Reduced interest rates on deposits create favourable environment for liquidity crisis in Belarus
Reduced interest rates on deposits in national currency have prompted the population to withdraw their savings from the banking system. The liquidity crisis of July-August 2013 could repeat. While waiting for financial aid from Russia, the National Bank may switch on the money printing press.
According to the National Bank’s report, in May, there was an outflow of time deposits in national currency.
In May, the population withdrew BYR 151 bln worth of deposits in the national currency from the banking system. They were prompted by reduced proceeds due to lower interest rates (below 35% per annum) and increasing uncertainty around devaluation of the Belarusian ruble. The population accounts for over 60% of the total volume of term deposits in Belarusian rubles. Partially, they could convert their roubles into hard currency.
Events in early June 2014 are reminiscent of events from summer 2013, which resulted in liquidity crisis in the banking system. Back then, reduced interest rates in the banking system led to a rapid outflow of individual and legal persons’ deposits, and lower interest rates (20-21% per annum) sharply increased demand for loans. As a result, excess liquidity in the banking system turned into liquidity deficit within a month. The National Bank supported some banks’ liquidity, mostly state-owned.
In July 2013, interest rate on interbank loans increased from 21% pa to 61% pa, which resulted in the rapid growth of rates on loans and deposits, and suspended lending - even on previously opened credit lines. To stabilise the situation, interest rates on rouble deposits had to rise to 45% per annum and remain this high for a while.
In 2014, the situation is characterised by thinner international reserves (by USD 2.6 billion) and a large volume of term deposits in Belarusian roubles (USD 600 million). In addition, in June – July, Belarus has to repay its public debt (circa USD 1 billion). The debt will be repaid from the bridge loan provided by Russia’s VTB Bank.
There are two possible ways out of this situation. First, the National Bank repeats its actions. Interest rates will grow, but the government will be unable to show the desired economic results. Second, banks’ liquidity needs are covered by money printing – until Belarus receives the loan from Russia and other loans, which will carry Belarus safely into early 2015. In 2015, Belarus anticipates to raise an additional USD 1.5 billion from export duties and reduce the current account deficit to acceptable values.
As anticipated, reduced interest rates have led to an outflow of individuals’ funds from the banking system. The National Bank might change its tactics policy if liquidity shortage occurs, but its policy’s success will depend on the timely receipt of financial assistance from Russia, on which the Belarusian leadership is really counting.
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.