Are Belarusian Authorities Ready For Market Reforms?

On 3-4 November three biggest Belarusian economic think-tanks organised the Kastryčnicki Ekanamičny Forum (KEF) conference in Minsk. The third annual economic conference gathered a number of high-ranking Belarusian and foreign experts, and representatives of international institutions like the IMF and the World Bank.

During Lukašenka's rule there has never been as many talks about implementing structural reforms in Belarus as this year. In 2015 virtually all the policy-makers responsible for economic policy advocated economic reforms.

It seems the authorities have realised that reforms are unavoidable. However, they cannot agree on the actual range of reforms and the speed of their implementation.

Why Reforms Are Unavoidable?

The Belarusian economy faces a systemic crisis. The decomposition of economic growth shows that the potential for economic long-term growth has steadily fallen from around 9% annually in the mid-2000s to around 0% in 2015. The deterioration of the external environment, mainly low energy subsidies and the recession in Russia, has only exposed structural weaknesses. As a result, Belarus has been experiencing its first recession since 1996.

The IMF and the World Bank have forecast a further recession or stagnation in Belarus in 2016-2017. Facing unfavourable external factors, the economy can no longer generate sustainable growth. Even the ministry of economy expects the economy to grow by only 0.3% in 2016. Given that in the past several years the official forecasts exceeded actual growth by 5.1 percentage point per year, the future seems indeed miserable.

The negative prospects of the Belarusian economy have forced officials to recognise the need for deep economic restructuring. Already in April 2015 the President's economic advisor, Kiryl Rudy, wrote a paper in the Belarusian Economic Journal on “Structural economic reforms: necessity for the Republic of Belarus and international experience”. Rudy focused particularly on why the present structure of the Belarusian economy needs reform, and what are the lessons of transition in post-socialist countries.

Noticeable Change In Public Rhetoric…

Already at the end of 2014 many Belarusian officials started discussing the topic of economic reforms. On 26 November 2014 the deputy minister of finance Maksim Jermałovič announced that:

“We are actively discussing these issues with the International Monetary Fund and the World Bank, to develop a common vision, and possibly to organise a joint programme of structural reforms in Belarus.”

In April 2015 the government and the World Bank confirmed the readiness to work together on “the roadmap of structural reforms”. Since then Minsk has discussed the initial roadmap with the IMF and the Eurasian Development Bank (EDB) in order to obtain new financing.

In the meantime, many other influential policy-makers in Belarus have expressed their positive attitudes towards reforms. Among them were, the Prime-Minister Andrej Kabiakoŭ, the Chairman of the Council (the parliament) Michail Miasnikovič, the Deputy Minister of the Economy Dzmitry Krutoj. Since political will is the essential precondition for successful reforms, such a change in public statements has drawn attention.

Moreover, during the 2015 presidential campaign Lukašenka announced a relatively liberal economic programme. It included, for example, the de-monopolisation of the economy; the introduction of corporate governance in state-owned enterprises based on best international standards; the separation of the state’s role as an owner and a regulator; the exclusion of any forms of needless interference in business activities; and a moratorium on tax increases for five years.

Unlike the previous four economic election programmes, however, this time Lukashenka did not advocate populist slogans but focused on problems encountered by the real sector of the economy and he proposed the right solutions.

But Little Change In Structural Reforms

2015 becomes a ground-breaking year in terms of the economic policy conducted in Belarus. Despite the recession and the presidential elections, the authorities have carried out sound monetary and fiscal policy throughout the whole of 2015. For instance, regardless of a 30% devaluation of the Belarusian rouble at the end of 2014, inflation fell from 17.1% in January to 11.5% in October 2015. Additionally, the economy's foreign debt decreased by $2 billion during the first half of 2015.

Apart from economic stabilisation, so far the Belarusian authorities have introduced very few meaningful measures aimed to boost long-term economic growth. They lack agreement on the scope of the market transition. For some policy-makers (mainly the President and almost the whole government), the economy needs only some adjustments. But for others (mainly the National Bank of Belarus, the Ministry of Finance and the Ministry of Economics), only a profound transformation will let Belarus catch up with the advanced economies.

At the KEF the Deputy Head of the Presidential Administration Mikalaj Snapkoŭ mentioned two structural reforms crucial for a successful transition: the division of the state’s function as a regulator and as an owner, and the shift to indicative economic forecasting instead of compulsory forecasting. Although these are important issues, they miss the basics like the equal treatment of private and state-owned entities (SOE), SOE restructuring, further deregulation and privatization.

At the same conference Kiryl Rudy explained without optimism why Belarus may avoid the reforms in 2016. He revealed five barriers that prevent the regime from making structural reforms, including an absence of broad public support for reforms and the absence of a comprehensive vision among the political elite.

Cosmetic Changes Instead Of Real Reforms

At the KEF the first deputy minister of the economy Aliaksandr Zabaroŭski announced the six priorities of the roadmap. Half of them focused on supportive measures for reforms (like macroeconomic stability, the formation of effective financial markets and the development of the labour market). The second half sounded like true structural reforms (the state sector transition, development of the private sector and liberalisation of the markets for goods and services).

Nonetheless, with insufficient political will for reforms, their implementation may end up as merely cosmetic changes allowing for additional financing from the IMF or the EDB. However, creditors will monitor the progress of reforms before the payment of each tranche. Therefore, avoiding any reforms is out of the question.

Unfortunately, the long-awaited “roadmap of structural reforms” did not emphasise the most urgent and necessary reforms. Surprisingly, it took Minsk almost a year to make the roadmap public. It shows that the authorities are not ready for large-scale market reforms. But the slow and partial structural reforms appear inevitable.

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Belarus Finally Reforms Its Economy?

On 26 September in New York, Alexander Lukashenka met with IMF chief Christine Lagarde. They discussed prospects for an IMF-supported programme.

According to the IMF statement “Lagarde welcomed some recent progress in strengthening the policy framework in Belarus, but emphasised that a more comprehensive reorientation of policies, consistently supported at the highest level, is needed to restore stability and sustainable growth”.

In fact, in the current presidential campaign Lukashenka is distancing himself from populism. Moreover, since the beginning of 2015 the Minsk's authorities have consciously conducted a conservative economic policy and slowly introduced structural reforms, despite the recession.

On 27 December 2014 Lukashenka appointed a new government and central bank chief. These new appointments consisted of several moderate reformers with rather liberal views. In contrast to Russia, the Belarusian president took advantage of the current difficult economic situation to change government and economic policy.

Russia’s recession and low energy prices, limit Belarusian exports, as well as energy subsidies from imports of cheap Russian natural resources. Without them the quasi-socialist Belarusian economy does not generate growth. Adverse external conditions will hardly improve in the coming years, and that is why Minsk has no alternatives but to carry out structural reforms.

Conservative monetary policy

The new Belarusian policymakers have been successfully fighting inflation. The National Bank of Belarus (NBB) immediately tightened monetary policy and introduced monetary targeting to curb inflation. The real interest rate, which explains how much the nominal interest rate exceeds annual inflation, is already over 13%. For comparison, in Poland it is currently at around 2 percent. This completely suffices to eliminate any price growth.

