Belarus 3 months crisis and no way out The hot phase of the crisis in Belarus started mid March

h 2011. The Central Bank of Belarus couldnt provide fresh amounts of fx (Dollars and Euros) to the money market. It affected since then all spheres of the ecconomy and left it in a desperate situation. What happened: Over the recent years Belarus got used to a staedy inflow of fx mainly through credits (Russia,IMF, Eurobonds....). This money has been used in two ways: First to provide foreign currency to the money markets and maintain an exchange rate set up by the government, second to close the gaps within in the budget. We have to remind, that Belarus kept from Soviet timest the old system of fixed fx rates against the domestical currency. The credits in fx have been used to supplement the deficit in fx caused by a huge trade deficit to keep the financial system more or less stable. The price fort his ecconomic strategy was very high. Taking in account the official datas of Belstat (National Staistic Agency of Belarus) the gross external debt rose to 87% of the GDP (as per June 1st 2011 calculated on the official exchange rate). Taken in account that the BYR is still overvalued the real external debt should be considered around 140% GDP. This are alarming figures as the method of taking new loans is still the main issue of the Belarussian finacial politic. A steep hike in salaries (the state sector in Belarus accounts for about 85% of the GDP) before the elections in Dec. 2010), additional printing of money and the maintaining of an non realistic exchange rate of 1$= 3000 BYR proved that the president kept his pre-election promise of an average sallary of 500 US$. Unfortunately this promise lasted only until mid march. Suddenly there was no fx on the market at all. Reluctant foreign lenders and the russian halt of subsidizing the Belorussian ecconomy through cheap energy showed terrible results. Companies who has been in urgent need to buy goods abroad , either for trading or for production purposes could by fx only on the so called inter bank market whos fixings had been about 30-40% higher than the official rate. But this gap was also closed very quickly when the Central Bank recommended (in fact commanded) the Commercial banks to sell their fx not at a higher rate , than the official of 1US$= 5000 BYR. The Commercial banks showed no enthusiasm and refused to sell their valuable fx stocks (recieved from exporters or deposits of citizens) for overestimated BYR. Also this possibility for companies has been cut off and now there is no way for them to buy hard currenncy at all. There are certain dubious ways to buy hard currency but this is not legal and no executive in a company wants to risk his freedom for that. The last money market in Belarus which is working is the black market on the street (a reminder to old Soviet times) who has faced a revival in the last three months. Here the rate is about 1US$= 6000-6300 BYR. But this rate is meaningless because it reflects only the money circulating in the pockets of individuals who are not afraid to expose themselves in non legal money operations. The demands of the Russian side and the IMF to let the BYR flow and to let the money market fix a rate has not been met.If so the exchange rate would be about 1US$= 8000-9000

BYR. For a government whos political tantra is ecconomic and political satbility this would be a serious slap into the face. We spoke recently to a tax inspector whos net income in April 2011 was 850.000 BYR. Applying the above mentioned real rate for the US$ means that his income is about 100 US$ or 70 !!! Of course the goverment cant allow to admit such a reality . It would confirm that the incomes of his citizens reached the level of Zimbabwe. So the goverment (as seen on the press conference of the President Mr. Lukashenka (17th of June) continues applying the Chernobyl strategy: No crash happened, we have everything under control , do not listen to foreign propaganda , no reason to worry ........ In fact there is a lot to worry about: the meltdown is in full process. Trading companies, whos business was based on imported goods are suspending their operations in big numbers. Factories who also rely on supplements for their production are running out of material to continue their production. The result is an exploding unemployment rate. Even Belstat , elsewise overoptimistic and very questionable in their datas, admitted one month ago that due to the crises about 600.000 people lost their jobs. As a result of that the decline in revenues from taxes and import duties will seriously effect the budget. To pay salleries the goverment will have to print new money which will heat up inflation and accelerate the spiral which is leading further downwards. The countermeasures initiated by the goverment reflects the soviet style mentality of the political establishment. Currency regulations and a bunch of market restrictions only confirm the helplessness to cope with the actual problems. New substantial credits, which the government was used to in recent years, are not in sight. The unwillingness to follow the recommendations of the Russians and the IMF to initiate structural reforms put in question also the small credit promised by EurASEC. It is suspicious that the credit promised two weeks ago in Kiev did not arrived yet to Minsk. In old days the money came a couple of days after announcing it. May be this credit was promised under certain preconditions which has not been met yet by the Belrussian side. It is also doubtful that IMF, not taking in account political odds, gives money before seeing any substantial change in the policy of Belarus to move in the recommended direction. Taking credits on the international money markets is only possible with very high interest rates, since international rating agencies downrated Belarus bonds to junk status, which is also not an favarourable option. The only solution to receive bigger amounts of hard currency ad hoc ist the selling of state assets which is also not that easy, because the other side (evidently Russia) can play on time and squeeze the price to a desired level. Russia is not in need to buy, but Belarus is desperately in need to sell. Mr. Lukashenko is really not willing to sell therefore he is putting the yield for such transaction too high including additional conditions which no buyer can accept. What will happen next: Mr. Lukashenko will continue in his policy to let the things go as they go without offering a real solution. So far he had not to fear the pressure of voters, opposition, 2

unions or other potential antagonists to his policy. The supression of this groups is working perfectly. The government cant solve the serious crisis because of its commitment to soviet styled solutions. The pressure form the street will grow as well as the supression mechanism of the state apparatus. The final showdown is not predictable. But: If the discontent of the citizens goes beyond a critical point there will be not 3000 (as June 15th) but 500.000 people on the streets of Minsk. This group no security force can confine any more. This can result in a chain reaction where all options will be open.