Loan from the IMF or Privatization by the Russians?

Belarus' economy needs external financing more then ever before. The government resists privatization but it will have to surrender soon, even if the International Monetary Fund decides to extend another loan. 

Recently the Belarusian weekly Belorusski Rynok discussed the chances of getting an IMF loan. At least three factors play against it. First, Belarus failed to fulfill a number of conditions for the loan extended two years ago. For instance, it failed to establish an agency of financing for state programs, and while the agency on privatization was established, it stopped short of privatizing anything. Moreover, just before the 2010 presidential elections, the government has dramatically raised salaries to woo the electorate.

Apart from that, the IMF usually imposes caps on the amounts a country can borrow in accordance with the country's quota. Belarus has already used its quota. In 2008, following extension of the US $2.46 loan to Belarus the IMF Managing Director Dominique Strauss-Kahn noted that the access the country was granted to its resources in the amount of 420% of the quota was unprecedented.  However, Belorusski Rynok noted that the IMF was a flexible institution and may extend funds beyond the quota of Belarus. 

The political component in the IMF's future decision also needs an explanation. The United States and the European Union heavily criticize the Belarus government for its human rights violations. Both introduced sanctions against Belarus, although the European Union stopped short of serious economic sanctions. They insist that Belarus should stop repression against the opposition and release political prisoners before discussing any financial aid. 

Belarusian weekly Nasha Niva quoted an anonymous European diplomat in Minsk, according to whom Belarus authorities were sending inconsistent signals, both in politics and economics. As an example, he mentioned Lukashenka's statement that political prisoners would soon be released. However, following that statement two former presidential candidates - Mikola Statkevich and Dzmitry Uss were sentenced to long prison sentences.

The diplomat also recalled new restrictions on media, and the threat to close two leading opposition newspapers - Narodnaya Volya and Nasha Niva. According to him, if the situation remains the same, the European Union will continue to ignore any overtures made by the Belarusian authorities. As far as the economic situation in Belarus is concerned, he had the impression that Belarusian authorities are doing nothing to change the course of events. The government negotiates a possible loan with the IMF, but decisions are not being made by the government.

Although the West dislikes Lukashenka and his policies, they are also concerned about the increasing role of Russia, which continues to build up pressure against Lukashenka. This week, the Russian energy state-owned giant "Inter RAO EES" halved its supplies of electricity to Belarus. The reason was the debt of Belarus in terms of energy supplied in March-April of this year.

The Russian Ambassador to Belarus, Alexander Surikov stated this week that the main reason for the economic crises in Belarus was the change of the terms of Russian oil supply with Belarus. Between 1995 and 2007 Belarus did not have to share the export duty on refined oil products with Russia. Starting in 2007, it had to share with Russia, which "caused a hole" in the Belarusian budget.  Surikov noted that the government needed to correctly develop a program to combat the crises, secure external finances, privatize state property and reduce imports. According to him, it was time to understand that Belarus economy can no longer afford the level of spending it had in the past.

The Financial Times proposed in its editorial to extend an IMF loan to Belarus because that would help the country reduce the threat of placing Belarus irreversibly in Russia’s geostrategic and economic orbit. This would reduce the independence of Belarus to a cipher and set a disturbing precedent for other former Soviet republics. The editorial concluded that an IMF program, properly designed and implemented, would contribute to the goal of free and independent Belarus.

Others consider that providing an IMF loan to Lukashenka means prolonging the existence of the Belarus regime. This year the official Minsk faces pressure which it has never seen before and is closer to collapse then ever. Providing help to it today would mean to waste the momentum. Moreover, in the past not only did Belarus not comply with recommendations of the IMF it failed to implement any significant reforms and has largely "eaten up" the loans.

It appears that for the long-term development of Belarus privatization of enterprises is highly desirable. That would help attract the badly needed foreign investments and make state enterprises more efficient. However, Western investors worry about political risks in Belarus and the instability of its legal and political system. Russian investors, on the other hand, have enough financial resources and hope that the Kremlin could protect their interests.  Even if the state enterprises are sold to Russian business groups, Belarus will be able to tax and otherwise regulate those enterprises and even expropriate, if necessary.  In the future, the same enterprises can be sold by the Russian investors back to the state or to Western investors. 

However, privatization by the Russian capital has two potential downsides. First, the privatization process will not be transparent. A significant share of the proceeds of sales of large enterprises will end up with corrupt Belarusian and Russian bureaucrats. Second, early 1990s showed that Russian investors tend to loot assets instead of thinking long-term. The situation in Belarus today in many respects resembles the early 1990s, which may prompt Russian businesses to behave as before. Another downside of inviting Russian investors is that it will further strengthen Belarus' dependence on Moscow. Also, Russian privatization in the early 1990s demonstrated that it was better to invite investors with superior technologies and management skills rather then selling to the locals.

However, because the demand for the external financing is so great, it appears inevitable that Russian businesses will take over many Belarusian state enterprises. And even the IMF loan will not help the Belarusian authorities to keep its state-owned property. Once the structure of the economy is changed, Belarus will no longer be the same. 

YK

Yarik Kryvoi is the editor-in-chief of Belarus Digest and the founder of the Ostrogorski Centre.

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