The autumn of liberalisation – digest of the Belarusian economy

On 26 September 2017, Belarusian officials declared plans for the liberalisation of the economy by developing a new decree on freeing up Belarusian entrepreneurship.

Moreover, on 28 September, the First Deputy Prime Minister of Belarus Vasily Matyushevsky announced the government’s intensions to encourage further growth of the IT-sector.

The latest statistical figures on the development of the Belarusian economy, though optimistic, are still far from promising.

Economic growth: searching for optimism

According to the latest data from Belstat, a government agency for official statistics, the Belarusian economy is slowly starting to recover. In the first eight months of the year, growth of industrial production equaled 6.1 per cent, GDP grew by 1 per cent and the volume of foreign trade rose by more than 20 per cent (see Figure 1).

However, a deeper analysis of the figures reveals that officials’ increased optimism rests on shaky ground. First, trade turnover in 2016 dropped by 12.4 per cent, while a year earlier it declined twice as much.

Second, the rise in global commodity prices mostly explains current achievements. For example, compared to last year the price for the Belarusian refinery products rose by 63 per cent, and ferrous metals by more than a third. Overall, export prices increased by 20 per cent, while the physical volume of export supplies improved only by 3.1 per cent.

Third, Belarus’s export structure has not changed. It still comprises mostly agricultural products, refinery products, potash fertilizers, and metals. Moreover, the share of high and medium-technology goods in total volume of Belarusian exports to the EU does not exceed 2 per cent.

Finally, despite the best efforts of Belarusian officials, the share of exports to Russia in the first half of the year accounted for more than a half of total turnover (not much different from last year). Accordingly, the trade turnover with EU countries increased only by 14 per cent, with the total share equalling 23 per cent.

Therefore, any optimism about a recovery seems a bit premature, taking into account the absence of assurance that current pricing trends will continue longer into the future.

Entrepreneurship: approaching liberalisation

Meanwhile, on 26 September, the government submitted a key document to aid liberalisation of the Belarusian economy, the draft decree “On the Development of Entrepreneurship,” for consideration by Belarusian president Alexander Lukashenka .

The decree proposes the following changes. First, the government will systematise and reduce administrative requirements (procedures for obtaining certificates, approvals and other permits) in order to simplify entrepreneurial activities.

Second, the decree advocates the formation of predictable tax legislation with the aim of ensuring a stable situation in the tax sphere. In particular, the government plans to introduce a ban on the introduction of new taxes or the increase of tax rates till 2020.

Third, the decree introduces a new notification procedure (by way of “one window” services or by implementing an e-services portal) for some of the most common types of economic activity for small and medium private enterprises (household and travel services, transportation of passengers and cargo, production of agricultural goods and building materials).

Fourth, the decree cancels the need for licenses for 3 of the 36 currently licensed business activities. It also streamlines 20 additional licensing components for the remaining activities. Finally, the government will attempt to transform the economy to focus on information technologies. Particularly, the First Deputy Prime Minister of Belarus Vasily Matyushevsky has acknowledged further development of Belarus High-Tech Park.

As a whole, the decree aims to change the mechanisms of interaction between the state and businesses. The hope is to minimise state intervention in the activities of private companies and to strengthen the mechanisms of self-regulation for entrepreneurs. However, the government still insists on maintaining a level of control over the economy.

The real sector: waiting for investments

Later, on 28 September, during the Belarus Investment Forum held in Minsk the First Deputy Prime Minister of Belarus Vasily Matyushevsky praised the success of the measures taken by the government to support businesses in general.

Matyushevsky stated that Belarus occupies the 37th place in the latest World Bank’s Ease of Doing Business ranking and grades among the ten countries-leaders in the reform of legislation. As a result, the number of companies bringing in foreign capital is growing—40 per cent more in comparison with 2014.

Discussion during forum touched on several topics, including investment in the real sector, technological and human resources of Belarus, and growth drivers for the Belarusian economy. Additionally, participants have evaluated the possibility for a  transition from a “catch-up development” strategy for Belarus to a “harmonious integration into international value chains” strategy, which envisions generating a stream of FDI into the country.

Moreover, the officials have stated that Belarus will continue reforms in order to support promising sectors of the economy, developing modern technologies, and increasing of the role of private sector.

However, World Bank Country Director for Belarus, Moldova, and Ukraine, Satu Kahkonen has argued that, along with the many opportunities, several risks remain in store for Belarus.

Kahkonen noted that Belarus can no longer rely on its traditional position in the market. Global driving forces have changed: the prices of raw materials will not be as high as in previous years. This means for Belarus that it cannot rely further on high commodity prices. If Belarus stops developing and reforming, it will fall into the trap of slow growth.

She added that additional growth factors for Belarus should include high level education, infrastructure development and taking advantage of its geographic location between EU and non-EU states.

In total, while the government demonstrates commendable efforts in the legislative sphere and tries to assure foreign investors with good economic development prospects, the economy still awaits more proactive steps and shows only temporary signs of recovery.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




State debt and weak trade policy test Belarus recovery – digest of the Belarusian economy

On 5 September 2017, Belarusian president Alexander Lukashenka once again declared the need to accelerate the government’s efforts to improve legislation concerning economic embezzlement and other abuses that are slowing down the economic development of the country.

Meanwhile, export are recovering briskly, although mostly due to goods based on raw materials. What’s more, the debt burden on the economy is rising, reaching a historical maximum. This is now the most significant risk to the national economy.

Trade Policy: exporting to the European Union

In the first half of the year, Belarus increased its export of goods, although this is primarily due to the price factor and goods based on raw materials. The dominant exports include fuel, meat, milk and other food products, chemical products (especially potash fertilizers), and metals.

Thus, the main export items comprise goods with relatively low value added. Meanwhile, on 11 July 2017, Lukashenka officially demanded that export partners be diversified, first of all to the EU market. According to him, all Belarusian economic authorities and enterprises need to ‘bite’ into the European market, given its status as the most most effective and technologically advanced.

However, in the first half of the year, the share of EU countries accounted for only about a quarter of Belarusian exports. This is in stark contrast to the early 2000s, when Belarus delivered almost half of its exports to Europe.

In 2012, Belarusian exports to EU countries reached a record of $17bn, primarily due to the export of petroleum products produced from duty-free Russian oil.  Afterwards, disputes with Russia concerning the price of supplied oil and the redistribution of duties from oil products, along with  a decline in world oil prices, has resulted in a drop of export to EU countries of approximately 67% in 2014-2016 (see Figure 1).

Nevertheless, the share of raw materials in exports to the EU remains huge – approximately 80 per cent of Belarusian sales still consist of fuel, wood, chemical products, and metals. Therefore, it is evident that an increase in exports of high-tech products remains a very important task for the economy as a whole.

According to the President of the Mises Scientific Research Centre, Jaroslav Romanchuk, Belarus’s economy still lacks the prerequisites for increasing and diversifying its exports in the Western direction. On the contrary, economic self-isolation threatens Belarus, as competitors displace Belarusian exporters even on the Russian market.

State debt: increasing pressure

The debt burden on the economy is on the rise. The national debt relative to GDP has reached 40.4 per cent – a historical maximum. As a result, continuing with existing growth dynamics creates serious challenges for the economic development of the country.

According to official data, in 1997-2006, the debt burden on the Belarusian economy remained at very low levels — external and internal debt were less than 10% of GDP. Low energy prices from Russia and the growing Russian market allowed the Belarusian economy to grow rapidly in the early 2000s without the need for additional borrowing.

In 2007, however, Russia revised energy prices on oil and gas for Belarus. As a result, in order to ensure a high rate of economic growth and the stability of the exchange rate of the Belarusian Ruble, the government became actively involved in external borrowing.

Thus, starting in 2007, the debt burden on the economy began to rise. From 2007 to 2012, the national debt relative to GDP increased by more than four times. Moreover, due to the devaluation of the Belarusian Ruble and the economic recession of the last two years, by the beginning of this year the national debt has grown by almost half, reaching 39.4 per cent.

As a result, today the debt service costs alone for the national budget make up approximately 10 per cent of its expenditures; to repay the main part of its debt, Belarus needs keep borrowing.

According to the Honorary Chairman of the Business Union of Entrepreneurs and Employers, Georgiy Badei, such dynamics will remain negative until Belarus has an acceptable rate of economic growth: to pay the debt, the economy needs to generate growth. If the economy grows, the budget revenues will increase and we Belarus can begin to repay accumulated debts.

At the same time, the reduction of investment in fixed capital over the past several years (such as plant machinery and equipment) does not lead to optimism regarding acceleration of growth of output and employment. Therefore, the only significant steps to be taken to liberalise the economy include reducing taxes on enterprises. This could will stimulate economic activity and help to repay accumulated debts.

The budget: balancing fiscal stability

Meanwhile, the consolidated budget in Belarus has boasted a surplus since 2011, which is used for repayment of state debt (see Figure 2). The structure of revenues and expenditures of the budget has remained stable over the last eight years.

However, securing a surplus is posing more and more of a challenge. In real terms, budget revenues shrank in 2015-2016 because of a recession (although revenues remain relatively stable as a share of GDP), becoming the reason for expenditure restraint from the government.

In recent years, capital expenditures have decreased the most. As a result, fiscal policy has become persistently procyclical. What’s more, steady growth in social transfers has become a major instrument of the government to provide a certain level of social protection and limit the poverty level in the country.

Taking together, the physical volumes of foreign trade have led to strong growth, thus helping the government fulfil budget obligations. However, debt sustainability is becoming the largest risk for the national economy.

 

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




Putin expects Belarus to boycott ports of Baltic States

On 16 August, at a conference on transportation in Northwest Russia, Russian president Vladimir Putin demanded that Belarus stop exporting its oil products through Latvian and Lithuanian ports. Instead, Moscow wants Belarus to reroute through Russia’s Baltic ports. This way, Putin intends to put even more pressure on the Baltic states.

The next day, the Belarusian stateaffiliated news agency BelTA published an interview with the acting director general of Belarusian Oil Company, Siarhei Hryb. The article made clear that Minsk wishes to continue its cooperation with the Baltic states.

It seems that Russia and Belarus are heading towards another oil dispute just months after ending the previous one. Minsk refuses to blindly follow the Kremlin’s policy of strangling the Baltic states, if only for pragmatic reasons. To survive as a sovereign state, Belarus needs good relations with all its neighbours, not just Russia.

Moscow wants Belarusians to join in a boycott of the Baltic states

Last year, Belarus exported 13m tons of oil products – a significant number for such a small country. In comparison, Russia exported 156m tons in 2016. Traditionally, Minsk has exported its oil products through Lithuanian and Latvian ports due to their geographic proximity. Notably, Belarusian cargo, mostly oil and potash products, made up 36 percent of the total volume of shipments of Lithuanian railways last year.

