Foreign Investment in Belarus: Mission Possible
Last week, the Ministry of Transport of Belarus and the Belavia national air carrier revealed that they have been negotiating with Boeing.
Minsk is proposing to Boeing that it participates in the reconstruction of the Minsk aircraft repair plant and help establish a Boeing maintenance hub in that nation’s capital.
In May a new Swiss investment project – a railroad engine and car plant – opened in Fanipal near Minsk. At the same time another EU firm – Czech Papcel – received approval to start construction on a major paper mill in Shklou.
For some opponents of the current Belarusian government these developments would appear to be a form of silent collaboration between Western business and “last European dictatorship”. In reality Belarusians are in need of economic development, regardless of who rules the country. Widespread poverty and the prevailing backwardness that exists in Belarus presently only helps promote populism and, by extension, the tyranny that props the whole system up. Investing isn’t the only way to get involved in the market. Many people find careers within the market. Many stockbrokers make a good living, as do financial advisors.
The EU has no need for a poor dysfunctional state on its borders, regardless if its political regime or the degree to which it is or is not considered pro-Western.
New Production in Two Years
As the story of a major Swiss company Stadler Group shows, foreign investors can indeed sucessfully work in Belarus. The company’s work in the country began when Belarusian Railways bought a few new electrical trains from them. After concluding their successful deal, the CEO of the company, Peter Spuhler, came up with the idea to manufacture their trains in Belarus.
In July 2012, the Belarusian government and the Stadler Group founded the open joint-stock company Stadler Minsk. The Belarusian state contributed the assets of Belkamunmash, a publicly-owned company that produces urban electric transportation vehicles, and some land. Stadler contributed a majority of the funds for the new company’s launch and received 60% of its shares as a result. The construction of a new production facility for “Swiss trains” in Fanipal began over a year ago in April 2013.
TheSuch rapid implementation of this deal may impress those who think that Belarus is a bad place for doing business. Spuhler named three reasons for their decision to create train production facilities in Belarus. First and foremost, of course, was Belarusian Railways’ interest in their products that led to the sale of Swiss trains. A second element that attracted the Swiss company was the availability of an established local partner – Belakamunmash – to help launch the project. The third item that attracted them to seriously consider opening up a manufacturing facility was the opportunities that Belarus presented the company as it seeks to access the markets of Russia and Kazakhstan through the Customs Union.
Yet there are other important aspects which make this success story appear so prosaic. The Belarusian leader Aliaksandr Lukashenka recently used to refer to the Stadler Group’s work in the country as a proverbial paragon that other foreign investors could, and should, follow.
“They brought new technology [to us], we did not have this kind of manufacturing earlier. They had not yet built the plant and had already signed contract to supply electric trains to Russia.” Lukashenka added. When Spuhler proposed to privatise Belkamunmash, Lukashenka gladly accepted, though not without reminding potential investors that the last word in such matters would always be his.
By now, the well-established Western firm has already invested about 50m euros in the country. The Director of Stadler Minsk, Uladzimir Karol, emphasises that a number of new technologies have arrived in Belarus. Yet so far production is essentially reduced to assembly, as almost 100% of blue prints for their construction come from abroad. According to Karol, due to their internal limitations, it could not be otherwise initially.
Investors on the Ground: More Positive Than Negative Opinions
Most investors who actually work in Belarus assess business climate rather favourably. The Representative Office of the German Economy in Belarus, a member of the German Union of the Chambers of Trade and Industry, published in June a survey of investors’ opinions on the ease of doing business in Belarus. 42 companies with mostly German investment responded to the questionnaire.
70 per cent of them would choose Belarus in the future as a destination for investment. Among the most attractive factors of the business climate in Belarus was the nation’s political stability, overall infrastructure, human resources and the quality of its higher education.
Listing the most problematic issues for the business climate the individual surveyed mentioned access to loans and credit, the unpredictability of Belarus’ economic policies, legal guarantees and the transparency of its tenders.
The Representative Office of the German Economy concluded:
Belarus as an island of stability obviously positively contrasts with the general regional background […] General assessments of Belarus’ business climate internationally, comparatively, significantly exceeds the level of assessments of the business climate in neighbouring countries, Russia and Ukraine.
However, the level of foreign direct investments (FDI) fails to impress. Minsk boasted of attracting around $15bn in 2013, 7% more than in 2012. Yet 80.8% of this sum consists of money used to satisify debt repayments, with only a small fraction of this sum being true capital investment (in 2012 – $0.3bn, data for 2013 unavailable).
