belarus Has Lost the Ability to Shape an Independent Economic Policy

Rising fuel prices in russia risk serving as yet another reminder of just how fragile belarus’ economic stability remains, as the country has effectively tied its own macroeconomic dynamics to that of its neighbor.

In the first half of the year, the slowdown in inflation in belarus almost exactly mirrored the russian trend. Officials in minsk attributed this to favorable external conditions: slower price growth in russia automatically kept import costs in check. This dynamic works both ways. If inflation in russia accelerates, belarusian authorities can only watch how the effect – which they were inclined to count as one of their own achievements – disappears.

The same situation applies to the currency market. Formally, the belarusian ruble is pegged to a currency basket, but the russian ruble remains its anchor. Therefore, when the russian currency weakens, minsk’s room for independent policy turns out to be significantly smaller than official rhetoric suggests.

Meanwhile, russia’s problems are only piling up. The drop in oil prices following the reopening of the Strait of Hormuz deprives the russian ruble of one of its few sources of support. What just yesterday helped mask the economy’s structural weaknesses is now beginning to work against it.

For belarus, this is a double blow. The weakening of the russian ruble simultaneously increases inflationary risks and reduces the dollar value of exports to its main market. A significant portion of this year’s improvement in foreign trade statistics was the result of favorable exchange rate conditions, rather than qualitative changes in the competitiveness of the belarusian economy. If these conditions change, the current statistical successes will disappear along with them.

The main problem is that neither side actually controls the key factors of its own stability. russia’s economy remains dependent on oil revenues and external price conditions. belarus’ economy depends on the russian ruble exchange rate, russian inflation, and russian demand. In this setup, any external shock quickly spreads to both countries, and talk of “stability” increasingly resembles an attempt to pass off a favorable coincidence of circumstances as the result of effective economic policy.