The Russian Kaliningrad Province. Image: Encyclopedia Britannica

In contrast, Russia has decided to put a complete halt to export of its oil products through the Baltic states by 2018, opting to use its own ports on the Black and Baltic seas instead. The director of Russian Railways, Oleg Belozerov, told Putin at a conference on 16 August that Belarusian firms are refusing to use Russian railways and ports to export goods. Belarus has made this decision despite Russian Railway’s offer to double the standing discount for transporting Belarusian oil products to Russian Baltic Sea ports to 50 percent. According to Belozerov, Belarusians cite their long term contracts with Baltic state ports.

Putin supported the complaints of Russian Railways: ‘Belarusian oil refineries reprocess only our oil, they have no oil from other suppliers… hence we shall offer it [to Belarus] as a package: if they get our oil they use our infrastructure.’

The conference also dealt with a related issue which demonstrates that Moscow is making no distinction between friend and foe in its renewed effort to strangle the region. Russian officials discussed establishing transport routes between Russia’s Kaliningrad Province and the rest of Russia and circumvent foreign states. Moscow aims to develop a direct communication line which would link its exclave to Russia proper and stop transiting through both Lithuania and Belarus.

Two months ago, acting Governor of Kaliningrad Anton Alikhanov announced plans to triple  the capacities of ferry lines between Kaliningrad province and the Ust-Luga port near Saint Petersburg by 2020. In his own words: ‘This is an important step because our dear neighbours – Lithuania, Latvia, Poland, and Belarus – love to exploit the transportation factor, the isolation of Kaliningrad from the rest of Russia.’

Belarus unlikely to join Putin’s continental blockade

Moscow has so far failed to pressure Belarus into using Russian ports instead of Lithuanian or Latvian ones. Now, both the Belarusian government and the business sector intend to resist Putin’s demands, even at the risk of a new oil dispute.

Even in March, when Russian Railways offered Minsk a 50 percent discount on oil products shipments, Belarusian Transport minister Anatol Sivak outrightly dismissed the offer. Commenting on Putin’s recent initiative, Hryb told BelTA on 17 August that even the high discount offered by Russia would not make much difference. It is still cheaper to send Belarusian oil products through the Baltic states. In addition, the Russian Baltic sea ports have had problems processing oil products and ensuring they remain undamaged by the elements in winter. Hryb maintains that his company offers customers the option of transporting oil products through Russian ports. However, the customers choose ports in the Baltic states.

TUT.by, the largest Belarusian news portal, quoted an anonymous oil trader who brought up the fact that it is not only the transportation tariff that matters, other factors are important too: how much time it takes to transport cargo, which port infrastructure is available, which services are offered, and so forth. The Baltic state ports win out over their Russian competitors in all these regards.

A strategic sector

Purchase and refining of predominantly Russian oil, along with the subsequent export of its products, are a key sector of the Belarusian economy. Talking in June at a government conference, Lukashenka called the oil refining industry ‘strategic.’

Belarusian government holds a conference on oil refining industry. Image: CTV.by

According to calculations by the IPM Research Centre, if in 2018 Russia supplies 23m tons of oil (the standard volume in earlier years when bilateral relations were good), then the Belarusian GDP would grow by 2.7 percent. If the strained situation of 2016 or 2017 is repeated and Moscow cuts supplies (which would then make up just 18m tons) the Belarusian GDP would increase by just 0.5 percent.

TASS news agency quoted several experts as saying that for Belarus, switching to Russian ports would cost up to $150m in financial terms. However, this sum is insignificant in perspective: after all, Minsk currently earns about $1.4bn on cheap oil it gets from Moscow.

Minsk looks for solutions abroad and inside the country

To counter the Kremlin’s repeated oil threats, Minsk is looking for alternative sources of oil by making new attempts to import Azerbaijani and Iranian oil. Out of the 18.6m tons of oil imported by Belarus in 2016, 0.5m tons were imported not from Russia, but most probably from Azerbaijan.

On the other hand, Minsk is working on a strategic long-term modernisation of the Belarusian petrochemical industry. In March, Alyaksandr Dzyamidau, the newly appointed director of Naftan, a Navapolatskbased refinery, explained to the media that Lukashenka had asked him to accelerate the modernisation of Naftan. The aim, according to Dzyamidau, is to make Belarusian refineries capable of processing oil of any brand and from various countries.

Mozyr oil refinery. Image: BelTA

The government is investing huge amounts of money to modernise the two oil refineries, and the process should be complete by 2019. However, in 2011-2015 alone, investments in Naftan development exceeded $1.2bn, and the refinery continues to receive millions to the present day. Another refinery in Mazyr has received $1.47bn for ongoing modernisation.

The Kremlin’s impossible political demands of Belarus threaten to drive it into a corner. Moscow could even endanger the alliance between Minsk and Moscow. However important Russia is for Belarus, Minsk cannot radically reduce its relations with its other neighbours, even if the Kremlin insists.

For Belarus, cutting links to the Baltics would mean significant financial losses and deterioration of political relations with the EU, as well as a return to political isolation. This would also lead to a fatal dependence on Russia and its oligarchic capital, reducing Belarusian statehood to a nominal status like that of Abkhazia or South Ossetia. There is no reasons to believe such a situation would be acceptable for the current Belarusian leadership.




The Belarusian hi-tech revolution: the government drafts an ambitious decree

Last month, Belarusian IT businessman Victor Prokopenya published a post on Facebook informing the public about a new decree on High Tech Park. This led to fervent discussion in the Belarusian media, with a number of articles devoted to the topic.

After meeting with HTP head Usievalad Jancheuski and Prokopenya, Belarusian president Alexander Lukashenka repeatedly mentioned that fundamental measures would be taken to develop the IT industry. ‘We have set an ambitious goal – to turn Belarus into an IT-country,’ said Lukashenka at the plenary session of the 4th Belarus-Russia Forum.

The new IT decree, drafted by a group of representatives from HTP, state bodies, specialists from leading IT companies, and legal and financial experts, aims to address the problems of the Belarusian IT sector. From cryptocurrencies and investment funds to English law and immigration policies, the decree is groundbreaking in the number and types of reforms it sets out.

 

Optimists believe that this sensational decree could turn totalitarian Belarus into an ‘IT Hong-Kong for the Slavic world’. Others remain critical of the fact that the government has neither published the decree nor opened it up for public discussion, suggesting that certain points may be controversial. Thus, whether the decree will benefit the whole country’s economy or merely widen the already existing gap between privileged IT companies and other sectors remains unclear.

New benefits for the IT business

Most importantly, the decree prolongs already existing tax benefits for IT businesses, which will help sustain the growth of Belarus’s most successful industry. The document also makes numerous large and small amendments which remove limitations on the sector’s further growth.

With the new decree, HTP will open its doors to large IT product companies, export-oriented ITES (IT enabled services), and companies working in other hi-tech spheres (such as medicine, biotechnologies, and electronics). Not only will this create thousands of well-paid jobs for Belarusians, it will also broaden the type of activities High Tech Park engages in.

Moreover, the decree welcomes investment funds, including venture capital, which is crucial for the sphere’s growth. In March, the head of Flint Capital announced the readiness of international investment funds to come to Belarus once the necessary legislative conditions are created. Thus, if the government implements the legislative changes – such as cancellation of subsidiary liability for HTP residents in case of bankruptcy – more investment funds and venture organisations will enter HTP.

What’s more, the decree simplifies the business process, allowing IT companies to implement various business models, such as earnings on advertising, marketing activities, games with internal currencies, etc. For example, it would be possible for Google or Facebook, which make money off advertisement, to become HTP residents. At the same time, investment funds and lifted restrictions regarding earnings will encourage Belarusian companies and startups to remain in the country, as they will be able to find finances and opportunities for development in Belarus.

English law, currency control, and documentation changes

The decree stipulates the application of English law, which would stimulate shareholder agreements, investment partnerships, and non-competition agreements with employees. This measure would boost investment activity and also structure transactions for Belarusian IT business sale.

Furthermore, in order to reduce the risks associated with the unstable Belarusian economic situation, the decree would abolish control of the movement of capital. It would also eliminate a significant amount of paperwork that companies engaging in foreign trade have to deal with. Experts consider these steps crucial for making Belarus appealing to large foreign enterprises, as they do away with some of the most frustrating bureaucratic procedures with which enterprises must contend.

The decree will uproot old Soviet-style legislation, involving complex document circulation, which prevents Belarus from adopting business practices preferred in much of the rest of the developed world. Key IT players lack the incentive to enter the Belarusian market as long as these time-consuming practices continue to exist. Thus, simplification of legislation is a wise move if Belarus wants to attract big names in the tech sphere.

Cryptocurrency and unmanned vehicles

On 17 July, the National Bank of Belarus announced the introduction of blockchain technologies for solving a wide range of problems in the banking sector and outside it. This decision is rooted in the HTP decree, which legitimises cryptocurrencies and tokens based on blockchain technology.

The proposed legal regulations would allow HTP residents to provide crypto-exchange services, use cryptocurrencies in everyday life, and attract ICO financing. Potentially, this could also lead to the creation of crypto-centres for generating crypto-code. Given the increasing legal status of cryptocurrencies around the world, their legitimisation could allow Belarus to directly benefit from this trend .

The decree also creates the legal basis for the development of unmanned vehicle technologies in Belarus. In May, Uber’s regional head and the CEO of Gett announced the opening of R&D centres in Minsk. Their motives for doing business in Belarus relate to existing information about upcoming reforms for HTP. Additionally, the decree makes provisions for a legal act which would even allow the circulation of 3rd-class unmanned vehicles on Belarusian roads. Hence, Belarus could become one of the first countries in the world to launch driverless cars.

One country – two systems?

The decree sets the ambitious goal of turning Belarus into a world centre for IT development and innovation. However, its critics insist that the decree would enforce a ‘one country, two systems’ formula, by which HTP would function according to capitalist laws while the rest of the country remains socialist. This would exclude non-IT spheres from the same privileges and reforms, creating an unfair and unbalanced economy.

Furthermore, some criticise the fact that Belarusian society has no access to information on the development of the decree. Thus, the public cannot influence the decision-making process. Key IT figures participating in the drafting of the decree are struggling to attain privileges for themselves, let alone campaigning to amend the Civil Code for everyone. Thus, critics claim that the decree will foster the IT industry exclusively and question whether it will benefit the rest of the country.

However, IT specialists respond that although the decree primarily targets HTP, it will also allow the expansion of IT activities to education, science, finance, and other fields. Moreover, it will create more well-paid jobs, thus increasing the size of the wealthy class of Belarusian programmers and preventing brain drain.

