Belarus' Inflation Crisis: Why So High?

Belarus has experienced high inflation rates in the past, with an average of 16% in the decade leading up to 2022. In 2011, inflation reached 108.7%, and in 1999, consumer prices grew by 294%. The country's inflation rate has been projected to decrease in the coming years, with a forecast of 5.03% in 2029. Belarus's economy is an upper-middle-income mixed economy, with a heavy emphasis on centralised political and economic controls by the state. The country's high inflation rates can be attributed to various factors, including financial distress, the devaluation of the national currency, and the impact of the COVID-19 pandemic.

Devaluation of the national currency

The devaluation of the national currency, the Belarusian ruble, has played a significant role in the high inflation experienced in Belarus. In 1998 and 1999, the country faced a financial crisis due to economic turmoil in Russia, its largest trading partner. This resulted in a sharp increase in consumer prices, with a staggering 294% inflation rate in 1999, and the devaluation of the ruble.

The Belarusian ruble continued to weaken against the US dollar in the following years, and by the end of 2012, it had depreciated by 64% compared to 2012. In 2011, the situation worsened as rumours of a possible devaluation spread, leading to a rush by Belarusians to convert their savings into foreign currencies. This created a shortage of foreign currency in banks, and the black market exchange rate soared, further exacerbating the currency crisis.

The National Bank of Belarus struggled to balance the supply and demand for foreign currencies, eventually devaluing the ruble by 36% in May 2011. However, the currency shortage persisted, and the black market continued to flourish. The crisis had a significant impact on the economy, with inflation reaching 108.7% in 2011, and a decrease in average salaries and purchasing power.

The impact of the devaluation was long-lasting, and the road to recovery was challenging due to the country's isolation from the EU and US. Belarus's heavy reliance on imports, particularly energy imports from Russia, further contributed to the economic woes. Additionally, the country's highly regulated labour market and centralized economic controls have likely contributed to the persistent inflationary pressures.

Dependence on Russian oil and gas

Belarus' dependence on Russian oil and gas is a critical factor in understanding the country's economic situation and its susceptibility to inflationary pressures. Here are four to six paragraphs elaborating on this topic:

Belarus has a heavy reliance on Russian energy, particularly oil and natural gas imports. This dependence has significant implications for its energy security and, consequently, its overall economic stability and inflation rate. The country's energy strategy has recognized the need to reduce this dependency, aiming to decrease Russian supplies from 90% to 70% of total energy imports by 2035. This high dependence on a single supplier leaves Belarus vulnerable to pricing disputes and interruptions in energy supplies, which can have knock-on effects on the country's inflation rate.

The energy disputes between Russia and Belarus have a history of causing interruptions in energy flows to Europe, which relies on Belarus as a transit route for about 10% of its oil and more than 6% of its gas consumption. These disputes have resulted in Russia temporarily suspending energy supplies to Belarus, causing shortages and impacting Europe's confidence in Russia as a stable energy supplier. The transit oil and gas that flows through Belarus is a crucial source of revenue for the country, and interruptions can have significant economic implications.

To reduce its dependence on Russian oil and gas, Belarus has been exploring alternative energy sources, including nuclear power, and aiming to decrease overall energy consumption. The country has set ambitious targets to reduce the share of gas in electricity and heat energy production from 90% to 50%. Additionally, Belarus has been working to expand its underground gas storage capacity to enhance energy security and manage seasonal fluctuations in demand. These efforts are crucial for mitigating the impact of potential supply disruptions and stabilizing energy prices, which can influence the inflation rate.

The Naftan oil refinery in Novopolotsk and the Mozyr oil refinery in Belarus primarily use Russian oil as feedstock. While Belarus has its own oil and gas reserves, with 27 Mt of crude oil reserves and an estimated 3 bcm of natural gas reserves, these are limited compared to its energy demands. Therefore, the country remains reliant on imports, particularly from Russia. This dynamic gives Russia significant leverage in negotiations and can influence the pricing and availability of energy supplies for Belarus.

In summary, Belarus' high dependence on Russian oil and gas has implications for its energy security and economic stability. The country's efforts to diversify its energy sources and reduce consumption are essential steps towards mitigating the impact of potential supply disruptions and stabilizing energy prices, which can, in turn, help manage inflationary pressures. However, the country's progress in reducing this dependence will be crucial in the coming years, as energy prices and supplies can significantly influence the overall economic health of Belarus.

