Ineffective state-owned enterprises, improved business climate – digest of the Belarusian economy

On 17 November 2017, the official statistical body of Belarus, Belstat, announced that GDP growth for ten months of the year has reached a new high outscoring the previous month’s record.

However, state-owned enterprises are still unable to significantly improve their cost-effectiveness, which delivers additional pain to their creditors threatening the banking stability of Belarus.

In the meantime, on 23 November 2017, the Belarusian President Alexander Lukashenka has signed a presidential decree aimed at improving Belarus’s business climate.

Economic growth: withholding the handicap

According to Belstat, from January–November 2017, GDP growth continued and reached 2 per cent year on year (see Figure 1). The main contributor to economic growth remains to be exports supported by increased demand within Belarus’s traditional external markets.

In particular, foreign counterparts (for example, China) display a belated interest in certain Belarusian goods, mainly potash fertilisers, as well as a range of capital goods exported to Russia. As a result, the figures of the first nine months of the year indicate that export of goods has increased by 20 per cent.

Correspondingly, industrial production is steadily recovering. The effect of “belated” external demand plays a crucial role here. Domestic demand, on the other hand, is mostly negated by the associated growth of imports for intermediate goods.

Additionally, Belarusian families are gradually restoring their consumption levels comparable to the “rich” years of the 2000s. This happened mainly because households started to believe that recession in the economy has ended, which subsequently will lead to growth in their real incomes.

However, the reverse side of increased consumption means the growth consumer goods imports.  For many households, the normalization of consumption also means more imported goods in their consumer basket.

Finally, another major component of GDP—capital investments—has also grown. After a downturn in the first half of the year, capital investments have gained in size and number. In October, they grew by 2 per cent year on year.

State sector: stressing the economy

The state-owned enterprise sector remains the key challenge for Belarus’s economy. In 2015–2016, devaluations of the national currency and government financial rehabilitation efforts combined to reduce costs for Belarusian firms. In addition, low domestic demand for imports (in comparison to the past two years) gave some “fresh air” to improve export competitiveness.

However, without permanent state support, a large number of the state-owned enterprises (SOEs) would be unable to sustain operations or generate profits. State directed redistribution of resources limits capabilities for the development of efficient firms and the economy in general.

For example, Jaroslav Romanchuk, Executive Director for Strategy, an analytics centre, notes that 60 per cent of agricultural enterprises and a quarter of industrial enterprises remain unprofitable and are unable to survive without state support. Moreover, Romanchuk says that half of all construction organizations work at a loss.

These inefficiencies compound the increasing inability of state-owned enterprises to repay their debts. This results in budget coverage of their obligations and investments in fixed capital (see Figure 2). Since 2015, Belarusian enterprises have demonstrated a steady decline in the acquisition bank loans with a corresponding build up of overdue debts, which consequently threatens the financial stability of the entire banking system.

The trends described above—a fall in issued loans, and rises in overdue loans and consolidated state budget funds—happened, first of all, due to the high cost of capital for SOEs during the past two years of economic recession. Second, the inefficiency of investment modernization programs from previous years failed to deliver substantial profits.

Doing business: high taxes limit cost-effectiveness

On 23 November 2017, President Lukashenka signed the presidential decree “On Enterprise Development.” The decree contains a package of government-drafted ordinances aimed at improving Belarus’s business climate.

In a major change, the decree introduces a notification system for businesses engaging in activities such as, among others, consumer and tourism services, trade, food services, passenger transportation, and the production of building materials.

This means that a business may merely notify local authorities of its plans to start engaging in such activities, which requires the filling out of electronic form, and then it can begin operations the following day. Additionally, the decree shortens the list of mandatory operational requirements for businesses, removing many sanitary, environmental, and other regulations that have manifested into business-stifling red tape.

The result is that Belarus currently ranks 38th in the World Bank’s Ease of Doing Business 2018—a drop of only one position in comparison with the previous year. World Bank experts have noted the downgrade occurred due to a drop in the tempo of legislative reforms intended to improve conditions for entrepreneurship in the country.

Additionally, World Bank expert and co-author of a study into the Belarusian economy Valentina Saltane argues the second factor that limits the attractiveness of doing business in Belarus, in particular, is the high tax burden for businesses. According to Saltane, Belarus ranks 96th in the world in terms of taxation weight (the first place being the least burdensome).

The overall rate of taxes and duties in relation to an organisation’s profit in Belarus is 52.9 per cent. For example, in Europe and Central Asia this figure hovers around 33.1 per cent. In high-income OECD countries, the ratio reaches 40.1 per cent. Therefore, Saltane concludes that Belarus should do more in order to reduce the tax burden.