More well-paid workers will consequently increase Belarus’s tax revenue. Additionally, the decree will foster improvement in IT education as HTP residents will be able to carry out educational activities, contributing to IT education at schools and universities.

Nevertheless, the question remains of how an authoritarian state with no experience in regulating investment funds or venture organisations will ensure everything functions at an optimal level. Despite doubts, experts are expressing hope that once the decree is fully implemented, it might eventually de-bureaucratise the Belarusian economy and bring positive changes to the conservative state apparatus.

 




Redrawing the geopolitical map: Belarus and its neighbours connect the Black and Baltic seas

Belarus and Poland are advancing a project to connect the Black and Baltic Seas via the E40 waterway. The 2,000 km-long waterway will run through rivers and canals in Belarus, Ukraine, and Poland and provide better access to seaports for landlocked Belarus.

Having already conducted a feasibility study, the participating countries are now considering ways to finance the project before making their final decision.

However, in July, several environmental organisations and public associations launched a campaign against the E40 waterway. About two dozen organisations from Belarus, Poland, and Ukraine signed a petition to halt the project.

If anything can ensure the sovereignty of Belarus and its neighbours, it is such projects which modify the political geography of the region. Unfortunately, many experts and politicians in the region do not seem to understand this matter.

Is the project really as large as it seems?

Linking up the Black and Baltic Seas, the proposed E40 route also connects many of the region’s major cities: Brest and Pinsk in Belarus, Gdańsk and Warsaw in Poland, and Kyiv and Kherson in Ukraine. The designers of the E40 project emphasise that their intention is to restore a previously existing waterway to move both people and cargo. In most parts of the waterway, ships are navigating even today.

The Polish leg of the project will require the most work, while Belarus has only to partially streamline the Prypiats’ River, construct seven locks, and build several other hydro-technical facilities.

Map of the proposed E40 waterway. Image: e40restoration.eu

The Polish Maritime Institute in Gdańsk carried out a feasibility study on the project with EU support. According to the institute, construction of facilities on the Prypiats’, i.e., the Belarusian part of the undertaking, would cost $150m. In comparison, about 12bn euros is to be spent on construction of the Polish part of the route.

Criticism from activists

On 19 July, certain environmentalists and economists expressed their concerns over Е40 during a press conference in Minsk. Ales’ Herasimenka, the press secretary of the Business Union of Entrepreneurs and Employers, criticised the project for the high investment risks it carries and the negative consequences for the Belarusian economy.

According to him, internal waterways are generally less efficient than automotive and rail transport in terms of rapidness, necessity of reloading cargo, and seasonal limitations. Therefore, according to Herasimenka: ‘We believe that government and institutional investors should come to terms with the decline of the role of inland water transport. … Waterways were relevant at the beginning of civilisation.’

However, such cursory dismissal of inland water transport is misjudged. In other European countries, this form of infrastructure shows no obvious signs of decline. Between 1990 and 2015, despite some ups and downs, the cargo volume of German inland water transport remained more or less static, at slightly more than 220m tons.

Likewise, some types of cargo, especially liquid bulk and dry bulk cargo, can be profitably transported through inland waterways, despite the limitations on speed. Several major firms in southern Belarus could take advantage of the waterway to transport large volumes of cargo. The Mikashevichy-based firm Hranit has been using the Prypiats to transport its granite for many years. Likewise, the Mazyr oil refinery or the Salihorskbased potash company Belaruskali could transport their products using water transport.

Tourism cannot replace trade

Image: Nasha Niva

Environmentalists insist that the project could have grave consequences for the local bird population, including several vulnerable species. Moreover, they claim it could potentially destroy the unique wetlands ecosystem.

However, the project does not envision any direct destruction of the wetlands. Moreover, nature in the area is not pristine anyway. In the 20th century, most swamps were drained in southern Belarus, and intensive economic activity altered the region significantly.

What’s more, the local environment is transforming because of global climate change. The water level in southern Belarusian rivers has been low for several years. Last year, because of the low water level in the Prypiats’, navigation on the river stopped much earlier than usual: by the beginning of autumn. On the other hand, because of rising temperatures and earlier springs, last year the company Belarusian Riverine Steamships started navigation on the Prypiats’ a month earlier than normal, in March.

One critic of the project, a representative of the Polish organisation Ratujmy Rzeki, Przemyslaw Nawrocki, urges Belarus to develop tourism along the Prypiats’. However, despite the beautiful landscapes along the river, the tourism industry is unlikely to be able to compete with the income brought by the E40. Belarus is simply too poor to leave the region undeveloped to satisfy environmental activists.

The waterway as a political game-changer

The E40 project also has political significance. ‘Death of Palissie [the name of the region in the Pripyats River Basin] or an alliance against Russia?’ exclaimed the US-financed and administered Radio Liberty, writing about the project on 24 July.

Meanwhile, the Belarusian government is negotiating a waterway which would help it use Polish and Ukrainian ports at the time when the Kremlin is urging Minsk to reroute its cargo away from Latvian and Lithuanian ports towards Russian Baltic ports. Minsk is not only resisting Moscow’s plans in this area, it even wants to make more intensive use of ports in countries Moscow considers unfriendly.

Map of the Baltic ports used by Belarus. Image: Tut.by

However, this concerns more than just Russia. Minsk is increasingly interested in the Polish port of Gdańsk and various Ukrainian ports because of very probable problems with using the Lithuanian port of Klaipėda

The Lithuanian government has become unfriendly towards Minsk in recent years because of Belarus’s decision to build a nuclear power plant near the Lithuanian border. Moreover, on 14 July, the Klaipėda City council voted to expand the city at the expense of its port – a priority destination for maritime export of Belarusian products. Belarus had invested in the Klaipėda port and there was long-standing bilateral cooperation on using the port for Belarusian foreign trade. This decision of local authorities dissmisses the plans of the port administration to construct a new deep-water port for ocean-going ships a dream for Belarusian exporters.

In sum, projects like E40 alter the geopolitics of the region, opening it up and providing it with further and better connections to the sea. Belarus cannot change its location, but it can develop its infrastructure in a way which mitigates its disadvantage as a landlocked country. Minsk can diversify its exports and reduce its dependence on Russia; it can also better integrate with its neighbours and the EU.

The environmental and economic arguments against the project are unconvincing, at least as far as Belarus is concerned. To survive, Belarus must reach the sea; the E40 is one way to do this.




Remember reforms and forget about oil – digest of the Belarusian economy

On 1 June 2017, Belarusian President Alexander Lukashenka announced that the oil refining industry was experiencing substantial problems.

Meanwhile, the economy is still showing signs of recovery, growing three months in a row. This will encourage the government to make even better economic projections for next year.

However, according to Belstat, Belarus's official statistical body, the real price of this economic miracle continues to come at the cost of simple people – every month, half of all Belarusians bring home less than half the average monthly wage.

The oil sector: sinking giants

On 1 June 2017, Alexander Lukashenka declared that refining had turned from the bulwark of the economy into a loss-making industry (see Figure 1). He admitted that for the most part, inclement external conditions (falling oil prices) were to blame, but he also noted the failure of modernisation.

According to the President, the value added by oil refining to Belarus's GDP dropped last year to only half a percent. As a result, the contribution of two Belarusian refineries, Mozyr and Novopolotsk, is now equal to companies such as Beltelecom, a state-owned telecommunication company.

However, any radical change in the management of the oil industry still appears unlikely. Moreover, the authorities are once again planning to invest more money – as much as $1.2bn – to complete the modernisation of the two refinery companies by the end of 2019.

According to a recent statement by Uladzimir Siamashka, Vice Prime Minister of Belarus, this modernisation should allow the the depth of oil refining to increase by up to 90 per cent, turning these companies into 'aerobatics plants' – enterprises able to provide oil processing as deep as the world's best refinery companies and featuring a wider range of petroleum products.

However, these promises remain dubious for several reasons. First of all, Belarus is experiencing a shortage of money for large investment projects. According to the First Deputy Minister of Finance Maxim Ermolovich, approximately 10 per cent of the budget goes to repayment of the state debt (both external and internal).

Second, the country lacks high-level management skills at state-owned enterprises. Finally, Lukashenka has admitted that preparation for the project is not yet complete and points to inappropriate distribution of resources.

In light of this, on 27 June, Alexander Lukashenka announced radical measures for rapid development of the IT sector, which remains the only industry which still possesses competitive advantages.

Economic growth: waiting for better results

On 26 June 2017, First Deputy Prime Minister Vasily Matyushevsky declared that last month's results show that the economy is gradually emerging from recession – economic growth is increasing month to month.

The GDP did indeed increase by 0.9 per cent during the first half of the year in comparison with the corresponding period of the previous year (see Figure 2). Inflation has stayed at the lowest level in Belarusian economic history – for the five months of the year it reached only 2.7 per cent, less than half of what was predicted.

Export in January-April grew by 19.5 per cent. However, according to Vasily Matyushevsky, this was mainly thanks to technological products (motor vehicles, tractors, and machinery), rather than sales of commodities (petroleum products and potash fertilisers).

However, according to economic expert Anton Boltochko, the current positive economic figures reflect only conjunctural growth caused by the low base of the economy, the result of the past two years of recession. With a projected GDP growth of 1.1 per cent in the next year, this looks more like a stagnation scenario, not so much a development plan.

Moreover, even Vasily Matyushevsky reluctantly agrees with this statement. He emphasises the need for structural reforms accompanied by improvements in the institutional environment in order to fulfil the more dynamic target economic scenario.

Wages: directive planning may rise again

Meanwhile, it seems that while reforms remain only in the planning stage, directive tools of governance of the economy are once again gaining momentum. This is especially true for the growth of real wages.

According to the Belstat, the average salary in Belarus reached BYN795 ($414) in May 2017. Taking into account growth of consumer prices, the corresponding real wages have increased by 4.1 per cent in comparison with May 2016. However, it is necessary to take into account that the average wage fails to reflect the differences in regions and industries.

In comparison with economic centres (such as Minsk and regional capitals) this problem is exacerbated by the low level of economic activity. Differences between industries add additional pain.

On one side, light industry and agriculture are still largely loss-making, one the other side, telecommunications, logistics, banking, and information technology remain profitable.

Finally, in the public sector the average wage hovers at approximately 77 per cent of the country average. As a result, according to data revealed by Belstat on 29 June 2017, every second Belarusian has less than BYN370 ($192).

Given such low growth rates for wages and the significant differentiation across regions and sectors, it would take a miracle to fulfil the authorities' goal of achieving an average wage of BYN1,000 or $520 (growth by 26 per cent) by the end of this year using standard market methods.

