State-owned enterprises threaten economic prospects – digest of the Belarusian economy
On 24 January 2018, government officials announced new plans for support to Belarusian entrepreneurs in the current year. Meanwhile, according to Belstat, the state industrial sector remains the main driver of economic growth accompanied by a strong recovery of exports. However, the absence of an acceptable strategy for solving state-owned enterprises’ debt problems continues to threaten financial stability and long-term economic growth.
Entrepreneurship: several steps forward
In the second half of 2017, the authorities adopted a package of documents aimed at facilitating private business development. Legislative innovations greatly simplified the conduct of business, while radically reducing regulatory and administrative barriers. In addition, the government introduced additional tax and regulatory liberalisation for certain entrepreneurial activities; primarily small companies and individual entrepreneurs. Finally, the authorities expanded the possibilities for self-employed individuals (without registration of small businesses), for example, in the fields of craft activities and agritourism.
Next, on 24 January 2018, government officials announced plans to support entrepreneurship in the current year, including increased lending, lowered loan rates and several changes to taxation. In particular, the head of the National Bank of Belarus’s department for monetary policy and economic analysis, Dmitry Murin, says that lending will grow by 9-12 per cent, which supposedly will not harm macroeconomic stability.
Moreover, the National Bank expects a small drop in lending rates by approximately 1 percentage point. According to Murin, inflation expectations deter a more radical decrease in rates. Namely, the results of the analytical survey of individuals show that they subjectively feel inflation at 13 per cent, while prices in 2017 increased by two times less.
Finally, according to the deputy minister for taxes and duties, Ella Selitsky, the government will prepare proposals for comprehensive reforms of tax legislation throughout the year. It is likely that the fiscal system will undergo significant changes in 2019, with stabilising tax legislation the main goal for the next three years.
These measures will support private sector development. However, the key barrier to entrepreneurship remains unequal conditions for economic activity in comparison with state-owned enterprises (SOEs) rather than the regulatory environment.
In this respect, the artificial “bias” in allocating resources in favour of the state sector remains especially important. Without its elimination, the private sector will be stuck in the doldrums and unable to fully realize its potential.
Real sector: rising debts
While measures to develop the private sector have only limited effects, the state industrial sector remains the main driver of economic growth. In 2017, it showed growth of 6.1 per cent year-on-year.
According to honorary chairman of the board of the Business Union of Entrepreneurs and Employers, Georgiy Badey, this growth mostly occurred due to the favourable macroeconomic environment in key trade markets. However, the real sector lacks new drivers of growth and encouraging changes in economic policy.
In particular, financial instability associated with low quality SOE debts remains a serious threat to the economy. Moreover, Belarusian SOE debts continue to rise. For the first nine months of the previous year, the payments on loans and borrowings exceeded the volume of gross value added in the industrial sector as a whole. Therefore, in the past year, they not only failed to cover their old debts but became further indebted. As a result, the total national debt currently hovers in the range of 45-50% of GDP.
Measures recommended by the IMF to kickstart the process of resolving debt problems include strengthening creditors’ rights, permitting bankruptcy procedures for large debtors, and the sale of SOE debts at a fair market value (compared to their nominal value).
At the same time, this tough solution may seriously disturb the real sector (the sector of the economy that actually produces goods and services) and has both social and political implications. The “soft” alternative assumes new subsidies from the state.
However, such an “easy” solution only freezes the problem and limits its negative impact on the current macro dynamics. In the future, the debt problem may reveal itself at any moment and cause a new wave of economic recession.
Foreign trade: imbalances grow
Stable global growth contributes to revived demand for Belarusian commodities and industrial goods exports to Russia. This recovery in exports gave a positive impulse to the Belarusian economy, although growth remains fragile. For example, in the second half of 2017, the physical volume of shipments of “growth leaders” in the first half of the year (oil products, potash fertilizers, tractors and trucks) dropped. In contrast, the delivery of goods that previously lagged behind (food products, tires, refrigerators and shoes) increased.
Instability in export growth therefore remains a challenge for the whole economy, since the prospects for output growth highly depend on export performance.
Overall, foreign trade turnover of goods during the eleven months of the previous year reached $54.1bn and increased by 23.5 per cent year-on-year (see graph below). In November, imports of goods exceeded exports by $600m increasing the negative balance in merchandise trade to $4bn year-on-year, which surpassed 2016 figures by more than $800m.
As a result, the traditional imbalances in the Belarusian economy return: the growth of export goods invariably leads to the import growth and a deterioration in the balance of payments. Thus, while the results of measures for the development of the private sector remain invisible, positive dynamics of the economy will sustain only in case of a new round of export growth. Furthermore, the absence of an adequate strategy for solving the debt problem of SOEs continues to threaten financial stability.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)
Losing Russian transit, Belarus looks for European and Chinese alternatives
On 1 February Belarus will raise tariffs for the transit of Russian oil via pipelines crossing its territory by 6.7 per cent. Transit constitutes an important source of revenue for the country, while control of pipeline routes also gives Minsk a bargaining chip in relations with Moscow.
Seeking to expand its transit role, the government has announced plans to double its revenues from transit and transportation services. The ambitious plans aim to partly offset Russia’s increasing tendency to route cargo and passengers around Belarus.
