Numerous developed countries have imposed tough sanctions on Belarus, as the Belarusian regime has become part of the Russian aggression against Ukraine. At the same time, economic relations with Ukraine have been disrupted. These shocks have simultaneously disturbed the Belarusian economy and triggered a severe recession. Thanks to several positive effects from the external environment, some success from measures undertaken by the authorities to stabilize output, and some degree of resilience – all seasoned with a large portion of good luck – the situation of the Belarusian economy is however “not that bad”. Nonetheless, the Belarusian economy is experiencing its worst economic crisis since the mid-1990s, and the current path of the economy is highly unstable and associated with numerous risks and threats. In economic terms, it is likely the case that the full costs from the sanctions are yet to be paid.
Sanctions, Multiple Shocks and Their Potential Implications
As the Belarusian regime has become part of the Russian war on Ukraine many developed countries have adopted tough sanctions against Belarus. These sanctions include an embargo on a large share of Belarusian exports and imports, prohibitions and restrictions on transportation of goods of Belarusian origin, restrictions on and/or blocking actions regarding financial operations and settlements, a freeze of parts of the Belarusian international reserves, and numerous restricting and blocking actions against banks, companies and individuals. Such sanctions, combined with a new external environment, cause powerful indirect effects with foreign companies exiting the Belarusian market and refusing business with Belarusian counterparts. Additionally, some Belarusian businesses and employees have left the country. On top of this, economic relations with Ukraine, formerly Belarus’s second largest trading partner, have been virtually reduced to zero.
In economic terms, the above mentioned may be treated as a bundle of simultaneous powerful shocks to the national economy, differing in direction, mechanics, size, and persistence. These shocks may be grouped into three clusters.
The first cluster covers demand shocks, and in particular export shocks. According to our assessments, the exogenous demand shock following the sanctions may reduce Belarusian exports (in physical terms) by 40 percent, compared to previous steady-state levels. This figure should however be seen as a potential lower bound which may be realized if no measures to mitigate the impact from the sanctions are undertaken. Belarusian authorities and businesses are however doing their best trying to find new buyers for the “vanishing” exports, bypass restrictions in order to connect to “old” buyers, and establish new logistic and financial chains. The extent to which these attempts may be successful depends on the global environment, the degree of the price competitiveness of Belarusian producers, and numerous non-economic factors. Additionally, all factors affecting exports are unstable and volatile. Exports under these new conditions are therefore less sustainable and may fluctuate in an extremely wide range. Shocks to consumption and investments stemming from weakened sentiment and expectations further amplify the demand shocks.
The second cluster of shocks relates to the supply side of the economy. It includes business closures, emigration that weakens labor supply, and production bottlenecks due to the inaccessibility of imports. Supply shocks are hard to quantify, but we perceive them as persistent and cumulative. Business closures and emigration have irrevocable effects on the national economy (at least in the medium-term), and a continuation of such drop-outs will likely amplify the size of the shock.
The third cluster combines different primarily nominal shocks: price, exchange rate, financial stability and fiscal ones. Such shocks have become permanent companions to the Belarusian economy under the sanctions, and they are volatile in terms of size. As a result, the corresponding economic indicators are likely to also become highly unstable.
This bundle of adverse shocks shifts the economy down from the previous, close to steady-state, trajectory. A new trajectory is however far from predetermined. Firstly, it depends on the effectiveness of the government in curbing the shocks stemming from the sanctions, as the actual path of the economy may be considerably affected by monetary or fiscal policy and other interventions. Secondly, some positive exogenous shocks may partially offset the effects from adverse ones. Lastly, the economy, at least for a while, may resist through exploitation of accumulated buffers (such as, international reserve assets, financial reserves of State-owned enterprises that were accumulated under favorable conditions in 2021 etc.).
Considering the worst possible assumptions regarding the above mentioned issues, our model-based simulations predict a severe recession of about 20 percent (as compared to the output peak in 2021-Q2). This recession is accompanied by a sharp increase in inflation (which in turn is highly likely to be supplemented by a full-fledged financial crisis). This simulation should however be regarded as the potential rock bottom. Whether it will become reality or not critically depends on the Belarusian government’s policies.
Policy Response by the Authorities
The root cause of the problem, namely the provision of Belarusian territory for the Russian army, has never been publicly discussed by Belarusian officials. Instead, the government has focused on strategies which treat the symptoms, rather than focusing on curing the disease itself. The main coping strategies that were publicly discussed include: 1) expected increase in Russian support and exports to Russia 2) re-orientation of exports towards Asian and developing markets 3) greater mobilization of domestic resources and 4) monetary, fiscal and other stimuli.
The Russia-related initiatives are often beyond convention and include some radical proposals. These are, for instance, accelerating the establishment of sea terminals in Russian ports, promoting exports to Russia, and requesting greater financial support from Russia linked to the so-called “deep integration” package (mainly in the form of energy subsidies, import substitution investments and direct subsidies). Adherence to these proposals would mean that Belarusian authorities de facto accept serving as a Russian protectorate and correspondingly take on the role of a puppet government.
