The chairman of the board at the National Bank of the Republic of Belarus talks to James King about addressing the country’s vulnerability to trade tensions and the fluctuations of the Russian ruble.

Pavel Kallaur

Q: What are the implications for Belarus’s economy of Russia’s so-called 'oil-tax manoeuvre', which will see the country’s oil export duties replaced by a mineral extraction tax? 

A: The implementation of the oil-tax manoeuvre in Russia is, effectively, a negative external shock for the economy of Belarus. It means that Belarus will face an increase in prices for imported oil between 2019 and 2024.

Undoubtedly, this kind of change in the supply of energy resources will have a negative impact on the state of foreign trade and the national balance of payments. In addition, it will affect the revenues of the budget of Belarus as it will lead to a reduction in the volume of incoming export duties on oil products, while contributing to the growth of fuel prices in the domestic market and a [rising] inflationary [environment].

[Nevertheless], the oil-tax manoeuvre will act as an additional stimulus for Belarusian enterprises to carry out active work on raising their production efficiency. Our economic entities have the opportunity to construct optimal strategies for their development by switching to [new ways] of operating. [Primarily], this refers to the country’s oil refinery plants, which can implement investment projects on technical re-equipping, making it possible for them to work more efficiently under the present market conditions, set prices for oil and oil products, and level out the negative impacts of the oil-tax manoeuvre.

Q: To what extent has Belarus’s external sector been impacted by growing global trade tensions? 

A: Belarus is a country with an open economy. At present, about 70% of our goods and services are being sold to the external market. [Accordingly], a balance of external trade has been ensured in recent years, while the national economy has become less vulnerable to external shocks. Nevertheless, current global trade tensions are increasing the instability of prices in the raw materials markets and the uncertainty around their future movements. [These tensions have also] negatively affected the prospects of global growth in the short and medium terms.

These developments could lead to a reduction in demand for traditional Belarusian exports. In light of this, efforts to increase the competitiveness of Belarusian goods, as well as the geographic and goods-based diversification of foreign trade, are currently in progress. This will contribute not only to lessening the possible negative impact of the growth of global trade tensions, but also to the creation of conditions for the stable growth of exports in the future.    

Q: How would you characterise the external inflation risks that are facing Belarus’s economy today? 

A: The openness of the Belarusian economy ensures its dependence on trends in global markets, as well as the general inflationary environment in the global economy. The main external factors that influence inflation in Belarus are the dynamics of consumer prices in Russia, the Russian ruble exchange rate, and the world oil price. Their influence is transformed into inflation in Belarus, both directly through the prices of imported consumer goods, and indirectly through an increase in Belarusian producers’ costs at the expense of growth in the cost of imported raw materials and components, including that related to the exchange rate factor.

At the same time, the changes that have occurred in the domestic economy and economic policy as a whole have diminished the influence of external factors on inflationary processes in Belarus. For example, the volatility of the Belarusian ruble exchange rate has decreased, and its impact on inflationary processes in the country has become less significant.

In addition, I would like to point out that, at present, the balance of risks from external sources is shifting towards a disinflationary trajectory. This is primarily due to the slowdown in inflation in Russia. According to a forecast from the Bank of Russia, annual inflation in the country will return to 4% in early 2020. As a result of measures taken by the Russian government, the dependence of the exchange rate of the Russian ruble on fluctuations of global energy prices has decreased, and its dynamics have become less volatile.

Under these conditions, the inflationary risks for Belarus from the Russian ruble exchange rate have decreased. Amid a slowdown in the global economy, inflationary pressures in the EU and US have also lessened. Moreover, a further escalation of the trade wars that we are seeing may lead to a decrease in world oil prices, which will reduce the pressure on fuel prices in the domestic market and, in general, on inflation in Belarus.

Q: In terms of monetary policy, what are the next steps in the central bank’s transition to full inflation targeting? 

A: In the first half of the current decade, Belarus experienced macroeconomic imbalances and high inflation, which were brought about by excessive monetary and fiscal stimulation of the economy. Since 2015, the government’s economic policy has been adjusted, with the utmost importance being placed on stable development through macroeconomic balance and price and financial stability. [In tandem], monetary policy has focused on the control of money supply. As a result, inflation has slowed from double digits to 5% and has been maintained at this level since 2017. 

At the same time, preliminary work, designed to switch the National Bank of the Republic of Belarus to an inflation-targeting regime, is being carried out and is close to completion. In particular, the bank’s responsibility for price stability has been enshrined in legislation, a transition to a floating exchange rate has taken place, a set of measures designed to reduce the volume of foreign exchange in the economy has been adopted and technical work on strengthening the bank’s forecasting potential has been completed. 

[In the near future], we will tackle a number of other tasks. These will include a change in the current procedures for setting the inflation target. At present, it is approved for one year. We need to proceed to a medium-term target, no shorter than three years, due to the slow reaction of the economy when it comes to the adjustment of monetary policy. Indeed, the necessary proposals relating to changes to the banking code have already been prepared [to meet this objective]. 

Q: What are the key challenges facing Belarus’s economy over the long term? 

A: The most important objective of Belarus’s social and economic development is the formation of an efficient, socially oriented and competitive economy. [For this goal to be realised], the economy must grow at a fairly high rate, while the macroeconomic balance should not be upset and inflation should not accelerate. However, over the short term, national economic growth rates [are likely to] remain relatively low. Structural reforms will be required to increase them. The government is carrying out systematic work in this regard, with the active co-operation of international institutions such as the World Bank.

Structural adjustment of the economy implies an increase in the efficiency of using state property, based on the introduction of modern corporate governance methods. It also means the accelerated development of information and communication technologies and hi-tech industries, industrial innovation clusters and related infrastructure throughout the economy, which will affect the quality of human development.

The state is paying great attention to hi-tech sectors of the economy and, in particular, IT and biotechnologies. Favourable conditions have been created for their development in science and technology parks, such as the Hi-Tech Park, the China-Belarus Great Stone Industrial Park, and the Scientific Technological Park BelBiograd. As a result, the technology sector is already showing rapid growth and is becoming one of the drivers of [the broader economy]. In 2018, IT services exports totalled about $1.5bn, an increase of 30% on 2017.

For the purpose of achieving these goals, both external and internal sources will be used. Above all, this refers to the creation of conditions for foreign investment growth. In addition, an important task is the formation of a competitive and structurally developed financial market, and the use of new financial technologies to attract investments. The main contribution of the financial sector to the achievement of long-term objectives facing the economy is to ensure price and financial stability as the basis for sustainable and balanced economic development and an improvement in the country’s investment attractiveness.


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