Belarusian leadership given a week to mull over way out of the ‘potash conflict’
Russia’s chief sanitary doctor Onishchenko said possible restrictions on Belarusian dairy products would be postponed by one week.
A meeting between the Russian and Belarusian Deputy Prime Ministers on September 5th has confirmed Russia’s unchanging stance regarding the Belarusian Potash Company (BPC) conflict. Economic losses from actions that Russia may undertake if Belarus refuses to resolve the conflict ‘peacefully’, will be much higher than Belarus’ damage claims in the BPC criminal case. Due to the significant deterioration of the macroeconomic situation in Belarus, time is not on Belarus’ side.
On September 5th, Deputy Prime Minister Semashko was given an ultimatum in Moscow. In essence, Russia said it would supply 18.5 million tons of oil instead of the anticipated 23 million tons for 2013. The supply of Belarusian dairy products to Russia may also be restricted. Other restrictions on exports from Belarus are also possible. Russia’s main condition for resuming the negotiations is the immediate release of the Uralkali CEO. On September 6th, Russian President Putin effectively confirmed the Russian government’s position, but refrained from direct involvement in the conflict at this stage.
If the conflict continues, economic losses will be significant. By late Q3 2013 oil supply to Belarus will be circa 16.3-16.5 million tons. The agreed 18.5 million tons supply implies that in Q4 Belarus will receive only 2-2.2 million tons, which means a significant cut in the refineries’ capacity use. The Belarus’ supply of dairy products to Russia is worth circa USD 160-170 million per month. If dairy supply is cut by one-third, Belarus will lose at least USD 53- 57 million a month. Russia may also put forward claims regarding Belarusian sugar supply volumes. Annual quotas for sugar supply have been met, but there are cases of sugar supply by road bypassing the arrangements. Restrictions on sugar supply may reduce Belarus’ foreign currency proceeds by USD 20- 25 million per month. Russia also has issues with foodstuff re-exports from the EU to Russia. Belarusian pork exports to Russia have been suspended and supply of meat products produced in Belarus is undergoing inspections.
Potential losses of foreign exchange proceeds against the background of reduced international reserves and growing devaluation expectations may result in significant adjustments to the national currency exchange rate. The latter is highly undesirable for the authorities, as it would imply that its economic policy had failed. Belarus’ export markets are not diversified, which disables any long-term trade war with the major trading partner.
If Belarus and Russia fail to reach a compromise over the Uralkali CEO case, Russia will implement various measures that will affect Belarus’s economy and will have an immediate negative impact on the economic situation. Thus, Belarus does not have much time left to decide on the Baumgertner case.
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.