Economic developments in Belarus

1. Economic developments in Belarus Daniel Krutzinna Investment Company Uniter

2. Current situation Main prerequisites of the crisis Main causes of the crisis Policy options Government approach to tackle the crisis Belarus financing needs Projections

3. Current situation March 22: the National Bank stopped selling foreign currency to commercial banks. May 24: the National Bank devaluated Belarusian ruble by 56%, but the foreign exchange market didn’t recovered. October 20, the National bank introduced free floating regime for Belarusian ruble, total depreciation from the beginning of the year accounted for 189,3% Following limited access to foreign currency the foreign trade balance started to improve Uncertainty on foreign exchange market led to inflation acceleration up to 74% for Jan 11 – Sep 11 (comparing to CPI 2010 = 9,9%) Positive trade balance for July 2011 = 173,8mn USD

4. Main prerequisites of the crisis Structural imbalances of Belarusian economy + boosting internal demand through soft macroeconomic policy caused a chronic CA deficit during last 5 years Oct 1: 4,7 bn USD or 5,5 weeks of imports Fixed exchange rate was maintained by exhausting the international reserves. Before 2009 currency depreciation and before 2011 crisis international reserves dropped by third. To maintain international reserves on appropriate level government was forced to seek external financing. Thus, the gross external debt increased from 17 % of GDP in 2005 to 52% of GDP in 2010

5. Main causes of the crisis: • Internal factors • Structural imbalances: state sector accounts for 70% of economy • Soft macroeconomic policy: stimulating of demand by low interest rates • Large quasi-fiscal investment financing through state programs • Pertaining high employment by subsidies to state enterprises • Raising wages of state sector employees before 2010 presidential elections • Existence of fixed exchange rates • External factors. • Reduction of energy/hydrocarbons subsidies from Russia. • Entry into the Customs Union with Russia and Kazakhstan.

6. Policy options: 4th June, 2011 EurAsEc Anti Crisis Fund (ACF) approved a $3 billion loan to Belarus to support the balance of payments and to augment foreign exchange reserves. The loan is accompanied by a stabilization program. Since September, 2011 Belarusian Government has started to take clear steps for economic stabilization under the EurAsEc stabilization package. 13th September, 2011 IMF issued its Country Report with analysis of current situation. The report offers more tight stabilization package. 17th October, 2011 The IMF appreciated the Government’s efforts in recovery from the crisis, but required deeper reforms and a “clear commitment—including at the highest level to stability and reform and to reflect this commitment in their actions”. The Head of the National Bank Ms. Ermakova said, that the IMF loan is unlikely to be provided. So the baseline scenario seems to be EurAsEc ACF stabilization package 20th October, 2011

7. Government approach to tackle the crisis Monetary policy  EurAsEc requirements • Positive real interest rates • Restrain credit growth Current policy indicators +80%  Implications for economy The Head of the National Bank NadezhdaErmakova supposes that there is no need to raise the refinancing rate to the level exceeding inflation (80%) motivating this view by her considerations regarding the vanishing role of the refinancing rate in crisis situation and economic security concerns. The governmental policy now is focused on combating inflation. But in frame of price liberalization (introduced this year under Directive of the President No 4) the only instrument to tackle inflation is tight monetary policy. So there is certain risk that the Government will fail to curb inflation in short term perspective (the inflation target for 2012 is 19%).

8. Government approach to tackle the crisis Budget policy  • Budget deficit decrease from 3% of GDP to 1,5% of GDP: • Freeze of budget sector wages • Reduction of subsidies for transportation and household utilities • Increase in export duties for potash fertilizers, tax rates for the extraction of mineral resources, and excise tax rates for alcohol and tobacco. EurAsEc requirements • Real incomes are declining however at the lower pace than inflation • In Sep-11 the Government introduced a one-time additional payment to all pensioners • Decrease in real incomes of state sector employees are partly compensated (lower than inflation rate) Current policy indicators • The Jan-Aug budget generated a surplus of 0,9% of GDP. The government prepared the adjusted budget plan for 2011 which envisages budget deficit of 1,5% of GDP. The additional inflation-generated revenues, revenues from oil export duties and higher potash export duties will be channeled to some increase in budget sector wages and social payouts. • The adjusted budget plan also provides for reduction of subsidies for transportation and household utilities up to agreed levels. • Although export duties for potash fertilizers and tax rates for the extraction of mineral resources were raised this year, the excise taxes are planned to raise gradually next year.

