Belarus devalues its way to hyperinflation

LAST week, Belarus demonstrated very clearly what happens to a country when it does not address its deficit, does not rein in spending and tries to mask its problems with state intervention. Overnight, the National Bank of Belarus devalued the Belarusian rouble by 56 per cent. The devaluation resulted in an immediate 24 per cent rise in fuel prices, and shoppers queuing down the street as shelves emptied of food.

Those with Belarusian-denominated debt saw their liabilities halved and those holding their money in gold or silver saw their relative purchasing power double. However, the rest of the country is up the proverbial creek without a paddle.

The former Soviet state had previously been granted a $3bn loan by Russia, with the country being pushed to sell $7.5bn of assets in order to plug some holes in the country’s economy. In response to this insistence, President Alexander Lukashenko warned that Belarus “will not throw anything to anybody for nothing.”

The state’s economy collapsed with the end of the Soviet Union, which had provided the country with a market for exporting farm materials, textiles and agricultural machinery. When he came to power in 1994, elected on a platform of Brownonomic market socialism, Lukashenko re-nationalised companies and infrastructure and put in place price and currency controls.

As a country that has been in a vast, rigid supranational political and monetary union – reliant on bailouts from neighbours to stay afloat – market watchers observing the plight of Belarus will inevitably draw comparisons with Greece, as it weighs up plans to leave the European single currency experiment and return to the drachma. According to investment managers Charles Stanley: “Critically, in our view, the threatened fire-sale of state assets will be the warning shot fired at each country in the developed world considering following Belarus’ example.” They continue: “The world is beginning to wake up to the realisation that there exists simply insufficient cash flow to cover the interest payments on a debt pile, in both the public and private sectors, a pile that continues to rise at an astronomic rate even as the global economy shows signs of slowing from the centrally planned and ‘steroid-infused’ post-Great Recession recovery.”

As is the case for every country that tries to devalue its currency, Belarus is on the road to hyperinflation. According to Alexei Moiseev, chief economist at VTB Capital: “Unless Belarus heeds Russia’s call for mass privatisation of state assets, it is headed for hyperinflation, mass unemployment and a shutdown of production.”

As the Greek finance minister in Athens considers his country’s monetary future, he should look 1,500 miles north to Minsk to see the effects of long term dependence on bailouts and bond auctions. But as George Papaconstantinou tries to sail between Scylla and Charybdis – between leaving the euro and remaining in the eye of the Eurozone storm – he knows that at some point his rapidly sinking ship may be wrecked in the squall.