The inflation’s slowdown is clear on a monthly basis. In July and August, prices increased by 0.2% per month. Extrapolating such a pace of inflation for the whole year, the annual inflation rate will amount to only 2.5%.

In addition, the NBB successfully liberalised the exchange rate regime. As a result, transparent market conditions have formed the current currency rate, while the regulator has virtually withdrawn from intervening in the market. Finally, the exchange rate has served as an automatic stabiliser for internal and external shocks.

The strong depreciation of the national currency has balanced the country's current account. Since the beginning of 2015 the dollar exchange rate in Belarusian roubles has increased by 50%. As a result, in the second quarter of 2015 the NBB recorded a current account surplus of 4.3% of quarterly GDP, which is highest since the first quarter of 2005. By contrast in the fourth quarter of 2014 the deficit was 9.5% of GDP. The new currency policy automatically avoids high current account deficits which led in 2011 to the worst currency crisis in Belarus in the past 20 years.

Conservative fiscal policy

The current presidential campaign is the first during which the authorities have pursued a conservative fiscal policy. In January-August 2015 the public sector surplus debt amounted to $1 bn (2.7% of GDP) which facilitated servicing the public debt.

The government maintains a simple principle: wage growth should not exceed labour productivity growth. In January-August 2015 real salaries fell by over 3% or 0.5 p.p. more than productivity. Thus, unit labour costs declined and became an anti-inflationary factor.

Since 2012 Minsk has managed to control its growing foreign debt. In relation to GDP external debt fell from 58% at the end of 2011 to 55% on 1 July 2015. Last year debt decreased also in absolute terms, by around $3 bn. This is a fundamental change compared to 2007-2010 when the government stimulated economic growth by foreign loans.

Structural Reforms Implemented

Besides stabilising the economy, simultaneously the government conducts structural reforms, including restructuring state-owned industrial enterprises. Despite the elections, employment in the largest industrial factories decreased by around 10 percent.

For example, Minsk Automobile Plant “MAZ” and Minsk Tractor Works “MTZ”, the two biggest employers, employed over 2 thousand (10%) and 2.7 thousand (14%) people less in the first quarter of 2015 than a year before. Even the potash factory “Belaruskali”, the third largest employer and the most profitable company, fired 1.5 thousand (8%) of its employees. In fact, the authorities recommend or at least allow management boards to downsize industrial enterprises quicker than the whole economy.

Some state-owned companies plan to accelerate the privatisation of redundant assets. Currently, the State Property Committee offers more than one thousand properties for sale. Auctions for some of them are assigned for the coming weeks. However, despite the private sector’s demand for free commercial space, asset privatisation has not been carried out on a broad scale and is currently very slow.

The authorities occasionally decide to liquidate unprofitable industrial enterprises. For example, in August 2015 a court ordered the liquidation of a hosiery factory called “KIM”. Only two years ago the company, founded in 1931, employed more than 900 people.

Besides restructuring enterprises, the government has limited direct lending to the produce sector and planned to depart from future planning initatives. According to the independent news agency BelaPAN, the resolution’s draft, approving the prognostic parameters for 2016 departs from the compulsory nature of the forecasts and grants them only an indicative character. In other words, the state will not interfere with a firms’ production and financial processes in order to “accomplish” forecasts.

Moreover, Minsk has announced ambitious plans for further reforms. Earlier this year Belarus developed with the World Bank “a road map of structural reforms”. In accordance with this, Minsk has already adopted a plan of radical increases in tariffs for household servicing.

International recognition

The new economic policy in Belarus has been gaining recognition from international organisations. The last IMF mission to Minsk in the first half of July praised the conducted economic policy and plans for structural reforms. The IMF assured the regime that if such a policy is continued, negotiations on granting a new IMF loan may be successfully finished by year-end.

To conclude, since the beginning of 2015 the new Belarusian economic policymakers have been conducting a conservative economic policy. As a result, the economy regains balance, after being hit by external shocks in the second half of 2014 and the first half of 2015. In these circumstances, Minsk has taken unpopular reforms, such as firms’ downsizing, the sale of idle assets, and the liquidation of some enterprises.

These reforms, in fact, are rudimentary and slow. Hence, they cannot bring immediate success. One hopes the reform will continue after the presidential campaign. Finally, Lukashenka reforms the economy not because he wants it, but rather because he has no choice. If external factors do not improve, perhaps at last the authorities will implement the changes that should have been implemented in the 1990s.

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Why Belarusians Stay Away from the Belarusian Rouble

On 16 September a new regulation of the National Bank of Belarus on currency transactions came into effect. It forced all consulates in Belarus to suspend their activities for a few days in order for them to invent new ways of collecting payments from clients.

This is how Minsk attempts to limit the dollarization of the economy. Instead of fixing its monetary policy, the Belarusian government prefers to rely on administrative tools and introduc​ing new restrictions on economic transactions.

These efforts will hardly increase trust in the Belarusian rouble, however.

The Story Of Continuous Devaluation

The Belarusian rouble has been depreciating dramatically throughout its history. Since regaining independence, Belarusians have experienced countless devaluations. The most sever devaluation occurred following the Soviet collapse in 1991. Since the USSR's authorities prohibited keeping international currencies, people remained unprepared for the hyperinflation of the early 1990s. Th​is period wiped out most people's savings in just a few months.

Since then the Belarusian rouble has never been a stable currency. Although all the post-socialist national currencies depreciated greatly in the 1990s, many became internationally convertible and relatively stable in the 2000s. For example, the Polish zloty appreciated by 10 per cent in 2001-2015. But the success story does not concern the Belarusian rouble which devalued fifteen-fold against the US dollar at the same time (from over 1,100 to under BYR18,000 per $1; figure 1).

Most devaluations of the Belarusian rouble were sharp and unexpected. Only in the past seven years have the Belarusian authorities shocked society three times.

within a few months in 2011 the national currency devaluated almost three times

First, on New Year's Day of 2009 it devalued the currency by 20 per cent. The unpleasant surprise forced many people to buy what they could in anticipation of steep price rises following the devaluation. Since then Belarusians have always met the year-end with certain concerns.

Second, in 2011 the internal currency crisis changed the well-being of Belarusians dramatically. Prior to that the president, the prime minister, and the National Bank of Belarus (NBB) systematically had promised that there would be no devaluation. Nevertheless, within a few months in 2011 the national currency devaluated almost three times, while consumer prices doubled throughout the year. Not surprisingly, Belarusians have become wary about any promises concerning currency stability.

Third, in mid-December 2014, following the 30-percentage devaluation of Russian rouble, the NBB introduced a 30-percent temporary tax on the purchase of foreign currency. Statistically the national currency remained unchanged for a few weeks until the new chief of the NBB, appointed on 27 December 2014, gradually cancelled the tax and devaluated the currency. Since the beginning of 2015 the price of US dollar in Belarusian roubles has risen by a half.