9. Government approach to tackle the crisis Lending under government programs (LGP)  • Gradual decrease of lending under government programs (LGP): • 4% of GDP in 2011; • 3% of GDP in 2012; • 1% of GDP in 2013. • Sources of LGP financing – only MinFin deposits, no National Bank subsidized lending. • Establishment of special Development Bank to manage LGP • Voluntary participation of commercial banks in LGP on market conditions EurAsEc requirements Current policy indicators • For Jan-Apr 2011 the LGP volume accounted for 2,2% of GDP • 21st June, 2011 – President issued an Edict “On establishment of Development Bank” for managing LGPs. • New mechanism of interest rate compensation: funds are channeled not to banks, but to the borrowers. • On 2 September, 2011The National Bank sent a circular to all banks engaged in LGP with instruction to limit the volume of debt of the borrowers under Government Programs by the 1st September 2011 level. This means that new loans in frame of LGP will be provided within the amounts of repayment of the previous debts.

10. Government approach to tackle the crisis Exchange rate policy  EurAsEc requirements • Exchange rate unification • All trade conducted at a market-clearing rate Current policy indicators • 20th October, 2011 – after a month-lasting period of existence of 2 segments of foreign exchange market (one segment operated on market conditions, another segment was maintained to allow foreign exchange at lower-the-market rate for purchase of imported energy sources and medicines) the National bank introduced free floating regime for Belarusian ruble. Total depreciation since the beginning of the year accounted for 189,3%. • To maintain stable market exchange rate in short and middle term the Government and the National Bank has only 2 instruments: • Market interventions of the National Bank, which require considerable level of international reserves • Tight monetary policy, which will limit money supply and aggregate demand • Now the level of international reserves is still below the safety level and the monetary policy is still not tight enough so there are certain exchange rate risks

11. Government approach to tackle the crisis Structural reforms  EurAsEc requirements • Large scale privatization during 2011-2013 (7,5 bn USD). • According to the Privatization plan for 2011-2013 the state planned to sell 178 state enterprises in 2011, another 64 are planned to be sold in 2012, 2013 (most of the enterprises are small and medium, loss-making or non-effective state companies with liquidity problems). As for 19th October 2011, 29 enterprises were sold (primarily to local competitors) and the proceeds from the privatization accounted for 110 bn BYR (about 12,8 mn USD). The failure of privatization program is caused mainly by lack of appropriate approach to market the assets, poor quality of the assets, and rigidity of local management to change the status quo. There are talks in government structures that 2011-2013 privatization plan could be extended up to 600 enterprises. • The progress in privatization of large interesting enterprises is the following: • The sale deal of another 50% of Beltransgaz to Gazprom for 2,5bn USD is planned to be finalized by the end of the year. • There are 2 Russian bidders to acquire MAZ (one of the largest CIS trucks and buses producer): GAZ and KAMAZ • The President announced the Belaruskali price: 30 bn USD which is about 2 times higher than market price. No real plans to sell. • Belarus plans to sell its 50% stake in mobile phone operator MTS for 1 bn USD on 1st December, 2011 Current policy indicators

12. Belarus financing needs • The IMF projections provide for existence of considerable financial gap even in 2011. However, the IMF plan does not consider certain issues: • Additional source of financing (FDI), • Better CA balance situation, • Extra loans Limited access to external financing S&P: Local/foreign currency rating: B- Issuer credit long-term rating: B- Issuer credit short-term rating: C Moody’s: Country Ceiling for For. Curr. Bonds – LT: B3 Country Ceiling for For. Curr. Bank Deposits – LT: Caa

13. Projections Basing on the conservative scenario the Government prepared forecasts for the main economic indicators Economic security indicators

14. Thank you Daniel Krutzinna Investment Company Uniter