Modernisation in Belarus: the Process is More Important than the Result?
On 20 December, Deputy Prime Minister Piotr Prakapovich announced the need to accelerate the modernisation of Belarus.
According to him, it was necessary to carry out not only its technical modernisation, but also its economic modernisation, including improving public administration system.
But what Prakapovich's speech actually proved was that modernisation of Belarusian enterprises has failed. The state invested over $1bn in the cement and woodworking industries, but businesses are still generating only losses.
At the same time some Belarusian companies cooperate with developed countries and update new technologies in their enterprises successfully. These examples serve as a good lesson for today's leaders of Belarus.
The authorities have adopted a number of modernisation programmes over the past 19 years, though they started talking about it much more since 2012. Belarusian economist Leanid Zlotnikau links it with the reduction in revenues from the export of solvents.
Although the authorities state that modernisation goes beyond simply modernising equipment, in reality they are not ready to change their management style. On the one hand, they waste valuable resources on huge projects, yet they do not even try to prepare adequate business plans.
Many Belarusian officials are interested in the process of modernisation, rather than in its results.
Plenty of Expensive Cement
Over the past years, the authorities have modernised four cement plants in Belarus with a price tag of about $1.2bn. China gave a conditional loan to finance new equipment and specialists who carried out the modernisation of the enterprises. Despite all of this, the introduction of the actual usage of these new capacities at cement factories has been postponed for two years, which in effect has led to a $0.5bn loss for Belarus.
Before investing money, the authorities failed to take into account any possible market changes and how competitive their own products would be. As it turns out, the cost of Belarusian cement, unfortunately, has remained too high. Belarusian officials wanted to make these plants were export-oriented, but Belarusian cement appeared to be more expensive than its Russian counterpart.
The authorities have to sell their cement at lower prices to offload their stockpiles and thus, all of thews recently modernised cement plants remain unprofitable.
Other Challenges of Modernisation
The defeat of a programme of modernisation in the woodworking industry has become a part of many anecdotes in Belarus. Over six years, the state invested more than $1.3bn to modernise the woodworking industry. Last year, Lukashenka even introduced compulsory work at woodworking enterprises. No employee of the nine companies in the industry could resign without the permission of their superiors.
A month ago, Alexander Lukashenka once again visited Barysaudreu, a woodworking company in the Minsk region. He was shocked by the lack of results. Barysaudreu, as with most other enterprises in the sector, not only failed to become more competitive, but did not even begin to undertake the first steps towards its own modernisation. Mastydreu, another enterprise in the industry, has been unable to produce anything since 2010.
Many other firms have similar problems. Mikhail Miasnikovich, Prime Minister of Belarus, said that "20 percent of companies cannot cope with the modernisation and another 37% are modernising with a lag." And still, Lukashenka's regime continues to waste money on other major projects.
Integral, the largest manufacturer of microelectronic components in Central and Eastern Europe, is also in decline, as the authorities failed to modernise the enterprise. Alexander Abukhovich, an economist who worked at Integral, explains that the company needed about $2bn to modernise, but the state allocated only $284m: “That is not enough to even reduce the backlog as competitors modernise even faster.”
This January, the Belarusian Ministry of Finance published financial reports of Belarusian enterprises for the first three quarters of 2013. According to their data, Belarusian companies succeed primarily in areas related to raw materials.
|Most Profitable Open Joint Stock Companies of Belarus||Most Losing Open Joint Stock Companies of Belarus|
|Navapolatsk Oil Refinery||Barysau Meat Processing Plant|
|Mazyr Oil Refinery||Slutsk Meat Processing Plant|
|Belshyna (tire producer)||Svetlahorsk Pulp & Board Plant|
|Belaruskali (potash producer)||Vityas (TV set plant)|
|Homeltransoil Druzhba (oil transit)||Krychau Cement Plant|
Why the Process is More Important than Result
The failure of these and other modernisation projects have their roots an economy dominated by the public sector. Responsibility for improving enterprises' capacities remain divided between many officials who try to pass it on to someone else, usually the directors of the companies.
