russia’s Banking Crisis Will Hit belarus Harder than It Will Hit russia

The banking crisis in russia will not lead to an immediate collapse of belarus’ financial system. Subsidiaries of russian banks control about a quarter of the assets in the belarusian banking sector; they operate as separate legal entities, comply with the national bank’s capital and liquidity requirements, and their deposits are protected by the local deposit insurance system. Therefore, a direct domino effect seems unlikely.

The brunt of the impact will fall on the real economy. russian subsidiary banks primarily lend to large enterprises operating in the russian market. If the financial crisis in russia escalates into an economic recession, demand for belarusian goods will plummet. This will hit companies’ revenues, worsen the quality of banks’ loan portfolios, and simultaneously limit businesses’ access to new financing. The situation will be further complicated by a reduction in lending by russian banks themselves. For a country where nearly two-thirds of exports go to russia, this will be a serious blow.

The next problem will be government financing. The weakening of the russian banking system will make it harder for belarusian banks to access foreign loans and the interbank market, and will also make it extremely difficult for minsk to receive further financial support from moscow. If opportunities to refinance debts narrow, the regime will have to tap into its reserves.

This will inevitably increase pressure on the belarusian ruble. The devaluation of the russian currency will quickly spill over to the belarusian ruble. Even if the national bank manages to prop up the exchange rate for a while, it is unlikely to be able to do so for long. A weaker ruble will be necessary to maintain the competitiveness of belarusian goods in the russian market.

Depositors’ confidence remains a separate risk. News of problems at russian banks could trigger a flight of deposits from belarusian banks as well, which would further intensify pressure on the financial system and the currency market.

A banking crisis in belarus will hardly begin at the same time as the one in russia. However, due to the country’s dependence on russia’s economy, its consequences could prove to be significantly more severe and prolonged. This was already the case following the 1998 default, when belarus continued to pay the price for the crisis russia had experienced for several more years.

For minsk, the main threat is not the bankruptcy of russian banks, but the collapse of economic ties with the country on which the current model of the belarusian economy is, in fact, almost entirely dependent.