China Helps an Ailing Autocracy
On 8 November Minsk signed a deal with Dagong Credit Rating Co Ltd, China’s largest credit ratings agency, to assess its sovereign credit rating. State-owned Dagong may issue a more favorable rating than the US agency Standard & Poor’s, which downgraded Belarus from B to B- in late September.
The deal is part and parcel of Beijing’s bailout for Belarus – in September, China inked a deal to provide a $1 bn bailout loan by end of 2011, on more favorable terms than the Russia-led Eurasian Economic Community and the IMF. Beijing is willing to help a fellow autocracy off its knees, but the support comes with a price: stakes in Belarus’s strategic state-owned companies.
At face value, Beijing seems to be exploiting a downturn in the Belarusian economy. One could argue that China pursued similar acquisition strategies in Western Europe in the aftermath of the 2009 crisis, although China’s impact in Belarus is greater and the political implications are more significant. This version of events jives well with the view that Chinese investors are “neo-mercantilists”. But this picture is too facile.
Chinese investment comes in diverse clusters of coordinated projects. Belarus is no different. Large Chinese delegations that visited Minsk in March 2010 and September 2011 have initiated investment projects in up- and downstream industries, comprising several modes of entry. In the power sector alone, the value of investment projects carried out and planned amounts to $3 bn. Not all of that capital may be registered as FDI, since China often lends capital to Belarusian firms, who are then obliged to contract Chinese firms. Nonetheless, with Belarusian FDI averaging less than $2 bn per year, China’s investments would make a big impact even without equity investments.
China is set to make its biggest mark in power generation, and the main investments have gone into revamping four coal-fired thermal plants. Among the thermal plants is 5-Minsk, a key source of power for the nation’s capital – capacity will increase nearly fourfold to 610 MW. The air pollution this will cause for Minsk is considerable – CO2 emissions are set to quadruple. Equally controversial is China’s foray into nuclear power. It is entering a bidding process to build twenty 110-330 kWt substations to distribute electricity from the Belarusian Atomic Energy Station. The proposed site remains contested on environmental safety grounds. The Fukushima catastrophe and the ensuing nuclear debate in Western Europe this year have increased Western pressure to abandon the plan. This is why the implicit support from China is welcome news to Lukashenka.
However, China is also promoting clean energy in Belarus. According to an agreement signed last month, a new 40 MW hydropower plant is to be built at Vitsebsk by 2015. A further $500 m in investments could flow into a cascade of smaller hydro plants. On a smaller scale, China is breaking ground on wind power with a 1.5 MW farm in Grodno region. China today is the world’s top producer of wind turbines and has installed considerable capacity in its less populous western regions.
Beyond the power sector, a shining example of technology transfer is in telecoms. According to a bilateral agreement signed in September, China will help Belarus launch its first communications satellite within the next 30 months. Belarus will become the seventh country to carry out such a project with China.
Further downstream, China is engaging in several areas of manufacturing. On the one hand, China National Machinery Industry Corporation (Sinomach), China’s largest machinery producer, is keen on acquiring prized assets in the machinery industry, which form the core of Belarus’s export capacity. On the other hand, joint ventures are underway at chemical plants for sodium carbonate, nitrogen fertilizer, cellophane, and paper. China might be interested in using these industries as a platform for exports to Russia and the EU. In a sense, China is supporting dirty industry on Europe’s “periphery” – though it might help to bring in more modern, less polluting technologies.
The emergence of such diverse investment activities since 2009 underscores the coordinated nature of Chinese investment. Not surprisingly, there is talk of a new industrial park for Chinese companies. Beijing Fandian, a luxury hotel chain, has begun construction on a new branch in Minsk to be inaugurated in 2013, which will cater to Chinese businesspeople and officials. The hotel might play into Lukashenka’s explicit efforts to create a “Chinatown” in Minsk.
Indeed, some hope that Minsk may become a new center for the Overseas Chinese community. Chinabelarus.net, a Chinese-language site established in 2008, is already a popular networking tool for Overseas Chinese. The breadth and scope of Chinese engagement in Belarus could be impressive. But Beijing is likely to monitor each step of the way. The Chinese companies entering Belarus illustrate the importance of what is at stake. At least five of them have a market cap of over $500 m and are publicly listed (either directly or through their parent).
At a time when Belarus is mired in crisis, Beijing’s commitment to investing extensively with top companies is quite bold. As an emerging power, China now has sufficient capital, technology, and know-how to contribute, particularly in telecoms and clean energy. In the process, it can serve as an engine for employment, productivity gains, and technological progress, which in turn can stimulate economic growth. Large industrial projects could exert a centrifugal effect on corollary industries. In the short run, moreover, China’s vote of confidence could attract other investors to enter Belarus, allowing FDI inflows to shore up the country’s balance of payments.
But China is exporting some of its negative practices as well. It is supporting potentially hazardous projects in nuclear power, thermal power, and chemicals production. More importantly, while the West is intensifying its boycott of Minsk – most recently Deutsche Bank and BNP Paribas – Beijing is helping a fellow autocracy off its knees. As President Lukashenka so aptly put it: “We will always remember that our Chinese friends stretched out a helping hand to us in times of crisis.”
Iacob Koch-Weser, contributing writer
(This is the second article of a three-part series)
Is the Customs Union Good for Belarus?
On 4 November Alyaksandr Lukashenka declared that Belarus and Russia were close to reaching a new agreement on natural gas supplies for 2012. He also expressed confidence about the probability of coming to an agreement with Russia on equal prices for oil and gas within the Customs Union of Belarus, Russia and Kazakhstan. However, Lukashenka also made it clear that if the suitable price agreements were not reached by the end of November Belarus may not to participate in the Single Economic Space which the Russian leadership is keen to launch in January 2012.
