**3. State capitalism traps in Belarus**

### **3.1 The "debt trap"**

The "debt trap" appears when old debts are converted into new ones. As American economist Irving Fisher put it at the time of the Great Depression, "the more debtors pay, the more they owe." The same happens in Belarus. Belarus' external government debt is not repaid with proceeds from its use, and is partially refinanced, being shifted to the future. Non-project-related government loans are used to replenish reserves, to refinance old debts, and do not generate foreign exchange proceeds through exports and foreign direct investments.

Due to the nature of state capitalism in Belarus, "debt trap" appeared on the road of country's development. The problems with business plan appraisal and monitoring, project-related external government loans and guarantees do not always generate foreign exchange proceeds either, and are sometimes repaid by the budget rather than by the projects. In turn, external debt refinancing with the more expensive domestic debt leads to an increase in the size of the aggregate government debt and an outflow of foreign exchange from the country, due to the weakening of banks' resource base and the declining foreign exchange savings of households.

"Debt trap" is locking when the debt rule is broken—"government loans should stimulate economic growth, and the rate of economic growth should exceed that of government debt." In 2015–2016, the increase in the government debt in Belarus was accompanied by a fall in its GDP. As a result, the ratio of government debt to GDP increased in Belarus from 22.3% as of 1 January 2015 to 39.4% as of 1 January 2017. But, in view of the fact that Belarusian government debt is mainly denominated in foreign currency, the key indicators for payments related thereto include net

**69**

*State Capitalism in Belarus: Behind Economic Anemia DOI: http://dx.doi.org/10.5772/intechopen.93606*

Moment" comes when the asset value stops growing.

therefore of particular interest.

similarly, seems to be 100%.

exports, foreign direct investment, and the ability to attract new loans. When the

"Debt trap" brings to default when the inflow of new loans stops. It is symbolic that in economic theory this point is called the "Minsky Moment," after American economist Hyman Minsky, the son of Belarusian emigrants, who took the surname Minsky in honor of the city of Minsk upon their arrival in the USA. According to his theory, which regained its popularity after the 2008 mortgage crisis in the USA, there are three types of borrowers. Those belonging to the first type hedge their risks, manage flows, and can avoid default. Those of the second type are only able to pay interest on loans but cannot repay the principal amount. The third type cannot rely on their cash flows, but only on the growing value of their assets. The "Minsky

Belarus as a borrower can be superficially classified under the first type. But it has a specific feature, and if this is factored in, Belarus moves closer to the second type of borrower. Faced with a limited range of external creditors, Belarus de facto focused on borrowing from a single creditor in recent years. The new external loans mobilized from Russian banks, the EAEC Fund and the Government of Russia, are actually controlled by one creditor. It narrows the space for maneuver in government debt management and creates new risks. The worst thing in case of problems with several creditors is a default and the loss of access to the international financial

Until 2012, Belarus attracted resources from international markets, although these transactions were often predetermined, that is, Belarusian and Russian banks often bought sovereign bonds. After 2012, almost all non-project-related government loans were extended for political reasons. At the same time, government debt management instruments, such as syndicated loans, issuance of municipal, corporate bonds in foreign markets, and so on, were practically never used. In 2017, Belarus once again tapped the international financial market, issuing its Eurobonds worth USD 1.4 billion to refinance old debts and somewhat diversify the pool of its external creditors. In June 2020, Belarus issued sovereign Eurobonds with the amount of USD 1.25 billion. It is important to note that access to refinancing is generally linked both to economic development and to non-economic factors like overall confidence in the borrower. The problems developing countries have refinancing external debt are

a.Background problems with refinancing (default, or the inability or unwillingness to make debt payments): developing countries see refinancing problems start to occur on average when external debt reaches 69.3% of GDP [14]. Most often (in 32.3% of instances) they happen when external debt ranges from 41 to 60% of GDP, while in 19.4% of cases it is when external debt is below 40% of GDP, 16% when it is between 61 and 80%, 16% when it is between 81 and 100%, and 16% when it exceeds 100%. The threshold for when a country starts to have problems refinancing external debt can therefore be said with a high degree of accuracy to be when existing debt is around 60% of GDP. The ceiling,

b.Fallout following default: the main consequences of default are a drop in investor confidence, a lowered sovereign credit rating, and temporary exclusion from international financial markets. Carmen Reinhart and Kenneth Rogoff looked at 169 defaults from 1946 to 2008 and found that it takes countries 3 years on average to move past defaults (again begin to attract foreign loans) [14]. Interestingly, that period seems to be shrinking: from 1800 to 1945 it took countries an average of 6 years to get past 127 defaults. It is also worth remembering that defaults have on occasion led to war. For example, there

first two parameters decrease, the main focus becomes new loans.

market for 3 to 4 years; with one creditor it is a matter of sovereignty.