But directors have little interest in the long-term success of state firms. Thus, the government have no tools to motivate the directors of these enterprises, except criminal liability for failing to modernise their operations.
Siarhiei Chaly, a Belarusian economist, explains that nobody cares about the final result of these modernisation projects, but many people want to earn money from the modernisation process: suppliers, builders, or as Chaly states, "there is a large number of people who do not earn on a project's profitability, but on its expensiveness."
The more expensive the project, the better for its implementers.
Opportunities for Belarusian Enterprises
Many Belarusian officials are surprised that major modernisation projects have failed to yield the desired results. They believe that the purchase of new equipment immediately would translate into revenue growth. The result indicates that Belarusian enterprises still require specialists who are good in strategic planning, marketing, quality control and other areas not related to the equipment itself.
However, not all Belarusian companies have gone this way. Horizont, a manufacturer of TV sets and household appliances, invited Japanese engineers to modernise the enterprise. The engineers are still in Minsk introducing new technologies. As a result, Horizont produced 530,000 TV sets last year, and most of them are not under their own brand, but rather Toshiba or Sharp.
The Belarusian Automobile Plant, one of the world's largest manufacturers of dump trucks, established a subsidiary company in Germany to build outside contacts with producers from the European Union. For its part, the company is seeking new technologies and opportunities to modernise Belarusian mechanical engineering.
Looking at these examples, Belarusian officials understand the need to have links with more developed countries to reform. In such conditions, cooperation with the West and initiatives such as the European Dialogue on Modernisation with Belarus has become precisely the kind of thing the country's leaders need today.
The authorities often try to reinvent the wheel and find their own unique methods to modernise the country. But sooner or later they will be forced to initiate a real modernisation programme, one which should go far beyond simply buying new equipment.
Russia Wants Belarusian Enterprises Instead of Promises
On 13 December, Russian Prime Minister Dmitry Medvedev proclaimed that Russia and Belarus may introduce a single currency. Various officials from both countries have regularly proclaimed such intentions since 1993.
There has been no result to these back and forth in the past two decades, yet officials apparently have more interest in the process than in outcomes. Integration talk hides the reality of the diverging developmental paths of two nations.
The results of bilateral relations are far from ideal as the decline by eleven percent in volume of Belarus-Russian trade illustrates. According to Medvedev, trade diminished due to negative processes in global markets. Indeed, declines might be a result of Russian policy. This is especially true after Russia's one-sided accession to the WTO took goods from cheap-labour countries squeezed out Belarusian goods from Russian markets.
Russia does not want to consider Belarus a partner. It strangles Belarusian enterprises economically to force Minsk into selling them to Russia. The most publicised cases concern Belarusian oil refineries and its defence industries.
Earlier, Lukashenka speculated on his being Russia's best ally. Now he has a harder time to gain favours from Moscow as Ukraine just became a lot closer to the Kremlin by rejecting the EU association agreement. It is no wonder then that the day after President Yanukovych of Ukraine got his deal with Putin Lukashenka rushed off to Russia.
As Ukraine seemed to tilt towards the EU and Russia was on retreat in the region, Lukashenka believed that his positions as Moscow's only friend in relations with Kremlin were quite promising. On 6 December, he unexpectedly said that there was no obvious need to sell the Minsk Wheel Tractor Plant (MZKT).
Despite the fact that the plant has been on a Russian priority buying list as an established producer of world-quality civilian and military special transport vechiles. “I always wondered about this eagerness to sell the plant […] sure, I am absolutely against it,” he said. Such statement contradicts promises which Minsk had given Moscow for financial aid after 2011 financial crisis in Belarus.
After this latest Ukrainian rapprochement with Russia, Minsk had to adopt to a new view of reality. On 20 December Vice Prime Minister Uladzimir Siamashka said that next year a share in MZKT would be sold to a Russian investor. MZKT is a valuable asset yet it will lose in its value if Russia would implement its plan to exclude non-Russian enterprises from Russian arms production technological chains. Moscow already started to replace its foreign suppliers with Russian companies and emphasised that it would provide no special exemption for Belarus despite its being the most loyal Russian ally.
