Investment Climate in Belarus: Room for Growth
On 9 July General Motors and JV Unison signed an agreement to assemble Chevrolet Tahoe and Cadillac Eskaleyd automobiles in the Minsk region.
From the beginning of the year, several international fast food chains have announced a desire to open shop in Belarus. New businesses include major American brands such as Burger King, KFC, and Texas Chicken.
But despite official claims that Belarus presents an attractive environment for investment, the reality has shown quite the opposite. Most Western companies abstain from conducting business in Belarus due to the difficulties of doing business and enter Belarus mainly through franchises.
Investment Climate in Numbers
According to the Belarusian National Statistics Committee, in 2014 the primary investors to Belarus came from Russia (41.6% of all total investment), the United Kingdom (18.6%), Netherlands (13%), Cyprus (6.2%), Austria (3.5%), and Germany (2.5%). In 2014, foreign direct investment in Belarus dropped 0.7% annually according to the World Bank's data on foreign direct investment net inflows.
While the largest investment sums traditionally come from Russia, Western companies are finding their way into the market too, though prefer to profit from Belarus mainly through franchises. Two major examples are McDonald’s and TGI Friday’s. Both of these franchises opened restaurants, but they did so through their Russian franchises. The owner of TGI Friday’s franchise, the Russian company “Rosinter Restaurants Holding”, also owns the KFC franchise, which makes it the likely franchise owner for KFC's restaurants in Belarus as well.
The franchise of McDonald’s competitor Burger King actually belongs to a Russian businessman Alexander Kolobov, who recently became the owner of Germany's largest Burger King franchise and has started to intensively push the expansion of his new business.
While its financial and fuel dependence on neighbouring Russia has helped it to secure its own investment interests in Belarus, the country’s economic freedom has witnessed a decline in 2015. Belarus scored 0.3 points lower than the last year in the 2015 Index of Economic Freedom, setting it back to the “repressed” category. Belarus is ranked 42nd among the 43 countries in Europe, outperforming only Ukraine, a country in deep political and economic turmoil.
Gains from the Ukrainian Crisis
While Belarus’s ranking has been falling, there is hope that the country can improve its FDI. The Ukrainian crisis not only allowed Belarus to rid itself of its renowned brand as “The Last Dictatorship of Eastern Europe”, it also ended the country's isolation, and created some potential to create gains in the Belarusian economy.
The armed conflict and lawlessness in Ukraine has made Belarus a much more reliable partner and transit country for China’s “Silk Road” project. Chinese President Xi Jinping visited Belarus on 10-12 May for the first state visit in the past 14 years. In addition to improving infrastructure, the “Silk Road” project could bring much needed investment and develop industry. China’s cooperation with Belarus suggests a solid package of investment may be on the horizon, as well as a package of industrial projects such as the cooperative industrial park in Belarus which is in the works.
The Ukrainian crisis also triggered Russia to freeze its contracts for the transit of gas through Ukraine by 2019 and redirect transit through the Turkish Stream pipeline. A similar situation has the potential to develop with the Ukrainian branch of the “Druzhba” oil pipeline, a key transit corridor for Russian oil exports. Belarus, which has two “branches”: the southern (“Gomeltransneft Friendship”) and northern (Novopolotsk oil transportation enterprise “Druzhba”) lines, has serious potential to grab a larger strategic share of the lucrative transit and refining of Russian oil.
Risks to Conduct Business in Belarus
Belarusian Viktar Kisly, the head of the Wargaming company, which based one of the largest office buildings in Minsk, has overseen the creation of one the most popular war games in Russia and the former Soviet Union “World of Tanks” has seen the effects of the changing regional economic landscape. In an interview to Russian paper Vedomosti, he confirmed that the economic crisis in Russia has led to his audience shrinking and a loss of revenue. The successful businessman, whose company made more than $500 million in 2014, says that the business development in post-Soviet countries has enormous unrealised potential. According to him, however, Belarus should make many more steps to achieve favourable conditions for international business, something which it has yet to do.
The recent thaw in international political relations with Western countries cannot influence foreign investors’ intentions all by itself. Their first priority is naturally concerned with being profitable. From their perspective Belarus continues to be one of of the world’s most state-managed economies, or in other words, a place where the state interferes and influences many aspects of the economy.
Presidential decrees are embedded in a hierarchical web of regulations and are often in direct competition with laws and codes, which regularly contradict one another. This kind of a high-risk environment is unsuitable for potential investors as it is not clear by which set of rules they should be playing. Macroeconomic instability, which manifests in the devaluation of the Belarusian ruble, increases the risk of inflation in the country. In an inflationary economy prices cease to provide accurate signals for investment and, in turn, create distortions and disorient potential investors.
To attract international companies, Belarus needs to ensure a predictable business environment and reduce the investment risks for international business. This can be done by creating a common, uniform and equal set of rules and regulations for investing in Belarus. In order to stabilise the macroeconomic situation in Belarus, the state needs to introduce a series of gradual reforms as the economy is not prepared for an immediate conversion to a strict market economy, one that could lead to a sharp rise in inflation and send the economy into a nosedive.
