Belarus Shoppers Panic as Ruble Collapses

The Chaos of a Currency Collapse

My idea of an economic nightmare isn't a stock market crash, but a currency crisis which destroys the value of an entire country's wealth. If this story line sounds like the stuff of Hollywood film or a black & white newsreel from the 1920s -- think again. This horrific scenario is unfolding this week in Belarus, where the government was forced to devalue the currency by 36% on Monday as confidence in the nation's economy evaporated. - Could a Currency Collapse Happen Here?, SmartMoney, May 26, 2011

The horrific scenario playing out this week in Belarus should serve as a warning to the U.S.

June 16, 2011

GoldCoin.org - Last month Belarus witnessed the effects of a collapsed currency when the Government cut the rouble’s value against the US dollar by almost half. Previously 3155 roubles would buy a dollar but in the blink of an eye they decided 4930 would be needed.

This was not even the reality because perception of the collapsing currency meant the situation was even worse as people scrambled for foreign exchange on the black market where you needed at least 6000 roubles to buy a dollar.

So what sparked this crisis?

President Lukashenko had promised to raise public sector wages by a third during his election campaign, which he duly carried out. This was sustainable only because of the support Belarus received from Moscow in terms of loans. However, as fears grew about the country’s finances, support from Russia waned and even near neighbours from the EU didn’t fancy the risk thus sparking a sharp drop in confidence in the currency.

To exacerbate the problem there was a shortage of foreign exchange currencies, dollars or euros, in the country.

The consequences of a collapse

Flicker: chudentsov

Shelves quickly emptied of food and any "tangible asset" that would hold value better than their currency; Empty Store Shelves in Minsk, Belarus May 18, 2011

Wide spread panic broke out as the economy effectively became paralyzed and people suddenly realised their currency was of diminishing worth. Shops were quickly emptied of everything that could be bought. Everyday food was snapped up at “luxury” style prices as people thought of survival but also they also bought electric goods like toasters, microwaves, canned goods and virtually anything that was for sale as they rushed to convert their currency into “any tangible assets” that were not losing value as quickly as their roubles.

The empty shelves throughout the towns seemed eerily reminiscent of the Soviet controlled days.

Shoppers knew that anything they could purchase could be more useful as a form of barter than the diminishing currency in their purses and wallets.

The human cost was quickly evident from the stories of employees sent on unpaid leave as companies also struggled to cope and comprehend the impact. Andrei, a computer company employee explained how he queued for a week in Minsk trying to buy dollars but didn’t even get one.

“In just one month, I have been made bankrupt, the entire country is bankrupt,” he said, adding that “even during the Soviet collapse we never suffered such a nightmare”.

There are many more stories of hardship, families without food or the means to buy any, shops without stock for them to buy even if they had the means.

Dmitry who is a 48 year old factory worker explained how he closed his bank account to get out 5 Million roubles in cash so he “could buy something before my money turns to dust”.

Tensions are growing as many people blame the President for mismanaging the economy. Staple food supplies are now hoarded but people feel anxious that unrest is starting that could spill over into conflict at any time.

Revolution is always more likely when the population are starving.

Which country is next?

This may all seem so far away from wherever you are reading this but the causes of currency collapse may be closer to your doorstep than you think.

How many countries are in deep debt and reliant on support loans and bailouts right now?

Greece, Ireland, Portugal, Spain, Italy, Japan, USA, Belarus and virtually all of Eastern Europe and the Euro zone (only they never put it in the headlines!)

What happens when the support cannot be maintained? Currency Collapse.

It could be the US Dollar, the Euro, the Yen who knows?

But even if it isn’t your currency that collapses, what will be the knock on effects in every developed country if one of these currencies collapses? The same as in Belarus.

Globalisation has been the buzz word for expanding Capitalism but it also means that economies are now inextricably linked and inter-twined to such an extent that when one sneezes they all catch a cold!

Remember the level of Sovereign Debt is spiralling out of control in the US, Greece, Ireland, Portugal and others are close behind such as Spain and the UK. Austerity measures in all countries are hurting normal folk badly – they are losing their jobs, suffering pay freezes, inflation and pension erosion. Social unrest and industrial action looms large across Europe, and this will itself impact the recovery and debt repayment. This has already started in Greece, Portugal, Ireland and large scale protests in the UK are gathering momentum with the Autumn likely to be the boiling point of anger.

The discontent and despair of regular folk is understandable as they are bearing the brunt of all the hardship and it just isn’t fair.

Politicians spout their practiced rhetoric about how to fix things but the reality is they just don’t care that much as they are not the ones affected. They have means to isolate them from the hardships, and many of them are actually responsible for producing the mess. How can they care about regular people or preach what we need to give up when they don’t – ever met a poor politician? Enough said!

There is now even talk of a “sub-prime” type problem in China because of over-indulgence in property speculation, leaving huge swathes of developments empty or under-occupied and therefore leaking money and ready to default.

We need more than lip service!

Mainstream news outlets are all controlled by self-interest groups (private and Governments) and they never provide the whole story about global economic frailty as there would be worldwide panic if they told the truth. The situation right now is on a knife edge and the next Belarus is not far away.