Thus, taking all this together, the authorities may attempt to use directive (administrative) methods in order to ensure the growth of industrial production and wages. However, manual control over Belarusian companies may result in a chronically dire economic scenario: increased inflation and an economy threatened by financial instability.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




Problems and prospects for the Belarusian IT industry

On 7 June 2017, the Microsoft Corporation held a Government Industry Day at Belarus’s Hi-Tech Park with the participation of both Belarusian ministers and Microsoft experts. The seminar addressed issues surrounding the digital transformation of the economy and aimed to present technologies that could work for the finance, transport, health, education, and other economic sectors to the Belarusian authorities.

IT has become the fastest-growing sector in the Belarusian economy, increasing by over 20% annually. However, the nature of the industry in Belarus, which focuses on outsourcing, primarily targets foreign customers. This is partially due to the reluctance of the Belarusian state to embrace tech achievements at home.

Given the limited growth potential of outsourcing, Belarusian IT needs to shift from software services to production, as well as increase local consumption. These processes require economic liberalisation – including venture legislation and favourable investment conditions – larger number of specialists, and modernised national tech management.

The prevalence of the outsourcing model

On 12 June 2017, the number of Hi-Tech Park residents reached 181. Last year, HTP revenue nearly reached $1b – a huge leap from $22m in 2007. The World Bank’s Doing Business 2017 index ranked Belarus 37th due to its good outsourcing conditions.

However, outsourcing may soon reach its apex, given Belarus’s limited human resources and the world’s spending on outsourcing. The outsourcing-dependent IT sector sells ‘brains’, thus letting most income go abroad; it may also become less economically attractive after HTP tax exemptions terminate in 2020.

On the other hand, the presence of global outsourcing companies fosters the development of Belarusian IT infrastructure, thus increasing the productivity and stability of the IT sector and reducing risks and costs. It also sustains a labour market with a number of wealthy and skilled professionals who receive wages significantly higher than the average.

What’s more, many outsourcing companies are now moving beyond software services. For instance, EPAM Systems, owned by Belarusian businessman Arkadź Dobkin, has expanded its focus to product development in such areas as medicine, media, and banking.

Rising software production

At the moment, out of a total of over a 1,000 IT companies operating in Belarus, only 10-15 per cent create their own products. Nevertheless, product software remains the most promising direction, as ready-made projects earn more than services. In particular, Belarus will benefit from companies that create machine learning and artificial intelligence products – fields which will dominate the tech industry in the near future.

Software producers, however, are encountering problems finding specialists in such spheres as marketing and product management. Dominated by outsourcing, Belarus has so far failed to create the necessary job market for software producers. Last week, Wargaming, a game developer with Belarusian roots, began a liquidation process at its London ‘mother’ company. Belarus’s richest product developer, famous for the game World of Tanks, now faces serious business stagnation.

Nonetheless, Wargaming recently opened a mobile division in an attempt to reorient its functioning. Other Belarusian startups also remain active and receive foreign investment. This year, the mobility company Gett acquired the Belarusian-Israeli startup Juno, while the public company Globant acquired PointSource. Other promising startups include DroneX, which develops custom-made Unmanned Aerial Vehicles, Blinger – an app that allows communication via multiple platforms, the trip-planner Eightdays.me, and an emotion recognition app called NeoSound. These projects have already been noticed internationally and have high chances of becoming successful.

Problems in state policy and legislation

In a recent interview, Ivan Michnievič, a co-founder of Wargaming who left the company in 2014, described the state policy towards business as ‘short-sighted’. Belarus barely invests in IT and has complex legislation for the IT business. State investments in R&D have been declining since 2011, never exceeding 1 per cent of GDP. This consequently reduces Belarus’s ability to retain regional leadership in the current technology race.

During the conference IT Spring 2017, various speakers discussed investment problems in Belarus. Not only do specifics of legislation prohibit venture funds, they also fail to protect the investor. Belarusian law neither secures investor’s property rights nor protects him or her from employees transitioning to competitors.

What’s more, occasional arrests and administrative punishments of shareholders and managers for violations of economic and bureaucratic procedures frighten off potential investors. The government, which is incapable of scraping together national funds to support IT, should at least allow venture funds and amend legislation to attract more investment.

As for advertising, Belarusian legislation stipulates complex bureaucratic procedures. For example, paying for advertising services of foreign sites (such as Facebook, GooglePlay, or Apple) involves a 35% tax on non-resident services comes, making advertising from Belarus highly unprofitable.

Lastly, the reason why Belarus lacks many major corporations is the country’s image. In order to attract companies like Microsoft or Facebook, Belarus should cultivate a positive image in foreign media; this requires political will rather than large amounts of money.

Domestic IT consumption and social division

Lack of domestic consumption remains a challenge for the Belarusian IT industry. State companies which have their own tech specialists remain unwilling to move on to a new type of technology management. Beside being insufficiently informed about the opportunities offered by the IT industry, officials have no real interest in the tech-supported success of state-owned businesses.

Arkadź Dobkin expressed his readiness to work in Belarus provided that the customer has a sincere interest in the result and ‘wants to be your real partner, and not a boss on a high chair’. If Belarusian manufacturing and agricultural giants make better use of Belarusian IT services, this will eventually benefit both sides, improving the country’s economy overall.

Moreover, Belarus should address IT education, as the current level of IT training does not meet requirements. To increase its supply of professionals, Belarus could attract specialists from neighbouring countries by offering special visas or residence permits, reducing payroll tax, or providing other benefits.

On the other hand, the state must maintain a balance in the way it treats the IT sector. At the moment, IT specialists receive significantly larger salaries with many tax benefits; these are unavailable to the rest of the working population. Excessive attention to IT could contribute to the creation of a distinct labour elite, which brings inequality and division to society. The authorities should pay more attention to other spheres, such as education or health, regardless of the profit they bring.

Thus, provided the state implements legislative changes, the ICT sector will grow faster, bringing more companies, revenue, and technological advancement to Belarus. However, in order for ICT not to become overly exclusive and divisive, the sector should work out a way to directly benefit the Belarusian economy and society.

This article is a part of a series of publications on IT sector in Belarus supported by VP Capital.




Belarus and Moldova: cooperation despite opposing geopolitical orientations

On 6-7 May, Moldova’s Prime Minister Pavel Filip held a supercharged working visit to Belarus, meeting with the country’s top officials, kicking off several events, and discussing a wide range of issues, from trade to culture.

Despite serious recent setbacks in bilateral trade, Moldova remains an important economic partner for Belarus in the post-Soviet space. Unlike Russia, Belarus has no problem with Moldova's geopolitical orientation towards Europe, instead trying to use this factor to its advantage.

Will the recent election of the pro-Russian politician Igor Dodon to the Moldovan presidency affect the two countries’ economic cooperation?

Welcoming another advocate for Belarus in Europe

Pavel Filip received a warm welcome from President Alexander Lukashenka in Minsk. The Belarusian leader thanked ‘brotherly Moldova’ for explaining to ‘some zealous politicians in Europe what Belarus is and what our policy is’. Lukashenka promised to keep Belarus’s market open to products from Moldova, provided they adhere to high-quality standards.

Belarusian and Moldovan officials discussed trade and economic cooperation in detail during the 18th meeting of the joint intergovernmental commission. Filip also attended the BELAGRO agricultural trade show in Minsk. Twenty-two companies from Moldova promoted their wine, fruit, and vegetables at a 100-sq.m. stand dedicated to Moldova and sponsored by the Belarusian government.

The Moldovan Prime Minister also held a meeting with his Belarusian counterpart Andrei Kabiakou; they emphasised cooperation in the spheres of building and road construction, agriculture, and industrial assembly. The two officials also kicked off the Days of Moldovan Culture in Belarus.

Belarus does not object to Moldova’s European choice

Despite their relatively strong economic ties and shared history in the Soviet Union, there have been relatively few high-level contacts between the two countries’ executive authorities since their independence. Alexander Lukashenka visited Chisinau in August 1995 and received his Moldovan counterpart Petru Lucinschi in Minsk in June 2000.

Later, after two visits to Minsk by former Moldovan Prime Minister Vasile Tarlev in August 2001 and October 2005, there was a nine-year hiatus in high-level interaction, not counting irregular meetings on the sidelines of CIS summits. Finally, Lukashenka returned to Chisinau in September 2014 followed by Andrei Kabiakou in October 2016. Nicolae Timofti, the then Moldovan President, paid an official visit to Belarus in July 2015.

Interestingly, this reinvigoration of high-level contacts between Belarus and Moldova is happening against a backdrop of worsening relations between Chisinau and Moscow. In 2013-2014, Russia, unhappy with Moldova’s decision to enter into an association agreement with the European Union, introduced a ban on imports of Moldovan wine, fruit, and fruit and vegetable preserves.

In 2014 in Chisinau, Lukashenka reassured the Moldovan public that the signing and ratification of the association agreement would not affect the latter's relations with Belarus: ‘Don't dramatise… We need to create new forms and look for new ways of cooperating’.

Indeed, Belarus opened its market to Moldovan food products. Thus, in 2014, the imports of apples from Moldova to Belarus increased more than eleven-fold compared to 2013: from 5,600 to 63,900 tonnes. A large part of these Moldovan apples surely found their way to the forbidden Russian market. Total imports from Moldova to Belarus subsequently grew dramatically: from $91.8m to $149.6m.

‘During a gruelling time for us, Belarus has extended a helping hand in a very open, sincere, and friendly manner, for example, a few years ago, when we had some problems with some markets in CIS countries. We will not forget it’, Pavel Filip said about that period at his recent meeting with Lukashenka.

Will the golden age in trade return?

The golden age for trade between Belarus and Moldova lasted several years during the early 2010s and reached its peak in 2014. Last year, the turnover returned to its 2007 level. In 2016, Belarusian exports to Moldova reached their lowest point in the last decade.

The turnover continued to fall in the first quarter of 2017, contracting by 35% to the same period of the previous year. However, Belarusian officials are encouraged by increasing exports (up by 52%).

Belarus exports several dozen product groups to Moldova: petroleum and chemical products, tractors, motor vehicles, ceramic tiles, and glass fibre dominate exports. Imports are essentially limited to fruit and vegetables (fresh and preserved), wine, and spirits.

Petroleum products amounted to over half of Belarusian exports to Moldova in the peak years of 2013-2014. However, the abrupt drop in supply in 2015 upset bilateral trade. Nevertheless, it is fair to note that the sales decrease affected most product groups including tractors, the second-largest export group in trade with Moldova.

