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Belarus Special March 2022

Belarus: Belarusian ruble collapses amid war in Ukraine; Central Bank hikes rate by 275 basis points to 12.00%

On 28 February, four days after war broke out in Ukraine, the National Bank of the Republic of Belarus had its first meeting in seven months. At the meeting, the Bank hiked the base rate by 275 basis points to 12.00% in order to contain the external shock from sanctions on Russia and to stabilize the currency. Prior to the conflict’s escalation, inflation was already elevated: In January, inflation reached 10.4%, following December’s 10.0% reading. Furthermore, sequential inflation intensified throughout January amid broad-based price increases.

Beyond inflation justifying a rate hike, the Bank expected sanctions on Russia to impact Belarus’ economy and currency, given the strong economic and monetary ties between the countries. Notwithstanding the hike, the Belarusian ruble collapsed in recent weeks, reaching 3.10 per EUR on 4 March, which was a depreciation of 16.5% from the previous month.

Causes for the Belarusian ruble’s freefall were many. First of all, the Russian ruble’s collapse, which traded at 112 per USD on 4 March, marking a 31.4% month-on-month depreciation, spread over to its partners’ currencies. Meanwhile, trouble in the Russian economy following a wave of sanctions, which included banning Russian banks from the SWIFT payment system and major transporters including Maersk announcing that they would not call on Russian ports, are set to strangle Belarusian exports, which now rely on Russian support. Moreover, Belarus was also hit with additional sanctions in early March by the West, affecting the country’s key sectors. The EU targeted the tobacco, wood, steel and potash sectors, by banning imports, transportation or purchasing of products from those sectors.

Looking ahead, Belarus’ shift away from non-nuclear status in early March risks drawing additional sanctions on the country. Meanwhile, the possibility of the country joining the war is a downside risk to activity. Rising instability and a clouded economic outlook are likely to create a hostile environment for investment, which was already subdued leading up to the conflict.

On the outlook of sanctions against the country, Piotr Soroczynski, chief economist at the Polish Chamber of Commerce, commented:

“The new sanctions will strengthen the previous ones. It will have a very strong effect. The role of Belarus in the Russian-Ukrainian war is difficult to assess. Belarus has been subordinated to Russia and is helping her in this conflict. However, the resistance of the population and the army is visible. Perhaps the sanctions against Belarus should last shorter than those imposed on Russia.”

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