The announcement of the redenomination of the Belarusian Ruble, coming against the backdrop of high inflation rates, creates further potential integration of Belarusian and Russian markets.
President Alexander Lukashenko announced on November 4th that the country will conduct a redenomination of its currency in 2016.
The plan is to introduce new banknotes and coins as of July 2016 and re-asses the overall value of the currency. The ratio of the redenomination will be 10,000 current Belarusian Rubles to 1 new Belarusian Ruble. Between July and December 2016 both currencies will be legally circulating within the country and payments will be accepted with the new ratio.
This decision is noteworthy for three core reasons: it comes amid a period of high inflation caused by economic distress linked to the repercussions of international sanctions on Russia; it opens the door to further considerations regarding the integration of the Belarusian and Russian economies into a single unified market; and the redenomination also points toward the possibility of an enhanced coordination of monetary policy within the Eurasian Economic Union (EEU) in the long-term.
A redenomination amid high inflation
The Belarusian economy has experienced a protracted period of high inflation rates.
In 2014, the country recorded an inflation rate of 16.2 percent, and in 2015 the trend is likely to remain on a similar 16 percent level. The inflation within the country is due to two inter-related factors. On the one hand, the poor economic situation of Belarus coupled with it overreliance on Russian capital continues to negatively affect the country’s economic performance.
On the other hand, the crisis that hit the Russian economy following the implementation of Western sanctions led to a steep devaluation of the Belarusian Ruble. In January 2015, the exchange rate between the Euro and the Belarusian Ruble passed from 1/13,000 to 1/17,000 within less than ten days. A similar trend can be seen with the exchange rate between the US Dollar and the Belarusian Ruble as it passed from 1/11,000 to 1/15,000 in the first months of January 2015.
Given the country’s continued reliance on imports, this led to a situation of high inflation and a relative loss of local residents’ purchasing power. This has not currently translated into any kind of internal political instability or social unrest. However, the current redenomination of the currency should definitively be read as an attempt to rebalance the situation, especially since local authorities stated that it would not lead to further inflation.
Integration of the Russian and Belarusian Markets
The redenomination of the Belarusian Ruble may also be interpreted as a step toward economic cooperation between Minsk and Moscow given a future potential alignment of the exchange rates of the Belarusian and Russian rubles.
The Union State of Russian and Belarus was created in 1997 as a political and economic union. In itself the political entity has so far failed to result in institutionalized coordination between the two states. However, there has been an ongoing willingness by Minsk and Moscow to conduct economic integration aimed at facilitating exchanges within the common market.
One of the key objectives has been the development of a common currency. While this remains an abstract project given the discrepancies between the two economies, Russian and Belarusian authorities are working to facilitate the usage of national currencies in mutual payments within the two countries.
On November 5th, following President Lukashenko’s statement, the head of the Union State, Grigory Rapota, declared that positive progress is being made in this sense and that national authorities are currently actively pursuing this project. This evolution would be noteworthy as free-movement of citizens is already in place between Russia and Belarus and it would expand the economic integration of the two markets.
Toward an EEU Monetary Policy?
Since its early stages in 2014, the Eurasian Economic Union (EEU), regrouping Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russian, has had the ambition of setting up a common currency within the regional block. However, protectionist national market policies, economic strains and less-than-warm public opinion have so far hampered the project.
The growing interconnection between the Belarusian and Russian markets potentially sparked by the redenomination of the Belarusian Ruble in 2016 is likely to ignite additional talks within EEU institutions concerning the development of a common monetary policy. At this juncture, such talks are likely to remain linked to high-level strategic declarations and are not expected to result in concrete plans of action in the short-term.
However, there is a marked tendency among EEU member states to move toward more comprehensive economic integration and a monetary union likely led by Belarus, Russia and Kazakhstan may take shape in the medium-to long-term.