#### *State Capitalism in Belarus: Behind Economic Anemia DOI: http://dx.doi.org/10.5772/intechopen.93606*

*Public Sector Crisis Management*

Net exports of goods and services to

Transportation and communications

GDP

to GDP

**Table 1.**

They provided proper environment to increase the quality of capital in Belarusian economy, but not its necessary quantity. The economic anemia can be explained by

**1996– 2000**

GDP growth 6.3 7.5 7.3 1.2 1.1 GDP growth, global 3.7 3.6 3.5 3.6 3.4 Consumer price index growth 128.5 25.7 10.4 35.0 6.7 Current account deficit to GDP −4.1 −2.3 −9.3 −6.3 −1.7 Gross external debt to GDP 15.8 22.5 33.4 51.6 44.2 Consumption to GDP 78.0 77.1 70.5 64.2 71.4 Investment to GDP 25.2 25.6 28.9 35.1 27.9

Manufacturing to GDP 28.4 26.8 26.2 23.0 21.0 Agriculture and forestry to GDP 13.1 9.3 8.5 7.3 7.0 Construction to GDP 5.6 6.2 8.9 8.4 5.4

Trade and food services to GDP 8.6 9.8 10.9 13.8 11.3

**2001– 2005**

**2006– 2010**

−4.1 −2.2 −8.6 −0.1 0.5

10.8 9.8 8.5 8.8 10.9

**2011– 2015**

**2016– 2019**

The "debt trap" appears when old debts are converted into new ones. As American economist Irving Fisher put it at the time of the Great Depression, "the more debtors pay, the more they owe." The same happens in Belarus. Belarus' external government debt is not repaid with proceeds from its use, and is partially refinanced, being shifted to the future. Non-project-related government loans are used to replenish reserves, to refinance old debts, and do not generate foreign

Due to the nature of state capitalism in Belarus, "debt trap" appeared on the road of country's development. The problems with business plan appraisal and monitoring, project-related external government loans and guarantees do not always generate foreign exchange proceeds either, and are sometimes repaid by the budget rather than by the projects. In turn, external debt refinancing with the more expensive domestic debt leads to an increase in the size of the aggregate government debt and an outflow of foreign exchange from the country, due to the weakening of banks'

"Debt trap" is locking when the debt rule is broken—"government loans should stimulate economic growth, and the rate of economic growth should exceed that of government debt." In 2015–2016, the increase in the government debt in Belarus was accompanied by a fall in its GDP. As a result, the ratio of government debt to GDP increased in Belarus from 22.3% as of 1 January 2015 to 39.4% as of 1 January 2017. But, in view of the fact that Belarusian government debt is mainly denominated in foreign currency, the key indicators for payments related thereto include net

taking a closer look at the traps facing Belarusian state capitalism.

exchange proceeds through exports and foreign direct investments.

resource base and the declining foreign exchange savings of households.

**3. State capitalism traps in Belarus**

*Average annual macroeconomic statistics for Belarus, % [10, 11].*

**3.1 The "debt trap"**

**68**

exports, foreign direct investment, and the ability to attract new loans. When the first two parameters decrease, the main focus becomes new loans.

"Debt trap" brings to default when the inflow of new loans stops. It is symbolic that in economic theory this point is called the "Minsky Moment," after American economist Hyman Minsky, the son of Belarusian emigrants, who took the surname Minsky in honor of the city of Minsk upon their arrival in the USA. According to his theory, which regained its popularity after the 2008 mortgage crisis in the USA, there are three types of borrowers. Those belonging to the first type hedge their risks, manage flows, and can avoid default. Those of the second type are only able to pay interest on loans but cannot repay the principal amount. The third type cannot rely on their cash flows, but only on the growing value of their assets. The "Minsky Moment" comes when the asset value stops growing.

Belarus as a borrower can be superficially classified under the first type. But it has a specific feature, and if this is factored in, Belarus moves closer to the second type of borrower. Faced with a limited range of external creditors, Belarus de facto focused on borrowing from a single creditor in recent years. The new external loans mobilized from Russian banks, the EAEC Fund and the Government of Russia, are actually controlled by one creditor. It narrows the space for maneuver in government debt management and creates new risks. The worst thing in case of problems with several creditors is a default and the loss of access to the international financial market for 3 to 4 years; with one creditor it is a matter of sovereignty.

Until 2012, Belarus attracted resources from international markets, although these transactions were often predetermined, that is, Belarusian and Russian banks often bought sovereign bonds. After 2012, almost all non-project-related government loans were extended for political reasons. At the same time, government debt management instruments, such as syndicated loans, issuance of municipal, corporate bonds in foreign markets, and so on, were practically never used. In 2017, Belarus once again tapped the international financial market, issuing its Eurobonds worth USD 1.4 billion to refinance old debts and somewhat diversify the pool of its external creditors. In June 2020, Belarus issued sovereign Eurobonds with the amount of USD 1.25 billion.

It is important to note that access to refinancing is generally linked both to economic development and to non-economic factors like overall confidence in the borrower. The problems developing countries have refinancing external debt are therefore of particular interest.


were wars between the UK and Egypt in 1882, the UK and Turkey in 1876, the US and Venezuela in the middle of the 1890s, and the US and Haiti in 1915. The primary objective in each of those cases was to establish military control over customs in order to collect currency as payment for foreign debt.

Given that the primary source of the "debt trap" facing the Belarusian economy is the state capitalism system, opening up the economy to foreign capital and stimulating private investment is the way out of this pitfall.
