Russia: The Belarusian Challenge Alexander Chubrik IPM Research Center

© IPM Research Center http://research.by/

Outline • Belarus: A success story • The role of Russia • Short-term challenges • The long-term challenge • Beyond Russia: The domestic challenges

2

Belarus: Among top-25 fastest growing economies globally for a decade.. 25 20

percentage points

15 10 5 0 -5

-10 -15

real GDP growth rate, % yoy

domestic demand

2015Q4

2015Q1

2014Q2

2013Q3

2012Q4

2012Q1

2011Q2

2010Q3

2009Q4

2009Q1

2008Q2

2007Q3

2006Q4

2006Q1

2005Q2

2004Q3

2003Q4

2003Q1

2002Q2

2001Q3

2000Q4

2000Q1

-20

• 2001–2005 – World’s 24th (7.5% a year), 2006–2010 – 23rd (7.3%), 2011–2015 – 153th (1.2%)… • …but at what price? Correlation between contributions of domestic demand and net exports is -0.84.

net exports + statistical discrepancy 3

…but the only country where CA deficit went up during the IMF program implementation (2008 crisis)

gross external debt, other current account deficit*, RHS

• Between January 1, 2001 and July 1, 2014 (maximum, now it is 4% lower), gross external debt went up 20.7 times; • Between January 1, 2001 and October 1, 2015 (maximum, now it is 1.8% lower), gross external public debt went up 38 times.

2015Q4

2015Q1

-2,5

2014Q2

0

2013Q3

0,0

2012Q4

10

2012Q1

2,5

2011Q2

20

2010Q3

5,0

2009Q4

30

2009Q1

7,5

2008Q2

40

2007Q3

10,0

2006Q4

50

2006Q1

12,5

2005Q2

60

2004Q3

15,0

2003Q4

70

2003Q1

17,5

2002Q2

80

2001Q3

20,0

2000Q4

90

* 4-quarter moving sum. ** Including external debt of the gross external public debt, augmented** national bank + domestic government debt denominated in foreign currency. 4

Why Russia? “Each day on his way to work as he drives past a church near his home in the Minsk suburbs, the chairman of Belarus’ central bank says a prayer. “Every morning I look at the church and think to myself, ‘Oh Lord, let us have a good situation in Russia. Let us next year have an oil price above $50. Let there be more than 6.5 per cent GDP growth in China.’ Every day,” said Pavel Kallaur.”

Financial Times Europe, 15/10/2015

5

Intuition: External trade (real GDP growth rates, % yoy) 15 r=0.79

10 5 0

• Modelling results: 1% of real GDP growth in Russia gives about 1.2% of Belarusian “non-oil”* exports growth in real terms. * Total exports of goods and services minus exports of crude oil, oil products (including revealed reexports aso), and potash fertilizers.

-5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Belarus

Russia 6

Intuition: Energy subsidy (USD bn) 10

20

9

18

8

16

7

14

6

12

5

10

4

8

3

6

2

4

1

2

0

0 2000200120022003200420052006200720082009201020112012201320142015 crude oil

natural gas

oil products

total subsidy, % GDP (RHS)

• Crude oil: difference between the price of exported* crude oil and the price of its imports times volume of crude oil imports minus customs duties for oil products (4Q2010– 4Q2014); • Natural gas: difference between benchmark gas price** and price for imported gas times volumes of gas imports. * Belarus exports approx. 1.6 Mt of own crude oil annually. ** Taken as Russian gas market price multiplied by historical maximum ratio between imported gas price and Russian gas market price. 7

Intuition: Borrowing (government debt, USD mln) 2013 Acquisition Repayment

Russia (government, banks, ACF) Chinese banks Other (IMF, Eurobonds, IBRD, Venezuela, etc.) External government debt

Foreign currency denominated government bonds Government debt in foreign currency

2014 Acquisition Repayment

2015 Acquisition Repayment

Acquisition

2013-2015 Repayment

Change

1755.6

150.0

2526.9

992.3

1571.9

653.1

5854.4

1795.4

4059.0

533.3

87.2

626.3

182.3

528.1

147.7

1687.7

417.2

1270.5

140.7

1758.6

47.6

1388.4

72.9

1215.6

261.2

4362.6

-4101.4

2429.6

1995.8

3200.8

2563.0

2172.9

2016.4

7803.3

6575.2

1228.1

949.2

145.8

706.8

199.6

2137.5

399.5

3793.5

744.9

3048.6

3378.8

2141.6

3907.6

2762.6

4310.4

2415.9

11596.8

7320.1

4276.7 8

Short term challenges 80%

95%

70%

90%

60%

85% 80%

50%

75%

40%

70%

30%

65%

20%

60%

10%

55%

0%

50%

2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1

• Depreciation and gloomy growth prospects (in January, the IMF revised its GDP growth forecast for Russia for 2016 downwards: from -0.4 to -1%; Russian Ruble has fallen far deeper than expected by the IMF in October forecast); • Lower “energy subsidy” (cheap oil and rigid gas contract); • Growing debt repayment obligations (in 2016, Belarus should pay principal of about USD 1.1 bn to Russia).