The Belarusian Rouble As Quasi-Money

Belarusian roubles have never served the role of money. An item is money when it serves four basic functions: a store of value, a unit of account, a standard of deferred payment, and a medium of exchange. The national currency has problems with the first three functions. This has led Belarusians to rely on foreign currencies.

First, the past 25 years have taught Belarusians to distrust their national currency and keep savings in dollars or euros. An average Belarusian household and firm puts 60-70 per cent of its deposits in foreign currencies. The structure of deposits illustrates the society and businesses disbelief in the future value of the Belarusian rouble. For comparison, in Poland only 20% of deposits are in foreign currencies.

Second, because of to permanently high inflation, Belarusians have got used to using dollars or Euros as a unit of account. Since 1990 prices have risen by tens or hundreds of per cent per year. That is why many firms and individual traders have preferred to price their goods and services in “hard currencies”. In addition, counting in Belarusian roubles is very inconvenient due to the large numbers. For example, a new Apple MacBook costs around BYR30,000,000 compared to only $2,000.

In the early 1990s, retailers “renamed” dollars to „conventional units”

When the officials banned foreign currency pricing in the early 1990s, the firms “renamed” dollars to „conventional units”. So, when goes go to a bazaar it is easy to spot sneakers or other sport shoes sold for 50-100 conventional units. Until recently one could have used Onliner.by, the Belarusian alternative to eBay.com, to see price of a desired unit in conventional units. Only in late December 2014 did the authorities take Onliner.by off the Internet, refusing to allow it to return until it converted all prices in BYR.

Third, Belarusian roubles hardly serve as a standard of deferred payment. Frequently Belarusian businessmen, freelancer, and NGO representatives strike a deal in dollars and Euros. For example, one can rent a car or book a conference room in Minsk, and agree to pay $200 to the owner. Since payments in foreign currencies are illegal, you pay the equivalent amount in roubles on payment day.

A New Resolution Makes A Little Change

On 16 September the NBB passed resolution no. 515 which introduced amendments to the regulations on currency transactions. The resolution is a part of the NBB​'s de-dollarization policy. The resolution reduces opportunities for foreign currency transactions between firms as well as between firms and individuals. It makes little difference since most foreign currency transactions are already considered illegal.

The NBB announced the regulation a day before it came into effect

Unfortunately, Belarusian citizens have to pay for the authorities' incompetence. This law was passed without consultation with business representatives. The lack of a transition period for firms to prepare for the new regulation hits both the business climate and people's pockets.

The NBB announced the regulation a day before it came into effect. As a result, visa centres and some travel agencies stopped operating for two days in order to adjust their businesses to the new environment. On 18 September, most travel agencies, like Top-Tour, Tury.By, Sunrise Travel, began to accept consular fees in the national currency at the official NBB exchange rate plus 2-3 per cent. They shifted costs to their clients, who are now paying more money for the same service.

The new resolution of the NBB will not make much difference. Belarusians will invent other ways of how to avoid the restrictions. The only efficient way to increase reliance on the Belarusian rouble is to make it more stable. Until annual inflation hits two-digit figures, and significant devaluations happen frequently and unexpectedly, the population will remain sceptical about the national currency.

So far the Belarusian regime's administrative tools remains helpless against the economy's dollarization. The monetary policy of forcing Belarusian roubles on people approach will not work until the NBB focuses on conducting conservative and reliable monetary policy.

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Looking Back at Lukashenka's Fourth Term

On 11 September candidates for Belarusian president officially started their campaigns. From the previous presidential campaign slogan “For independent, strong and prosperous Belarus”, Lukashenka left only “independent”.

In order to buy voters in 2010, Lukashenka embarked on excessive wage growth in the public sector, while exploiting international reserves to sustain the Belarusian ruble. However, this year, given the shortage of resources Lukashenka has to abandon his policy of cheap populism.

Despite promises in 2010, there has been no change in economic freedom, the private sector share in GDP remains at a minimum, and the number of the small and medium enterprises still remains low.

Belarus Moves Away From Populism

Until recently Lukashenka focused his election campaigns primarily on raising living standards. The authorities and society had an unwritten “social contract”. Lukashenka who has ruled the country for over 21 years substituted the lack of political change with a substantial increase in social welfare.

Lukashenka's current fourth presidential term has become his worst

In each presidential campaign since 1994 Lukashenka had vowed to increase the populace's average wage by the end of that presidential term. So far, the economy in 2001 and 2006 delivered the expected outcome with ease, while in 2010 artificial help from the officials was needed. In 2010 Lukashenka promised to raise the average monthly wage to $1,000 by 2015. Yet, in July the average salary fell below the level that was reached by the end of 2010.

For the first time Lukashenka is running for re-election without any commitment to guarantee a certain wage. Unfavourable external conditions and the ineffectiveness of the Belarusian economy, has left the authorities with no sources to boost the economy in the near future. Minsk has simply no extra money to buy voters.

Economic Stagnation Instead Of Bright Promises

Lukashenka's current fourth presidential term has become his worst. In early 2011 the Belarusian authorities forecasted that GDP would increase by 62-68 per cent by the end of 2015. In reality, growth will likely only hit 6 per cent. The discrepancy between the official forecast and the performance of main economic indicators affects all other measurements.

The Belarusian economy faces a systemic crisis. In the period 2001-2008 economic growth amounted to 8.8 per cent annually, while in the period 2009-2015 growth was limited to 1.9 per cent. With such a performance the economic gap between Belarus and the EU, measured by GDP per capita on Purchaising Power Parity (PPP), has remained unchanged for the past five years. That has disappointed many Belarusians who are the absolute leaders in the world on the number of Schengen visas per capita. Through access to the EU, Belarusians can compare the living standards at home and abroad.

Minsk has avoided reforming the economy in the past five years. According to the main national forecasting document, the Socio-Economic Development Programme for 2011-2015, Belarus had to join the Top-30 countries in the world for the ease of doing business by 2015. However, Belarus’ position in the World Bank ranking has barely changed as the table below demonstrates. Despite promises, experts saw no change in economic freedom, the private sector share in GDP, and the share of small and medium enterprises.

The Doomed Future of The Belarusian Economy

During Lukashenka's current term for the first time since 1995 Belarus has experienced a recession. In January-July 2015, GDP plummeted by 4 per cent year-on-year. In addition, the IMF forecasts a minor recession in Belarus in 2016 (-0.1 per cent).

Lukashenka faces rising unemployment, the unpredictability of the automotive industry, a shorter working week in many industrial plants, declining real wages, and currency devaluation by 50 per cent since the beginning of the year. How to solve them remains unclear, and Lukashenka keeps silent about this.

The Belarusian economy in 2015 is more unstable than in 2010. In 2006-2010 the US dollar in comparison to the Belarusian rouble went up by 40 per cent, while in 2011-2015 the currency rate grew six fold. A similar deterioration happened in regards to inflation. Furthermore, Belarus has become more vulnerable to external shocks. The international reserves have decreased while foreign debt has increased.

