Blazing the cryptoliberalisation trail – digest of the Belarusian economy
On 22 December 2017, the President of Belarus Alexander Lukashenka has signed a presidential decree that identified Belarus as the first country in the world to legalise the blockchain—a digital ledger in which transactions made in cryptocurrencies can be chronologically recorded.
In the meantime, improved oil prices have helped the government outpace their economic growth plans for 2017. This has led to forecasts for 2018 to be even more ambitious.
On 18 December, government officials defined plans for wage growth in the coming year. In contrast to economic growth, the new 2018 wage growth target is below the presidential target set at the beginning of 2017.
The IT-sector: A haven for cryptocurrencies
On 22 December 2017, Alexander Lukashenka signed the presidential decree On the development of the digital economy, which is intended to make Belarus a regional IT leader.
President Lukashenka believes the decree will help Belarus become a centre for attracting computing talent, successful companies and international corporations working in the most advanced technological areas, such as artificial intelligence, big data, and blockchain technology.
The decree extends a special legal regime for companies based at the Belarus Hi-Tech Park (HTP) until 1 January 2049. It also expands the list of business activities to include new industries, such as neural networks, unmanned vehicles, biotechnologies, and more.
Most notably, the decree permits the HTP’s residents to conduct transactions with electronic money without limitations and companies no longer need the permission of the National Bank of Belarus to open accounts in foreign banks and other financial organizations and to perform financial operations.
Third, the decree legalises electronic money in Belarus. The HTP’s residents have a right to engage in mining and to conduct the cryptocurrency exchange.
Finally, individuals also have the right to own and to exchange cryptocurrency for foreign currency and Belarusian rubles, to carry out mining. Income from these operations frees from tax declaration of physical persons and excludes from taxation until 1 January 2023.
Almost all of the decree’s provisions will enter into force three months after its official publication. Its developers predict that by 2030 annual export revenues for Belarus’s IT sector will increase from the current $1bn to $4.7bn and the number of people employed will grow from the current 30 thousand up to 100 thousand people.
Economic development: results, prospects, and risks
On 5 December, Belarusian Prime Minister Andrei Kobyakov announced that GDP growth will reach 2 per cent for 2017 and inflation will not exceed 7 per cent. This is more ambitious than the 2017 forecast, which assumed 1.7 per cent GDP growth with an inflation rate lower than 9 per cent.
Several factors caused the current rebound of the Belarusian economy. They include improved external market conditions for trade, strengthened economic growth in Russia, and increased prices for commodities. These changes stimulated the growth of Belarusian exports and supported business activity in the country.
Furthermore, according to official forecasts from the Belarusian Council of Ministers, GDP in 2018 will rise by 3.5 per cent and goods and services exports by 5.7 per cent. The National Bank of Belarus also projects that inflation will stay at 6 per cent or below, and the money supply will not grow above 12 per cent.
However, certain experts disagree with the Council’s optimistic outlook. In particular, the World Bank forecasts GDP growth at 2.1 per cent and the IMF predicts only a 0.7 per cent growth to GDP. Common among the two organisations’ reasoning include a worsening external economic environment and the absence of structural changes within the Belarusian economy.
Indeed, it is unlikely prices of imported energy resources grow as much as in 2017. This will lead to lower benefits from commodity exports. Furthermore, the oil subsidy from Russia (a discount on purchased oil) that added substantially to GDP growth in previous years will continue to be reduced.
According to World Bank experts, in past years the Russian oil subsidy account for as much as 15 per cent of Belarusian GDP. A sharp drop in oil prices reduced the size of these benefits. In 2016, the oil subsidy accounted only for about 4.6 per cent, or approximately three times lower than in previous years.
In 2018, Belarus must repay about $3.7bn in external debts generated mostly by inefficient state-owned enterprises. Taking into account the absence of serious plans for structural reforms, these liabilities will need additional external financing and greater budget coverage.
As a result, according to the Minister of Finance Vladimir Amarin, the government plans to borrow approximately $1.2bn in 2018, increasing further the risks for financial stability and the burden on the budget.
Wages: looking forward
On 18 December, Labor and Social Protection Minister Irina Kostevich announced official predictions for wage growth in Belarus. According to Ministry estimates, average monthly wages will reach up to BYR941 in 2018 or approximately $466. Wage growth will ultimately depend on the situation of economic development in the country.
However, in April of this year, President Lukashenka said that a salary equal to BYR1000 a month remains the minimum government target. Currently, the average Belarusian earns approximately 98 per cent less than average Chinese, and more than two times less than the average Lithuanian or Pole (see the Average wages figure below).
Nevertheless, even if wages grow to predetermined levels in the coming months, true earnings will remain low. First, the threshold level of BYR1000 excludes taxes. Second, wages in the regions will be substantially minor in comparison with Minsk (the average salary in Minsk is higher by approximately 55 per cent).
Altogether, officials understand the unstable foundations of Belarus’s current macroeconomic drivers, but still, they prefer to ignore the problems of an unreformed economy and continue to dream about potential cryptocurrency benefits.
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)
Lukashenka to sign ‘revolutionary’ IT regulation package
On 13 December, at the plenary session of the 2nd Congress of Belarusian scientists, Belarusian President Alexander Lukashenka promised to sign the decree ‘On the Development of Digital Economy’ before the New Year.
The fathers of the decree call it revolutionary, because it includes a number of unprecedented measures to liberalise the way IT businesses operate. It aims to turn Belarus into a regional leader in the development of cutting-edge areas, such as artificial intelligence, big data, autonomous cars, and blockchain technology.
