Belarus launches new Geely plant and plans for electric cars
On 17 November, Belarusian President Alexander Lukashenka participated in the opening of the new BelGee automotive plant, which will produce Chinese Geely cars. The venture is the largest passenger car enterprise in Belarusian history. Lukashenka also announced a draft decree to create incentives for Belarusians to buy domestically manufactured cars. In August, local developers presented the first Belarusian electric car. Lukashenka personally advocates the development of domestic electric car manufacturing. Although the market for electric vehicles is still young, it is growing highly competitive—even within the borders of the Eurasian Economic Union, of which Belarus is a member. As the Russian government is gearing up to take unprecedented measures to support its own electric car industry, Belarusian developers will have to make serious, well-thought out efforts to become competitive.
Belarus starts to produce Chinese cars
On 17 November, during his visit to the new automobile plant BelGee, Presdient Lukashenka announced that the government is drafting a decree to encourage Belarusians to buy Geely cars built in Belarus. The Belarusian-Chinese BelGee plant, which produces passenger cars under the Chinese Geely brand, was established in 2011. Lukashenka says the state aims for as many Belarusians as possible to buy domestically produced cars. This is going to be the largest passenger auto project with foreign backing in Belarus’s history.
It should be noted, however, that previous projects have not fared well. For instance, over a five year period, the Iranian company Samand produced about a thousand cars which were mainly sold to state organisations. Ford, which manufactured cars in Belarus in the ’90s, did the same amount of sales in a year. The authorities closed both operations, because the enterprises did not meet sales expectations. For 2018 and 2019, the government expects production and sales to reach 25,000 and 35,000 cars respectively. “But we have [still] another goal—to produce more. We will double capacity. We will sell 60,000 cars and then set a goal of 120,000,” the Belarusian president said.
To be profitable, the plant has to sell at least 35,000 cars a year. However, the Belarusian market cannot absorb even a small fraction of this volume. According to data from the Association of Belarusian Car Owners, over the past 7 years purchases of new cars peaked in 2014. That year, Belarusians purchased around 50,000 vehicles, of which 20,000 were bought in Russia, where prices were attractive at the time. These figures suggest the absolute maximum domestic dealers can expect to sell is around 30,000 new cars. Moreover, the locally assembled Geely will have to compete with other more reputable, global brands. This seems an almost impossible task for the enterprise, as Geely remains outside even the top 25 most popular car models in Belarus, according to 2016 purchasing statistics published by TUT.BY, an online news portal. BelGee strategists say they are aware of the situation. They claim that 90 per cent of new Geely cars will be exported to Russia. But there, they will face virtually the same problem.
Will Russians accept the Belarusian Geely?
Chinese automaker Geely plans to make annual global sales of 2 million cars by 2020. It expects to sell 170,000 cars abroad—80,000 of this number in Russia. However, so far Geely sales remain unimpressive. Worryingly, over first 9 months of 2017, Geely’s most negative sales trend expressed itself on the Russian market. Purchases dropped by 55.4 per cent (1,693 Geelys out of a total 1.13 million sales for the total Russian market) compared to the same period in 2016.
Sergey Udalov, the Deputy Head for Autostat, a consultancy, was quoted by Reuters saying the Belarusian plant will not be able to sell 30,000 cars per year. “I think it is possible to increase sales to 10,000, but I do not think they will be able to sell more,” said Udalov.
In fact, it is Russia that supplies Belarus with cars. Russia manufactures a dozen of global brands, including BMW, Kia, Cadillac, Chevrolet, Renault, Volkswagen, Ford, and Hyundai. For example, 90 per cent of cars sold in Belarus are assembled in Russia. How Belarus will compete with these Russian produced, global brands within Eurasian Economic Union markets remains unclear. Indeed, since the 90s, Belarus has failed to establish a single successful foreign car manufacturing venture. Moreover, a strategy to sell cars to Russia is of questionable value in the context of Belarus’s 30-30-30 goal. This goal intends to even-out Belarus’s export volumes between the EU, Russia and Asia in equal shares, and thereby free it form excessive dependence upon the Russian market. If 90 per cent of cars are intended for the Russian market, it appears the 30-30-30 target does not apply to Geely cars.
Is electrification the answer?
Another issue for Belarusian Geely advocates is the global transition towards electric cars. In the coming decade, electric cars may reach prices comparable to their gasoline-powered counterparts and sales are projected conquer a larger share of the global market. For short-term, the production of petrol-engined Geelys can be justified by huge oil reserves and the absence of legislative incentives to sell electric vehicles in both Russia and Belarus. At first glance, Belarus appears to be taking an approach that risks lagging behind global trends in the very near future. But in fact, the Belarusian government is already trying to anticipate the shift to electric vehicles.
In August 2017, President Lukashenka personally tested and praised the latest Tesla electric car model from the US. The president urged Belarusian developers to use Tesla as an example. That same month, the National Academy of Sciences unveiled the first Belarusian electric car. The prototype is based on the Geely SC7 series, which is assembled in Belarus. Deputy Prime Minister Uladzimir Siamaška noted that with the commissioning of the Belarusian nuclear power plant, Belarus will need to increase its consumption of electric energy. According to Siamaška, in the next three to four years, Belarus will mass produce electric cars. (Related material: where to buy Tesla shares in the UK according to stockapps)
However, if Belarusians want to develop their own electric car, they must hurry. In October 2017, the Russian government sent a letter to all key ministries and state institutions calling for unprecedented measures to stimulate demand for electric-powered transport. The letter spoke of subsidy programs, preferential car loans and auto leasing for electric vehicles. Owners of shopping and entertainment centres will be awarded tax incentives for installing electric recharge stations. In particular, support will be provided to manufacturers of electric vehicles—both domestic and foreign enterprises—who localise assembly in Russia. The letter also suggests the government will set minimum purchasing quotas for electric vehicles for various state institutions. Given that many Russian auto producers have already begun work on electric cars, Belarusians will need to invent something truly extraordinary to be competitive.
