Belarus’s economy is doing a lot better than expected, with the government forecasting GDP growth may hit 1.7% this year, against expectations of no growth at all at the start of the year.

Industry has become the main driver of the Belarusian economy in 2017 and the biggest contributor to growth, accounting for 1.6% in January-August.

The improvement is due to higher than expected oil prices that have led to an increase in Belarusian exports. At the same time the resolution of a row with Russia over oil prices – Belarus is home to two modern refineries that Russian companies use – has also improved the earnings outlook for the country.

In January-August 2017, Belarus' GDP grew by 1.6% compared to the same period in 2016, according to Belstat.

The main growth was from industry, the added value of which increased by more than 5%. The country has also taken in a good harvest compared with 2016. Reduced subsidies to the economy increased net taxes on products that also pushed GDP up. Construction was the only major economic sector which performed worse than in 2016.

In 2017, the Belarusian government drafted two socio-economic development forecasts. The first assumed low oil prices – at $35 per barrel, which should have deterred industry performance. At this oil price, economic growth was projected at 0.2%. The ‘optimistic’ scenario envisaged economic growth at 1.7% assuming higher oil prices.

Currently, the price of oil is higher than the forecast. In January – July 2017, the average price for Russian Urals oil totalled $50 per barrel, which boosted economic growth in Russia and led to an increase in Belarusian exports by 24% in January-July 2017. Thanks to an increase in production, Belarusian enterprises were able to raise wages, which let to growth in retail trade turnover by 1.9% in January-August 2017. Simultaneously, Russia's industry growth rate has slowed down, which could lead to a production slowdown in Belarus.

One of the key factors, which would help meet the ‘optimistic’ forecast for economic growth in 2017, would be oil supply agreements. Belarusian refineries are unlikely to process all envisaged 24mn tons of oil in 2017 due to the limited capacity and a cut in supplies in the first quarter of this year during the fracas with Russia. Should Belarus receive all oil as planned, it is likely to resell circa 6mn tons of Russian oil and keep the oil export duty. This would improve the wholesale trade. Belarusian refineries would process 18mn tons of oil in 2017, which would be the same volume as in 2016.

Additional budget revenues could be spent on pay rises in the social sphere and would lead to an improvement in retail trade. Altogether, these factors would ensure GDP growth in 2017 at 1.7%, even if the Russian economy somewhat slows down.

Overall, the high oil price has been the key factor which ensured the economic recovery in Belarus. Russia's compliance with the oil supply agreements in 2017 at 24mn tons would guarantee additional budget revenues and support the GDP growth forecast at 1.7%.