Light At The End Of The Tunnel

Minsk seems to have learnt a lesson that populism has ruined the economy since the last political cycle of 2010. The new government, elected at the end of last year, has conducted in 2015 quite a reasonable economic policy which has gained positive feedback from representatives of the international financial institutions. Since the beginning of 2015, each IMF mission, the World Bank and the Eurasian Development Bank has praised the new authorities for a responsible economic policy.

On the positive side, the Belarusian government consciously decided to control the economy's total foreign debt. Because of that the foreign debt in terms of GDP has increased insignificantly in the past five years, only by 1.4, from 51.6 per cent. That manifests a profound change in Belarusian economic policy in comparison to the second half of the 2000s when foreign debt increased dramatically.

Belarus still has great potential to benefit from liberal reforms

Belarus still has great potential to benefit from liberal reforms. Privatisation of state owned enterprises and a favourable business climate for establishing new entities could support Belarusian fiscal policy and boost the economy. For example, income from the privatisation of one of the biggest Belarusian company's, Belaruskali, could pay off a half of Belarus's total foreign debt.

The standard of living in the recent 5 years has slightly improved. Suddenly, Lukashenka has stopped declaring any progress in the social well-being in the near future. Deeply rooted traditional statement “if only there was no war” and national security issues has replaced economic rhetoric. The reason is simple: Lukashenka has nothing to boast about since no economic prediction for his current 5-year presidential term has come true.

Although many experts often predict the quick collapse of the Belarusian economy, it still allows for small growth. Yet, in the absence of decisive reforms and low oil prices Belarus could stay in stagnation for coming years. However, the stagnation would not bring immediate political changes since Belarusians have accepted living under state propaganda and are afraid of any revolution after the Ukrainian Maidan in 2014.

Time will show whether Lukashenka goes down in history as a reformer or as the captain of a sinking ship​.

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Why Belarusians Prefer to Shop in Poland and Lithuania?

In July the Ministry of Trade announced a plan to levy a tax on online purchases in foreign shops​. Since then the state agencies have been elaborating the methods that will be used for tax collection. It could become another tool to prevent Belarusian customers from buying abroad, both online and in the flesh.

Earning almost three times less than Poles and Lithuanians, Belarusians often prefer to buy food, clothing, household appliances and many other goods in neighbouring EU countries rather than at home. The reason is simple: foreign shops have a wider variety of goods, which are on average cheaper and of better quality then in Belarus.

Unattractive Belarusian Goods

Lukashenka stated in September 2013 that Belarusians spend approximately $3 billion annually on shopping in EU countries (over 4% of GDP). This is quite a significant number when compared with the fact that each year the authorities struggle to find the necessary resources for the paying back of between $3-4 billion of foreign public debt.

Surprisingly, “richer” Poles are not interested in shopping in Belarus, while “poorer” Belarusians often buy in Poland. In the last five years spending of Belarusians in Poland has more than doubled, reaching just under $1 billion. At the same time, Poles spend around $25 million annually in Belarus. They mainly buy alcohol, cigarettes, and petrol. Although this number does not include the contraband that Belarusian smugglers take illegally to Poland.

Various consumer goods in Poland and Lithuania cost less than in Belarus while their quality is better and the range is wider. This applies to wide variety of goods, for instance, cheese and meat, washing powder and shampoo, jeans and trainers, IKEA furniture and a new iPhone. In addition, in Poland and Lithuania, Belarusians can find the latest products and products with significant discounts. This is something rather rare in Belarus, especially in state-owned shops.

Yet, 25 years ago there was hardly any difference between Poland and Belarus in living costs. Belarusians could go to Poland to buy or sell one type of groceries, e.g. eggs, while Poles could go to Belarus to buy or sell other types of groceries, such as meat. Today Belarus has hardly any good offers to tempt Polish customers. Even worse, it gets harder and harder to interest its own customers.

Shopping In Poland Becomes the “New Normality” For Belarusians

Belarus occupies the first place in the world on the number of Schengen visas per capita. According to the European Commission, in 2014 Belarusians received 880,000 visas, which is 108 thousand more than a year before. These figures do not include holders of the Pole's Card which allows people who claim to have Polish roots the opportunity to visit Poland without a visa.

Four out of five Belarusians declare shopping as the main purpose for visiting Poland, according to the Central Statistical Office of Poland. Moreover, each time Belarusians visit Poland or Lithuania as tourists, on business or to participate in various events, they always visit local shopping malls. Whether they go to Vilnius for a rock concert or to Warsaw airport, they will bring back goods bought in Poland or Lithuania.

The Polish government established a special type of Schengen visa for Belarusians that provides “for shopping”. Malls close to the border can issue invitations for potential customers. The first invitation for a short term visa can be for free with the obligation to spend $70-100 on goods. The next time, VAT invoices which confirm the previous shopping escapade should be sufficient for receiving another visa, which is usually a long term multi-entry visa.

Many Polish and Lithuanian shopping centres close to the Belarusian border organise special offers for Belarusians, like the annual Marathon of the Belarusian Week of Shopping and Recreation in Białystok, the capital of Podlaskie voivodship in Poland. During such weeks, shops and hotels grant Belarusians various special offers and discounts. VAT tax recovery on purchases on the border creates additional incentives for Belarusians to shop abroad.

Białystok’s and Vilnius’ malls actively advertise also inside Belarus. Akropolis and Ozas in Vilnius, the mecca for Belarusian shoppers, hold major advertising campaigns in Belarusian cities.

In Podlaskie voivodship of Poland shopping malls such as Auchan, Ikea, and Leroy Merlin install billboards written in Belarusian language. The shops try to market themselves among the increasing number of Belarusian customers.

Belarusian Government Tries to Limit Shopping Abroad

Belarusians became so active in shopping abroad that Lukashenka presented in 2013 the idea of introducing a $100 fee for Belarusians crossing the border with the EU. As a result of foreign shopping foreign currency leaves the economy putting pressure on the Belarusian rouble. The $100 fee was supposed to limit the negative impact of shopping abroad. However, following a wave of criticism Lukashenka retracted this proposal.

the authorities actively look for ways to tax purchases made online in foreign shops

To encourage Belarusians to shop in their own country on 10 March 2015 the government introduced new restrictions on the import of goods by individuals for private purposes. Now, the new policy allows Belarusians to import various duty-free items such as microwaves, refrigerators, washing machines and computers but they have to prove that they are bought for personal use.

Furthermore, the authorities actively look for ways to tax purchases made online in foreign shops. In late June, the chairman of the upper chamber of Belarusian parliament, Michaił Miasnikovič, revealed a plan to introduce a tax on imported online purchases.

The economic crises makes Belarusians count their money more carefully. Shopping abroad, particularly in big cities near the border with Belarus, has already become a way to save money and to buy better quality goods for many Belarusians. More and more frequently lucky owners of a Schengen visa travel for shopping in Vilnius, Bialystok and Warsaw.

