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13 Dec 2013

Time to worry about savings in USD?

 During autumn certain rumours have begun spreading in Belarus about possible ban on withdrawal of deposits in foreign currency  from Belarusian banks. They appeared after the publication of the article in the govermental newpaper “Respublika”, in which the author wrote about the reasonability of the banks refusal of accepting deposits in foreign currency in general. People are also worried with current state of Belarus trade balance which has turned negative within last six month.

   Things reached the highest point when National Bank discussed the problem on special hearings at an enlarged meeting of the Board held on November 15. After the meeting the bank informed that rumors appeared in the Internet about impending ban on the foreign currency deposits are just provocative and absolutely untrue.

   The National Bank noted that the full safety and 100% reimbursement of individual deposits both in Belarusian rubles and foreign currency are guaranteed by the Banking Code of the Republic of Belarus, The Decree “About guarantees of safety of money of the physical persons placed on accounts and (or) in bank deposits (deposits)” and the law of Belarus “About guaranteed compensation of bank deposits (deposits) of physical persons”.

   In addition, according to the National Bank, the introduction of such unilateral currency restrictions in Belarus is impossible due to the country's participation in such important integration organizations as the Customs Union and the Common Economic Space of Belarus, Kazakhstan and Russia.

   During the meeting of the board it was also observed that the situation in the internal currency and deposit markets of the country is controlled and it does not require taking any additional extraordinary measures, including administrative measures.

Indeed, the imposition of restrictions on foreign currency deposits market seems unlikely, not even by virtue of legislative obstacles. After all the above-mentioned law and the Decree protect the people from unlawful actions of banks only. But if the state is interested in individuals savings, the decrees will not be an obstacle – the state can always take new ones. But there are more substantial grounds for preventing such actions

   Firstly, the imposition of restrictions on the issuance or a ban to take foreign currency deposits will lead to the collapse of the country’s financial market. Transactions of individuals in foreign currencies will continue not withing the banking system, but on the black market instead. The people will continue to buy dollars, and they will keep them not in the banks, but at home. Taking into account that currently foreign currency deposits make up the largest part of Belarusian banking passives, financial losses for them will be considerable.

   The National Bank will have to compensate the lack of bank inflows by credit emission that will lead to higher inflation and pressure on the exchange rate of the Belarusian ruble. In such circumstances hyperinflation with all its unpleasant consequences can occur.

   Secondly we should take into account the fact that the imposition of restrictions on the currency market will cause serious discontent among the people, as it will create a lot of inconvenience, because it is better to work with banks than with the black market dealers. Also interest on foreign currency deposits is being accrued, but the currency under the pillow does not bring any income.

   Discontent of the people is a very serious argument in this case. It seems that this particular argument was decisive in the abolition of restrictions on the foreign currency sale on the Belarusian Currency and Stock Exchange in 2011.

   At least the President of Belarus Alexander Lukashenko at a meeting on August 30, 2011 where it was announced about intention to abolish restraints introduced at the beginning of the year said that “If this problem makes the people (especially the population of Minsk) moan, an opportunity to buy the currency will be provided”.

   In addition, he said that three variants of a policy on the currency market were considered. The first included saving of all constraints of that time. “Now we see that this variant is not suitable for us. If the real economy in general still shows good growth, all possible risks and imbalances in the financial sector and the currency market are only growing, it will soon affect or may affect the economy. Therefore, it is a dangerous variant according to experts. Or, perhaps, it is not very suitable for us, because everybody lives in accordance with other laws and other principles,” – Alexander Lukashenko said.

   As you can see, the issue of restrictions on the currency market in Belarus has already considered two years ago and the thesis of their negative consequences has been proven in practice.
It seems that the President reacted skeptically to the specialists earlier, but decided to listen to the people’s voice, at the same time taking into account the experience of neighboring countries.

   Thus, the arguments against the imposition of restrictions on foreign currency deposits seem pretty serious. It may be noted that even in the most difficult times there were no restrictions on foreign currency deposits in Belarus.

But it doesn’t mean that the restrictions cannot be imposed on the country’s currency market in the near future, at least for a short time. After all it has also seemed unlikely at the beginning of 2011, but nevertheless National Bank limited currency sale on the stock market for selling it to private importers and people. As a result we could see the devaluation of the ruble and an inflation upswing.

   The present situation on the currency market is deteriorating, as it was in the beginning of 2011. And the leadership of Belarus, as then, has no real anti-crisis plan in case of force majeure. Therefore, the situation when the restrictions will become unavoidable can appear.

   The Government and National Bank rely on increasing exports and revenues from privatization in 2014. Of course it would be nice if these hopes come true. But if they won’t? After all in the beginning of 2012 they also relied on increasing exports and investment. We can recall the beginning of 2011, when the head of National Bank of that time Petr Prokopovich relied on the same things. But none of them has happened. And what will be in a few months, if increasing of currency inflow does not happen, and the country's gold and currency reserves fall by 1-2 billion USD?

   Will National Bank start selling gold? No. Then immediate measures to stabilize the situation will definetely be needed. And most likely it will be some kind of a ban, but at the moment tt is difficult to say what exacrtly type of ban could be introduced.

   Such uncertainty will negatively affect public sentiments. It doesn’t matter what rumors will spread in the Internet. Even if general discussion of this issue stops or everybody posts that we have nothing to fear, some investors will start to take currency deposits out of banks with deterioration of the country’s financial situation. Rumors will spread rapidly without the Internet, as it was in Soviet times.

   Such actions are absolutely normal. All people are worried about their deposits, and they will try to protect themselves from any risks. For example, in 2011 during the crisis individuals took currency deposits out in the amount of about 1.2 billion USD – about a quarter of their savings in foreign currency (see chart). Such a process can begin in 2014 if the situation with foreign trade and gold and currency reserves will not be stabilized.

   Perhaps there is only one way to change such public sentiments. It’s necessary to create a realistic action plan in case of failure of plans of exports growth and revenues from privatization in 2014. It’s not so difficult. Stability in the financial market can be achieved by loss of real wages because the devaluation of the ruble will not give the desired effect. One more variant is to sharply increase the payment for utilities services.

   However, it’s difficult for the President to take such measures because of approaching presidential elections in the end of 2015. It is especially true speaking about utility services, low cost of which is one of the most important Lukashenko’s election trumps.

   But we must understand that in case of lack of growth of currency inflow in the form of external borrowing and privatization revenues, fall of living standards is unavoidable. Actually, in some way it happens in Belarus, because the introduction of a tax on the unemployed, cars, etc. - there are ways to reduce income.

   But these measures are unlikely to be enough, we need more drastic ones. In fact, financial stability can be achieved by reducing real incomes for a few months. But would leadership of the country do it? They will have to choose.

Vladimir Tarasov


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