Russia leads the list of major investors in Belarus (48.6%), followed by the UK (21.4%), Cyprus (7.1%), the Netherlands (4.9%) and Austria (3.4%). A majority of these investments came from former Belarusian citizens or from businessmen in neighbouring countries who channel their investments through the UK or Cypriot companies.
Russia’s share of investment, when compared to 2012, rose by 1.9%, much to the detriment of Western companies. This figure corresponds with longer-term trends in Belarusian foreign trade.
Recently, Foreign Minister Uladzimir Makey rebuked the EU, stating:
Last year, the trade turnover with Russia made up about 49% of [Belarus’] total turnover and with the EU – 27%. Several years ago, the numbers were almost equal. As a result of sanctions and some other actions, the situation has deteriorated. Now we have an imbalance.
Belarusians – More than Just Lukashenka and the Opposition
The major issue with investment stems from the poor reputation of Belarus in the West. Some of its political and human rights problems are frequently blown out of proportions. Even quite respectable German newspapers such as Der Taggesspiegel allow themselves to print articles with titles like “Hockey World Cup in Belarus: Blood and Games,” while forgetting to explain whose blood they were implying or specifying the scale of the political prisoner problem.
Meanwhile, despite the evident political suppression and fraudulent elections, Belarus has a functioning state apparatus and its regime enjoys a rather high level of popularity. The latter has even risen as Belarusians have observed the developments in Ukraine.
The idea that Belarus is a dangerous place where surveillance and the “KGB” thrive are accepted as common knowledge among a majority of Western politicians. The result of this general consensus is the continued international isolation of Belarus in the West, a policy that has contributed to preserving the current state of affairs both inside and outside Belarus since the 1990s.
There are millions of Belarusians who have nothing in common either with Lukashenka nor the opposition Read more
Western politicians can do a great deal of good even if their actions merely mean stepping aside and accepting that there are millions of Belarusians who have nothing in common either with Lukashenka nor the opposition and let business get to work in Belarus.
These millions of people have the right to live decent lives. After all, the European Union has nothing to win if one day on its borders a despondent and impoverished country pops up – regardless of whole rules the country.
The EU has to think about Belarus’ development and as an initial step, it would serve both Belarus and Europe if they would allow Belarus to develop economically, regardless of the name of its acting president. Such a policy would help build a viable and robust Belarus, a country able to resist foreign pressure and become increasingly more integrated with the global community.
Some reasonable encouragement for Western businesspeople wishing to deal with Belarus will immediately have an impact on Belarus and the region in the foreseeable future.
By gradually changing the political economy of the country – without undermining those state institutions that have nothing to do with political persecution – investors will change Belarusian politics.
They will also help Belarus to change politically in an evolutionary way, helping it to avoid a Ukrainian-style bloody confrontation.
A Split in the Eurasian Union: Belarus Refuses to Join Russia’s Trade War with Ukraine
While Ukraine was preparing to sign the Association Agreement with the EU, Russia was trying to secure the support of Belarus and Kazakhstan in introducing protective measures against Ukrainian goods.
Moscow failed to convince its Eurasian partners that Kyiv’s Association Agreement would pose a threat to their economies and had to resort to taking unilateral action for raising customs duties on goods from Ukraine.
This case may well represent a model of relations that may come to dominate decision-making in the Eurasian Economic Union.
Fairly frequently, the three nations have viewed their respective interests as being too divergent to reach a comfortable compromise and instead are resorting to taking unilateral action.
Interestingly, Belarus itself behaves in a similar fashion towards several Ukrainian imports that it views as a real hazard to its domestic industries.
Russia’s authorities had warned their Ukrainian counterparts that they would resort to serious protective policies if the latter decided to sign the Association Agreement long before Kyiv’s Maidan happened. Presumably, those warnings may explain Viktor Yanukovych’s decision to not sign the agreement at the Eastern Partnership Summit in Vilnius back in November 2013.
When the newly elected Ukrainian President Petro Poroshenko declared that he would sign the economic part of the Association Agreement immediately after his inauguration, the issue returned to the Kremlin’s agenda. The Russian government raised it with Belarus and Kazakhstan, its Eurasian Customs Union (ECU) partners. At a meeting of the Eurasian Economic Commission on 23 June in Russian Sochi, the ECU’s supranational body, Russian officials suggested putting forth a collective response to Ukraine’s decision.
They argued that the Association Agreement threatens producers and manufacturers from the Eurasian troika. The Deep and Comprehensive Free Trade Agreement (DCFTA), the economic part of the Association Agreement, stipulates that Kyiv should remove its import duties on goods from the EU.
Ukraine is also a member of the Commonwealth of Independent States’ (CIS) region of free trade. Ostensibly, Russia fears that cheap European goods, disguised as Ukrainian goods, will flood the ECU’s markets and, thus, bankrupt less competitive producers in Belarus, Kazakhstan and Russia.
