In the fairy tale world of Belarusian President Lukashenko, the answer to his falling popularity leading up to the December 2010 elections was simple: an across the board 50 percent salary increase for all public employees.  Given the fact that a full eighty percent of the Belarusian economy is state owned, one can imagine the wonders this decree did for the economy; by overvaluing the Belarusian currency to support his new populism, the budget deficit spiked by a full fifteen percent of GDP.  What is more, these measures failed to pacify the citizens of Belarus, and Lukashenko resorted to massive repression to secure the election.  This, in turn, led to widespread visa blacklists from the West on high level Belarusian officials involved in the repression.

Mired in political and economic crisis, Lukashenko did what he always does when his mismanagement becomes near-terminal: shop around for loans.  The only trouble is, his credit history is a bit spotty.  In January of 2009 he accepted IMF loans in exchange for promise of structural reforms, which never materialized; new loans from the IMF were thus flatly refused.  Lukashenko was forced to negotiate an aid package with his nemesis Russia.  Russia’s terms were essentially the same as the IMF’s: ruble devaluation and a floating exchange rate, with a promised for stricter monetary policy.  Perhaps finally aware of how precarious his position is, Lukashenko seems to be largely adhering to the terms set by Russia.  Major currency devaluations took place in May and September, which wiped out all income gained by public workers in December (the average public worker salary is now about 300 USD a month).

Today, the Belarusian ruble was finally placed on a floating exchange rate, and the results were not pretty, although probably necessary for long-term viability.  Whereas yesterday one could obtain an American dollar for a mere 5712 Belarusian rubles, today one needs 8620 Belarusian rubles (figures from Vedomosti).  The national bank also pledged minimal economic interference, vowing to let the ruble stand on its own.  The state is likely to sell off some of its major assets to get cash, including its remaining 50% share in the nation’s gas pipeline system, Beltransgaz.

Despite painful and significant reform the way forward looks rough for Belarus, at least in the short/medium run.  Inflation is expected to grow dramatically, and the treasury is reportedly working on a 200,000 ruble note to cope with it (the highest current denomination of Belarusian currency is 100,000).  This is by far the worst crisis of Lukashenko’s near two decade tenure; given how many severe crises brought about by his mismanagement, that says a lot.