Tactical Oil Weapons
Moscow resorts to similar unfriendly means to get their hands on Belarus' oil refineries. Russia declined to agree with the Belarusian government on a yearly balance sheet of oil shipments to Belarus. Moscow agreed with Minsk on Saturday only on their oil export plans for January-June. In this way Putin can keep Lukashenka on a short leash. The Russians did as much in 2013 and are apparently going to do it again next year.
As a result, while in 2013 Belarus was planning to import from Russia 23m tonnes of oil, it actually managed to get no more than 20.7m tonnes. Under these circumstances, Belarusian refineries face unpredictable workload schedules and can work only at 80-85 per cent of their full capacities which adversely affects their profitability.
Belarusian Vice Prime Minister Pyotr Prakapovich openly lamented on Friday that Moscow was not willing to refine more oil in Belarusian refineries and sent its own crude abroad of Customs Union leaving its allies without work and revenues. Indeed, the Belarusian government cannot provide refineries with sufficient volumes of oil and has to sell its shares in them to somebody who can bring the necessary oil in. Prakapovich announced that Minsk had already sent to Russian Rosneft' its offer to sell its state-owned majority share in Mazyr refinery next year.
Strategic Oil Weapons
The Russian Prime news agency reported recently that Russia was preparing to sign with Belarus a protocol on prolongation of December 2010 agreement. That agreement destroyed political economic basis of Belarusian regime as it made Minsk pay export duties on Russian-origin oil and products extracted from it.
Before that, Belarusians get Russian oil on duty-free conditions, refined it and exported oil products, mostly to Europe, without paying any duties to Russia. The December 2010 agreement made Belarusian oil products' exports shrink and stripped the government of revenues estimated to be up to $4bn annually.
Lukashenka repeatedly spoke of his hope that Putin will deliver on his promises and since 1 January Minsk will be relieved of its obligation to pay these duties. Moscow seemingly has better idea – Russian Deputy Prime Minister Igor Shuvalov in October said that Russia would begin duty-free oil trade with Belarus only in January 2015 and only if Minsk removed all its trade exemptions with Russia inside the Customs Union.
No Overtake of Belarusian Industry
The State Secretary of the Union State of Belarus and Russia Grigori Rapota on 4 December complained that only integration between several electronics firms (Belarusian Integral and Russian “Roselektronika; Belarusian Peleng and Russian “Roskosmos”) has gone well. However, other planned projects in chemical and machinery branches faced their own difficulties – integration between “Hrodna Azot” and “Gazprom” and “Evrokhim”; MAZ and Russian KAMAZ.
As economic analyst Tatyana Manyonak told the Belapan news agency last week, it was Lukashenka who makes the final decision on the sale of Belarusian enterprises. And he is seemingly not in the mood to sell now. In addition to his ambiguous statements on MZKT, earlier in October, he publicly criticised the Russian proposals of the MAZ and KAMAZ merger, because the Russians failed to guarantee MAZ new investments, production increases, technological renewal and market expansion.
The Belarusian government has for a long time been demonstrating increasing economic and political nationalism. So far it managed to neutralise Russian pressure on many points while getting from Moscow substantial preferential economic treatment and assistance.
Even in the unfavourable conditions of 2011, as Minsk lost the option of “going West” after brutal crack down on post-election protests, the Belarusian government still managed to get billions of dollars of Russian help to overcome its financial crisis. For that, Lukashenka gave the Kremlin little more than a few promises most of which he does not seem to plan to deliver on. These tactics have paid off – Russia scaled down its demands and now Lukashenka can sell the same things once again.
But this tug-of-war cannot last much longer. Beginning in 2010 Russian aid and subsidies have not been sufficient to bolster Belarus' ailing economy and the deficit of its current accounts regularly requires additional injections of funds. To get the money, the Belarusian government will both reform the economy and sell some assets. These economic changes will result in political shifts – however, this does not necessarily mean that they will lead to the establishment of a liberal democracy.