Currently, eighty-seven companies operate in Moldova with the participation of Belarusian capital, including flagship projects of knockdown assembly plants of Belarusian trolleybuses and tractors. Now, the Belarusian government is hoping to launch a knockdown assembly plant of Belarusian MAZ buses in Chisinau in late 2017.

Will Lukashenka’s fan in Moldova help to increase bilateral trade?

Igor Dodon, the recently elected Moldovan president who sympathises with Russia, has an affection for Lukashenka. He called the latter ‘an example for [Moldova] … in preserv[ing] all the best things from the USSR’. ‘The economy works like a clock, and there is a rigid vertical of power [in Belarus]’, Dodon said in an interview to Deutsche Welle.

Belarus supported Dodon’s application for observer status at the Eurasian Economic Union, which was approved by the member states in April 2017. The head of Moldova’s executive branch, Pavel Filip, seems to harbour no grudge against the Belarusian government for having supported this initiative, which he called ‘a symbolic gesture’ with no legal consequences.

Lukashenka and Dodon met in Bishek, Kyrgyzstan on 14 April, on the sidelines of the Eurasian Economic Council. According to Dodon, Lukashenka advised him to hold a referendum on introducing a presidential republic in Moldova to give the country's leader more power, according to the examples of Russia and Belarus.

Dodon also announced in April that he would soon come to Belarus on Lukashenka’s invitation. The visit is tentatively scheduled for 13-14 July.

Dodon’s activities as the new President of Moldova have apparently failed to affect Belarusian-Moldovan relations in any way, be it positive or negative. Dodon has little real power in the parliamentary republic, and Belarus prefers to work with those in charge.

Even if he succeeds in bringing Moldova back to the ‘Russian world’, it would hardly help to strengthen Belarus’s economic position in Moldova. Thus, despite its apparent fondness for rhetoric about integration and Soviet nostalgia, Belarus remains quite pragmatic in its economic dealings.




The avant-guarde of Belarusian hi-tech industry

Agreements concluded in May of this year between the Belarusian High Tech Park and Uber, along with the opening of an R&D centre for the Israeli company Gett, demonstrate the growing success of the Belarusian IT industry.

Dave Waiser, Gett’s CEO, compared Belarus to Israel in terms of its small domestic market for retail business, but big opportunities for IT export for worldwide use.

Over the past decade, Belarusian IT services have grown by almost 50, with export reaching $900m – a number which is growing at a rate of 20 per cent and currently constitutes 12 per cent of Belarusian export.

Out of the 1,000 IT companies in Belarus, only 24 belong to the state. The largest IT companies, which operate in Belarus’s most promising industry and do most of their business abroad, put continuous effort into ensuring the industry continues to grow.

While the authorities support the increasing contribution of the IT sector to Belarus’s declining economy, it is Belarusian IT companies themselves which play the largest role in boosting IT education, expanding the sector’s size and regional reach, and cautiously influencing changes in legislation.

High Tech Park – Belarus’s hub for IT

It’s been 12 years since High Tech Park opened in Minsk, after the president signed the decree ‘On High Tech Park’ in 2005. Before the park’s opening, Belarus’s IT export constituted $15.2 million.

In 2009, HTP had already reached $121.5m worth of export. In 2016 it reached $820.6 million, expanding its activities into the fields of nanoelectronics, mechatronics, data transmission, and other areas.

Currently, the park hosts 173 companies from 67 countries, producing 91% of its software for export and attracting $169m of foreign direct investment. Thanks to HTP, the export of Belarus’s IT services became the second most important contributing factor to the country’s current positive trade balance for foreign services.

A few days ago, HTP opened an educational centre in a regional department in the city of Hrodna. The department implements and supports regional ICT projects, cooperates with local universities, and promotes employment in the IT sector. HTP has also opened IT academies in several locations in order to teach programming to school children. In this way, the park can enhance IT education while motivating students to specialise in ICT, consequently increasing the number of potential IT specialists for the growing sector countrywide.

The number of foreign companies entering HTP is increasing thanks to tax benefits and a pool of inexpensive and highly qualified specialists; this creates a perfect environment for outsourcing.

Four Companies with Belarusian roots (EPAM Systems, IBA Group, Intetics, and Itransition) are ranked among the world’s largest outsourcing companies in 2016 Global Outsourcing 100. Another ranking, SoftwareMag, includes EPAM, IBA and eight more HTP residents among the top 500 IT service providers.

Top outsourcing companies

EPAM Systems is the largest Belarusian IT company, registered in the US with 25 branches around the world. Arkadz Dobkin, a Belarusian immigrant to the US, founded EPAM in 1993. Today, EPAM employs 22,000 people, including 8,000 in Belarus, where the company has branches in all regional centres. With revenue of over $1 billion and IPO at the New York Stock Exchange, EPAM is the fastest-growing IT company in Belarus and among the fastest in North America. Over the past six months alone, the Belarusian branch of EPAM increased its staff by more than a third.

EPAM invests millions of dollars into real estate for Belarusian programmers, finances university training programmes, and runs start-up initiatives. Moreover, the company is listed among the winners of the ‘Best Exporters of 2016’ for its leading position in Belarus’s IT services export.

However, EPAM’s overall revenue structure shows that North America takes the largest share (59.2 per cent), while CIS receives 14 times less (4.2 per cent), and this gap is widening. Hence, most of EPAM’s revenue falls outside Belarus, the country with the most employees.

IBA Group, the third largest IT exporter and second biggest supplier to Belarusian market, is another major Belarusian outsourcing company. IBA owes its creation to the US company IBM, which established a joint venture with the Minsk Research Institute of Computers in the early 1990s. Today IBA is headquartered in Prague, while the Minsk-based office remains the key to the company. IBA has developed several projects for the Belarusian market, including an e-tax system for the Ministry of Taxes and Duties, a ticket system for public transportation, and budgeting systems for banks.

In August 2016, the media claimed that Belarusian police had detained IBA’s top managers. While IBA CEO Siarhiej Liaŭciejeŭ denied this information, he confirmed certain claims by national law enforcement agencies. Nonetheless, IBA, EPAM, and other top IT companies, such as Itransition, ISsoft Solutions, and iTechArt, remain among the top Belarusian IT service providers to this day.

Conquering the world with tanks and augmented reality

While the Belarusian IT industry largely focuses on services, product development continues to be the most profitable sector. Wargaming, founded in Minsk in 1998, is a primary example. Last week, the world’s fifth most popular PC gaming company held its 2017 Grand Finals in Moscow, gathering 12 teams to compete for a $300,000 prize. Officially registered in Cyprus, Wargaming garners international recognition for its game World of Tanks, played by 110 million users. The game turned the company into an international corporation.

Wargaming’s CEO Viktar Kisly became the first gaming industry billionaire from the CIS included in the Bloomberg index, which valued Wargaming’s business at $1.5 billion. However, since World of Tanks, no other game has had similar success. Stagnation of the business could have influenced the decision of co-founder Ivan Michnievič to leave Wargaming in 2014. While the Minsk-based Game Stream Studio continues developing new projects, recent games such as World of Warplanes and World of Warships have failed to take off.

Other fresher examples of Belarus’s IT development is the company Banuba Development, registered in Hong-Kong with a development centre in Minsk. Backed by $5m of funding from the Gutseriev family’s Larnabel Ventures and Viktor Prokopenya’s VP Capital, the team of 45 Belarusian programmers are currently developing augmented-reality-enabled mobile apps. Already boasting 11 US patents, Banuba expects to present its first application this year.

Emerging trends

During Lukashenka’s visit to several IT companies, the president made clear that the state has given a green light to the development of the IT industry. Lukashenka praised the achievements of Belarusian IT companies, promising to expand state support for new projects.

The fact that Belarus already has EPAM and InterActiveCorp (IAC), which owns the HTP-registered mobile apps developer Apalon, shows that the right steps are being taken towards involving large corporations in Belarus’s IT sector. Nevertheless, further revenue growth requires a new legal system to support the IT product model and attract more public IT companies with traded shares on stock exchanges.

While Belarusian and Russia-oriented exports continue to shrink, the West-oriented IT industry is growing by leaps and bounds. The government supports Belarus’s high-tech achievements by asking for its 5 per cent share in GDP, while IT businessmen carefully push for reforms in economic legislation. As long as the interests of IT business and the government in making Belarusian economy more innovative coincide, HTP residents can expect production and revenue growth, as well as more IT corporations coming.

This article is a part of a series of publications on IT sector in Belarus supported by VP Capital.




Can new companies replace state giants in Belarus?

Deputy Prime Minister Uladzimir Syamashka recently announced that full-cycle car production is to start in Belarus this month; this will be a first for the country. So far, only Chinese-designed cars have been assembled in Belarus.

Meanwhile, the holding Amkodor presented its first tractor at the Belagro exhibition on 6-10 June in Minsk. This means that the Belarusian government has made another concession to the privately-owned holding, allowing it to challenge the national industrial giant MTZ, which has manufactured tractors for many decades.

As most major Belarusian machine-building firms such as MAZ and MTZ struggle with problems, the government supports them to avoid social disturbances. Nevertheless, it also supports new projects, which create competition for existing enterprises and thus tacitly change the political economy of the state.

Chinese cars for Belarusian public servants

Once, there was a private-sector initiative to launch joint car production with the American company Ford and the Iranian company Iran Khodro. Both projects were terminated after assembling only several hundred cars. Thus, the forthcoming launch of a full-cycle car production factory makes the joint Belarusian-Chinese project a remarkable achievement.

Assembly production of Chinese-designed Geely cars began in Belarus in 2013. The new factory, near the city of Barysau, is set to reach a production level amounting to 60,000 cars a year by the end of 2017.

From the outset, the government has emphasised that 90 per cent of these cars would be exported. Some exports to Russia and Kazakhstan have succeeded, albeit perhaps with Beijing's assistance.

However, Minsk has also taken measures to ensure sales within the country. In April 2016, president Lukashenka announced that 'There will be no imported cars for civil servants, except for the prime minister, vice premiers, and top-ranking officials,' and stipulated that only Geely cars manufactured in Belarus be used for state needs. Moreover, as Tut.by noted, the new law regulating taxi firms looks as if it compels taxi drivers to buy Geelys.

Shakutin rising

Another new project in the machine-building sector involves launching the production of a tractor by the holding Amkodor; this will compete with models offered by MTZ, a state-owned firm. The government has not only allowed Alyaksandr Shakutin, a co-owner of Amkodor, to challenge MTZ, it even intends to use Chinese loans to fund the project, including construction of a new plant.

At first glance, this seems logical. Belarusian authorities consistently support the rising business empire of Shakutin. For example, on 24 May, Industry Minister Vital Vouk remarked on Shakutin's holdings Amkodor and Saleo's intention to invest $2.1bn in further expansion in 2016—2030.