Regional crises drive growth in transit via Belarus
In 2016 Belarus earned about BYN3.2bn (more than $1.5bn) from transit and transportation services. That meant a growth of 40.8 per cent from 2015. According to an assessment published by Belarus Segodnya, the main media outlet of the Belarusian government, Minsk received $150m for oil transit, $476m for gas transit, and $879m for transportation services in 2016.
The Belarusian government aims to double revenues from transit and transportation services in next 12 years, taking 2016 as the baseline. This conforms with the Concept of Development of the Logistical System of Belarus covering the period through to 2030, which the Belarusian Council of Ministers approved on 28 December.
The newly adopted Concept lists among key priorities the development of transit between Europe and China (including as part of China’s “One Belt, One Road initiative”), integration with EU markets, facilitation of logistical integration between the EU and the Eurasian Economic Union (EAEU), as well as integration with global logical and transport companies.
Is it realistic? Belarus’s transit role in various sectors has grown in recent years. Transit flows increased after the start of the conflict in Eastern Ukraine, as Kyiv minimised its rail transportation with Russia. On 12 December, Ukraine’s minister for infrastructure, Volodymyr Omelyan, announced that plans to completely halt rail transport to Russia are under consideration. If realised, this would mean that even more passengers and cargo between Ukraine and Russia would cross Belarus.
A similar situation has developed in air transport. According to official information from Belavia, the Belarusian national airline, transit passengers now account for almost every second passenger on its regular flights. Speaking to TUT.by on 15 December, Anatol Husarau, general director of Belavia, attributed the increase in transit passenger numbers to the war in Eastern Ukraine. According to him, following the halting of air links between Belarus’s neighbours,
the main transit flow for Belavia and the National Airport Minsk is that one between Ukraine and Russia. I think this is about half of the total transit flow. That’s why we began to fly more [frequently] to Ukrainian airports.
The visa-free regime that Minsk introduced for citizens of eighty countries in February 2017 also facilitates passenger transit through Belarus. The probable increase in the duration of the visa-free regime, recently discussed by foreign minister Uladzimir Makei, can be expected to further promote transit.
Nord Stream pipeline threatens Belarusian interests
At the same time, a series of growing problems seriously undermines these transit developments for Belarus. Most acutely, other developments threaten gas transit – more profitable and politically crucial than oil transit. Despite the efforts of Russia’s opponents, especially Poland and Ukraine, Moscow continues to lay additional pipelines as part of the Nord Stream project. The pipeline brings gas from Russia to Germany via the Baltic sea, circumventing Belarus and other Eastern European countries.
As early as January 2007, Belarus’s president, Alexander Lukashenka, called the plans for Nord Stream “Russia’s most foolish project.” His consternation hardly surprises, Minsk traditionally collects not only transit fees from Russian gas exports but also uses its capacities to regulate these transit flows as a leverage in political disputes with the Kremlin.
Minsk may lose more than gas transit. In September, the Moscow-based Kommersant daily newspaper reported that Russian shipbuilding firms were beginning to construct huge railway ferries to connect mainland Russia with the Kaliningrad enclave. If implemented, this move will relieve Russia of dependency on the region’s countries, including Belarus, in its land communication with Kaliningrad enclave.
Belarus can develop its transit – but only together with its neighbours
Integration with Russia and members of Russia-led EAEU very little helps Belarus to attract transit flows. Russia’s effective closing of almost the entire border with Belarus for nationals of third countries in October 2016 dramatically illustrated this, as did the introduction of border control zones in February 2017.
Wider Eurasian integration has brought even fewer results in the sphere of transit and transportation. The head of managing board of Eurasian development bank, Dmitri Pankin, admitted this at the 12th International conference on Eurasian integration in Moscow in October. He stated that analysis of 30 major projects between EAEU member countries in the transportation sphere revealed a comprehensive lack of coordination.
The different width of railway track gauge between the former USSR and countries to the west of them constitutes part of the problem, requiring Belarus to change train undercarriages on the border. Moreover, according to Pankin, while Chinese containers move on Belarusian and Russian railways at a speed 40−50 km/h, after they cross Polish border their speed falls to just 15 km/h and the trains have to be shortened due to different transportation standards.
Minsk looks to solve these issues: after all, it has long desired to become a mediator between the Eurasian and European integration blocks. At a meeting of foreign ministers for Eastern Partnership and Visegrád Group members in Warsaw on 12 April 2017, Belarusian foreign minister Makei emphasised the importance of achieving better interaction between the members of both groups on transportation. According to him, this could be achieved in particular by ensuring better compatibility of standards in the region and ensuring international financing for infrastructural projects in Eastern Europe. Yet so far, no material results have followed from these discussions.
In recent years, Minsk earned more from transit and transportation services, in particular, due to the traffic of passengers and cargo which had earlier circulated directly between Ukraine and Russia. However, the situation with transit looks precarious for Minsk: Moscow works to decrease major gas transit flows via Belarus, establishing links to the Kaliningrad enclave that bypass Belarus, and otherwise sidelining Minsk and the entire region in its communications links to European countries.
The losses for Minsk from these Kremlin policies will be considerable both economically and politically. The Belarusian government apparently wants to compensate by providing Belarusian transit routes for new passenger and cargo flows’ between regional countries, the EU and China. And, last but not least, Moscow’s attitude will inexorably further alienate Minsk from the Kremlin.