Belarusians will prefer to shop abroad as long as the Belarusian authorities sustain the old ineffective economic system which produces many uncompetitive and unwanted goods. The recent depreciation of the Belarusian rouble will temporarily make imported goods more expensive but the trend to shop abroad is irreversible.

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How Russia's Subsidies Save the Belarusian Economy

On 24 August, the Brent oil price fell to $43, which was close to a 7-year low. Although Belarus has not got its own crude oil, this is terrible news for its economy. The cheaper the oil, the lower are benefits from the energy subsidies to Belarus from Russia.

Over the last 20 years Belarus has maintained, relatively successfully, a quasi-socialist economy mostly thanks to the generous economic aid from Russia. Under Lukashenka’s rule Russia's unprecedented economic support has amounted to a dozen or so per cent of Belarusian GDP annually. But the decline in the world oil and gas prices limits the benefits for Belarus.

The Cheapest Oil And Gas Prices In The Region

Russian subsidies over the last two decades reached around 15% of Belarusian GDP annually

Both government and non-government economists agree that Belarus benefits from a good relationship with Russia. For instance, in 2012 due to favourable energy prices Belarus saved $10 billion or 16% of GDP, according to the Economic Institute of the Belarusian National Academy of Sciences. Using the same methodology would suggest that the average level of Russian subsidies over the last two decades reached the equally incredible level, around 15% of Belarusian GDP annually.

Belarus has the lowest gas price in the region, apart from Russia itself. Until 2007 the gas price was three-to-five times cheaper than for Poland. Then, Russia gradually raised the price for Belarus while still offering Belarus the best deal in the region. In 2014 gas for Belarus cost $170 per 1,000 m3 which is 55% less than for Poland. If Belarus were to pay the market-based price similar to the one Poland pays it would cost it almost $4.2 billion more or 5.5% of its GDP.

In addition, Belarus takes advantage of duty-free oil for its own needs, saving another one or two billion dollars annually. For example, in 2014 Belarus bought one ton of crude oil for $395, only 55% of the average world price, which meant over $2 billion of savings (2.7% of GDP) throughout the year.

Decreasing Grant From Petroleum Products

With hardly any oil resources inside the country, Belarus belongs to the Top-10 net exporters of petroleum products in the world, according to the International Energy Agency. Until 2007 Belarus imported duty-free crude oil at a price close to the Russian domestic one and processed it at its two refineries. Belarus used a third for domestic needs and exported the rest to the West at market prices. This profit added several billion dollars a year and boosted the ineffective economy.

When the Kremlin wishes some concessions from Lukashenka, it often engages its energy leverage. Since 2007 Russia tried to conduct more market-oriented economic relations with Belarus in the oil trade. In 2007-2010 Belarus had to pay approximately 30% of the duty applied to other recipients of Russian crude oil. It was the first time when the energy subsidies shrank.

In 2011 Russia obliged Belarus to transfer to the Russian budget export duties on petroleum products made with Russian oil and exported outside the Customs Union. To sweeten the pill Belarus again could import duty-free crude oil. Yet, in 2011-2014 Belarus transferred to the Russian budget $2.9-3.8 billion of these duties annually. This is quite a lot when compared to the pre-2007 period, when Belarus paid no duties at all.

At the signing of the Treaty establishing the Eurasian Economic Union in 2014, Russia agreed to keep $1.5 billion of petroleum products' duties in the Belarusian budget in 2015 and perhaps more in 2016.

Subsequently Russia introduced tax reform to increase internal tax on extracted oil and lower export duties on petroleum products. As a result, Belarus would pay approximately one billion dollars more for imported oil while potential future gains from leaving duties on exported petroleum products in Belarus would decrease.

The Brilliant Inventions Of Lukashenka

In exchange for generous energy subsidies, Lukashenka vows to strengthen political integration between the two countries, which can be seen as paying Russia back. Yet often he has withdrawn his promises and Russia still tolerates his behaviour. After all, Russia does not have that many friends in the world these days.

In a challenging situation Lukashenka almost always finds a way to cool the Kremlin's economic pressure. In 2010-2012 he surprised his Russian colleagues by importing oil from Venezuela and Azerbaijan. Both initiatives lacked economic sense but they strengthened Minsk's bargaining power against Moscow.

Semi-legal exports of so called solvents and thinners counts as another excellent scheme. In 2011 and the first half of 2012 Belarus traded Russian petroleum products under the guise of goods which remained duty-free according to intergovernmental agreements. As a result, the Russian budget lost about $3 billion in duties. In the second half of 2012 Russia forced Belarus to curtail this “business”.

No other country or regional union could give to Belarus as much as Russia

Recently, Belarus has also taken the opportunity of the Russian food product embargo on Western countries, delivering "Belarusian" shrimps, "Belarusian" salmon, "Belarusian" Parmesan and many other goods exported from the West to Russia under the "Belarusian" brand.

No other country or regional union could give to Belarus as much as Russia. To compare, the net direct gains of Poland from the EU in 2004-2014, included structural funds, add up to around three per cent of GDP annually. It is five times less than Russian energy subsidies to Belarus in the same period. Nevertheless it is Poland that grew faster.

Minsk Hangs On Tightly To Moscow

The Belarusian authorities drive a hard bargain, ensuring cheap energy resources, positive duty-free trade, and preferential credits, for little in return. Discounted energy resources from Russia have provided competitiveness to the Belarusian economy for the last two decades. Only in 2014, the energy subsidies for Belarus, resulted from discounted prices on gas and duty-free oil for own needs, climbed to over $6.2 billion or 8.1% of GDP.

Unfortunately, having a permanent energy grant, the Belarusian authorities did not even think about reforms. Previously, they could reach out for more help and find convincible arguments for the Big Brother to give another discount.

However, plunging oil prices automatically leads to significant reduction in the Russian energy bonus for Belarus, since the difference in price for Belarus and the rest of the world decreases. With no exceptional resources it will be challenging for Lukashenka to keep the ineffective economy alive.

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Russian Loans for Belarus: Postponing The Transition

On 28 July Belarus received a long-awaited loan from the Russian government worth $760 million. This was just in time to transfer the funds to the pockets of other borrowers – on the same day Belarus was due to pay $1 billion to the 5-years Eurobonds’ holders.

However, initially, it aimed at the repayment and servicing of Belarus’ debts to Russia and the Eurasian Fund for Stabilisation and Development (EABR). Thanks to this shift the international reserves has not changed that much recently and forced no panic on the currency market.

This year Minsk faces a peak of foreign debt payments of over $4 billion. A big piece of this debt Belarus owes to Russia. On the other hand, the international reserves of the Belarusian National Bank holds reserves of only $4.7 billion. Without additional resources Belarus could experience a significant currency depreciation in the short run, and stagnation in the long run unless the state launches economic reforms.

Urgent Credits From Russia On Preferential Terms

On 25 December 2014, Putin and Lukashenka agreed that Russia will provide Belarus with up to $2 billion in additional loans in 2014 to counteract the economic slowdown. The next day the Russian government approved the allocation of a $450 million loan for 10 years with a 4% interest rate, which is less than a half compared to average market rates for Belarusian Eurobonds. The resources quickly reached Minsk. However, that was only the beginning of the Kremlin's generosity.

