Sanctions against Russia and low oil prices block industrial growth in Belarus
In January-April 2015, industrial production in Belarus scaled back by 7.5%. The main culprit in the decline was recession in Russia, which had occurred from falling oil prices and sanctions. Assuming that Russian economy is unlikely to recover this year, and Belarus is lacking funds to stimulate production growth, industrial growth is hardly attainable by the year-end.
According to the National Statistics Committee, in Q1 2015 industrial production volume in Belarus totalled BYR 229.8 trillion roubles, which is 7.5% less than in Q1 2014. With the exception of oil refining and chemical industries, all other economic sectors have reported a decline in production. Production of machinery and equipment has shrunk right up to 28.2% compared with 2014. Amid cutback in production, warehouse stocks have grown by 20% on average. At some enterprises, their volume has exceeded the annual production volume.
The situation on the Russian market had a huge impact on the industrial production in Belarus. In addition, Belarus lacks the resources to stimulate domestic demand for domestic products. Production capacities of Belarusian enterprises are much higher than domestic demand. For instance, of 65,000 tractors produced annually only 20,000 will fully cover the domestic market needs. Russia accounts for 60% of Belarusian exports of tractors. In Q1 2015, the decline in exports of tractors to Russia decreased by 40%. Other machinery and engineering manufacturers are facing a similar challenge. After the crisis of 2009 and 2011, the cutback in production was offset by boosting domestic demand with issuing preferential loans for equipment purchases. In 2015, public debt repayments limit Belarus’ financial capacities.
The Russian market creates the largest demand for Belarusian industry products. The sanctions against Russia are unlikely to be lifted in the short term, thus depriving Russian banks from access to cheap loans and increasing the cost of borrowing for both, producers and consumers. Amid low oil prices, Russia’s budget might experience a chronic shortage of funds for state programmes aimed at stimulating economic growth, leading to a further decline in production and cutbacks on imports. That said, Belarusian budget revenues would shrink too, as they are heavily relying on revenues from export duties on oil and oil products. Low oil prices have a negative impact on the incomes of Russians, which reduces the demand for Belarusian produces, such as foodstuffs and consumer goods. Provided, that 35% of the total volume of Belarusian exports is to Russia, and that another 32% depends on oil and oil products, low oil prices and sanctions against Russia are very likely make industrial production growth in Belarus impossible.
Belarusian industry has shrunk due to its dependence on the Russian market. The decline in production in Belarus will persist until oil prices reach the benchmark of USD 80 per barrel and sanctions against Russia are softened.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.