Sibling rivalry.

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Russian Ruble's Hapless Little Brother

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The worst-performing currency in the world so far this year is called the ruble, but it's not Russian. It's the legal tender of Belarus, a country increasingly uncomfortable with its too-close alliance with Russia. The small nation's latest bout of economic difficulties shows Russian President Vladimir Putin's vision of a Eurasian Economic Union -- a partial recreation of the Soviet Union as a tight, European Union-like economic alliance with Russia at its center -- makes little sense for its members.

The Russian ruble is down 10 percent against the U.S. dollar so far this year, but that's negligible compared to the Belarusian ruble's 27.9 percent devaluation in the same period. On Jan. 9, Belarus's National Bank changed its rules on regulating the exchange rate. It pegged the Belarusian ruble to a basket of three currencies: 40 percent Russian rubles, 30 percent U.S. dollars and 30 percent euros, and said it would maintain a positive medium-term balance of foreign currency purchases and sales. It also raised the refinancing rate 5 percentage points to 25 percent, but that had little effect on the devaluation.

Here's how the Belarusian President Alexander Lukashenko explained the policy at a Jan. 29 press conference:

Folks, everything depends on you. If you start running from one exchange office to another trading in those unfortunate Balarusian rubles for hard currency, we will not wait for the National bank to run out of international reserve. You, households and businesses alike, will force us to let the national currency float freely to some degree. And that's what we had to do. So what do you want from me? I didn't even ask you, the population, to stop doing it, knowing that you as true Belarusians would not listen. And you went off... Last year you bought, according to the newspaper's statistics, 60,000 cars!.. Mainly from Russia, you've taken out all there was in Moscow and St. Petersburg.

This might make little sense to an outsider: What do car purchases in a neighboring country have to do with currency devaluation? But the policy shift in Belarus, which has just $5 billion of international reserves on Jan. 1, has to be understood in the context of what amounts to a permanent currency war with its huge neighbor Russia.

Because Belarus is part of the Eurasian Economic Union -- Putin's pet project of a borderless trade alliance that now includes Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia -- it's like a room with all its doors and windows open to Russian economic winds. In the last five weeks of 2014, the Russian ruble lost almost a quarter of its value against the dollar. Prices on cars and luxury items could not keep up with the ruble's rapid fall. Russians waited in endless lines to buy electronics and cleaned out the stock of Porsches and Lexuses.

If Belarusians also took part in the shopping sprees, as Lukashenko contends, they would have had to buy Russian rubles or dollars before heading to Moscow and St. Petersburg. And it would only take a few thousand such transactions for the Belarusian National Bank, with its tiny resources, to become alarmed.

That's not the whole story, of course. More than 40 percent of Belarusian exports go to Russia, and keeping the national currency weak against the ruble keeps these exports competitive. When the Russian ruble collapsed, Belarus had to catch up to avoid having its goods priced out of the Russian market. 

Belarus is chipping away at this dependence. In the 1990's, Russia's share as an export market exceeded 80 percent, but Lukashenko has done his best to encourage trade with the EU (despite being banned from entering the bloc because of his abominable human rights record): the EU now accounts for 30 percent of Belarusian exports. Russia, however, is still by far the biggest trading partner, and its economic crisis has meant that Belarusian exports of trucks and agricultural machinery dropped 20 percent last year. The European Bank for Reconstruction and Development predicts the country's economy will shrink 1.5 percent this year. 

Though Russia keeps Belarus firmly in its orbit by selling it natural gas for $134 per 1,000 cubic meters this year, compared with $329 for Ukraine, Belarus's currency devaluation produces high inflation, which undercuts any benefits from subsidized gas. Last year, consumer prices in Belarus went up 16 percent, and the government's 12 percent forecast for this year is already wildly unrealistic.

While the Russian economy was expanding, fueled by the commodity boom, it may have seemed a good idea to Belarus to hitch its fortunes to Russia's star. Now, not so much. Besides, since Russia annexed Crimea in March, Lukashenko has been stricken by a fear that Putin's lack of respect for post-Soviet nations' statehood will drive him to claim Belarus as part of Russia. He has already said Ukraine should have fought for Crimea, blunt statements that have raised eyebrows in Moscow. So has his refusal to join the Russian embargo on European food imports -- a measure that would have negated all of Lukashenko's efforts to build business relationships with Europe.

Though the Belarusian leader says he doesn't believe Russia will invade, if only because it has its hands full in Ukraine, he is clearly still concerned. At the end of January, Belarus changed its law on the state of war to take account of the hybrid invasion methods Russia used in Ukraine, such as "a foreign state or states sending armed bands or groups of irregulars" into Belarus. 

None of this means Belarus is going to try to wiggle free from Russia's iron grip. Lukashenko is wily enough to understand the West will never accept his methods of running the country. (This year, he is likely to be "elected" for a fifth term.) And given the state of the Belarusian economy, with its Soviet-style price controls and minimal entrepreneurial freedom, reorienting trade flows away from Russia isn't a realistic possibility.

Belarus's predicament, however, is a graphic illustration of the dangers for other post-Soviet nations that might consider joining Putin's Eurasian Economic Union. Even if Ukraine never achieves EU membership, it did the right thing when it refused to join. Being economically and politically tied to Russia is much too risky, at least while Putin is in the Kremlin and Russia's finances are dependent on volatile energy prices.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net