In 2015 the government has already received two loans on very favourable conditions to refinance Belarusian payments to Russia. Earlier this year, Belarus collected $110 million to repay the interest on the Russian loan issued in 2010. Recently, at the end of July, the Russian government provided another $760 million. Both loans mature in 10 years and their first instalments are to be paid in 2019. Their interest rate is floating on the market, and currently amounts to slightly over 1.5%.

On the other hand, the loans hardly satisfy the needs of the authorities, since the economic situation deteriorates in unexpected ways. In January-July 2015 the economy plunged by 4%, resulting in the first recession since 1997. Hence, in July Belarus asked Russia for a new loan of $3 billion, particularly the EABR in return for promises of structural reforms in the coming years. Since Russia holds the predominant share in the organisation, the decision remains with the Russian government.

Commercial Loans On Market Conditions

Russian state-owned banks also directly support the Belarusian economy by offering commercial loans. In general, this scheme is more expensive but the government uses it in case of emergency, especially when Moscow holds back decisions on new financing. For instance, at the end of last month the biggest Russian bank, Sberbank, gave a €550 million loan to the biggest Belarusian enterprise, Belaruskali, for five years. Eventually, the resources arrived in the central bank’s international reserves.

In 2011 Belaruskali also received $1 billion from Sberbank, although on truly market conditions. The bank granted the one-year loan under dual warranty – the guarantee of the Belarusian government and the guarantee of a 51 percent shares in the Naftan refinery. The interest rate amounted to around 8.7%, more than the average economic growth of Belarus. Nevertheless, the authorities hardly had a choice because of serious economic problems.

Moreover, in December 2010 Belarus placed government bonds denominated in Russian rubles on the Russian financial market. It placed two-years bonds worth of $225 million. Two Russian state-owned banks, the Sberbank and Gazprombank, helped with the bond issuance. Though, the interest rate at 8.7% was very high again.

History Of Indebtedness

All in all the Belarusian authorities borrowed from Russia over $12 billion for state purpose since 2007, more than $1.3 billion or 2% of GDP on average per year (see the table). That includes many intergovernmental loans, credits from the Eurasian Economic Community in 2011-2013, resources from Sberbank and the Russian stock exchange. However, Belarus borrowed even more due to business credits for enterprises, and last but not least the huge credit for the nuclear plant.

In 2014 Russia offered Belarus a state credit line of up to $10 billion to build the nuclear plant by 2020. But, in fact, that is an export credit facilitating Russian companies, since the resources may cover only the supply of goods, works and services from the Russian authorised organisation. Hence, Moscow eliminated the possibility of spending the credit to create economic stabilisation.

Big Brother Always Helps

Belarus faces a challenging economic situation prior to the presidential elections in October. In order to avoid the financial turmoil just after the election it needs more loans, especially cheap ones. Only the Russian government can privilege Belarus in this way with low interest rate loans which are spread over a long period of time.

Furthermore, since the Russian government lends in Russian rubles, for Belarus it will be cheaper to pay them back due to the depreciation of the Russian ruble.

The ineffective quasi-socialist economic system survived in Belarus for over 20 years largely thanks to the financial support from Russia. In the long run, however, Belarus should start transition and pursue structural reforms, particularly when Russia itself experiences economic decline. Otherwise, the external debt stock will keep on growing, forcing Belarus to take a new loan to pay back the previous one. Eventually this will bring the economy to collapse.

Until now, in the most urgent situations Russia has always supported Belarus with quite beneficial aid. Sometimes it required some steps in return, real ones or at least political promises from Lukashenka. But Russia has never abandoned its partner, perhaps the last permanent ally of Russia. Currently Minsk hopes for another $3 billion from the Eurasian Fund for Stabilisation and Development. Sooner or later Minsk will get it.

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The Myth of Thriving Belarusian Agriculture

Agriculture was the fastest growing branch of the Belarusian economy in the first half of 2015. Many in Russia and other post-Soviet countries consider Belarus to be a model when it comes to maintaining a viable agricultural sector.

But in reality, the Belarusian government spends more on agriculture than the sector’s value added. Despite substantial subsidies many Belarusian foodstuffs cost more than European equivalents, including Polish cheese, Dutch meat, and Spanish tomatoes.

Agriculture plays a significant role in Belarusian state ideology. Almost every television news report in Belarus contains at least one reference to the agriculture sector, such as the recent story on Lukashenka teaching French actor Gerard Depardieu how to mow with a scythe.

In fact, however, Belarusian agriculture is the least effective sector of the economy. It still resembles the USSR era. Soviet-style collective farms still dominate the market and can barely operate without state subsidies.

The Least Reformed Economic Sector​

The share of agriculture, hunting, and forestry in the economy has been diminishing over the last 25 years – from 23 per cent of GDP in 1990 to 7 per cent in 2013, according to the National Statistical Committee. With over 320,000 Belarusians employed in the sector last year, agriculture still accounts for quite a significant part of the economy. By contrast, in Poland the share of the agriculture sector is twice as small.

Private farmers contribute less than two per cent to the total agricultural output

Salaries in agriculture remain among the lowest in the country, and hence the sector suffers from severe labour shortages. Currently, agriculture sector wages are a third of the average national salary (around $300 per month). However, earnings in this sector rose faster than the average in 2011-2013.

Agriculture remains the least transformed sector of the Belarusian economy. Private farmers, the basis of agriculture in any market-oriented economy, contribute less than two per cent to the total agricultural output. Together with production from household plots, i.e. individual gardening for one's own needs, they constitute less than a quarter of the total agricultural output. Yet state-owned collective organizations or collective organisations with significant state involvement make up the vast majority of the rest.

Agriculture has become a very export-oriented branch of the Belarusian economy, with a positive trade balance. In 2014 it accounted for $5.6bn or 15.5 per cent of total exports. The only problem is that virtually all these exports, particularly dairy and meat products, go to Russia.

Ineffective State-Owned Collective Farms

Almost all state-owned collective farms would immediately go bankrupt without state support. Only 10 per cent of agricultural firms could operate profitably without public aid, according to a study published in December 2013 by the Ministry of Economy. The absence of reforms turned agriculture into a very ineffective sector of the economy.

Paradoxically, the Belarusian government uses more resources on agriculture than it produces. In recent years subsidies for the agriculture sector oscillated between 9 and 12 per cent of GDP, according to the Ministry of Agriculture. At the same time agriculture’s contribution to GDP is less than 9 per cent.

On the other hand, with hardly any financial aid from the state private farmers have proved themselves to be more productive than generously subsidised state-owned entities. Over the last 15 years private farmers have increased production by 16 per cent annually, i.e. 10 percentage points faster than the state-owned collective farms. This financial performance also boosts arguments in favour of private ownership.