Financial distress in the late 1990s

Belarus experienced significant financial distress in the late 1990s, particularly in 1998 and 1999, due to the financial and economic crisis in Russia, its neighbouring country. This period witnessed a sharp increase in prices and a devaluation of the Belarusian ruble, negatively impacting the country's trade with Russia and other CIS countries. The crisis led to a decline in trade, a rise in inter-enterprise arrears, and a deterioration of Belarus's balance of payments.

The extreme tension within the foreign exchange market was the primary factor that destabilized the Belarusian economy during this period. The national currency, the ruble, weakened significantly against the US dollar, impacting the country's import and export capabilities. The financial distress also resulted in a substantial increase in consumer prices, with a staggering 294% inflation rate in 1999.

The economic crisis in Russia had a ripple effect on Belarus, causing a decline in trade between the two countries and with other CIS nations. This reduction in trade further exacerbated the financial challenges faced by Belarus. Additionally, the overall balance of payments for Belarus deteriorated, indicating a worsening of the country's economic health and stability.

The financial distress in the late 1990s had far-reaching consequences for Belarus, leading to a sharp rise in prices, currency devaluation, and a decline in trade. These factors collectively contributed to a challenging economic environment for the country, highlighting the interdependence of economies in the region and the vulnerability of Belarus to external economic shocks.

2011 economic crisis

Belarus' inflation averaged 16% in the decade leading up to 2022. In 2011, the country experienced an economic crisis that was caused by a number of factors, including:

• Strong governmental control over the economy, which has historically rejected privatisation efforts in favour of centralised political and economic control.
• A discount rate lower than inflation, which led to a budget deficit.
• A government-imposed increase in average salaries to $500 per month in the lead-up to the 2010 presidential election.
• Rumours of a possible devaluation of the ruble, which caused Belarusians to start converting their savings from Belarusian rubles to dollars and euros in January 2011.

The National Bank of Belarus was forced to spend $1 billion of its foreign reserves to balance the supply and demand for currency. However, it did not significantly change the exchange rate, which led to increased demand for dollars and euros, exhausting banks' cash reserves. This resulted in a shortage of currency and the creation of a black market for currency, with the black market exchange rate reaching 9,000 BYR per dollar in August 2011.

The crisis had a significant impact on the economy, with inflation reaching 108.7% in 2011. The average salary, when counted in dollars, decreased from $530 in December 2010 to $330 in May 2011. The refinancing rate, an analogue of the discount rate, rose from 10.5% in December 2010 to 45% in December 2011. Interest rates at several banks reached 120% in rubles in November 2011.

Sanctions imposed by the EU and other countries

The EU has imposed a number of restrictive measures against Belarus in response to the country's involvement in Russia's invasion of Ukraine and the ongoing political situation in Belarus. The EU has adopted various measures since 2022, including:

• Individual and economic sanctions targeting 22 people
• Trade restrictions
• A SWIFT ban for five Belarusian banks
• A prohibition on transactions with the Central Bank of Belarus
• Limits on financial inflows from Belarus to the EU
• A prohibition on the provision of euro-denominated banknotes to Belarus

The EU has also imposed sanctions on individuals and entities organising or contributing to activities by the Lukashenko regime that facilitate the instrumentalisation of migrants for political purposes and hybrid attacks. These sanctions include a travel ban and an asset freeze. The travel ban prevents those listed from entering or transiting through EU territories, while the asset freeze targets the funds or economic resources of the listed persons. In addition, EU citizens and companies are forbidden from making funds available to the sanctioned individuals and entities.

The United States has also imposed sanctions on Belarus in response to the country's involvement in Russia's invasion of Ukraine, human rights abuses, and support for the Lukashenko regime. These sanctions include restrictions on exports to Belarus, visa restrictions, and sanctions on Belarusian government officials and state-owned enterprises.

The Bureau of Industry and Security (BIS) has also imposed extensive sanctions on Belarus by amending the Export Administration Regulations (EAR). These sanctions were implemented in response to Belarus's substantial enabling of Russia's invasion of Ukraine by allowing it to proceed from Belarusian territory. The BIS has primarily targeted the Belarusian defence, aerospace, and maritime sectors with expanded export controls.

Frequently asked questions