Belarusian authorities have reached some success from choosing the “Russian track” as the debt payments to Russia were postponed, new cheap gas and oil prices were granted and export to Russia increased by 15 percent in the first 8 months of 2022. The Belarusian regime’s $7 billion compensation claim for incurred economic losses due to the war has however been rejected by Russia so far.
The coping strategy of export re-orientation serves primarily as a rhetoric intervention as China and other Asian countries considered by the government cannot fully replace the European market. For many Belarusian exports, the EU was a premium, high-margin market while re-orientation means at best lower margins. The success of re-orientation depends on the degree of price competitiveness, which can change greatly over time. The only success from this strategy to date is the re-orientation of 10 percent of potash exports to China via railroad (incurring greater transportation costs).
The third strategy “greater mobilization of domestic resources” firstly assumes more interference with the business activity of State-owned enterprises (SOE). Despite severe demand shocks these are pressured by the government to maintain production and/or salaries, the latter in order to support output via sustained consumer demand. Further, a “discipline” component of the strategy is implemented through renewed catch-pay-and-release practices. In effect, businessmen are arrested based on anti-corruption or tax fraud criminal charges. They are then offered to pay certain amounts to the state and released if they choose to pay.
Since late spring, when direct financial shocks have been suppressed, the authorities have intensified stimulus measures to the economy. In the fiscal sphere, these are aimed at promoting exports and mainly provided on an individual or sectoral basis. To a large extent, these stimuli may be seen as partial compensation to SOEs for their output-supporting role. In the monetary sphere a specific environment in which the Russian ruble is appreciated vs. the US dollar, despite the worldwide strength of the latter, has allowed the authorities to implement a “magic” (but highly likely temporary) solution: The Belarusian national currency is manipulated to depreciate vs. the Russian ruble (both in nominal and real terms) but appreciate vs. the US dollar. The former leads to a great increase in price competitiveness (as Russia is today the dominant trading partner), while the latter serves as a buffer for fragile prices and provides financial stability. Moreover, the authorities have excessively softened monetary policy, trying to spur domestic credit. These measures lead to heightened inflation pressure, which is however somehow suppressed by reinvigorated direct price controls.
Current Situation and Future Implications
Until now, the Belarusian economy places far from the potential rock bottom. By the end of the second quarter in 2022, output losses (vs. the output peak in 2021-Q2) amounted to about 5.5 percent. By the end of 2022, they are however expected to increase to about 8.5 percent (vs. the 2021-Q2 output peak). The Belarusian economy is stuck in a heightened inflation environment – with the inflation being as high as 20 percent in annual terms. Although the inflation is considerably higher than in “normal times”, it is still not a disaster (considering the much higher projected level under the worst-case scenario and the background of 40-year peak in global inflation). Moreover, the current situation is still far from a full-fledged financial crisis, despite some financial turbulence.
The position of the economy as “not that bad”, is a result of existing buffers, positive effects from the external environment and some immediate efficiency from actions undertaken by the authorities to stabilize output – all seasoned with a large portion of good luck. For instance, the jump in price competitiveness accounts for a large share of curbing efforts that counter the sanctions. This is, in turn, due to a combination of high global prices, low and frozen energy prices for Belarus, and a very specific and unstable stance on monetary policy underpinned by direct price controls. Some buffer savings that Belarusian SOEs succeeded to accumulate during the period of the so-called “foreign trade miracle” in late 2020 and 2021 also play an important role. Last but not least, the Belarusian authorities seem to have succeeded in the partial curbing of the export shock. Since the beginning of summer, there are some signs of recovery in exports which most likely reflects a partial recovery of exports within the most sensitive domains: oil products and potash fertilizers (corresponding statistics have been blocked out).
However, the “not that bad” position of the economy does not mean good. According to all standard metrics, Belarus is currently experiencing a severe economic crisis. The notion that it could be even more severe is bad news, not good ones. Moreover, the current situation is extremely unstable and fragile. The economy is facing numerous distortions, contradictions and risks, all of which can still shift the scenario of the crisis from the “not that bad” situation to the worst possible.
The Belarusian regime’s involvement in the Russian aggression against Ukraine have propelled Belarus into the most severe economic crisis since the mid-1990s. Until recently, fortunate external economic circumstances, a specific policy mix and a good portion of luck have allowed for a partial mitigation of the crisis. The situation is however extremely unstable and the full effects from the sanctions are likely yet to be realized.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
This policy brief summarizes the results of our research on factors influencing preferences for democracy in transition countries. The aim of this work was to detect which macroeconomic and individual factors impact the choice of supporting democracy. The results showed that the performance of the country, described by level of GDP, unemployment, level of corruption and economic growth, has a serious impact on an individual’s perception of democracy. At the same time, individual factors like education and age also influence people’s choice of support of democratic authorities.
Individual perception of democracy is a question that attracts the attention of policymakers. The macroeconomic instability that has been observed worldwide lately is likely to impact individual attitude toward democratic values and political institutions. The recent economic crisis brought a deterioration of the economic situation around the world and provided new challenges to cope with. It is likely that macroeconomic indicators have an impact on how a person perceives democracy. Literature studying similar questions has shown that GDP growth, unemployment and inflation all affect personal attitude to democratic institutions (Clarke et. al., 1994; Barro, 1999; Papaioannou and Siourounis, 2008). As for individual characteristics, the level of education is revealed by the literature as a very important factor in the context of the individual’s propensity of democracy approval.
