taliban Prime Minister Seeks Global Help to Shore Up Economy – Bloomberg

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Afghanistan’s Acting Prime Minister Mullah Mohammad Hassan said his interim administration has inherited a sinking economy and called on the global community to assist the country in preventing a further crisis as inflation spirals.

The former U.S.-backed government of Ashraf Ghani was corrupt and damaged the country’s economic situation, Hassan said in his first national address since assuming office. “The Islamic Emirate wants good relations with all countries and economic relations with them.” Only the audio portion of the speech was broadcast on television.

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Afghan Economy Nears Collapse as Pressure Builds to Ease U.S. Sanctions – The New York Times

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Afghanistan’s economy has crashed since the Taliban seized power, plunging the country into one of the world’s worst humanitarian crisis.

MAZAR-I-SHARIF, Afghanistan — Racing down the cratered highways at dawn, Mohammad Rasool knew his 9-year-old daughter was running out of time.

She had been battling pneumonia for two weeks and he had run out of cash to buy her medicine after the bank in his rural town closed. So he used his last few dollars on a taxi to Mazar-i-Sharif, a city in Afghanistan’s north, and joined an unruly mob of men clambering to get inside the last functioning bank for hundreds of miles.

Then at 3 p.m., a teller yelled at the crowd to go home: There was no cash left at the bank.

“I have the money in my account, it’s right there,” said Mr. Rasool, 56. “What will I do now?”

Three months into the Taliban’s rule, Afghanistan’s economy has all but collapsed, plunging the country into one of the world’s worst humanitarian crises. Millions of dollars of aid that once propped up the previous government has vanished, billions in state assets are frozen and economic sanctions have isolated the new government from the global banking system.

Now, Afghanistan faces a dire cash shortage that has crippled banks and businesses, sent food and fuel prices soaring, and triggered a devastating hunger crisis. Earlier this month, the World Health Organization warned that around 3.2 million children were likely to suffer from acute malnutrition in Afghanistan by the end of the year — one million of whom at risk of dying as temperatures drop.

No corner of Afghanistan has been left untouched.

In the capital, desperate families have hawked furniture on the side of the road in exchange for food. Across other major cities, public hospitals do not have the money to buy badly needed medical supplies or to pay doctors and nurses, some of who have left their posts. Rural clinics are overrun with feeble children, whose parents cannot afford food. Economic migrants have flocked to the Iranian and Pakistani borders.

Victor J. Blue for The New York Times
Victor J. Blue for The New York Times

As the country edges to the brink of collapse, the international community is scrambling to resolve a politically and legally fraught dilemma: How can it meet its humanitarian obligations without bolstering the new regime or putting money directly into the Taliban’s hands?

In recent weeks, the United States and the European Union have pledged to provide $1.29 billion more in aid to Afghanistan and to Afghan refugees in neighboring countries. But aid can do only so much to fend off a humanitarian catastrophe if the economy continues to crumble, economists and aid organizations warn.

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“No humanitarian crisis scan be managed by humanitarian support only,” said Abdallah Al Dardari, the United Nations Development Program’s resident representative in Afghanistan. “If we lose these systems in the next few months, it will not be easy to rebuild them to serve the essential needs of the country. We are witnessing a rapid deterioration to the point of no return.”

Under the previous government, foreign aid accounted for around 45 percent of the country’s G.D.P. and funded 75 percent of the government’s budget, including health and education services.

But after the Taliban seized power, the Biden administration froze the country’s $9.5 billion in foreign reserves and stopped sending the shipments of U.S. dollars upon which Afghanistan’s central bank relied.

The scale and speed of the collapse amounts to one of the largest economic shocks any country has experienced in recent history, economists say. Last month, the International Monetary Fund warned that the economy is set to contract up to 30 percent this year.

Kiana Hayeri for The New York Times
Jim Huylebroek for The New York Times

Thousands of government employees, including doctors and teachers, have gone months without pay. The wartime economy that employed millions and propped up the private sector has come sputtering to a halt.

By the middle of next year, as much as 97 percent of the Afghan population could sink below the poverty line, according to an analysis by the United Nations Development Program. Many people who were already living hand-to-mouth have been pushed over the edge.

One October morning in Mazar-i-Sharif, dozens of men gathered downtown, carrying shovels cobbled together with rough wood and rusted metal.

For years, day laborers have gathered there to pick up work digging wells, irrigating fields of cotton and grain, or doing construction around the city. The pay was modest — a couple dollars a day — but enough to buy food for their families and pay other small bills. These days, though, the men stay at the square until sunset hoping for even one day of work a week. Most cannot even afford to buy bread during lunch.

“There was work one day — and then suddenly there wasn’t,” said Rahmad, 46, standing in the crowd. “It was so sudden I didn’t have time to plan or save money or anything.”

Even before the Taliban takeover, Afghanistan’s fragile economy was wracked by slow growth, corruption, deep poverty and a severe drought.

Afghanistan has long been dependent on imports for basic foods, fuel and manufactured goods, a lifeline that was severed after neighboring countries closed their borders during the Taliban’s military campaign this summer. Trade disruptions have since caused shortages of crucial goods, like medicine, while the collapse of financial services has strangled traders who rely on U.S. dollars and bank loans for imports.

At the Hairatan port along the Afghanistan-Uzbekistan border, a team of workers unloaded flour bags from a shipping container into trucks, sending clouds of white specks into the air. Since August, their company has slashed its imports in half; people can no longer afford basic goods.