Both officials and businessmen work to promote it inside the country and with foreign partners, creating perhaps the first case of state-business partnership on such a scale in Belarusian history.
The critics accuse the package of privileges to only one sector, lack of public discussion, and playing with poorly understood blockchain technology. In the meantime, Belarusian society silently waits to see what innovations will come their way.
The ‘revolutionary’ decree
On 11 December, President Alexander Lukashenka held a meeting to discuss the draft decree ‘On the Development of Digital Economy’. The talk featured well-known IT businessmen and government officials.
According to its developers, the document contains legal solutions that are a breakthrough not only for Belarus and its neighbouring countries, but also for the most developed countries of the world. Lukashenka himself calls it ‘revolutionary’.
The decree aims to turn Belarus into a regional centre of attraction for talented specialists, successful companies, and international corporations. The hope is to make Belarus at least a regional leader in the development of cutting-edge areas, such as artificial intelligence, big data, autonomous cars, and blockchain technology.
Apart from development of the IT sector, the package includes other important goals: creating conditions for the transformation of traditional industries, and a new educational approach in schools and universities, where students will be able to master at least one foreign language at a high level.
The success story of the Belarusian High Tech Park—despite its growing revenue—has been stagnating due to its orientation to outsourcing and lack of its own products. This was the most probable reason to remove the park’s founder, Valier Tsapkala, and replace him with Usievalad Jančeŭski as the new park director in March 2017. Nearly at the same time, President Lukashenka visited the High Tech Park and met with EXPCapital company head Viktor Prokopenya, one of the main promoters of transforming Belarus into an IT-country.
According to estimates of the decree’s designers, by 2030 the Belarusian IT sector will grow to 100,000 workers—compared to 30,000 now. Export revenue is projected to grow to $4.7bn a year compared to $1bn today, and foreign investments to increase to $4bn from its current $800m level.
Belarus has never boasted a favourable business climate. Although, a number of recent projects with foreign capital have proven successful. This time, the government seems determined to seriously change the situation with unprecedented novelties and adopt some of the world’s best practices.
What is so great about it
As the officials put it, the package will contain minimum strict formulations to provide a flexible basis for the future development and elaboration of regulations. Most important ideas of the decree concern the following.
Foreign companies, which provide marketing, advertising, consulting and other services to the residents of the High Tech Park, will be exempt from paying value-added tax (VAT). For example, today in order to sell a mobile app, a company needs to buy ads from Google and Facebook. For every $100 allocated for advertising, they have to pay $20 VAT and $15 foreign operators’ income tax. Companies in other countries do not pay these taxes, and therefore have a big advantage over Belarusian firms.
The decree also removes a number of barriers in electronic transactions. High Tech Park residents will have the right to open accounts in foreign banks and conduct monetary transactions without any regulator permissions.
The new system will also introduce aspects of British law and international business standards. Ahead of the publication of the system’s conceptual design, legal company Aleinikov&Partners revealed they are studying the experience of venture investment world leaders—Singapore, Israel, and USA—in cooperation with the Belarusian government.
High Tech Park residents will receive privileges for recruitment of foreign specialists. Foreign hires will not need to obtain work permits and will have the right to work in Belarus without visas.
Cryptocurrencies received special attention in the document. It fully legalises digital currency tokens and creates conditions for engaging cryptocurrencies into circulation. Tokens can be mined, bought, inherited, exchanged for money, and involved in other similar operations. At least until 1 January 2023, the government exempts this form of activity from taxes. However, individuals may only perform all operations via High Tech Park residents to prevent fraud.
Critics of the decree and responses to it
The generally positive hype surrounding the decree was somewhat dampened by critics, many of whom agree with the assessment of famous independent economist Siarhiej Čaly. Shortly after his Economics in Layman’s Terms show on TUT.by online TV, where he discussed the potential negative sides of the decree, the top manager of IT company VPCapital, Mikalaj Markoŭnik, published a response to the criticism.
Čaly accused the fathers of the decree of not engaging in any public discussion. The High Tech Park administration, however, claims that it chose a different approach—consulting with the industry and expert community. It collected the opinions of all park residents, as well as certain IT companies outside the Park, and consulting companies. Information that the High Tech Park was working to propose a draft decree was public and anyone can still submit ideas and initiatives.
Critics also point to the fact that the special regime does not apply to the entire country, but only to residents of the High Tech Park. Proponents respond that the decree does not in fact offer new tax benefits, but rather can be regarded as a de-bureaucratisation test. If successfully passed, it is likely that this approach will be extended to the rest of the economy.
Next, critics claim the boosting of IT sector could potentially destroy the rest of the economy by drawing away talent from other sectors. But Markoŭnik argues that brain-drain to foreign IT companies has long been an issue for the Belarusian economy. He says further development of the High Tech Park will prevent brain-drain, because people will at least remain inside Belarus and work within its economy.
Siarhiej Čaly considers cryptocurrency a bubble on a global scale and warns against any investment in it. His opponents argue that regulation of cryptocurrencies in the decree is not simply a tribute to current trends, but a reflection of the way the market is headed. Blockchain and cryptocurrencies certainly do present one of the main trends in the IT world. Although some analysts believe the trend is only beginning, this does not mean that the state should wait at the sidelines.
Despite certain critics, most stakeholders remain optimistic. The decree represents unprecedented liberalisation of one of Belarus’s most important economic spheres. Both officials and businessmen are working to promote it inside the country and with foreign partners, creating perhaps the first case of state-business partnership on such a scale in Belarusian history. The coming year will demonstrate whether Belarus can indeed become a Slavic Hong Kong, as fathers of the decree wishfully put it.