However, this argument has failed to convince Moscow’s allies. In the words of Belarus’ representative to the Council of the Eurasian Economic Commission Siarhei Rumas, Belarus and Kazakhstan “strongly reject” the proposal.
According to Rumas, the consequences of Ukraine signing the Association Agreement for the ECU’s economies remains unclear as the Eurasian Economic Commission has yet to analyse them. Under these circumstances, Belarus sees no “urgent need to adopt such a decision”.
As a result, however, Russia must invoke a special clause from the CIS free trade treaty and introduce its protectivist measures unilaterally.
Own Interests First
By rejecting Russia’s proposal, Minsk again demonstrates that its space to manoeuvre in its relations with Russia and remains resolute in using it to protect its own interests. It is abundantly clear now that one of Belarus' national interests includes maintaining good relations with Ukraine.
In 2013, Ukraine was Belarus’ third largest trading partner, following Russia and the EU. It accounted for 7.8% of the country’s foreign trade. Crucially, Minsk had a sizable trade surplus with Ukraine amounting to around $2.1bn.
Given the country's worsening economic situation and its traditional problems with its current and foreign trade accounts, the Belarusian authorities are actively looking for ways to minimise the negative repercussions of the crisis in Ukraine on their bilateral trade.
Minsk would be happy to re-export Ukrainian goods to Russia Read more
Supporting Russia’s sanctions against Kyiv would exclude such a possibility. Moreover, Belarus would be happy to use the ongoing trade tensions between Russia and Ukraine to bolster its own position. For example, Minsk would be happy to re-export Ukrainian goods to Russia.
Similar events unfolded after the Russia-Georgia War in 2008. When Moscow banned Georgia’s imports, certain Georgian goods (for example, its staple wine and mineral water exports) started entering Russia via Belarus.
Therefore, instead of aligning itself with Russia’s policies, the Belarusian Foreign Ministry emphasises that it considers Ukraine’s decision to sign the AA with the European Union as “the sovereign right of a sovereign nation”.
Belarus Says No to Ukrainian Sweets and Beer
At the same time, Belarus’ government feels free to take the liberty of introducing its own restrictions on trade for certain imports from Ukraine that it perceives as a threat for domestic producers. Recently, both beer and confectionery products from Ukraine have been denied entry to the Belarusian market.
In May, the Council of Ministers adopted a decree that obliges confectionery importers to obtain one-time incentives. In order to acquire the licenses, importers need to set very high prices, prices so high that they automatically make their goods uncompetitive on the Belarusian market.
The decree does not name Ukraine specifically. It does, however, appear to be the primary target. According to the Ukrainian Confectionery Industry Association, Belarus’ authorities have begun to ask the importers of sweets from Ukraine to increase their prices and even blocked their deliveries a month before the decree’s adoption.
As a result, most Ukrainian confectionery producers have had to abruptly stop exporting their goods to Belarus. Similar developments have affected beer imports from Ukraine as well.
Unlike Moscow’s proposal to take collective, union-wide measures, the Belarusian government is much more concerned about its own domestic preferences when considering which Ukrainian imports to curb – a decision that has nothing to do with Kyiv’s decision to sign the Association Agreement.
In his 22 April 2014 State of the Nation address, Lukashenka proclaimed that the development was a top priority of what he called a new economic policy. Ukrainian confectionery and beer imports simply fell victim to the Belarusian government’s understanding, or lack of it, of how an internal market should develop.
It should be noted that Minsk did not even bother consulting with its ECU partners before introducing the restrictive measures.
Model for Decision-Making in the Eurasian Economic Union
Unilateral actions are likely to dominate sensitive decision-making issues in Eurasian Economic Union's future Read more
The unilateral actions by both Moscow and Minsk suggest that a similar model will dominate sensitive decision-making issues in Eurasian Economic Union's future. Belarus and Kazakhstan's refusal to support Russia’s sanctions against Ukraine shows that the Kremlin lacks the ability to force its ECU allies into full political and economic compliance.
Belarus’ unilateral moves against Ukrainian beer and confectionery products implies that it does not take Eurasian regulations and supranational institutions very seriously.
This would appear to be a more or less natural state of affairs for an economic union that embraces authoritarian political regimes, each of whom are racked with difficult mixtures of contradicting economic problems and political concerns and ambitions.
In this light, Eurasian integration will likely face one of the two scenarios. Either Russia will have to pressure its allies into better compliance or the integration dynamics will gradually erode to reflect one of the more amorphous forms of the post-Soviet integration – something akin to the CIS and the Union State of Belarus and Russia.