The currency crisis in the Republic of Belarus (former Belorussia), which started earlier this year is commonly attributed to excessive state spending and heavy government dominance in the country’s economy. However, it would be too easy to fall back on the very convenient scapegoat of command economy that so many have become accustomed to using since the times of the Cold War.
Events such as financial crises are complex and multifactorial, and can rarely be explained away simply by assigning blame to any one side. Despite the fact that the Belorussian government, trying to fulfill the campaign promises of President Alexander Lukashenko, did rapidly increase spending on social programs, average Belorussian residents and, more importantly, importers, are just as guilty. Fearing rumors of devaluation of the Belorussian ruble, many local companies, as well as regular citizens, began buying up all the foreign currency available in the country.
The panic began sometime in January 2011, to which the Belorussian government reacted by increasing the commission rate on currency exchange transactions from 0.00095% to 2%. This measure was undertaken to protect the country’s foreign currency reserves, which were beginning to get used up in order to make up for the increasing demand for foreign currency. However, that did not help the issue, and even though the Belorussian National Bank stated many times that it had no plans to go through with currency devaluation, the people kept on buying foreign currency (dollars and euros), effectively reducing the amount of Belorussian rubles remaining in circulation.
Why did this panic start? Again, there are a number of reasons. First, a similar currency crisis based on expecting devaluation occurred in the Ukraine in autumn of 2010. The initial reasons for the Ukrainian frenzy were different, particularly having to do with the increasingly less transparent practices of local business. However, this panic mode of thought, regardless of objective reasons, quickly spilled over from the Ukraine to its neighbor, effectively jump starting the Belorussian financial crisis.
Secondly, the large spike in demand for foreign currency in Belarus was also prompted by the country’s impending entrance into the Customs Union, a trade bloc with a unified external tariff created within the framework of EurAsEC (Eurasian Economic Community) between the countries of Russia, Belarus and Kazakhstan. Belarus’ inclusion in the bloc meant that it would have to raise its customs duty on imported products in order to match that of its partners. The raise in tariffs was scheduled for this summer, prompting many of Belorussian businesses, particularly in the automobile industry, to import products from Europe in amounts far exceeding the usual while the customs duty was still low. This, in turn, fueled the skyrocketing demand for foreign currency in order to carry out these import transactions. A statement to that effect was made by Alexander Lukashenko in April 5, 2011.
In the end, the devaluation became a self-fulfilling prophecy. Unable to control the unreasonable demand for foreign currency any longer, the Belorussian government was forced to devalue its local ruble to bring the exchange rate closer to market value. The devaluation, of course, caused a price jump in many goods, including staple foods and gasoline. Now, the Belorussian economy, weakened by months of turmoil at the currency exchange market, must seek outside help.
Belarus has already secured a $3B loan from EurAsEC, but requires even more for complete economic stabilization, and plans to seek additional funds from the IMF. These loans, however, are not without conditions, and will most likely be followed by serious economic reform and privatization of Belorussian government assets. Those with financial interests in the country should watch very closely how the situation will develop.
It is important to realize that the Belorussian financial crisis was not caused by increased state spending alone (though it did add unnecessary fuel to the fire), but rather a combination of various factors. After all, Belarus’ has shown that a socially oriented economic model can work, just like it has been working in Scandinavia. However, problems arise when economically ignorant individuals act in their own selfish interests, but in a collective fashion, without any regard for the consequences of their actions.
As with any system, an economy can be severely impaired when those without the proper knowledge of its principles are put in a position where they can influence its workings. The panic-fueled actions of average Belorussians and the automobile importers' uncontrolled desire for greater profits did just as much damage to the country's economy as the untimely increases in government social spending, if not more.