The literature on the determinants of political support and attitudes to democracy was mostly focusing on exploring stable world economies with long-formed and steady-functioning democracies. We tried to look at a similar question in the context of transition economies, where democratic institutions are still under development.
We intend to estimate individuals’ propensity to favor democratic values. The specification of our econometric model was based on the literature addressing the same topic. The estimation procedure used probit econometric techniques, which allows for the calculation of the propensities of interest while taking into account the influence of both macroeconomic factors and individual characteristics. The paper used two sources of data: macroeconomic information was collected from the World Development Indicators of the World Bank, and individual-level cross-sectional data was obtained from Life in Transition Survey (LITS) 2010, which initially covered 38864 individuals from 35 countries. However, as the paper focuses on countries in transition, the final set only included individuals from 30 countries, most from Eastern Europe, Baltics and CIS, and excluded representatives of Western Europe. This data allowed for substantial data variation in the context of economic development vs. perception of democratic values (Graph 1).Figure 1. Support of Democracy and GDP Per Capita Source: WDI and LITS 2010
Inclusion of different macroeconomic variables together with individual factors allowed for an evaluation of their importance and level of impact on the perception of democratic values (Table 1). The results show that GDP per capita has a positive and significant effect on individuals’ perception of democratic values, which is in line with the literature claiming that standard of living in countries with not so high level of GDP is positively correlated with satisfaction with their life and the political system (Easterlin, 1995; Clark et al., 2008; Stevenson and Wolfers, 2008). Inflation rates are not significant and do not influence individuals’ attitude to democracy. On the other hand, economic growth is strictly positive and significant, and an increase of the economic growth rate raises propensity of democratic support by around 1.6 percentage points. The possible explanation here is that the growth rate of GDP works as a proxy of expectations for improvements of the standard of living in the future.Table 1. Influence of Macroeconomic and Individual Factors on Perception of Democracy
Unemployment works as an indicator of a country‘s economic performance and has an expected negative sign in terms of individuals’ satisfaction with life and political institutions, which is also in line with the results in the literature (Di Tella et al., 2001; Wagner and Schneider, 2006). Impact of unemployment was tested using a cross product of unemployment and the Freedom House Index (this latter indicator shows the level of political and civil rights from 1 (most free) to 7 (least free)). The sign on this cross product is positive, which captures their mutual positive impact on the support for democracy. Thus, the higher the unemployment in a country with a low level of democratization is, the larger the probability of democratic support by individuals in these countries is. The indicator for the level of corruption in a country was also taken into account, via the Corruption Perception Index. This index ranks countries on a scale from 0 (highly corrupt) to 10 (effectively, corruption-free). The results show that the less corrupt a country is, the higher the propensity that an individual in that country will support democracy is. In fact, one additional point in the index increases the propensity of support by almost 4 percentage points. Military expenditures negatively affect the support of democratic values, and so does the existence of oil in the country. Here, military expenditures may be seen as a proxy for a less democratic regime, so that the leaders there have higher incentives to rule using suppressive measures with a support of military force in the country (Mulligan, Gil and Sala-i-Martin, 2004).
As for the individual factors, both secondary and higher education appear to be very important factors with a positive impact on the satisfaction with democracy. This finding follows the literature (Barro, 1999; Przeworski et al., 2000; Glaeser et al., 2004). In our results, people with secondary or higher education degree showed 10 and 18 percentage points higher propensity of support, respectively. Age also seem to matter: positive perception of democracy is specific to those aged 18-54, compared to the older generation, which goes in line with the explanation that senior citizens are more conservative than younger citizens. We also observe a negative significant coefficient on female gender, which may, perhaps, be related to women being more conservative than men.
Subjective relative income measure (answer to the question “to which income quintile do you think you belong to?”) has a positive impact on the support for democracy. Surprisingly, individuals from middle-income group have a more positive attitude than those who regard themselves as rich. Employment status is positively correlated with the support for democracy. Moreover, self-employment and employment in the public sector have a larger effect on the propensity of positive attitude to democratic values than employment in the private sector.
Divorced and widowed people expressed less support for democracy than single individuals, which might signal some dissatisfaction that impacts on personal attitude. Urban residency is positively correlated with the support of democracy. The same relationship is present for the risk tolerance of an individual. Finally, inclusion of a subjective measure of life satisfaction brought some changes to the general picture. It appeared that those who are satisfied with life strongly support the democratic values and such mentality raises the propensity of support by 7 percentage points. Moreover, inclusion of this variable makes the effect of being rich insignificant.
To sum up, the results showed that economic performance of the country described by various macroeconomic indicators has a serious impact on individual’s perception of democracy and, most probably, of other forms of government. At the same time individual factors also influence people’s satisfaction with the authorities. Thus, individual support of a political system is based on the results of performance of both the individual and the country.
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Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.