Both holdings have enjoyed success. Saleo was established by Shakutin and his partners in 2014 as a firm producing hydraulics for mobile machinery which had earlier been imported. By now, as Vouk emphasises, 30-60 per cent of necessary hydraulics are manufactured in Belarus.

A patriotic business?

Shakutin emphasises that his business is all about manufacturing and insists on his patriotism.

The Belarusian web-portal Tut.by, however, has pointed out that a very large share of his firms' sales involve Belarusian state purchases. He has also acquired several formerly state-owned enterprises without competition and for little money. Likewise, Shakutin used to employ a number of formerly high-level Belarusian state officials, such as Lukashenka's former economy assistant Siarhei Tkachou, BRSM (a pro-government youth union) leader Alyaksandr Nakhaenka, MAZ director Mikalai Kasten', transportation minister Ivan Shcherba, and others. This obviously strengthens his ties to the government, Tut.by points out.

Shakutin responds to these comments by emphasising his efforts to export, underlining that the factories he bought were destitute and he salvaged them. He also claims that he employed former officials because of their superb managerial qualities.

Nevertheless, Shakutin's ties to the government are obvious. For many years, he worked in the upper chamber of the Belarusian parliament and held a key role in the organisation of the pro-goverment Belaya Rus' movement. There has even been talk of EU sanctions, as he is 'Lukashenka's oligarch.' However, this is an unfair characterisation, as Shakutin is merely a tool for the Belarusian leadership.

MTZ vs. Amkodor

The government's decision to allow Shakutin to launch a project which could have an adverse impact on a Belarusian state-run company must be understood in context. A number of older, state-owned companies are seriously struggling. While three years ago MAZ was producing 24,000 trucks a year, this year the enterprise expects to manufacture less than 11,000.

The government plans to provide financial support for the branch. On 24 May, Deputy Prime Minister Syamashka announced that the government was to invest $500m in MAZ, and $645m in Homselmash, an agricultural equipment manufacturer. For 2016-2030, MTZ needs $1.1bn of investments and has almost no funds of its own.

It will take Minsk a significant amount of money to develop the plant, but the struggle may succeed. The case of BelAZ has served as an example for the Belarusian government: it invested $800m into the firm, which manufactures huge trucks. As a result, BelAZ developed new models and succeeded in increasing its share on the global market, which is now estimated at almost 30 per cent.

Between Russia and China

Where exactly Minsk will find the money to invest in its machine building industry remains unclear. Government officials refer, inter alia, to Chinese loans; recent contacts with Beijing also support this hypothesis. Less clear is how Minsk will involve Russia in developing Belarusian industry: will it strive to limit cooperation or will it be willing to give the Russians anything if they can save companies from bankruptcy?

Most probably, the government policy on Russian involvement will remain ad hoc and pragmatic. On 24 May, Deputy Prime Minister Syamashka revealed that during the recent Belarus-Russian negotiations on oil and gas, the two governments agreed to prepare proposals on three industrial integration projects – these concern the petrochemical and machine building enterprise.

In 2011—2014, Belarus and Russia had already agreed on five industrial integration projects involving the Belarusian firms MAZ, Intehral, MZKT, Pelenh and Hrodna Azot. In recent years, however, Minsk and Moscow have kept silent on these projects.

Minsk will certainly use cooperation with Russia to develop its machine building sector, but the Belarusian government is considering all its options. Thus, the authorities are promoting new privately-owned production projects. In the future, these could replace giants like MTZ. In addition, Minsk hopes to use China as a source of loan-funding and technology.

In general, the development and state support of major Belarusian businesses such as Shakutin's holdings resemble the famous post-WWII South Korean business conglomerates called chaebols, the most famous of which are Samsung and Daewoo. These helped the government adapt and develop the national economy in exchange for state support.




The end of a long-lasting recession? – Digest of the Belarusian economy

On 17 May 2017, Belstat, Belarus's official statistical body, announced that Belarus's economy is growing for the second straight month.

Thus, on 24 May, Deputy Prime Minister Vladimir Semashka declared new investment plans for the industrial sector assuming further economic recovery.

Nevertheless, the economic environment remains complex and the debt burden of enterprises is high, threatening the stability of the banking system.

Economic growth: good prospects for the future

On 17 May, Belstat announced that in January-April, GDP increased by 0.5 per cent in comparison with the corresponding period of the previous year, thus extending March's positive dynamics (see Figure 1).

The main contributor to the recent economic growth remains export. Figures for the first quarter of the year indicate that export of goods has increased by 20 per cent, thanks to the steady recovery of the Russian economy and increase in consumer demand for Belarusian food products.

Another key factor is that the export of oil refinery products has risen from the ashes after the upward correction of world oil prices and a long-awaited deal with Russian authorities on oil import. This will mostly add up in the second half of the year.

According to economist Vyacheslav Yaroshevich, the Russia-Belarus oil deal will encourage the entire economy, thus resulting in 30 per cent year-on-year export growth and an additional 0.7 per cent GDP growth by the end of May.

Furthermore, in the second half of the year, industrial production will also start contributing to overall GDP growth. According to Vyacheslav Yaroshevich, the industry shows signs not only of growth in production volumes, but also improvements in the financial situation, including increase in revenues, efficiency of sales, and net profits.

The financial sector: disappearing savings

According to data from the National Bank of Belarus, as of 1 May 2017 the amount of foreign currency deposits in banks amounted to $6.8bn – the lowest since December 2013. This trend of constant decline in foreign-currency savings has been observable since November 2015. As a result, after 18 months, savings declined by almost $1bn.

Three factors explain this trend. First is the the constant decrease in the profitability of deposits for Belarusians both in foreign and national currency.

For many years, the deposit rates on bank savings nominated in Belarusian rubles exceeded two-digit numbers. Even during periods when the Belarusian ruble was stable (the 2000s – a period of generous oil subsidies), their yield came to more than 10 per cent per year. Only in the summer of 2006, due to declining inflation, did the average deposit rate fall to 9.7 per cent.

Over the next decade, it was always expressed in double figures due to the high inflation rate. It even exceeded 50 per cent per annum during the 2011 and 2014 financial crises. However, in 2015-2017, after the National Bank of Belarus committed to reduce inflation, these rates dropped to the historically low level of 8.4 per cent. They will supposedly continue to decrease (see Figure 2).

The second factor is that there are very few profitable investment projects for banks to finance. Moreover, on 1 May, the share of bad assets (generated by current operations of enterprises) in Belarusian banks reached 14.2 per cent.

According to the Senior Director of the Moscow office of Fitch Ratings, Olga Ignatieva, the quality of assets in banks will continue to deteriorate, as the economic environment is complex and the debt burden of enterprises remains high. Thus, banks have less motivation to attract new deposits.

Finally, Belarusians, who are facing a decline in their real incomes, try to maintain the same level of consumption at the expense of their savings.

Manufacturing sector: modernization 2.0

On 24 May, Deputy Prime Minister Vladimir Semashka announced plans to invest $500mln in the modernization of MAZ (the largest manufacturer of trucks in Belarus), $800-850mln in the development of BMZ (a large metallurgical plant), and commit additional financial resources to the modernization of refineries.

According to Vladimir Semashka, MAZ struggles with production volumes. Three years ago, the enterprise produced 24,000 trucks per year, whereas by the end of 2017 it was producing no more than than 11,000. The refineries performed better, but endured financial losses due to the drop in world oil prices and the decrease in oil suppliers from Russia in 2016.

However, in light of the absence of internal financial resources, the government has only two options if it wants to fulfil its plans for modernization and foreign direct investments.

According to the opinion of economists from the investment company UNITER, Belarus must increase the annual inflow of foreign direct investments (FDI) to $3-4bn if it wants to increase economic development. However, data for 2013-2016 shows that the volume of FDI has stabilised at $1.3-1.5bn per year without significant changes in recent years.

The second option is obtaining loans from international financial organisations. Once again, negotiations with the IMF remain incomplete (nobody knows for how long), and the Eurasian Development Bank still requires more profound reforms in the Belarusian state sector (including privatisation).

Thus, in May, Belarus's economy showed its first signs of recovery – the rise in export and industrial production point to positive prospects for the second half of the year. However, problems in the financial system, which have accumulated over the previous years, have not disappeared. This threatens the sustainability of the economy.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




Is the IT sector Belarus’s most successful industry?

On 24 May, Usievalad Jančeŭski, the Head of Belarus’s High Technologies Park (HTP), and Pierre-Dimitri Gore-Coty, Head of the EMEA region at Uber, agreed to an R&D centre for Uber in HTP for driverless vehicles.

Uber’s decision to cooperate with HTP does not come as a surprise, given Belarus’s reputation on the East European IT market. Belarus hosts more than 1,000 IT companies with over 30,000 employees. Boasting many well-educated and relatively inexpensive specialists, the country provides excellent hi-tech outsourcing services for foreign enterprises.

The majority of IT clients come from North America and Europe, while a number of famous IT firms, such as EPAM Systems and IBA Group, have roots in Belarus. The IT industry was successful thanks to limited government interference and a large pool of highly-skilled professionals.

Despite the favourable business climate, however, the unstable tax system, loosely defined property rights, the government’s capricious behaviour, and Western sanctions are barriers to the Belarusian IT business.

The history of tech innovation in Belarus

During Soviet times, Belarus was an epicentre of technological research and development: Belarusian engineers designed 60 per cent of the USSR’s computers. Once the Soviet Union fell apart, Belarus’s legacy of software expertise and scientific research became the foundation for today’s independent IT entrepreneurial activity. Young programmers kept their small companies away from state control; in some cases they eventually entered the global market.

In 2005, after Lukashenka signed a presidential decree entitled ‘On the High Tech Park’, Belarus got its own version of Silicon Valley. The establishment of the High Tech Park has done much to foster the development of information and communication technologies (ICT) in Belarus, producing computer services for export. With simplified regulations regarding hi-tech business and taxation, Belarus became one of Europe’s main outsourcing destinations, competing with other East European countries.

Given the overall economic decline, the authorities see the IT industry as a potential solution to the Belarusian economy’s woes, leading them to promote Belarus’s self-branding as an ‘IT country’. Meanwhile, foreign clients choose Belarus because it’s IT services are high-quality and cost-efficient. Although Belarusian developers charge more than South-East Asian ones, they still demand less in wages than West Europeans and Americans; they are thus among the cheapest IT specialists in Eastern Europe. Foreign enterprises make Belarus’s IT market grow, currently contributing 1.5 per cent to the GDP; this number is expected to rise to 4-5 per cent by 2020.