Kiana Hayeri for The New York Times
Kiana Hayeri for The New York Times

At the same time, the cost of doing business soared. Customs and traffic officers, who have gone unpaid for months, are asking for more in bribes, according to a manager for the company, the Bashir Navid Group.

“Everything is disorganized,” the manager, Mohammad Wazir Shirjan, 50, said. “Everyone is completely frustrated.”

To avoid a complete currency collapse, the Taliban limited bank withdrawals to first $200 and then $400 a week and have appealed to China, Pakistan, Qatar and Turkey to fill its budget hole, which is billions of dollars large. So far, none have offered the financial backstop that Western donors provided to the former government.

The Taliban have also pressed the United States to release its chokehold on the country’s finances or risk a famine, as well as Afghan migrants flooding into Europe in search of work.

“The humanitarian crisis we have now is the result of those frozen assets. Our people are suffering,” Ahmad Wali Haqmal, a spokesperson for the Ministry of Finance, said in an interview.

In late September, the Biden administration issued two sanctions exemptions for humanitarian organizations to ease the flow of aid, and it is considering additional adjustments, according to humanitarian officials involved in those negotiations. But those exemptions do not apply to paying employees like teachers in government-run schools and doctors in state hospitals, and the decision not to include them risks the collapse of public services and a further exodus of educated professionals from the country, humanitarians say.

Kiana Hayeri for The New York Times
Kiana Hayeri for The New York Times

And the scope of the exemptions is limited in other ways. Many foreign banks that aid organizations rely on to transfer funds into Afghanistan have cut ties to Afghan banks for fear of running afoul of sanctions. And the liquidity crisis severely restrains the amount that organizations can withdraw to pay vendors or aid workers.

“The current economic restrictions and sanctions policy, if maintained and not adjusted, are on track to hurt the Afghan people — through deprivation and famine — more than the Taliban’s brutalities and poor governance,” said John Sifton, the Asia advocacy director at Human Rights Watch.

Already in hospitals across the country are signs of a hunger crisis that could overwhelm the fragile health care system.

In a malnutrition ward of a hospital in southern Afghanistan, Shukria, 40, sat with her 1-year-old grandson, Mahtab, his mouth craned open but body too weak to let out a cry.

For weeks, the boy’s father had come home empty-handed from his mechanic shop as business dried up, and the family resorted to bread and tea for every meal. Soon his mother stopped producing milk to breastfeed, so she and Shukria supplemented his diet with milk from their family’s goat. But when they ran out of cash to buy food, they sold the animal.

“I’ve been asking this hospital to give me work,” Shukria said. “Otherwise after a week, a month, he will just end up sick and back here.”

Jim Huylebroek for The New York Times

Kiana Hayeri contributed reporting from Mazar-I-Sharif, and Yaqoob Akbary from Kandahar.

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Charting Global Economy: Latin America at Top of Inflation Wave – BNN

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(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

While prices are rising all over the world, the increases are especially striking in Latin America, which has the highest inflation forecast for both this year and next.

U.S. and U.K. inflation metrics recorded multi-decade highs, while big price jumps in New Zealand led the central bank to raise interest rates for the second time in as many months. India’s economy is showing signs of strengthening, while an increase in Covid-19 infections is denting business sentiment in Germany.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:

U.S.

Personal spending rose in October from a month earlier by the most since March, while a closely watched inflation measure posted the largest annual increase in three decades. The figures come as some Federal Reserve officials are advocating for a faster tapering of the central bank’s asset-purchase program than initially planned.

The supply crunch that’s helped drive inflation to multi-decade highs shows some signs of easing in the U.S. -– but it’s still getting worse in Europe. 

Applications for U.S. state unemployment benefits plunged last week to a level not seen since 1969, which if sustained would mark the next milestone in the labor market’s uneven recovery. However, the larger-than-expected drop was largely explained by how the government adjusts the raw data for seasonal swings.

Europe

German business confidence took another hit in November, with a new wave of Covid-19 infections looming over the economy and rising inflationary pressures threatening to weigh on manufacturing. Expectations for the next half year also worsened.

U.K. companies reported the strongest inflation in more than two decades during November, adding to pressure on the Bank of England to lift interest rates as early as this month. IHS Markit Ltd. said 63% of purchasing managers reported increased cost burdens, driving the fastest growth in an index tracking inflation since the report started in 1998. 

Asia

Singapore expects gross domestic product to expand 3% to 5% next year, a slower pace than this year as its rebound from the worst of the pandemic steadies. The first official forecast for 2022 compares with about 7% this year, the Ministry of Trade and Industry said Wednesday, reflecting the impact from easing pandemic restrictions and a stabilizing global economy.

China pulled back on its already halting progress toward meeting its U.S. trade deal targets, slowing purchases of all types of goods covered by the agreement despite calls from the Biden administration for Beijing to adhere to its commitments. 

Emerging Markets

Price surges are busting through policy makers’ targets in all of Latin America’s major economies, with annual inflation prints this month of 6% in Chile, 10.7% in Brazil and a whopping 52% in Argentina. Consumer prices in Mexico rose 7.05% in the first half of November from a year prior, the highest in 20 years.

India’s economy showed steady signs of strengthening in October as services, manufacturing and exports kept it on course to post the world’s fastest growth.

World

New Zealand’s central bank raised interest rates for the second time in two months and signaled it will need to tighten policy more quickly than previously expected to contain inflation.

©2021 Bloomberg L.P.

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