“Last dictator of Europe” Alexander Lukashenko of Belarus in deep financial trouble, in spite of Vladimir Putin coming to the rescue; Belarus Rouble devalues by 50%.

People call it the last dictatorship of Europe: Belarus or White Russia. This country –  one of the former Soviet republics, lying between Russia and the Ukrain – is ruled with an iron hand by Alexander Lukashenko, president since 1994.

Where you could say that countries like Ukrain and Russia have accepted some kind of democracy and free market economy, albeit seriously flawed ones; there is no doubt who is the boss in Belarus. One look at the inflexible face of ‘Alexander Grigoryevich’ shows you: here is ‘one tough cookie’.

Alexander Grigoryevich Lukashenko,
president of Belarus
Picture courtesy of news.belta.by

But even the toughest of the presidents of the former Soviet republics has to accept that if you try to force the economy, the economy will force you in the end.

The Financial Times (www.ft.com) writes two stories on the growing problems of Belarus with its financial situation and its currency, the Belarussian Rouble. I will show here some pertinent snips of these articles and add my comments. 

Putin offers Belarus a $3bn bail-out 

Away from frantic negotiations over how to save Portugal and Greece, another peripheral European country is scrambling for a bail-out. But Belarus is looking not to the European Union or the International Monetary Fund but to a grouping of ex-Soviet republics led by Russia.

Vladimir Putin, Russia’s prime minister, flew to Minsk on Thursday to offer Belarus about $3bn in loans over three years from the Eurasian Economic Community, in return for undertaking economic reforms and privatising state companies – which could see Russia take controlling stakes in strategic assets such as oil refineries and pipelines.

“It will help to improve investor sentiment,” said Anastasiya Golovach, an analyst with Renaissance Capital. “But Belarus will definitely have to pay something for this and Beltransgaz [operator of the east-west pipeline shipping Russian natural gas to the EU] will be the price.”

Moscow is relishing Alexander Lukashenko’s discomfort, as the authoritarian leader of Belarus, who has long had a prickly relationship with Russia, endeavours to calm the growing panic surrounding the Belarusian economy.

Belarus has plunged into a balance of payments crisis, with the current account deficit soaring to 16 per cent of gross domestic product and currency reserves dwindling to a month of import cover. The central bank has introduced multiple exchange rates, seeing a collapse in the rouble’s black market rate.

The economic model that allowed Mr Lukashenko to rule over this largely unreformed ex-Soviet republic of 10m since 1994 has broken down. For many years Belarus was an island of post-Soviet stability, paid for in large part by the import of cheap oil from Russia, which was then refined and exported to the west at a considerable profit.

Several years ago Russia lost patience with the mercurial Mr Lukashenko, who was reneging on promises to bring Belarus into a closer union with Russia, and began to raise energy prices.

Although the former Soviet republics Russia, Belarus and Ukrain in the nineties could be seen as ‘old partners in crime’, the animosity and envy between these countries have been growing strongly, of late. In case of the Ukrain the reason was the growing overture to Europe, the EU and even the NATO that was a clear offense and threat to Vladimir Putin and his henchman Dmitry Medvedev.

For Belarus, however, it was probably the fact that Lukashenko has been tougher and more macho at politics than Putin and Medvedev together. To understand this, it is important to know something of the culture in these countries.

These countries of the former Soviet Union seem to have some things in common, like:

• Idolizing of the President and people in power in general;
• People thinking they need strong leaders to be able to survive in the world;
• Overexaggerated respect of the people for their country’s history, authorities, ‘famous people’, artists and old sports and army heroes;
• A culture of nepotism and pork barrel politics;
• Incomprehensible laws and many unwritten rules of conduct that force people to find original ways to obtain products and services.
• As a result: An informal economy that is fueled by the “if you scratch my back, I scratch yours”-attitude under the people to get things done or undone;
• As a second result: Widespread corruption;

So where Americans and West-European people might look at Lukashenko as a dinosaur from forlorn ages, in Russian eyes he is a tough and strong leader that doesn’t prick up his ears to Russia, America or the European Union and sails his own course. That gained Lukashenko a lot of respect. That fact might have annoyed Putin and Medvedev, who both suffer from dwindling respect and authority in their own country in a pre-election year and now see a chance to get even with Lukashenko.

The fact that Lukashenko has to hold out his hands to Russia is a defeat for him and a victory for the Russian leaders. The article is very right that this will come at a high price. How high this price will be, can be seen in the coming months.

Watch out for companies like Gazprom, Rosneft (oil), Lukoil and others that are closely attached to the current Russian government, to obtain important parts of former Belarus state companies. And Putin and Medvedev probably also want to buy the unconditional loyalty of the Belarus government.

Belarus devalues its currency

Belarus on Tuesday lowered its official exchange rate against the dollar by 36 per cent, but analysts questioned whether even such a radical step would be enough to resolve the country’s balance of payments crisis.

The central bank lowered the official rate for the dollar from 3,155 roubles to 4,930 roubles but the move appeared to have little impact on the street, as the bank also said over-the-counter currency traders could not deviate by more than 2 per cent from the official rate.

The bank also continued to refuse to sell foreign currency to commercial banks.

Belarus has run into increasing economic trouble in recent months as the country’s state-controlled economy has proved unable to deal with Russia’s increase of energy prices and the spending increases by authoritarian President Alexander Lukashenko before last December’s presidential elections.

Currency reserves have dwindled to $3.8bn and Belarus is running a current account deficit of about 16 per cent of gross domestic product.

The $3 bln loan that was granted to Belarus by the Russian government seems like something out of Lukashenko’s own pocket, as he needs to pay the higher energy prices that Russia charges.

However, one should remember that the energy prices that were charged to the Ukraine and Belarus by Russia have always been much lower than the prices paid on the international energy marketa.

This has proven to be a timebomb for both countries, as Russia not only asks for cash, but also for unconditional love in exchange for gas and oil. The second undesired side-effect was an addiction of these countries to cheap oil, instead of being forced to develop more energy efficient industries, offices and houses.

The main problem for Belarus nowadays is that the official exchange rate from the Belarussian Rouble to the Dollar and the Euro is still ridiculously high, compared to the black market rates and that no foreign bank or company will accept this currency, that is akin to the Zimbabwean dollar in (lack of) value. So there is no force that will help the financial situation to increase.

The $3 bln will be spent in a jiffy and after that Belarus will be forced to sell its crown jewels: to the Russian stateowned companies or the ever hungry Chinese that are always looking for ways to expand their influence in Europe. Also this cash will disappear soon if the Belarussian economy doesn’t seriously change into a competitive one.

And Lukashenko: he is trapped between a rock and a hard place and he might have a beautiful future behind him.

However, one good thing is that wages in Belarus are relatively low and the people are very well-educated. A change in the government might open the Belarussian markets for western investors that want to move their production lines there.