Occasionally Belarusian officials discuss privatisation of agricultural enterprises. In November 2014, Deputy Prime Minister Michal Rusy stated that nearly 30 per cent of agricultural enterprises were insolvent and said that perhaps it was time to sell them. In mid-July this year the head of Hrodna region, Uladzimir Kraucou, confessed that a third of the 150 agricultural organisations in the region cannot pay off their debts. The local authorities have considered their privatisation or at least reorganisation and have even received business proposals from investors to this end.

Commitments To Decrease Financing For Agriculture​

If Belarus were to join the WTO, it would have to cut significantly its financial support to agriculture. Without the prior liberalisation and privatisation of the agricultural sector, this will cause the whole sector to collapse. On the other hand, Belarus has already begun decreasing financing for the sector, and in 2016 subsidies should not exceed 10 per cent of GDP, due to Belarus’ commitment to the Eurasian Economic Union.

Improvement of the business environment can be a successful substitute for the huge financial injections into agriculture. Making it easier to do business and providing equal treatment for all business entities may encourage Belarusian private and foreign capital to replace the ineffective companies or force them to become more effective.

For instance, during the last economic liberalisation in 2007-2010 one of the world's biggest brewing companies, Heineken, entered the Belarusian market. The company has taken a large chunk of the brewing industry, and by doing so has invested in cooperation with many Belarusian agricultural enterprises.​

Private Farming Remains The Only Solution

Lukashenka’s policies have hindered the development of the private sector, particularly in agriculture. For instance, Belarus now has around 20 per cent fewer individual farmers compared to 1994 when Lukashenka was first elected as president. Officials have been discriminating against private farmers, sending inspections to their premises more frequently and subsidising predominantly the state-owned collective organisations.

For the last 25 years the authorities have tried to avoid reforming the sector. The absence of private ownership of land remains the real obstacle for the sector’s growth. The agricultural land market hardly exists. Less than one per cent of Belarus’ land areas is under the private ownership of natural persons who are citizens of Belarus. The experience of other post-socialist countries, both in Eastern Europe and in East Asia, shows that the transfer of land ownership boosts the profitability of agricultural activities.

The ability of the Belarusian authorities to maintain a viable agricultural sector remains only a myth propagated in Russia and some other countries. In fact, Belarusian agriculture survives only thanks to gigantic state subsidies. Instead of supporting the systematically unprofitable entities, the government should distribute the financial resources more equally, creating an equal market environment for both collective organisations and private farmers.

Aleś Alachnovič

Aleś Alachnovič is the Vice President at CASE Belarus and PhD candidate at the Warsaw School of Economics, an alumnus of the London School of Economics.​

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Why Are Belarusian Economic Forecasts Constantly Inaccurate?

According to the official five-year Socio-Economic Development Programme For 2011-2015 the GDP was supposed to increase by 62-68 per cent by the end of 2015. In reality, the growth is likely to hit around 6 per cent. How did the government manage to get it wrong by such a large disparity?

After 25 years of transition, the Belarusian state forecasts remain unreliable. But Belarusian independent think tanks, commercial banks and international organisations also frequently overlook the real economic trends and have to revise their forecasts several times throughout any given year.

The Belarusian quasi-socialist economy is hardly suited for macroeconomic forecasting. Irrational decision-making by the Belarusian authorities and incentives for officials to polish the data hinders sound forecasting. Additionally, official statistic gathering and reporting is still in its infancy and competition between those making the forecasts is scarce.

Systematic Errors in Forecasting

Belarusian state-employed economists regularly fail to provide accurate predictions about the economy. They often fail to provide proper predictions even for economic growth, probably the most important macroeconomic indicator for any economy. The government's annual forecasts continuously underestimated the GDP's actual growth by almost a quarter from 2000-2006, while from 2009-2015 their figures exceeded its actual performance by almost three quarters.

In other words, in 2009-2015 official economic forecasts exceeded the true GDP's growth on average by 5.1 percentage point per year. Hence, forecasts even just the year ahead have been highly inaccurate.

 

The forecasting errors in Belarus have become even clearer after comparing them with more developed post-socialist countries. True, the annual GDP forecasts projected for Poland’s central budget also happened to miss the actual economic growth in 2000-2015.

Nevertheless, in contrast to Belarus, the margin of error was much smaller and offset one another in consecutive years. In particular, in 2009-2015 they fell in a range of -2.5 to +2.4 p.p. but their sum in the whole period was only 0.8 per cent of GDP. Neither the global financial crisis nor other external factors spoiled Poland’s governmental forecasts.

 

Frankly speaking, the poor results of economic forecasting in Belarus also concern Belarusian think tanks, individual economists, commercial banks, and international organisations (such as the IMF or the World Bank). For instance, in the last week Priorbank, the 6th largest bank in Belarus, reduced its GDP forecast for 2015 to -3.5 per cent. Yet, early this year in its first weekly economic review the bank projected economic growth at 0.5 per cent. Thus, in the absence of a war or a major natural disaster, 4.0 per cent of the GDP evaporated in less than seven months.

Unpredictable decisions of Belarusian authorities

Political discretion stands at odds with economic rationality in Belarus where state-owned enterprises (SOEs) account for 70 per cent of GDP (according to the EBRD). Belarus has a very weak market economy and whereas in other market-oriented countries an unprofitable state-run enterprise that regularly goes bankrupt would be dropped, in Belarus the authorities rescue SOEs at virtually any expense. Recently, Lukashenka ordered $0.6bn in financial aid to be sent to state automotive plants to stabilise their financial situation. Therefore, the authorities violate the very principles of economic predictability by ignoring some of the basic laws that rule any market economy.

Administrative decision-making play a bigger role in Belarus than in the average market-oriented economy. At times, it is very difficult to predict what the economically irrational choices of Belarusian authorities may be. Take, for example, the policy of raising the nominal average salary by 46 per cent over 12 months before the presidential elections in December 2010. Eventually, the officials’ continuous interference in the economy leads to macroeconomic instability.

Moreover, as Lukashenka regularly approves the official macroeconomic forecasts, state officials are encouraged to try to alter what is really going on with their statistics to make the outcomes look better than they really are. For instance, in autumn 2011 the government submitted to the President a draft forecast that had predicted 1.5 per cent GDP growth for 2012. Lukashenka’s harsh critique forced officials to promptly revise its growth forecast to 5.5 per cent but, needless to say, the GDP ended up growing by 1.5 per cent, after all.

Technical Obstacles For Forecasters

Technically, Belarusian statistics contain insufficient data to make accurate forecasts – relatively coherent data are available from 1995, but they cover only the last 20 years. Given this short time frame, it is difficult to determine the range and number of general business cycles that Belarus has witnessed (perhaps three of them). Moreover, during each business cycle Belarus has experienced several extraordinary events unfold such as its decision to abandon market reforms in mid 1990s, the period of generous energy subsidies in 2000s, and the 2008 global financial crisis. However, precise economic forecasting requires stable and replicable trends, something which Belarus currently lacks.

