Lukashenko challenged by isolation
Main challenge the authorities face today is how to ensure external financial support for the Belarusian economy and political support for the regime – ideally – without changing the disposition.
The past week demonstrated that the current demands of the EU (release of political prisoners) are more painful to implement in terms of reputation, but less challenging than Moscow’s demands in terms of preservation of the monopoly on power by the ruling group.
Deterioration of the relations with the EU presumed to a certain extent that Kremlin will get involved in the Belarusian-EU conflict on the side of Belarus, thereby increasing the value of Belarus vis-à-vis Moscow as an ally. As a result, Belarus hoped for concessions by Moscow in terms of economic reforms (privatization and unification of the economic rules within the Customs Union) and for additional financial support.
The EurAsEC Summit demonstrated to Lukashenko that if Europe was not interested in him, he would be of no interest to Kremlin either. If there is no threat of the intensification of the relations between Belarus and the EU, while relative stability is preserved in Belarus, the Kremlin sees no point in applying additional efforts in the current circumstances. Stability of the Russian transit is secured and the sale of Belarusian industry and infrastructure assets becomes a matter of time, which is playing on the side of Russian business (state-owned assets in such circumstances become only cheaper over time). Furthermore, the less Belarus is capable of implementing independent policy towards the EU, the sooner Russian business will be able to take over the financial and logistics schemes.
Consistency of the EU’s expansion of sanctions against the ruling elite is most likely to provoke an increase in ad hoc repressions against civil society and tension on the official level. The logic of the regime suggests that the pressure will continue increasing.
Meanwhile, Minsk sent mixed signals last week. In his traditional manner Lukashenko made it clear that he was prepared to discuss a moratorium on the death penalty. A celebration of the 94th anniversary of the Day of Belarusian People’s Republic (a traditional rally organized by the opposition) passed peacefully. These signals suggest the authorities are not yet ready to abandon plans of normalization of the relations with the EU, regardless of the threats voiced by Lukashenko and the Belarusian Foreign Ministry.
We believe, during the next week or two Lukashenko will be choosing between two options and neither of them is good for him.
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.