Financial Times: Lukashenko is leading the country to economic disaster

Statements by the governor of the salary of 500 dollars is deliberate lie or a signal of a new crisis.

Three months before planned parliamentary elections, the authoritarian government of Belarus is returning to its favoured methods of securing an electoral victory by clamping down on dissent and promising dramatic wage increases.

The measures threaten to increase Belarus’s isolation from the European Union and run the risk of reigniting the economic crisis that almost sunk the country in 2011.

Andrzej Poczobut, Belarus correspondent for Poland’s Gazeta Wyborcza, was arrested last week on charges defaming president Alexander Lukashenko, prompting the Polish government to issue a protest and warn Minsk that it risked further EU sanctions.

Mr Lukashenko, condemned by US officials as the last dictator in Europe, is still holding pro-democracy activists arrested in the wake of protests that broke out after the December 2010 presidential elections. The polls were widely condemned as being rigged in his favour.

The government’s harsh measures brought condemnation from Brussels and Washington, who levied sanctions that targeted more than 200 regime supporters involved in the crackdown.

Before the 2010 election, Mr Lukashenko, who has ruled the ex-Soviet republic of 10m since 1994, ramped up public sector salaries in a bid to win greater support. The result was an economic catastrophe in 2011, with inflation hitting more than 108 per cent, a balance of payment crisis, and a shortage of foreign currency.

The economy has since stabilised, thanks to a decision to unify exchange rates and to let the steeply depreciated Belarusian rouble float, as well as a $3bn bailout from the Russian-led Eurasian Economic Community, a grouping of ex-Soviet states.

Minsk had to agree to a privatisation programme as a condition for the aid, which saw Russian companies buy up strategic assets like a pipeline carrying natural gas from Russia to the EU, binding Belarus even more closely to Russia.

But Mr Lukashenko’s recent actions threaten to undo that progress. He has called for a rise in average monthly salaries in the 70 per cent of the economy still controlled by the state to above $500, up from $420 in May. “This is a must for everybody,” Mr Lukashenko said earlier this month.

While the measure may boost his support before the September 23 elections, it is setting off alarms with economists.

In a recent report on the Belarusian economy, the International Monetary Fund warned that “pursuing high growth and wage targets could reignite the inflation-depreciation spiral and imperil medium-term fiscal and debt sustainability.”

The economy, which grew by 5.3 per cent last year and is set to grow by a similar amount in 2012, is slightly more resilient than it was in 2011, with foreign currency reserves now at $3.9bn compared with about $1.3bn the year before, and inflation showing signs of falling.

“The risks of a disaster like last year are a bit lower,” said Gabriel Sterne, an economist with Exotix, a firm specialising in frontier markets. “Now, silly policies will result in an increase in inflation and a depreciation of the exchange rate.”

The one hope is that Mr Lukashenko does not mean what he says.

The government has tied its talk of salary rises to increases in labour productivity, which may avoid a repeat of what happened in 2010 and 2011, said Alexander Chubrik, director of the IPM Research Center, a Belarusian economic think tank. “This may be pre-election rhetoric and not tied to concrete policies,” he said.

Jan Cienski, Financial Times