Failure of Minsk-2 and the Belarusian Presidential Election
Belarusian president Aliaksandr Lukashenka’s role as a mediator in the conflict in Ukraine has received high praise from European officials and partially ended the isolation of the republic. Recently the government has taken part in several high-level events, most notably the Eastern Partnership summit in Riga on 21-22 May.
But the potential impact of the collapse of the Minsk-2 agreement on Lukashenka’s popularity three months before the presidential election in October has received little attention. A related question is: where do residents of Belarus stand on various issues of the conflict, which has effectively severed relations between its two neighbours?
Minsk-2 on Shaky Ground
Minsk-2 (February 2015) featured a consolidation of terms reached at the earlier Minsk-1 (the Minsk Protocol) agreement in September 2014, which in turn derived from a 15-point peace plan drafted by Ukrainian president Petro Poroshenko. It required a ceasefire, the withdrawal of heavy weapons from the front, preparation for local elections in Donetsk and Luhansk, and monitoring by the OSCE.
In addition to Lukashenka, the presidents of France and Germany initiated Minsk-2, and thus it took on the appearance of a common European effort to stop the war. In Minsk, Lukashenka acted as mediator. After the signing, but before its measures took effect, the separatists mounted a sustained and successful campaign to capture the town of Debaltseve, following their takeover of the remains on Donetsk airport.
The past four months have seen both sporadic and heavy conflict, which approaches once again a full-scale war. Ukraine argues that Russia has committed up to 12,000 troops on the scene, some from the Caucasus and Central Asia. After Ukraine retook the occupied territories, it has seized advanced weaponry produced in Russia, including tanks and artillery. Ukraine in turn has continued to shell the city of Donetsk. The OSCE has neither the numbers nor the authority to monitor the zone, and deception of the monitors is common. Minsk-2 is on the brink of failure.
Outlook of Belarusians in Summer 2015
Currently, despite a struggling economy, Lukashenka should win the election, though his popularity has taken a dip because of concerns over rising prices and unemployment. The recent June poll conducted by the Independent Institute of Social-Economic and Political Research (NISEPI) indicates that 37.4% of those polled would vote for the incumbent president if he runs, as expected, for a fifth time, and 20.6% for a candidate from the democratic opposition. But individually no member of that opposition is polling more than 5%. The highest is Mikalai Statkevich, who is currently in prison.
The same poll, however, contains interesting insights into popular views on international affairs. A majority of respondents would not want to join either the European Union or a merged state with Russia. On the other hand, appraising the actions of state leaders, the highest levels of approval went to Vladimir Putin (60%), Nursultan Nazarbayev (43.7%), Xi Jinping of China (35.4%), and Angela Merkel (34.6%). Least favoured were President Barack Obama of the United States ((13.5%) and Petro Poroshenko (10.1%). The inescapable conclusion is that Belarusians prefer authoritarian leaders to democrats.
In the event of a Russian invasion of Belarus, only 18.7% of those polled would take up arms in defence of their country Read more
Regarding attitudes to Russia, some 39% supported the concept of the “Russian world,” 62.3% considered the annexation of Crimea by Russia in March 2014 as the rightful return of Russian lands, and almost half thought that the people of “Novorossiya” have the right to self-government. In the Ukrainian-Russian conflict, Belarusian sentiment is overwhelmingly on the Russian side. In the event of a Russian invasion of Belarus, only 18.7% of those polled would take up arms in defence of their country, and 52.9% would adjust to the new situation. Still, currently over 60% consider Lukashenka’s policy toward the conflict as the right one, reflecting, as the poll demonstrates, the pervasive power of Russian Television.
Lukashenka: Hobson’s Choice?
NISEPI polls have consistently been quite accurate. Thus if one takes these results at face value, respondents would prefer to remain out of the conflict, but nonetheless sympathise with Russia. If hostilities escalate, the options for the president may be limited. Moreover, the failure of Minsk-2 would undermine his image of a “peacemaker,” and perhaps drag Belarus into the conflict as a base for Russian weapons and servicemen. In this respect, Lukashenka, limited by his own past ardently pro-Russian policies and commitments, might feel compelled to join forces with Putin in order to retain the support of the electorate.
The poll’s dismissive attitude toward Poroshenko merits comment. His popularity is falling in Ukraine too but remains respectable, in contrast to that of his Prime Minister Arsenii Yatseniuk. Yet Poroshenko has elevated as governor of Odesa region (and according to some reports potentially the next Prime Minister) the flamboyant former president of Georgia, Mikheil Saakashvili, not only an implacable opponent of Putin, but also perhaps the closest friend of Lukashenka in Europe. Lukashenka’s past neutrality on the conflict reflects his dilemmas: to betray friends like Saakashvili or antagonise Putin?
Lukashenka likely hopes some semblance of Minsk-2 remains in place until October. But if, as seems probable, it collapses before then—the separatists usually favour summer campaigns—he will need to reevaluate the situation promptly and with intricate care. Neutrality may no longer be an option, and the Russian president applies pressure for deeper commitment to a common struggle with the West and “neo-Nazi” Ukraine. But that choice (for Russia) would negate newly built ties with Europe as well as potential reductions of sanctions by the EU and United States. A Catch-22 situation prevails.
David Marples, special to Belarus Digest
David is a Distinguished University Professor at the University of Alberta in Canada.