MINSK, July 10 (Reuters) - Belarus President Alexander Lukashenko, in power since 1994 and once referred to by Washington as "Europe's last dictator," must find $3 billion by year's end to prop up his heavily indebted economy.
That raises the compelling questions – How will he raise the cash and is his hold on power weakening?
For many Belarussians, a financial crisis threatens a tough end of year in the shape of higher heating, public transport and education bills, possibly bringing wider social discontent.
A 36 per cent devaluation of the Belarussian rouble has hit people’s savings.
Hyper-inflation of consumer goods is a constant threat. Key exporters are starved of the dollars they need to buy spare parts abroad to make their goods marketable.
Lukashenko, 56, has brushed off talk of a crisis with typical bravado — he refers publicly only to "panic" exhibited by people seeking to hoard goods.
But the speed and force used by police to crack down on sporadic peaceful street protests by young people suggest a high-level concern that discontent could spread.
The former Soviet state farm boss, who has clung to a model that keeps all key economic levers in state hands, is likely to swallow his pride and make some limited sell-offs, economists and diplomats say.
In the short term, that will most likely mean the sale of a chunk of Belarus’ gas transit system to big neighbour Russia, bringing in about $2.5 billion and releasing a new $400 million slice of credit from a Russian-led bailout fund.
But that will only buy a breathing space in an acute crisis that is narrowing the options for the authoritarian leader.
DOLLAR DRAIN
Due to a huge current account deficit triggered by wage and pension hikes last year in the run-up to Lukashenko’s re-election, dollars have drained from the system.
Central bank reserves are perilously low, covering slightly more than one month’s imports.
Key exporters like the industrial plant sector, for example, are critically short of the working capital needed to buy spare parts that will guarantee their goods a market abroad.
The rouble’s devaluation last May, as panic set in, eroded the savings of those who were either not shrewd enough or quick enough to buy dollars.
Price controls imposed on key foodstuffs have calmed the panic, but high inflation is still a reality.
But there are signs of growing anger. Motorists noisily demonstrated on the border with Poland last month when they were restricted to taking only a limited amount of petrol out.
With the mainstream political opposition still in disarray after a police crackdown on Dec. 19 during Lukashenko’s re-election, young protesters have also emerged in Minsk and other towns to challenge his leadership.
Mobilising support online through social networking sites, they are now holding weekly protests at which they stand and clap.
Alhough their numbers are relatively small, police are turning out in force every week, arresting them in droves.
There is no sign yet that the industrial workforce — which provides the bedrock of Lukashenko’s support among the people –is ready to side with the online protest movement.
But the general wisdom is that once summer is over, Belarussians will meet mounting bills for heating, public transport and other vital services when the mood could change.
Ultimately, Lukashenko may have to make hard choices at home, holding down wages this year for instance, at the risk of straining relations with factory workers, diplomats say.
"If he loses the workers, he is in deep trouble," Jaroslav Romanchuk, a Minsk-based dissident economist, told Reuters.
WRITING ON THE WALL
The writing has been on the wall for the Belarussian economic model since 2007 when Russia reduced annual subsidies of between $6 billion-$10 billion mainly on supplies of oil and gas that kept it afloat.
Western economists and diplomats say Lukashenko, despite warnings by the International Monetary Fund and other lenders, has failed to undertake radical reforms that would allow market forces to begin to take root.
Last year’s rises in public-sector pay, intended to meet a promised target of $500 for the average worker before Lukashenko went to the polls for re-election, were folly, economists say.
The result: cash chased imports as exporters bought dollars to finance purchases abroad, sending the already high current account deficit yawning wider.
Russia, far and away Belarus’s biggest trading partner, is pressing Lukashenko more and more to end his aversion to privatisations and sell off some state assets.
Although it has backed a $3 billion bailout to Belarus over three years by the Moscow-led EvrAzES fund, Russia has made it conditional on privatisations by Belarus worth $7.5 billion.
Belarus, which faces some potentially difficult repayments next spring on a 2009 IMF loan, has turned to the fund again with a request for $3 billion-$8 billion of new credit.
Lukashenko’s rough handling of the opposition has made him a pariah for the United States and the European Union. Both are pressing him to release political prisoners if he wants to secure fresh IMF credit.
But most observers believe the International Monetary Fund will eventually throw Belarus the lifeline it needs.
"Privatisation and a new programme with the IMF seem to be the only possibilities. I think that eventually a combination of these two will need to materialise for a meaningful solution of the crisis," said Ivan Tchakarov of Renaissance Capital.
PRIVATISATIONS, IPOs
The market is alive with talk of possible IPOs involving Belaruskali, the potash miner on which Lukashenko has set a value of $30 billion, and other key assets.
But Romanchuk and some others question whether Lukashenko is committed to a large-scale privatisation programme or IPOs.
"Lukashenko does not want open transparent auctions. His policy will be to give as little as possible because for him it means losing control over sections of the economy," he said.
"He’s trying to get as much as possible by giving as little as possible," said one diplomat with several years’ experience tracking Belarus. But he cautioned against assuming that Lukashenko could lose control even if the crisis worsened.
He has the loyalty of the security forces, judging by the harsh crackdowns meted out to protesters, and he is a shrewd manoeuverer within the system he has created.
"He will take care not to alienate the work force," said the diplomat.
"Doomsday scenarios have been written many times here. They never take place. All I would say is that the situation is much less predictable now," he said.