Politicians won’t admit it, but then again they won’t suffer like the rest of us as they’re all rich enough and well connected to see out any storm. They care too much for their own popularity to be honest. Posh boys and rich kids rule the world and their assets are well protected in advance.

Remember what happened when panic struck in Belarus, people bought any tangible asset they could because it would maintain value better than their currency. This phenomenon is happening daily – your bank account is the best place to keep currency if you want it to devalue!

Currency is not a means of preserving wealth because it has no inherent value especially when confidence is lost – then it is just a piece of paper.

The only real money available is a tangible asset that maintains its value whatever happens to printed bits of paper currency – and that is gold!

A lesson on Money and currency

We need to understand the difference between money and currency as one is real and the other a promise. Money can be defined as a medium of exchange and a store of value and until fairly recent times was in fact coins made out of precious metal with an intrinsic value or for ease of use, notes backed by precious metal.

Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency. Thomas Paine (1737 – 1809)

Currency is still a medium of exchange but is not a store of value as it only derives its value by government degree or “fiat”. It’s value is based on the issuing the authority’s guarantee to pay the stated (face) amount on demand, and not on any intrinsic worth or extrinsic backing. All national currencies in circulation, issued and managed by the respective central banks, are fiat currencies.

A days wages in Germany 1923

The problem is that fiat currency runs the risk of central bankers printing too much and causing large inflation or worse. The more that is printed the more the currency is debased just as the Fed is doing now with the dollar. This has been going on for decades with central banks indiscriminately creating money to cover expenditure and ever increasing debt. There are examples throughout history and in the 20th Century most of us are aware that in Germany in 1923 it would take a barrow load of Deutschmarks to buy a loaf of bread but an ounce of gold could buy a reasonable house and one dollar was worth 4 trillion marks.

This irresponsible printing of money has eaten away at the value of the world’s reserve currency the USD dollar and dollar based assets, to such an extent that they have lost 82% of value since 1971, the year the US cut links with the gold standard. The GBP has fared even worse that the USD losing around 85% of value since 1971. There are many illustrations of then and now and how owning gold with intrinsic value would have more purchasing pro rata than currency. E.g the latest model Cadillac Eldorado would have taken 180 ounces of gold at $42.02 to pay the showroom price of $7,546. This same 180 ounces is now worth over $200k and would buy two Cadillac convertibles with enough left over to fuel to first service. In the UK an average family car cost £1000 around 60 oz of gold and now the same would cost £17000 around 23 oz of gold. The 60 ounces would have bought the same family car for you a sports car for your wife and a hatchback for your son or daughter. Gold retains its purchasing power year after year...

Belarus Appeals to IMF for $8 Billion Rescue Loan

June 1, 2011

AP - Belarus has asked the International Monetary Fund for a loan of up to $8 billion to stabilize its plummeting economy, the government said Wednesday as it struggles to manage the country's most severe financial crisis since the Soviet collapse.

Prime Minister Mikhail Myasnikovich said the country is counting on striking a low-interest loan deal of anywhere between $3.5 billion and $8 billion. Analysts say at least $9 billion is needed to get the economy back on track.

"This is an SOS signal from the Belarusian government, which is losing control of the situation," said Stanislav Bogdankevich, former head of the National Bank.

Panic spread across the country last week, when the National Bank cut the value of the Belarusian ruble against the dollar almost in half. Belarusians have been rushing to buy up goods and lining up for days at currency exchange offices to get dollars and euros in a desperate attempt to protect their savings.

On Wednesday, the government issued a decree freezing prices on staples such as fish, cheese, tea and coffee and some fruit and vegetables.

The IMF, which issued Belarus loans amounting to $3.5 billion in 2009-2010 to help it weather the impact of the global financial crisis, is studying the country's finances and is expected to produce a report in mid-June.

An IMF spokesperson, Olga Stankova, said the Fund's mission visiting Belarus will "discuss policies that would restore economic stability and put the economy on the path of strong and sustainable growth."

"The mission will use the opportunity to exchange views with the authorities on possible next steps in response to their request for the Fund-supported program," she said in a statement.

Observers pin much of the blame for the country's financial woes on authoritarian President Alexander Lukashenko, who oversaw an increase in social spending before his re-election late last year. The IMF cited that as a key drag on the economy.

Belarus is hoping for a $3 billion loan from Russia but the Kremlin has been dragging its feet, insisting it will lend Minsk money only if the country sells up to $7.5 billion worth of its key state-owned enterprises over the next three years. A decision is expected to be announced later this week.

Russia is reportedly seeking to capitalize on Belarus' vulnerability by acquiring major stakes in energy assets such as Beltransgas, the state-owned gas pipeline network that supplies domestic homes and forwards the gas to Europe. Russia's state energy giant Gazprom already owns 50 percent in Beltransgas, and is demanding the remaining 50 percent as part of the deal.

Russia's Finance Minister Alexei Kudrin warned Belarus last month that it is in no position to turn the deal down because it is ill-equipped to meet the tough terms for any IMF loan.

For most of his 17 years in power, Lukashenko has relied on Russia — Belarus' main sponsor and ally — to maintain a quasi-Soviet economy complete with a social safety net that helped maintain his popularity.

But the Russian subsidies have dwindled recently as Moscow pushes for control over Belarus' most prized economic assets.