Belarusian regime's administrative tools remains helpless against the economy's dollarization

In 2009 National Bank devalued Belarusan ruble by 20%; within a few months in 2011 it devaluated by almost 3 times; in 2014 National Bank introduced a 30% temporary tax on purchasing foreign currency.

On 16 September a new regulation of the National Bank of Belarus on currency transactions came into effect. It forced all consulates in Belarus to suspend their activities for a few days in order for them to invent new ways of collecting payments from clients.

This is how Minsk attempts to limit the dollarization of the economy. Instead of fixing its monetary policy, the Belarusian government prefers to rely on administrative tools and introduc​ing new restrictions on economic transactions.

These efforts will hardly increase trust in the Belarusian ruble, however.

The story of continuous devaluation

The Belarusian ruble has been depreciating dramatically throughout its history. Since regaining independence, Belarusians have experienced countless devaluations. The most sever devaluation occurred following the Soviet collapse in 1991. Since the USSR's authorities prohibited keeping international currencies, people remained unprepared for the hyperinflation of the early 1990s. Th​is period wiped out most people's savings in just a few months.

Since then the Belarusian ruble has never been a stable currency. Although all the post-socialist national currencies depreciated greatly in the 1990s, many became internationally convertible and relatively stable in the 2000s. For example, the Polish zloty appreciated by 10 per cent in 2001-2015. But the success story does not concern the Belarusian ruble which devalued fifteen-fold against the US dollar at the same time (from over 1,100 to under BYR18,000 per $1; figure 1).

Most devaluations of the Belarusian ruble were sharp and unexpected. Only in the past seven years have the Belarusian authorities shocked society three times.

First, on New Year's Day of 2009 it devalued the currency by 20 per cent. The unpleasant surprise forced many people to buy what they could in anticipation of steep price rises following the devaluation. Since then Belarusians have always met the year-end with certain concerns.

Second, in 2011 the internal currency crisis changed the well-being of Belarusians dramatically. Prior to that the president, the prime minister, and the National Bank of Belarus (NBB) systematically had promised that there would be no devaluation. Nevertheless, within a few months in 2011 the national currency devaluated almost three times, while consumer prices doubled throughout the year. Not surprisingly, Belarusians have become wary about any promises concerning currency stability.

Third, in mid-December 2014, following the 30-percentage devaluation of Russian ruble, the NBB introduced a 30-percent temporary tax on the purchase of foreign currency. Statistically the national currency remained unchanged for a few weeks until the new chief of the NBB, appointed on 27 December 2014, gradually cancelled the tax and devaluated the currency. Since the beginning of 2015 the price of US dollar in Belarusian rubles has risen by a half.

The Belarusian ruble as quasi-money

Belarusian rubles have never served the role of money. An item is money when it serves four basic functions: a store of value, a unit of account, a standard of deferred payment, and a medium of exchange. The national currency has problems with the first three functions. This has led Belarusians to rely on foreign currencies.

First, the past 25 years have taught Belarusians to distrust their national currency and keep savings in dollars or euros. An average Belarusian household and firm puts 60-70 per cent of its deposits in foreign currencies. The structure of deposits illustrates the society and businesses disbelief in the future value of the Belarusian ruble. For comparison, in Poland only 20% of deposits are in foreign currencies.

Second, because of to permanently high inflation, Belarusians have got used to using dollars orEuros as a unit of account. Since 1990 prices have risen by tens or hundreds of per cent per year. That is why many firms and individual traders have preferred to price their goods and services in “hard currencies”. In addition, counting in Belarusian rubles is very inconvenient due to the large numbers. For example, a new Apple MacBook costs around BYR30,000,000 compared to only $2,000.

When the officials banned foreign currency pricing in the early 1990s, the firms “renamed” dollars to „conventional units”. So, when goes go to a bazaar it is easy to spot sneakers or other sport shoes sold for 50-100 conventional units. Until recently one could have used Onliner.by, the Belarusian alternative to eBay.com, to see price of a desired unit in conventional units. Only in late December 2014 did the authorities take Onliner.by off the Internet, refusing to allow it to return until it converted all prices in BYR.

Third, Belarusian rubles hardly serve as a standard of deferred payment. Frequently Belarusian businessmen, freelancer, and NGO representatives strike a deal in dollars and Euros. For example, one can rent a car or book a conference room in Minsk, and agree to pay $200 to the owner. Since payments in foreign currencies are illegal, you pay the equivalent amount in rubles on payment day.

A new resolution makes a little change

On 16 September the NBB passed resolution no. 515 which introduced amendments to the regulations on currency transactions. The resolution is a part of the NBB​'s de-dollarization policy. The resolution reduces opportunities for foreign currency transactions between firms as well as between firms and individuals. It makes little difference since most foreign currency transactions are already considered illegal.

Unfortunately, Belarusian citizens have to pay for the authorities' incompetence. This law was passed without consultation with business representatives. The lack of a transition period for firms to prepare for the new regulation hits both the business climate and people's pockets.

The NBB announced the regulation a day before it came into effect. As a result, visa centres and some travel agencies stopped operating for two days in order to adjust their businesses to the new environment. On 18 September, most travel agencies, like Top-Tour, Tury.By, Sunrise Travel, began to accept consular fees in the national currency at the official NBB exchange rate plus 2-3 per cent. They shifted costs to their clients, who are now paying more money for the same service.

The new resolution of the NBB will not make much difference. Belarusians will invent other ways of how to avoid the restrictions. The only efficient way to increase reliance on the Belarusian ruble is to make it more stable. Until annual inflation hits two-digit figures, and significant devaluations happen frequently and unexpectedly, the population will remain sceptical about the national currency.

So far the Belarusian regime's administrative tools remains helpless against the economy's dollarization. The monetary policy of forcing Belarusian rubles on people approach will not work until the NBB focuses on conducting conservative and reliable monetary policy.

Originally published at BelarusDigest