During Lukashenka’s visit to HTP in March 2017, the president asserted that the state would continue to assist the IT sphere in legal and other aspects. Besides state investments, the ICT sector is growing mainly thanks to limited governmental control and relaxed taxation. The 2005 presidential decree exempted High Tech Park companies from corporate and profit tax payments, and HTP residents from custom duties. Additionally, HTP residents receive special rent and insurance rates, pay a fixed 9 per cent income tax instead of the usual 13 per cent, and receive the benefits of the Social Security Fund despite earning above average salaries (BYN 777 or $420 in April 2017).

Nevertheless, the IT industry remains vulnerable to the whims of the authorities. For instance, in March 2017, Lukashenka dismissed Valiery Capkala, HTP’s former head, with no explanation. One version suggests that Capkala did not aim at deploying the IT sector fully in favour of the Belarusian economy. If such incidents occur more often, they may negatively affect the IT investment climate, creating uncertainty among potential investors.

Young and well-educated IT talents

IT-sector growth became possible thanks to the huge IT talent pool. Despite the many issues in the Belarusian education system, it maintains a focus on mathematics, hard sciences, and logical thinking. Around 16,000 STEM students graduate from 54 universities every year, 4,000 of which are IT specialists. Because the IT sector guarantees a well-paid job, admissions for IT degrees are highly competitive. For example, the admissions rate for the Information Systems and Technologies degree at Belarusian State University of Informatics and Radio-electronics (BSUIR) reached 7.3 people per place in 2016; 373 out of 400 applicants had a passing score.

Therefore, most Belarusian IT students have deep knowledge of their subject and participate in numerous national Olympiads and international competitions. For example, Belarusian sport programmer Hienadź Karatkievič won the Google Code Jam competition three times in a row in 2014-2016, breaking the world record. What’s more, Belarusian students won several prizes in the IEEEXtreme competition, International Mathematics Competition, and Informatics Olympiad. Such results demonstrate the high level of technical and scientific knowledge that allows Belarusian programmers to compete with their rivals from Western countries.

It comes as no surprise that many IT firms maintain close contacts with Belarusian universities, providing special trainings for students, taking on interns, and hiring recent graduates. These graduates constitute 11 per cent of IT employees, while one third have a 7-year working experience. Thus, with an average age of 28.6, young people dominate the Belarusian IT industry and enjoy a standard of living several times higher than the national average.

Local product development, geography and mentality

Localised product development also contributes to Belarus’s self-branding as an IT country. Recently, the mobility company Gett acquired the Belarusian start-up Juno, while document management startup PandaDoc scored $15 million of investment. Other examples of famous Belarusian IT projects include MSQRD, one of the top 2016 iPhone apps, popular messaging service Viber, the video game World of Tanks, and the mapping service Maps.me.

In some cases, Belarusian emigrants contribute to IT growth by bringing leading software enterprises back to their home country. This was the case for Arkadź Dobkin, who opened multiple franchises of his company EPAM Systems and began collaborations with local universities to train and recruit students. EPAM, together with IBA Group and Wargaming, are perennially at the top of the list of Belarusian IT companies.

Finally, the geographic location of Belarus makes it attractive to IT companies, which prefer physical proximity to outsourced personnel. What’s more, Belarusians are more familiar with the Western mind-set, and have no trouble adapting to company etiquette. Belarusian IT specialists have earned a reputation for being hard-working, tech-savvy, mobile, and eager to be relocated if necessary.

Whether the Belarusian IT industry will keep growing depends primarily on the demand for Belarusian software services and custom development from international clients. Unless the government puts more pressure on the IT sector, Belarus will probably see more foreign tech enterprises coming.

Nevertheless, these companies still opt for registration abroad to avoid economic vulnerability and political risks. This demonstrates a lack of confidence in Belarus’s business environment, which may lose its attractiveness once HTP’s privileges come to an end in 2020.

This article is a part of a series of publications on IT sector in Belarus supported by VP Capital.




Privatization: one step forward, two steps back – digest of the Belarus economy

On 4 May 2017 Belarusian president Alexander Lukashenka declared that Belarus plans to gain approximately $50bn in exports off goods produced in the Great Stone industrial park.

Meanwhile, on 3 April 2017, Moscow and Minsk resolved all their disputes in the oil and gas sector.

On 18 April 2017, Belarusian prime minister Andrey Kobyakov announced that the Belarusian economy has avoided recession, with 0.3 per cent GDP growth in the first quarter of the year.

Privatisation: standby mode

On 21 April 2017, the authorities once again announced that state-owned enterprises (SOEs) would not be privatised in the near future.

However, for the IMF, privatisation of major SOEs is a key condition if Belarus wants to receive a new credit line (worth approximately $3bn). More precisely, the IMF wants Belarus to prepare approximately 10 SOEs for pre-sale. The government has so far failed to begin any stage of this process.

Although the official list of state enterprises up for sale in 2017 includes 38 joint-stock companies, almost nothing has been transferred into private hands – neither auctions nor tenders of sale for the SOEs have been declared so far. The Belarusian government insists that this is due to lack of interest from potential investors.

This is unsurprising, as many SOEs are in a difficult financial position due to high credit indebtedness (see Figure 1). According to the National Bank of Belarus, at the beginning of 2017 the debt load of the real sector exceeded its monthly revenue by 3.2 times. These SOEs, suffering from chronic debt and a failed business model, have proved impossible to sell as whole business entities.

As a result, on 21 April 2017, Lukashenka stated that privatisation is unrealistic, essentially ending discussion about the fate of the largest SOEs.

Instead, the Belarusian authorities want to attract foreign investment. Each regional governor has been ordered by the president to bring in no less than $100m in investment each year. However, the Belarusian economy remains unattractive to foreign investors, which is reflected in the reduction of foreign direct investment in 2015 and 2016.

The oil and gas dispute: finally resolved

On 3 April 2017, Belarus and Russia resolved their longstanding oil and gas dispute and signed the corresponding documents on 13 April 2017.

As a result, Russia agreed to increase oil supplies to Belarus to up to 24m tonnes and sell gas to Belarus at a discount. Over the next year, the price of Russian gas for Belarus will fall to $129; in 2019 the price will decrease even more. Nevertheless, experts are dubious that the pursuit of a unified gas market by 2025 will encourage Russia to supply Belarus with gas at domestic prices.

According to the Scientific Director of the IPM Research Center, Irina Tochitskaya, if Belarus paid Russian gas prices, all other countries in the Eurasian Economic Union would insist on similar discounts. This would be a significant loss of income for Russia.

In turn, the Deputy Chairman of the Belarusian Scientific and Industrial Association, Georgy Grits, admitted that according to the agreement, independent gas operators would be able to sell gas to Belarus, not just Gazprom. However, if this were the case, the stock market would determine the price of gas, precluding preferential conditions for Belarus.

What's more, he also noted that the gas transportation system in Belarus belongs to Gazprom. Therefore, it would be difficult to deliver gas from independent operators without agreements with Russian authorities.

Thus, the dependence of Belarus on Russian gas supplies will only increase, guaranteeing new tensions in the oil-gas sector in the near future.

Economic growth: first time in 24 months

For the first time in two years, the Belarusian GDP has grown. According to the National Statistical Committee of Belarus, in January-March 2017 GDP growth reached 0.3 per cent year on year (see Figure 2).

On 18 April 2017, Belarusian Prime Minister Andrey Kobyakov stated that the economy was gradually recovering from an economic downturn and is on track for its forecasted targets, which include 1.7 per cent GDP growth. However, the authorities' optimistic forecasts are largely dependent on growth of oil refining and export of petroleum products.

Meanwhile, the IMF and the World Bank still predict that the recession in Belarus will continue. The Russian bank Sberbank has stated that given sluggish economic growth, the recession in Belarus will end only in 2018.

The considerable volume of foreign debt payments for the current year, the prolonged reduction in real household income, the limited effectiveness of monetary policy (due to high level of dollarisation in the economy), and the lack of significant resources for the state budget to finance its investment programmes all constrain possibilities for further growth.

Independent experts maintain a similar position, adding that the Belarusian GDP needs to improve by 7 per cent just to return to its 2014 level (in Belarusian constant prices).

According to the head of the analytical centre Strategy, Leonid Zaiko, if we compare dollar equivalents, the GDP must grow by nearly 40 per cent (from $47bn up to $76bn). Thus, he concludes that even with a 4 per cent growth per year, the economy will need more than ten years to return to its 2014 level.

All in all, it seems that the past two years of recession have not shaken the official economic policy of the last two decades. The authorities still rely on the public sector and oil revenues. Meanwhile, the lack of progress in privatisation limits Belarus's investment appeal and hinders further prospects for sustainable long-term growth.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)




Minsk wants China’s help countering Russian and Western pressure

Next month, Belarusian leader Alexander Lukashenka will head for China. While he remains isolated in the West, this will be his tenth visit to Beijing. Addressing the Belarusian parliament on 21 April, Lukashenka gave much attention to Belarusian-Chinese relations and Belarus's key role in the Chinese 'Silk Road' project.

Political contacts between the countries look excellent. On 17-18 April, Zhang Dejiang, Chairman of China's National People's Congress, the third-highest ranked member of the Chinese government, visited Belarus. On 10-11 April, Guo Shengkun, Chinese Minister of Public Security, also came to Minsk.

Economic relations, however, have been somewhat rocky. The trade balance remains hopelessly unfavourable for Belarus. Even the pet project of the Belarusian leadership – a joint industrial park near Minsk – remains almost empty.

Chinese money for Belarus

Lukashenka is taking every opportunity to meet with Chinese leaders. In September 2016, he paid a full-scale state visit to Beijing. Not much later, on 14-15 May, the Belarusian leader will attend the international forum of 'One Belt, One Way' (the Silk Road project) in Beijing.

For Minsk, contacts with Beijing are a useful tool in its complicated balancing act between the West and Russia.

For instance, talking on 20 April to Valeriy Shantsev, the governor of Nizhni Novgorod Province in Russia, President Lukashenka lashed out at the 'fabrications' in the Russian media concerning Belarusian-Russian relations, and made ambiguous hints talking about China's role. According to him, speaking about credit loans granted by foreign countries to Belarus:

It is not Russia which holds the first place on these matters, the first place belongs to the People's Republic of China. It provided us with a credit line of about $15bn for projects to be implemented in Belarus, we have not yet used it in full. Most importantly, they do not reproach us for helping us.

Persuading the Chinese to buy Belarusian

Meanwhile, Belarusian officials have publicly articulated several problems with Belarus-Chinese economic collaboration. Belarusian prime minister Andrei Kabyakou, meeting the Chairman of the Standing Committee of the National People's Congress of China Zhang Dejiang, stressed: 'It is now time to bring our economic relations to as high a level [as political relations].' President Lukashenka told the visiting Chinese official more bluntly that he was 'very concerned' because of the lack of balance in bilateral trade.

