National Bank is ready to take any measures to obtain foreign currency
Interest rates on the interbank market reached 78.7 % per annum.
Record high interest rates on the interbank market is the natural result of the National Bank’s measures aimed at forcing the banks to sell available foreign currency. The National Bank wants the national reserves to stop falling. As a result, the economy might experience financial paralysis, but industrial financial performance is not the National Bank’s responsibility.
On September 12th, interest rates on the interbank market reached a record high of 78.7% per annum. Even during devaluation in 2011, the interest rate was not this high. Various actions by the National Bank (NB) have led to this phenomenon. For instance, the National Bank increased the requirements for the allotments to the reserve funds, which resulted in additional demand for ruble liquidity. Unofficial restrictions on deposit interest rates for individuals - not more than 35% - introduced in August, against consistent weakening of the national currency, resulted in an outflow of national currency from ruble deposits in September and in a dramatic need for additional ruble liquidity by banks. The National Bank increased the interest rates to support liquidity, but as the support was limited, it provoked higher interest rates on the interbank market. The National Bank’s ultimate goal was to force banks to sell available foreign currency, which it then bought itself.
Banks are faced with a dilemma. Failure to comply with NB requirements regarding contributions to the compulsory reserve fund, results in penalties – up to twice the size of the discount rate – and all the transfer of outstanding requirements to the next period. But in this case, banks do not sell the currency. Alternatively, banks can sell the currency and fulfill the requirements without paying a fine. However, if the national currency sharply fluctuates, foreign currency risks will increase. As the banks are incapable of gaining such an amount of foreign currency in the short-term, they were unofficially allowed to increase the interest rates on deposits up to 42% per annum. The banks believe that people’s mercantile interests prevail over devaluation expectations. The opportunity to make quick money may encourage depositors to convert their foreign currency savings into national currency deposits in Belarus’ banking system.
The National Bank’s measures might have far-reaching economic consequences. Costly deposits lead to higher loan interest rates - up to prohibitive levels. Some banks have already announced the discontinuation of business loans. Given the large volume of payables and receivables, this can result in payment paralysis in the economy. Real estate lending programmes for individuals have been suspended. One consequence of the 2011 devaluation was many uncompleted construction projects were suspended due to the revision of construction costs and belated crediting. The new suspension of lending will result in a new ‘wave’ of uncompleted construction projects. However, the National Bank is more concerned about the size of gold reserves, hoping to replenish them in the near future. The NB is not really concerned about the situation in industry, which operates at minimal profitability and hugely relies on loans to pay for the delivery of goods and workers’ wages.
The National Bank attempts to refinance foreign currency payments, but this is becoming more costly and threatens unpleasant consequences for the economy. One solution would be to sell off assets, but this issue is beyond the National Bank’s scope of responsibility.
Over the past year, military-political relations between Minsk and Kyiv have become complicated. Due to their high inertia and peculiarities, this downward trend would be extremely difficult to overcome.
The root cause of the crisis is the absence of a common political agenda in the Belarusian-Ukrainian relations. Minsk is looking for a market for Belarusian exports in Ukraine and offers its services as a negotiation platform for the settlement of the Russo-Ukrainian war, thereby hoping to avoid political issues in the dialogue with Kiev. Meanwhile, Ukraine is hoping for political support from Minsk in the confrontation with Moscow. In addition, Ukraine’s integration with NATO presupposes her common position with the Alliance in relation to Belarus. The NATO leadership regards the Belarusian Armed Forces as an integral part of the Russian military machine in the western strategic front (the Baltic states and Poland). In addition, the ongoing military reform in Ukraine envisages a reduction in the number of generals and the domestic political struggle makes some Ukrainian top military leaders targets in politically motivated attacks.
Hence, the criticism of Belarus coming from Ukrainian military leadership is dictated primarily by internal and external political considerations, as well as by the need to protect the interests of generals, and only then by facts.
For instance, initially, the Ukrainian military leadership made statements about 100,000 Russian servicemen allegedly taking part in the Russo-Belarusian military drill West-2017. Then the exercises were labelled quazi-open and military observers from Ukraine refused to provide their assessment, which caused a negative reaction in Minsk. Further, without citing specific facts, it was stated that Russia was building up its military presence in Belarus.
Apparently, the Belarusian and Ukrainian Defence Ministries have entangled in a confrontational spiral (on the level of rhetoric). Moreover, only a small part of the overly hidden process has been disclosed. That said, third states are very likely to take advantage of the situation (or have already done so). This is not only about Russia.
The Belarusian Defence Ministry officials are restrained in assessing their Ukrainian counterparts. However, such a restraint is not enough. Current military-political relations between Belarus and Ukraine are unlikely to stabilise without the intervention of both presidents.