Foreign Investment in Belarus: Mission Possible

Belavia and Boeing Signing an Agreement. Photo: Tut.by

Last week, the Ministry of Transport of Belarus and the Belavia national air carrier revealed that they have been negotiating with Boeing.

Minsk is proposing to Boeing that it participates in the reconstruction of the Minsk aircraft repair plant and help establish a Boeing maintenance hub in that nation's capital.

In May a new Swiss investment project – a railroad engine and car plant - opened in Fanipal near Minsk. At the same time another EU firm – Czech Papcel - received approval to start construction on a major paper mill in Shklou.

For some opponents of the current Belarusian government these developments would appear to be a form of silent collaboration between Western business and “last European dictatorship”. In reality Belarusians are in need of economic development, regardless of who rules the country. Widespread poverty and the prevailing backwardness that exists in Belarus presently only helps promote populism and, by extension, the tyranny that props the whole system up.

The EU has no need for a poor dysfunctional state on its borders, regardless if its political regime or the degree to which it is or is not considered pro-Western.

New Production in Two Years

As the story of a major Swiss company Stadler Group shows, foreign investors can indeed sucessfully work in Belarus. The company's work in the country began when Belarusian Railways bought a few new electrical trains from them. After concluding their successful deal, the CEO of the company, Peter Spuhler, came up with the idea to manufacture their trains in Belarus.

In July 2012, the Belarusian government and the Stadler Group founded the open joint-stock company Stadler Minsk. The Belarusian state contributed the assets of Belkamunmash, a publicly-owned company that produces urban electric transportation vehicles, and some land. Stadler contributed a majority of the funds for the new company's launch and received 60% of its shares as a result. The construction of a new production facility for “Swiss trains” in Fanipal began over a year ago in April 2013.

TheSuch rapid implementation of this deal may impress those who think that Belarus is a bad place for doing business. Spuhler named three reasons for their decision to create train production facilities in Belarus. First and foremost, of course, was Belarusian Railways' interest in their products that led to the sale of Swiss trains. A second element that attracted the Swiss company was the availability of an established local partner – Belakamunmash ​– to help launch the project. The third item that attracted them to seriously consider opening up a manufacturing facility was the opportunities that Belarus presented the company as it seeks to access the markets of Russia and Kazakhstan through the Customs Union.

Yet there are other important aspects which make this success story appear so prosaic. The Belarusian leader Aliaksandr Lukashenka recently used to refer to the Stadler Group's work in the country as a proverbial paragon that other foreign investors could, and should, follow.

“They brought new technology [to us], we did not have this kind of manufacturing earlier. They had not yet built the plant and had already signed contract to supply electric trains to Russia." Lukashenka added. When Spuhler proposed to privatise Belkamunmash, Lukashenka gladly accepted, though not without reminding potential investors that the last word in such matters would always be his.

By now, the well-established Western firm has already invested about 50m euros in the country. The Director of Stadler Minsk, Uladzimir Karol, emphasises that a number of new technologies have arrived in Belarus. Yet so far production is essentially reduced to assembly, as almost 100% of blue prints for their construction come from abroad. According to Karol, due to their internal limitations, it could not be otherwise initially.

Investors on the Ground: More Positive Than Negative Opinions

Most investors who actually work in Belarus assess business climate rather favourably. The Representative Office of the German Economy in Belarus, a member of the German Union of the Chambers of Trade and Industry, published in June a survey of investors' opinions on the ease of doing business in Belarus. 42 companies with mostly German investment responded to the questionnaire.

70 per cent of them would choose Belarus in the future as a destination for investment. Among the most attractive factors of the business climate in Belarus was the nation's political stability, overall infrastructure, human resources and the quality of its higher education.

Listing the most problematic issues for the business climate the individual surveyed mentioned access to loans and credit, the unpredictability of Belarus' economic policies, legal guarantees and the transparency of its tenders.

The Representative Office of the German Economy concluded:

Belarus as an island of stability obviously positively contrasts with the general regional background [...] General assessments of Belarus' business climate internationally, comparatively, significantly exceeds the level of assessments of the business climate in neighbouring countries, Russia and Ukraine.

However, the level of foreign direct investments (FDI) fails to impress. Minsk boasted of attracting around $15bn in 2013, 7% more than in 2012. Yet 80.8% of this sum consists of money used to satisify debt repayments, with only a small fraction of this sum being true capital investment (in 2012 - $0.3bn, data for 2013 unavailable).

Russia leads the list of major investors in Belarus (48.6%), followed by the UK (21.4%), Cyprus (7.1%), the Netherlands (4.9%) and Austria (3.4%). A majority of these investments came from former Belarusian citizens or from businessmen in neighbouring countries who channel their investments through the UK or Cypriot companies.

Russia's share of investment, when compared to 2012, rose by 1.9%, much to the detriment of Western companies. This figure corresponds with longer-term trends in Belarusian foreign trade.

Recently, Foreign Minister Uladzimir Makey rebuked the EU, stating:

Last year, the trade turnover with Russia made up about 49% of [Belarus'] total turnover and with the EU - 27%. Several years ago, the numbers were almost equal. As a result of sanctions and some other actions, the situation has deteriorated. Now we have an imbalance.

Belarusians - More than Just Lukashenka and the Opposition

The major issue with investment stems from the poor reputation of Belarus in the West. Some of its political and human rights problems are frequently blown out of proportions. Even quite respectable German newspapers such as Der Taggesspiegel allow themselves to print articles with titles like “Hockey World Cup in Belarus: Blood and Games,” while forgetting to explain whose blood they were implying or specifying the scale of the political prisoner problem.

Meanwhile, despite the evident political suppression and fraudulent elections, Belarus has a functioning state apparatus and its regime enjoys a rather high level of popularity. The latter has even risen as Belarusians have observed the developments in Ukraine.

The idea that Belarus is a dangerous place where surveillance and the “KGB” thrive are accepted as common knowledge among a majority of Western politicians. The result of this general consensus is the continued international isolation of Belarus in the West, a policy that has contributed to preserving the current state of affairs both inside and outside Belarus since the 1990s.

There are millions of Belarusians who have nothing in common either with Lukashenka nor the opposition

Western politicians can do a great deal of good even if their actions merely mean stepping aside and accepting that there are millions of Belarusians who have nothing in common either with Lukashenka nor the opposition and let business get to work in Belarus.

These millions of people have the right to live decent lives. After all, the European Union has nothing to win if one day on its borders a despondent and impoverished country pops up – regardless of whole rules the country.

The EU has to think about Belarus' development and as an initial step, it would serve both Belarus and Europe if they would allow Belarus to develop economically, regardless of the name of its acting president. Such a policy would help build a viable and robust Belarus, a country able to resist foreign pressure and become increasingly more integrated with the global community.

Some reasonable encouragement for Western businesspeople wishing to deal with Belarus will immediately have an impact on Belarus and the region in the foreseeable future.

By gradually changing the political economy of the country - without undermining those state institutions that have nothing to do with political persecution - investors will change Belarusian politics.

They will also help Belarus to change politically in an evolutionary way, helping it to avoid a Ukrainian-style bloody confrontation.

Siarhei Bohdan is an associate analyst at the Ostrogorski Centre.

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