Economy recovers, but remains structurally vulnerable – digest of the Belarusian economy
During a trip to Minsk on 5 October 2017, Venezuelan President Nicolas Maduro showed strong optimism on economic teamwork with Belarus, but forgot to mention the buildup of outstanding debts.
On 25 October, the National Bank of Belarus gave its overview of the current macroeconomic situation, citing the positive influence of monetary policy.
However, a day later on 26 October, experts from the Eurasian Development Bank were hesitant to confirm good long-term prospects for the Belarusian economy.
Trade policy: diversifying from Venezuela
President Maduro arrived in Belarus on 5 October as part of an official visit. The negotiations with Belarusian President Alexander Lukashenka were concerned mostly with trade and economic cooperation.
In 2016, trade turnover between Belarus and Venezuela equalled only $2m, which is a 92.6 per cent decrease in comparison with 2015 (see Figure 1 below). From January–July 2017, trade turnover reached $5.4m and mostly comprised exports of Belarusian potash fertilizers.
The economic crisis in Venezuela and a sharp decrease in world oil prices are the main reasons for the decline of Belarusian trade with Venezuela, which currently uses its foreign exchange reserves only for the purchase of food, medicines and other socially important goods.
According to Belarusian Scientific and Industrial Association Deputy Chairman Georgy Grits, Venezuela is approaching a default. He bases his view on an appraisal of studies into the country’s default risk made by world rating agencies.
Therefore, the main problem for Belarus coincides not with further development of trade with this former high-income country, but with Venezuelan debts accumulated for already shipped goods in previous years.
The total debt has reached approximately $500m. For example, Venezuelan debts to MTZ (Minsk Tractor Works), a Belarusian producer of tractors, have reached $50m, debts to MAZ (Minsk Automobile Plant), a truck manufacturer, are at $170m, and debts to various Belarusian construction companies amount to $108m.
However, on 8 October, Belarusian Deputy Prime Minister Vladimir Semashka expressed the optimistic view that further cooperation with Venezuela is feasible. He noted that Belarus plans to help increase the production of oil in Venezuela by more than three times. Current production levels sit at less than one million tonnes per year.
Economic growth: the regulator staying firm
On 25 October, the National Bank of Belarus announced the consolidation of positive changes in the economy and monetary sphere during the first nine months of this year.
Specifically, the monetary authorities have admitted that economic growth has started to recover jointly with slowing inflation. Moreover, decreasing interest rates and a continuing process of de-dollarization are the results of a unified macroeconomic policy.
Correspondingly, declining borrowing costs have led to the recovery of business activity and to increased demand for loans by commercial companies, which further strengthen Belarus’s banking system. The regulator also drew attention to the significant growth of foreign exchange reserves (see Figure 2 below) caused by the sale of foreign currency by Belarusian citizens.
Moreover, the Chairman of the Board of the National Bank, Pavel Kallaur, has admitted that within two or three years there exists a real possibility to boost foreign reserves up to $10b. At present, Belarus currently is about $3b shy of this mark.
In particular, accumulating net sales of foreign currency by Belarusian citizens, who exchange it to purchase goods and services, and growing exports (for example, from January–August exports increased by 21 percent) may contribute to the achievement of the $10b goal.
However, along with opportunities, risks also arise. The first risk coincides with trade policies that are heavily concentrated and focused on Russia. The plunge in foreign currency earnings from 2015–2016 showed what can happen to the economy when Russia’s market falters.
Secondly, the increase in demand for imports of consumer goods may apply pressure on foreign reserves, which in turn may lead to an increase in demand for foreign currency from importers.
Finally, the dynamics of foreign reserves depend not only on foreign exchange earnings, but also on debt expenses. Foreign reserves have increased in 2017, because Belarus both undertook external borrowings and refinanced old debts with Russia. Therefore, the resolution of debts—old and new—will directly affect the volume of reserves.
Monetary policy: hidden threats
However, on 26 October, experts at the Eurasian Development Bank warned that despite the significant improvement of Belarus’s macroeconomic situation, the rapid easing of monetary policy (through the decrease of interest rates) carry serious risks for the acceleration of inflation, which may occur in early 2018.
Structural problems, including excessive employment in state enterprises and the propping-up of inefficient enterprises, limits the potential for monetary policy to stabilize inflation and further to solve the issue of repaying of foreign debts.
Overall, the current positive macroeconomic situation cannot last long. Each production cycle does not bring substantial profits for the majority of Belarusian enterprises. Indeed, in many cases the cycles generate losses. The more they produce, the more they get bogged down in losses, which in turn leads to the growth of foreign debts.
An expert from BIPART (the Belarusian Institute for Public Administration Reform and Transformation), Vladimir Kovalkin, compares the general situation in the Belarusian economy to “walking on very thin ice that might crack at any moment and fall in.” In Particular, the Belarusian budget possesses insufficient funds to pay both foreign debts and the interest building upon them.
As a result, according to experts, any problem or any differences in foreign economic relations may first prevent the refinancing of foreign debts from previous years, and then eventually lead to a default.
In sum, while the Belarusian economy gradually recovers, it still suffers from long-standing structural problems. Failure to resolve these problems may not only reduce economic growth, but also lay the groundwork for a new type of crisis for Belarus—a debt crisis.
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)