In the past the Belarusian ruler made significant political concessions to Russia. He led Belarus into Russia's projects on the creation of the Customs Union, the Single Economic Space and the Eurasian Union. Did these projects actually benefit Belarus economically?
Benefits in exchange for promises?
The gas supply agreement mentioned by Lukashenka was negotiated on 31 October during a meeting between Gazprom CEO Alexey Miller and Belarusian vice-premier Siargei Rumas. Though all details of the negotiations are still unknown, it is obvious that the future agreement will allow Russia's Gazprom to increase its share in JSC Beltransgaz from 50% to 100% and thus obtain full control over the Belarusian gas transportation system.
In return, Gazprom promised not to reduce gas supplies which go through Belarus even after the official opening of Nord Stream, which the German chancellor Angela Merkel and the Russian President Dmitry Medvedev opened earlier this week. Belarusian policymakers hope to benefit from equal gas prices with Russian consumers, but the Russian prime-minister Vladimir Putin insists on including of a special “integration reducing" coefficient for Belarus starting from 2012. Russia plans to equalize gas prices for its internal market and for export only in 2013.
Therefore, for the first time Lukashenka may become a victim in the traditional post-Soviet game “benefits in exchange for promises” which he and the former Ukrainian president Leonid Kuchma invented. Russia may continue to feed Lukashenka with promises to ensure equal hydrocarbons prices in the future and push Belarus further along the path of the Eurasian integration until there will be no way back. This development is particularly important as the Customs Union Commission will be abolished and a new supranational Eurasian Economic Commission modeled like the European Commission will start its work in July of 2012. The new commission will increase the number of staff from 150 to 1200 people.
Is the Customs Union good for Belarus?
Belarus' membership in the Customs Union has other benefits, but many of them are questionable. A new single Customs Code has been in force for Belarus, Kazakhstan and Russia since 6 July 2010. Transports and customs control has already moved from national borders to the Customs Union borders. According to official reports, Kazakhstan’s export to Russia increased by 38% and its export to Belarus more than doubled, Russian export to Kazakhstan raised by 25% and foreign trade turnover between Belarus and Russia increased by 50% at the end of 2010.
On the other hand, Belarus had to impose a high import duty on cars at the request of Russia, Belarus produces no cars while Russia was eager to support its car own industry. That led to a significant rise in car prices for ordinary Belarusians whose need for cheap used cars from Lithuania and Germany resulted in a large outflow of foreign currency estimated at 1 billion dollars in April-June of 2011.
In the heat of the summer economic crises Belarus was unable to impose prohibitive duties in order to prevent mass removal of goods and food to Russia. As a result, Belarusian consumers had to deal with deficit of meat, sugar and other basic products.
Moreover, by the end of 2011 Belarus should abolish the regulation on the obligatory sale of foreign currency by companies to the state as one of the commitments which fulfillment will allow Belarus to join the Single Economic Space. This abolition can provoke a new wave of foreign currency crisis.
The WTO factor
Despite Lukashenka’s hopes to gain different benefits from cooperation with Russia, it seems that Russian prime minister Vladimir Putin, who supervises the creation of the Eurasian Union and other integration projects, just seeks to maximize the economic benefits for his own country. All integration in the post-Soviet space is beneficial for Russia as it is the most developed and competitive CIS economy and has quite a lot of free financial and economic resources at its disposal to gain control over the majority of post-Soviet markets and gain political advantages as well.
In this context it is important that on 18 October leaders of all CIS countries except for Azerbaijan, Uzbekistan and Turkmenistan signed a new free trade treaty that had been discussed for more than 16 years. As expected, the list of preferential goods does not contain hydrocarbons and metals – the core of Russian exports. That means that all countries will not get an automatic discount on Russia's minerals but will have to negotiate with Russia separately in the future.
On 10 November Russia signed in Geneva an agreement with Georgia on the establishment of the international monitoring group on the Russian-Georgian border thereby removing the last obstacle in its way to the WTO membership.
Russia will support the accession of Belarus and Kazakhstan into the WTO, which would allow Russia to redistribute in its favour the amount of agricultural subsidies allowed by WTO regulations for the Single Economic Space as Belarusian agricultural subsidies may decrease more than threefold in the near future.
On 8 November the upper chamber of the Belarusian Parliament approved the so-called Treaty on Functioning of the Customs Union in the Framework of the Multilateral Trade System. In accordance with the treaty, following Russia's accession to the WTO its trade relations with Belarus and Kazakhstan will be regulated mostly by WTO norms that will have a higher legal force than the Customs Union norms. Moreover, Belarus will have to conduct separate negotiations with Russia on its WTO accession and Russia may lay put forward very tough conditions as Georgia did during Russia's accession process.
A sober balance of the Eurasian integration
To sum up, Belarus so far failed to achieve the main goal that could justify its participation in the Eurasian integration – equal oil and gas prices with Russian consumers and equal business conditions. No one can say for sure whether these goals will be achieved after the creation of the Single Economic Space. It appears that on balance Belarus currently loses more than gains from its participation in the Customs Union. Its economy is unreformed and not ready for competition in accordance with the WTO rules. That hinders Belarus ability to take advantage of the 170-million single market of the Customs Union. On the contrary, the Eurasian integration projects may seriously threaten its macroeconomic stability.
George Plaschinsky is an associate analyst at the Centre for European Transformation in Minsk. He is a graduate of the Moscow State Institute of International Relations (MGIMO University).