imported natural gas price, % of market price imported crude oil price, % of market price (RHS) 9

The long term challenge: The customs union for what? HS item (with contribution to increase of Russian imports from Belarus of more than 1%)

02 Meat and edible meat offal 03 Fish and crustaceans, molluscs … 04 Dairy produce; birds' eggs; natural honey … 07 Edible vegetables and certain roots … 08 Edible fruit and nuts; peel of citrus fruit … 16 Preparations of meat, of fish or … 25 Salt; sulphur; earths and stone; … 27 Mineral fuels, mineral oils and products … 39 Plastics and articles thereof 44 Wood and articles of wood; wood charcoal 61 Articles of apparel and clothing accessories … 62 Articles of apparel and clothing accessories … 68 Articles of stone, plaster, cement, asbestos … 72 Iron and steel 73 Articles of iron or steel 76 Aluminium and articles thereof 84 Nuclear reactors, boilers, machinery … 85 Electrical machinery and equipment … 87 Vehicles other than railway or tramway … 90 Optical, photographic, cinematographic … 94 Furniture; bedding, mattresses, mattress … Top-21 Other items Total

Contribution to increase of Russian imports from Belarus, % 8.3 1.4 22.2 1.8 1.2 4.1 2.1 10.3 7.9 1.4 1.4 2.1 1.9 1.3 3.3 1.4 8.8 5.4 1.2 2.1 1.9 91.5 8.5 100.0

Average annual growth rate, % Russian imports Russian imports from Belarus 17.1 21.9 17.0 18.5 15.2 20.2 13.2 8.6 12.2 7.4 6.4 10.4 9.7 2.8 6.2 14.5 5.8 6.7 0.7 9.4 3.5 7.8 2.2 6.3

6.7 17.9 12.2 14.2 13.4 5.3 12.2 5.4 15.9 11.4 21.9 21.0 11.1 11.8 11.1 10.7 14.0 16.5 16.9 10.5 12.5 13.7 10.6 12.5

Russian imports from Belarus, % of Russian imports 1998 2014 Change, percentage points 2.8 2.5 25.1 2.8 1.5 5.7 11.5 16.6 11.0 21.0 40.8 21.9 19.2 18.7 12.3 4.5 7.2 7.8 33.0 3.2 30.0 12.2 8.4 10.6

12.6 4.3 48.8 5.1 2.0 47.6 13.3 26.8 6.6 11.6 4.6 5.1 15.5 5.0 6.0 7.6 2.2 1.9 3.0 2.7 7.9 5.3 2.4 4.3

9.7 1.8 23.7 2.3 0.4 42.0 1.7 10.2 -4.5 -9.4 -36.2 -16.8 -3.7 -13.8 -6.3 3.1 -5.1 -5.9 -30.0 -0.5 -22.1 -7.0 -6.0 -6.3

10

• Modelling results: on average, 1% of Russian merchandise imports increase leads to 0.78% of Russian imports from Belarus increase (both in value terms), while 1% appreciation of the Belarusian Ruble against the Russian Ruble costs 0.23% of Russian imports reduction from Belarus (value); • Being protected against the rest of the world within the customs union with Russia, Belarus lost almost 2/3 of its share in Russian imports between 1998 and 2014; • “Success stories”: mainly food – thanks to Belarusian food processing private companies, but also because of the sanctions – and oil products (obligations of Belarus within the energy balance with Russia); “failures”: traditional sectors (transport and machinery, clothes, wood processing, etc.) – distorted incentives and mismanagement at the state-owned enterprises (SOEs). 11

Growth potential of the “Belarusian model” is totally wasted 15 12

growth rate, % yoy

9 2016M01; -1,11

6 3 0 -3 -6

2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 2014M01 2014M05 2014M09 2015M01 2015M05 2015M09 2016M01

-9

real GDP

log-term trend

• Since July 2014, growth rate of the real GDP long term trend* is negative – structural recession. • Since January 2015, growth rate of the real GDP cycle is negative (slight increase in 2014 thanks to record high potash fertilizers production) – cyclical recession. * Based on the HP-filter.

cycle 12

Beyond Russia: The domestic challenges • Risk of the banking crisis (tight monetary and fiscal policies caused nonpayments); • Risk of the sovereign default (short-term government debt obligations are comparable to the reserve assets); • Social risks (unemployment growth, utilities tariffs increase, lower incomes, higher poverty, lower social guaranties by the state and SOEs); • Political risks (attempts of the elite to re-distribute the pie in a situation of falling electoral rating of the President); • Partial reform trap (only conditionality matters – little reform ownership, very slow pace). • And Russia (not only!) again: soft budget constraints do not provide incentives to reform… 13