For more than a decade, Belarus has suffered from a huge trade deficit with China. Belarusian and Chinese officials have discussed the problem on numerous occasions and it has been a subject of public discussion at least since 2015. Nevertheless, there have thus far been no results. Thus, last year the value of Belarusian commodities export to China made up $468.3m, while imports reached $2,114m.

The widely-publicised Belarusian-Chinese joint industrial park project near the Minsk airport perfectly illustrates the difficulties which persist in bilateral relations.

An empty park

At a press conference on 14 April, Chairman of Minsk Province Executive Committee Syamyon Shapira acknowledged existing problems in attracting companies to the Great Stone Belarusian-Chinese Industrial Park.

So far, just eight firms have registered there. As of mid-April, only three Chinese firms have started constructing their factories there.

Shapira even went to China in early April to look for solutions to the Park's problems. Although he admits that 'there are not many businesses eager to come [to the Park]' he promptly assured 'there is no catastrophe.'

However, the situation is highly precarious, as the case of Weichai Power – a major Chinese engine-manufacturing company – demonstrates. Last October, Belarusian industry ministry Vitali Vouk announced that Weichai Power signed a memorandum with Minsk regarding joint production of its diesel engines at Great Stone Park.

If implemented, the project would have brought significant gains to both countries. Belarus expected the new joint production line to give a boost to major national enterprises like Minsk Motor Plant (MMZ) and Minsk Automobile Plant (MAZ). China obviously wanted access to the markets of the Eurasian Economic Union.

However, on 19 April, the Russian daily Kommersant reported that the Chinese were considering another option – organising a joint venture with the Russian KamAZ. According to the Russian newspaper, Weichai Power's project in Belarus had failed to take off.

Representatives of the Great Stone Park administration immediately refuted these claims and insisted that the project was advancing. The next day, the Belarusian embassy in Beijing quoted a representative of Weichai Power saying that the firm was sticking to its plans to launch production in Belarus. Moreover, according to him, Weichai Power's joint project with KamAZ would not impact Weichai Power's cooperation with the Belarusian MAZ, a long-time rival of KamAZ.

At any rate, Weichai Power is still not on the list of companies registered in the Park. What's more, given earlier criticism of the idea to establish a joint production of Chinese cars in Belarus by Russian ambassador Aleksandr Surikov, this story looks very much like another case of Moscow's interests colliding with Minsk's.

The 'Chinese Caterpillar' helps Belarusian MAZ

Minsk can certainly boast some achievements in its cooperation with Beijing. Listing the recent economic achievements of Belarusian-Chinese relations on 15 April, Belarusian deputy prime minister Uladzimir Syamashka highlighted the construction of three cement factories (total investment volume – $1.5bn), two power plants ($800m), and BelGee, a soon to be launched car-manufacturing joint venture ($360m) implemented with Geely, a Chinese automotive manufacturing company.

The Great Stone project is – however slowly – advancing, too. Thus, on 15 April, the construction of a $45m-factory for the Chinese Zoomlion corporation started in the Park. Zoomlion is a large Chinese firm manufacturing construction machinery and sanitation equipment or, as Financial Times put it, 'China's answer to Caterpillar.'

Zoomlion has already founded a joint enterprise with Belarusian MAZ, and the two firms plan to instal Chinese equipment and machinery on a Belarusian MAZ chassis. The Chinese reportedly have plans for two production sites in the country: in the Great Stone Park and in an existing plant in Mahilyou.

Cooperation with China remains a challenge for the Belarusian government. In the early 2010s, some oppositional activists, experts, and various media sources made gloomy predictions about possible massive Chinese settlement in Belarus by means of the Great Stone Park. These proved baseless, as the park, like many other Belarus-Chinese enterprises, suffer from the opposite problem: lack of Chinese interest.

Political relations prove to be difficult to translate into economic cooperation. By cooperating with China, Minsk could advance its neutrality model masked as 'multi-directional' foreign policy, yet the Belarusian economy sets limits for how far this policy can go. And it is the Belarusian economy which the Chinese are most hesitant about. Minsk hopes that in the future this can change, as China becomes a global power.




Belarus – Turkmenistan: the end of a success story?

On 30-31 March, talks were held in Ashgabat between Turkmen president Gurbanguly Berdimuhamedov and his Belarusian counterpart Alexander Lukashenka.

The launch of the $1bn Garlyk potash fertiliser plant which Belarus built in the country differentiated this encounter from other such annual meetings between Turkmenistan and Belaurs.

The economic cooperation and training of Turkmen students in Belarus remains the only thing keeping the two countries' relationship afloat. Will it survive the end of a huge construction project and the continuing fall in trade turnover?

‘Belarus's most strategically important partner’

In Ashgabat, Alexander Lukashenka has traditionally tried to sell Belarus as a ‘reliable foothold… in the centre of Europe'. However, his Turkmen host has shown little enthusiasm for this generous offer.

During the visit, Belarus and Turkmenistan signed a number of non-essential documents, mostly on cooperation in education. The leaders of the two countries also inaugurated a complex of Belarus embassy buildings in Ashgabat.

According to Alieh Tabaniukhou, Belarus’s ambassador in Ashgabat, his country sees Turkmenistan as the ‘most promising market… and Belarus's most strategically important partner in Central Asia’. This is quite an intriguing statement, as Turkmenistan does not even belong to the Eurasian Economic Union, unlike two other Central Asian nations, Kazakhstan and Kyrgyzstan.

Relations ‘on hold’ during the Niyazov era

Belarus and Turkmenistan, despite having been 'sister republics' in the former USSR, established their diplomatic relations only in 1993, more than a year after the break-up of the Soviet empire.

During the first fifteen years of the two countries’ independence, their relationship remained limited and occasionally strained. Lukashenka visited Turkmenistan only once, in 2002. Turkmenistan’s president-for-life Saparmurat Niyazov failed to show up in Minsk on a bilateral visit.

It took Belarus eleven years to open its embassy in Ashgabat. Belarusian citizen Ilya Veljanov, an ethnic Turkmen with virtually no ties to his country of origin, served as Turkmenistan’s ambassador to Minsk in 1994 – 2007.

Only after Niyazov’s death in 2006 did bilateral relations begin to improve more steadily. Since 2009, Lukashenka and his new Turkmen counterpart Berdimuhamedov have established an extremely regular pattern of meetings. The Belarusian leader comes to Ashgabat on every odd year and hosts his Turkmen counterpart in Minsk on every even year.

Trade and training: two pillars of relations

Relations with Turkmenistan are of little value to Belarus when it comes to political, security, or cultural issues. Thus, Minsk has focused heavily on trade and economic cooperation with the fast-developing Central Asian nation, which also boasts the world’s fourth-largest natural gas reserves.

During the last seven years of Niyazov’s rule, the bilateral turnover fluctuated between $3.6m and $46m per year. A steady growth began in 2009, the year of Lukashenka’s first post-Niyazov visit to Ashgabat, before attaining the peak in 2013, $320m.

Belarusian officials tend to blame the abrupt fall of Belarusian exports in 2014-2016 on Turkmenistan’s decreased gas revenues. However, during these crisis years the Turkmen economy remained among the fastest-growing in the world, with 10.3% growth in 2014 and 6.5% in 2015.

Meanwhile, the sales of Belarusian trucks to Turkmenistan dropped from 1031 units in 2013 to 203 units in 2015, tractor sales fell from 500 to 437 units, and special purpose motor vehicles from 589 to 33 units. The loss of export revenue for these three positions only amounted to $126m.

Sales of ethyl alcohol, road and agricultural machines, trailers, and some construction equipment and materials also suffered greatly. Belarusian exports continued to fall in early 2017.

Imports of Turkmen goods to Belarus remain quasi-nonexistent. They largely comprise cotton and cotton products, petroleum products, and preserved tomatoes.

Another major source of profit from cooperation with Turkmenistan is the education of its youth in Belarusian universities. Currently, 7,911 Turkmen students (a 5% decrease from the peak academic year of 2014/2015) are pursuing higher education in Belarus – over half of the total number of foreign students in the country.

Belarusian universities and technical colleges often turn a blind eye to the inadequate preparedness of many Turkmen students for higher education, caused by the desolate state of the country's schools. During each exchange of highest-level visits, the universities sign several new partnership agreements.

Major construction project finally over

Lukashenka and Berdimuhamedov attended the launch of the Garlyk potash fertiliser plant built by the Belarusian consortium Belhorkhimpram as the prime contractor.

Some Belarusian pundits had criticised the government’s decision to build a potash fertiliser plant in Turkmenistan, arguing that Belarus was creating a competitor for itself in fertiliser sales. On the top of everything, Turkmenistan is situated much closer to India and China, Belarus’s main markets for potash.

However, Berdimuhamedov confirmed during his talks with Lukashenka that Turkmenistan was ready to become a partner to Belarus in supplying its new commodity. Besides, if Belarus would have refused to build the plant, another contractor would have happily snapped up this lucrative construction project.

The plant, which is worth over $1bn, and is capable of producing up to 1.4m tonnes of fertiliser per year, has become the flagship project for Belarusian-Turkmen cooperation.

The two leaders laid the plant’s foundation stone on 19 June 2009, during Lukashenka’s first post-Niyazov visit to Turkmenistan. The parties signed the formal contract in early 2010. However, actual construction work started only in late 2011.

‘Despite all the drawbacks, I think we have not let down the Turkmen people,’ Lukashenka said during the opening ceremony, without elaborating on their nature. Indeed, the plant was launched two years later than the original deadline.

In September 2016, disagreements between the contracting parties went public. Belarus said that Turkmenistan had failed to honour its financial obligations under the project. Turkmenistan accused Belarus of seriously lagging behind the construction schedule and failing to supply the remaining equipment.

Berdimuhamedov told Lukashenka about his plans to build two more potash plants in the country. However, Turkmenistan’s reluctance to immediately attribute these contracts to Belarus may be a sign that the Central Asian nation was not fully satisfied with Belarus’s performance in the Garlyk project.

In 2014, Mikhail Miasnikovich, the then prime minister of Belarus, set an objective of achieving a $1bn turnover with Turkmenistan within the next three to five years. The latest developments in bilateral trade make this figure look utterly unrealistic.

The Belarusian government needs to obtain new large-scale construction contracts and reverse the negative trend in the sale of machinery to Turkmenistan. Otherwise, the turnover risks declining to negligible figures, which is the case for Belarus's trade turnover with Kyrgyzstan or Uzbekistan. The solidarity of the two autocratic presidents-for-life will not be of any help there.