Tim Gosling in Moscow -

December's rigged presidential election in Belarus briefly brought protesters onto the streets, only for the authorities to quickly to crush the dissent. In the following weeks, protests over economic hardships and corruption spread across the North Africa and the Middle East, which has served only to increase concern in Minsk over the poor state of the economy.

The problems with the already dire economy have mounted since the start of 2011. On March 15, Standard & Poor's downgraded Belarus' sovereign debt a notch to 'B', whilst rumours of a one-off devaluation for the Belarusian ruble saw the population swarming the banks to swap their local cash for hard currency.

Both events have their roots in a chronic trade deficit, which is draining Belarus' foreign currency reserves at a rate of half a billion dollars or so a month. In January, the country's forex assets sank to their lowest level since the depths of the global economic crisis, and analysts say Minsk is facing some tough choices if it's to avoid its finances sinking further into the mire.

The National Bank of the Republic of Belarus announced in mid-February that the country's foreign reserve assets shrank by $700m in January to total $4.3bn, their lowest level since October 2009. The government moved swiftly to insist that the drop was the result of "seasonal factors" - namely a sharp increase in demand amongst the population for hard currency.

However, analysts argue that the cause is structural, and to be found in the steadily deteriorating trade deficit. "The main reason for the drop in reserves is the country's steadily intensifying negative trade balance, which according to official data in 2010 amounted to over $9bn, a record in the history of independent Belarus," notes Kamil Klysinski of the Centre for Eastern Studies.

Erste Bank points out that until now, the pressure on the state's piggy bank has been obscured by the $800m raised via a Eurobond issue and what it terms "tricks", ie. forex lending by local corporate banks to the central bank.

Put simply, Belarus is buying too much abroad and selling too little - with government policy that forces economic growth via lending and wage rises simply putting more money in the hands of companies and people to buy more expensive imported goods. The removal of subsidies on Russian energy supplies hasn't helped the trade deficit either, with the value of the country's energy imports ballooning, whilst also limiting the export of refined oil products to the EU.

Underlying it all, however, is an economy populated by inefficient state-run companies turning out low-quality, heavily subsidized goods - in short, a typical picture of the early stages of transition to a market economy. Of course, the crisis has done much to expose these woes, and whilst the country has a relatively healthy low ratio of debt at 50% of GDP, it's due to pay down more than $12.5bn to creditors in the next 12 months.

Proper fix

The most obvious longer-term solution for Belarus is to carry out more privatisation and attract more foreign direct investment, which would not only bring in extra government revenue and reduce the current account deficit, but also start addressing those structural issues. However, for various reasons, a significant acceleration of such investment flows is some way off, so Minsk needs to urgently tap short-term strategies to give itself wriggle room. As Erste analysts warn: "The huge current account deficit is clearly not sustainable and has to be tackled by the authorities, if they do not want to simply run out of reserves."

However, Minsk's bloody-mindedness has hardly let up since Alexander Lukashenko was re-elected president in December. Quite aside from the extra dose of siege mentality created by international condemnation of the crackdown on protesters after the vote, the government continues to sound like a Soviet propaganda film when it comes to economics.

Take a speech from Prime Minister Mikhail Myasnikovich to MPs in late February. He brushed off sceptics as he announced that the government aims to achieve a trade surplus by 2015, but stopped short of suggesting any specific measures to achieve it, other than raising exports and limiting imports.

Analysts suggest that allowing a drop in the value of the ruble, reining in wage and budgetary spending growth, and tightening monetary policy would help stifle the growth in imports. However, it would be more in their style for the authorities to simply clamp down on the forex market by applying capital controls and foreign currency rationing. In the face of Minsk's refusal to slowly devalue the currency, alarm was already spreading on the streets by mid-March as rumours of a forthcoming one-off devaluation sent people racing to convert the rubles in their bank accounts.

Piotr Prokopovich, chairman of the central bank, promptly shoved his head in the sand, blaming the media for spreading what he termed "unfounded" rumours. "I suppose, after a couple of days the people will calm down and the 'raids' on currency exchange offices will stop," he told the Belta news agency, whilst suggesting there is no plan to make the currency more flexible. At the same time, he didn't categorically rule out a one-off devaluation - which Alexei Moiseev of VTB Capital suggests would offer no more than "a short-lived positive effect."

Another short-term option that the government appears to prefer is one employed to good use in 2010 - continue borrowing. Again, however, this is little more than robbing Peter to pay Paul. As Klysinski points out, the steady drop in reserves over the last few months is despite the issue of $800m in Eurobonds, meaning new credit is being used solely to roll over outstanding debt.

At the same time, if economic indicators continue to deteriorate, borrowing will become more expensive, and any shocks on the international debt markets could make life very difficult. The downgrade by S&P in March - reflecting "the country's heightened vulnerability to negative external financing trends because of the deterioration in usable reserves" - is a warning sign this strategy may be untenable going forwards.

Still, Minsk says it's considering another $200m Eurobond this year, as well RUB8bn in bonds denominated in Russian rubles. Renaissance Capital analysts said in January they're bullish on Belarus debt, not least because the 2011 budget plans for no more than $1bn of external public debt to be raised.

However, that limit on borrowing may need to be revised, with politics likely to stir the hornet's nest. EU Observer reported in January that the EU is considering pressing the International Monetary Fund (IMF) and other institutions to withdraw support. If that went through, it would seriously damage the country's ability to raise debt.

The report appears to have sent Minsk to the Anti-Crisis Fund of the Eurasian Economic Community - set up by several of the Commonwealth of Independent States (CIS) in 2009 - for a $1.7bn loan, its full quota. Not a problem, says Alexander Kudrin of Troika Dialog, except that that would leave Belarus "without this source of financing as an option in the future."

State sell-offs

Meanwhile, the former governor of the central bank, Stanislav Bogdankevich, told Prime Tass in January that although Belarus could make do without loans from international institutions for 12-18 months, that would depend on undertaking "large-scale privatisation attracting about $5bn-10bn."

That's an ambitious target: the state's privatisation strategy is still bogged down in confusion, and Lukashenko has a habit of reacting with erratic and furious edicts when offers come in below his expectations. The events since the December elections have only served to heighten concerns among western investors.

However, investment could come from elsewhere. Chinese money has started to flow to Minsk, just as it has across emerging markets, whilst Bogdankevich suggests the country "may make up its mind to sell the family jewels to Russian oligarchs - the refineries, automobile plants, farm machine producers and Belaruskali." Truck producer Maz has already backed away from a proposed privatisation, and is in talks over a merger with Russian peer Kamaz.

Even if Lukashenko were to take such advice, how quickly the government could restructure its inefficient companies and push through any privatisation deals remains questionable. And as revolution spreads out of North Africa and possibly into the authoritarian regimes in the CIS, it's a valid question how much more economic hardship Lukashenko can risk foisting on the people who he's already had to brutally repress.