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Testing the Waters: High-Level EBRD Delegation Visits Belarus

The removal of sanctions against Belarus earlier this year has led to increased interest from institutional investors such as the European Bank for Reconstruction and Development (EBRD).

Alain Pilloux, Acting Vice President of this major development bank visited Belarus last...

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The removal of sanctions against Belarus earlier this year has led to increased interest from institutional investors such as the European Bank for Reconstruction and Development (EBRD).

Alain Pilloux, Acting Vice President of this major development bank visited Belarus last week as a part of a delegation, which met with Belarusian officials, including the president, businesses, representatives of think tanks and other stakeholders.

EBRD officials expressed cautious optimism about the prospect of extending their cooperation to Belarusian authorities. In the past, their role in the country was limited to supporting the private sector and very limited contact with the government. With EBRD activities in Russia nearly frozen after the Ukraine crisis and instability in the Arab world, Belarus has good chances of attracting EBRD funding.

EBRD's troubled times

The EBRD was set up in 1991 to help the transition of the former socialist block countries. Although the focus of the bank’s work has traditionally been on Europe, the United States has the largest capital subscription and voting rights followed by the somewhat smaller shares held by Japan, Italy, Germany, the United Kingdom and France.

The EBRD expanded its activities in recent years to include Mongolia, Turkey, Greece and Cyprus as well as countries affected by the Arab Spring uprisings, such as Egypt, Morocco and Jordan.

In 2014, the majority of the bank’s shareholders decided to stop funding new projects in Russia, which used to be the main investment destination. The decision followed Western sanctions against Moscow over its role in the conflict in eastern Ukraine.

In 2014 the EBRD also suffered its first annual loss because its portfolio in Russia and Ukraine had tumbled (in 2015, the EBRD became profitable again). Political instability and corruption in the Arab world also affect its investment plans.

The removal of European sanctions against Belarus has created a better environment for the EBRD to extend its activities in the country.

With 74 projects, the EBRD already has significant experience in Belarus. So far most of the projects have focused on financial institutions and the corporate sector. The EBRD remains a major investor in Belarus. As of 1 June 2015 the Bank had invested nearly €1.8 bn.

Some of the recent projects which the EBRD has supported include a project to support women entrepreneurs in Belarus, a joint venture with Swiss company Stadler Rail AG and funding for facilities to develop the wood processing sector in Mahilioŭ and Smarhoń.

However, compared to other countries in the region, Belarus has failed to attract much EBRD funding. For instance, Moldova has received $313 per capita investments from the EBRD since 1991, Ukraine $271 and Belarus only managed to attract $187.

In Belarus, nearly all EBRD investments (94 per cent) went to the private sector, compared to a much lower level of investments that went to the private sector in Ukraine. Since 1996 the bank’s activities in Belarus have been limited by the country’s unsatisfactory progress in democratic and market-oriented transition.

The bank adopted a calibrated strategic approach to Belarus in 2009 and in its subsequent country strategy documents and focused primarily on the private sector. The Bank’s engagement in the public sector was calibrated against Belarus progress against certain political and economic benchmarks while the main focus remained on private sector development and entrepreneurial activity in the country.

EBRD's new approach to Belarus

Now the EBRD is working on a new country strategy for 2016-2020, which will be adopted in July 2016. The draft strategy proposes to focus on private sector development and public infrastructure to support the government reform agenda.

According to information which has become available to Belarus Digest, over the next few years the EBRD plans to continue stimulating economic competitiveness by supporting growth, efficiency and innovation in the private sector, both directly through debt and equity and indirectly through credit lines to the banking sector. The Bank also plans to promote the privatisation of state-owned companies.

As far as their work with the government is concerned, the bank plans to improve the sustainability and service quality of public infrastructure through policy and regulatory reforms and the introduction of commercial solutions.

Although the proposed strategy will continue to focus primarily on private sector development it will also provide for broader engagement by the Bank to support the Government's reform agenda.

Will the new approach work in Belarus?

The Bank officials at March meetings in Minsk expressed their willingness to extend cooperation with the Belarusian authorities as long as they show concrete steps to reform and stick to undertaken commitments. Although the Belarusian authorities fear any significant changes in the economy which may affect the political status quote, two main factors work in favour of reforms.

First, the dramatic fall in oil prices ended many profitable schemes, which usually involved processing oil products and selling them to the West. The Russian market, the main destination of Belarusian goods, has also suffered as a result of low oil prices and Western sanctions.

Second, the pro-reform camp within the government is growing stronger. Although many see Prime Minister Andrej Kabiakoŭ as a pro-Russian conservative, many influential figures in the National Bank, the Ministry of Economy and the Ministry of Finance have other views.

For example, the First Deputy Prime Minister and graduate of London Business School Vasil ​Maciušeŭski, as well as presidential economic advisor Kiryl Rudy, a former Fulbright fellow at the University of Chicago, recently became more influential and strongly advocate economic reforms.

With massive layoffs already starting to bite major Belarusian state enterprises, the authorities desperately need foreign investment. With no IMF loan in sight and cautious private investors, the EBRD could play an important role.

However, the political leadership of Belarus is not in a rush to implement reforms. They think they have time. After the crisis in Ukraine the public appetite for revolution is at its lowest for many years. But a growing number of officials seem to understand that Belarusian statehood itself depends on the viability of its economy.

Given the rapidly declining Russian economy, turning to the West seems like a logical response. However, this should not be mistaken for a geopolitical change of heart from the Belarusian leadership. Belarus' dependance on Russia is too strong for any radical moves.

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