Additionally, the Belarusian state statistical committee suffers from a low level of credibility among both Belarusian and international experts alike. This distrust stems from the data from the 1990s and the beginning of the 2000s, a period of hyperinflation in Belarus. At a relatively high level of inflation, even minor errors in calculating the GDP might lead to a serious misrepresentation of economic growth that was the result of shifts in prices rather than levels of production. In a country report from 2004, the IMF stated that the Belarusian national accounts were overstating their real growth by about 1-2 per cent.

Little Competition Among Forecasters​

Belarusian economists are reluctant to develop advanced macroeconomic models for forecasting due to the low level of competition between their counterparts to develop more accurate predictions. Very few economic units systematically produce forecasts in Belarus (the primary outlets are the National Bank of Belarus, Ministry of Economy, Ministry of Finance, IPM Research Center, and some commercial banks), but even fewer of them make their results public.

Without strong demand for sound economic forecasts and their subsequent assessment by an independent body, economists will continue to produce low-quality economic forecasts. Perhaps the National Bank of Belarus, alongside the national media, could set up and conduct a contest for the country's best macroeconomic forecasts. By drawing the attention of potential employers – be it the state ministries, businesses and think tanks – such a contest has an opportunity to attract the best economists and create incentives to improve their forecasting skills.

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Will Belarus Ever Become a WTO Member?

Two weeks ago, Belarusian Deputy Foreign Minister Aliaksandr Hurjanau declared Belarus was planning to finish all of the necessary technical work for the country’s accession to the World Trade Organisation (WTO) in one year's time. However, exactly three years ago he also projected that Belarus would join the WTO by the end of 2013. Is this time going to be any different?

The history of Belarus applying to join the WTO is a story of unfulfilled promises to liberalise and privatise the economy. Instead of firmly declaring its aspirations to join the WTO by establishing its strong political commitment that could motivate it to introduce reforms, the Belarusian authorities have preferred to imitate engagement.

Belarus remains one of the very few countries in the world that does not belong to the WTO. To name but two issues, the overwhelming role of the state in the economy and its extensive agricultural subsidies are the clearest obstacles for Belarus' accession to the WTO.

Everyone but Belarus

The WTO's mission is to negotiate global rules for export-import relationships, developing multilateral trade agreements and reducing trade barriers. To date, 161 countries, which account for over 98 per cent of global GDP, have joined the WTO. Another 23 countries, including Belarus, are in the process of negotiating their accession, and only 14 states have shown no interest in joining. No country has ever left the WTO.

Russia's accession to the WTO in 2012 automatically forced other members of the Customs Union of Belarus, Kazakhstan, and Russia to comply with trade liberalisation policies in accordance with Russia’s obligations to the WTO.

Therefore, since 2012 Belarus has experienced the negative impact of Russia’s membership in the WTO with no direct benefits to its own economy. Goods made in Belarus neither have easier access to foreign markets, nor does Belarus have the right to use the WTO’s protection regulations for litigation purposes. Yet, Russia’s accession to the WTO has raised the level of competition within the Customs Union and squeezed out a number Belarusian manufacturers from the market.

 

Unfulfilled Promises of Successive Governments

Belarus started negotiations on entering the WTO in 1993. After 22 years its WTO membership remains a distant prospect, though other countries in the world have a track record of between 3 years (Kyrgyzstan) to 19 years (Russia) in their attempts to join the organisation.

In 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO

In over 20 years Belarus participated in numerous events to bring the national economy closer to the global organisation. The Working Party on the Accession of Belarus to the WTO, which is comprised of 41 countries, assesses the progress of Belarus in bringing national legislation into compliance with WTO agreements. To date, the Working Party has already held 7 formal meetings in 1997-2005 and five rounds of informal consultations between 2006-2013.

In 2008-2013 the UN Conference on Trade and Development (UNCTAD) and the United Nations Development Programme (UNDP) Country Office in Belarus conducted a technical assistance project in support of reforms. The project consisted of many analytical studies, expert study tours, technical know-how exchange, seminars, and round tables. Two independent think tanks, Warsaw-based CASE and Minsk-based IPM, implemented another minor project in 2013. Last but not least, in December 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO.

Minsk, however, has only been putting on a facade of deep concern about its quick accession to the WTO. Belarus’ application process is abound with numerous declarations by the Belarusian authorities to accelerate the process. In 2005, 2010 and 2012 Minsk claimed that it would successfully wrap up negotiations in a year. Meanwhile, all of its neighbours and all of the current members of the Eurasian Economic Union have already joined the WTO (see the table below).​

Stumbling Blocks for Belarus's Accession to the WTO

With an economy where state-owned enterprises produce about 70 per cent of GDP according to the European Bank for Reconstruction and Development (many of which are subsidised), Belarus does not have the slightest chance of joining the WTO.

WTO membership requires that candidate-country commits to liberalise their economy and reduce the role of the state. The WTO has never admitted a country with such a quasi-socialist economy. For instance, the private sector in all 22 (out of 29) post-socialist countries in Central and Eastern Europe and in Central Asia that have successfully joined the WTO accounted for 50 to 75 per cent of GDP at the moment of accession. The private sector's minor role in Belarus's GDP clearly reflects the scope of its lack of transition towards a market economy.

The agricultural sector would immediately go bankrupt without the support of state subsidies

State support for the agricultural sector remains a particularly sensitive area of negotiations for Belarus’ potential accession to the WTO. Although its role in the economy has been diminishing over the last 25 years – from 23 per cent GDP in 1990 to 7 per cent in 2013, it still accounts for a rather significant part of the economy, employing 9.5 per cent of the total workforce according to the official government statistics.

The agricultural sector is comprised mainly of state-owned collective farms which would immediately go bankrupt without the support of state subsidies. Only 10 per cent of agricultural firms could operate profitably without this support according to a study published in December 2013 by the Economic Research Institute of the Ministry of Economy. If Belarus were to join the WTO, it would have to cut significantly its financial support to this sector. Without the prior liberalisation and privatisation of the agricultural sector, this would likely signal its collapse.

Yet, Belarus’s membership in the Eurasian Economic Union does not interfere with its aspiration of joining the WTO. On the contrary, since the customs policy in the Eurasian Economic Union is the same for Belarus and all other member-countries that have already joined the WTO, it means that Belarus is generally ready to instate a WTO-compliant customs policy. In other words, Belarus and the WTO could rather easily find some compromise in negotiations on tariff and non-tariff regulations of market access for goods and services.

Keeping The Quasi-Socialist Economy Alive

Though international competition defines growth in the long run, for an unreformed economy it poses a significant threat. The Belarusian authorities are aware of all of this, but remain reluctant to transform the economy. This is precisely why they continue to stall on implementing their promises towards quickly gaining membership in the WTO.

Without deep structural reforms, Belarus neither has a chance of join the WTO nor will it receive the benefits from accession. For the sake of its own national interests Belarus should at first advance its economic transition towards a market economy, including small and large scale privatisation, and at a later point focus on further foreign trade liberalisation, including its accession to the WTO.