Meanwhile, in 2016 President Lukashenka set a strategic goal for the government to reduce all types of production and sales costs by a quarter. The aim was to improve the competitiveness of the national economy. However, without reduction of the tax burden on business, this goal still seems unachievable.

Thus, in November Belarus’s economy has continued the growth of recent months. The rise in exports and industrial production are delivering positive economic prospects for the year. However, problems with the business climate and the cost-effectiveness of SOEs threaten the stability of the banking system and the sustainability of economic growth in the coming years.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Economy recovers, but remains structurally vulnerable – digest of the Belarusian economy

During a trip to Minsk on 5 October 2017, Venezuelan President Nicolas Maduro showed strong optimism on economic teamwork with Belarus, but forgot to mention the buildup of outstanding debts.

On 25 October, the National Bank of Belarus gave its overview of the current macroeconomic situation, citing the positive influence of monetary policy.

However, a day later on 26 October, experts from the Eurasian Development Bank were hesitant to confirm good long-term prospects for the Belarusian economy.

Trade policy: diversifying from Venezuela

President Maduro arrived in Belarus on 5 October as part of an official visit. The negotiations with Belarusian President Alexander Lukashenka were concerned mostly with trade and economic cooperation.

In 2016, trade turnover between Belarus and Venezuela equalled only $2m, which is a 92.6 per cent decrease in comparison with 2015 (see Figure 1 below). From January–July 2017, trade turnover reached $5.4m and mostly comprised exports of Belarusian potash fertilizers.

The economic crisis in Venezuela and a sharp decrease in world oil prices are the main reasons for the decline of Belarusian trade with Venezuela, which currently uses its foreign exchange reserves only for the purchase of food, medicines and other socially important goods.

According to Belarusian Scientific and Industrial Association Deputy Chairman Georgy Grits, Venezuela is approaching a default. He bases his view on an appraisal of studies into the country’s default risk made by world rating agencies.

Therefore, the main problem for Belarus coincides not with further development of trade with this former high-income country, but with Venezuelan debts accumulated for already shipped goods in previous years.

The total debt has reached approximately $500m. For example, Venezuelan debts to MTZ (Minsk Tractor Works), a Belarusian producer of tractors, have reached $50m, debts to MAZ (Minsk Automobile Plant), a truck manufacturer, are at $170m, and debts to various Belarusian construction companies amount to $108m.

However, on 8 October, Belarusian Deputy Prime Minister Vladimir Semashka expressed the optimistic view that further cooperation with Venezuela is feasible. He noted that Belarus plans to help increase the production of oil in Venezuela by more than three times. Current production levels sit at less than one million tonnes per year.

Economic growth: the regulator staying firm

On 25 October, the National Bank of Belarus announced the consolidation of positive changes in the economy and monetary sphere during the first nine months of this year.

Specifically, the monetary authorities have admitted that economic growth has started to recover jointly with slowing inflation. Moreover, decreasing interest rates and a continuing process of de-dollarization are the results of a unified macroeconomic policy.

Correspondingly, declining borrowing costs have led to the recovery of business activity and to increased demand for loans by commercial companies, which further strengthen Belarus’s banking system. The regulator also drew attention to the significant growth of foreign exchange reserves (see Figure 2 below) caused by the sale of foreign currency by Belarusian citizens.

Moreover, the Chairman of the Board of the National Bank, Pavel Kallaur, has admitted that within two or three years there exists a real possibility to boost foreign reserves up to $10b. At present, Belarus currently is about $3b shy of this mark.

In particular, accumulating net sales of foreign currency by Belarusian citizens, who exchange it to purchase goods and services, and growing exports (for example, from January–August exports increased by 21 percent) may contribute to the achievement of the $10b goal.

However, along with opportunities, risks also arise. The first risk coincides with trade policies that are heavily concentrated and focused on Russia. The plunge in foreign currency earnings from 2015–2016 showed what can happen to the economy when Russia’s market falters.

Secondly, the increase in demand for imports of consumer goods may apply pressure on foreign reserves, which in turn may lead to an increase in demand for foreign currency from importers.

Finally, the dynamics of foreign reserves depend not only on foreign exchange earnings, but also on debt expenses. Foreign reserves have increased in 2017, because Belarus both undertook external borrowings and refinanced old debts with Russia. Therefore, the resolution of debts—old and new—will directly affect the volume of reserves.

Monetary policy: hidden threats

However, on 26 October, experts at the Eurasian Development Bank warned that despite the significant improvement of Belarus’s macroeconomic situation, the rapid easing of monetary policy (through the decrease of interest rates) carry serious risks for the acceleration of inflation, which may occur in early 2018.

Structural problems, including excessive employment in state enterprises and the propping-up of inefficient enterprises, limits the potential for monetary policy to stabilize inflation and further to solve the issue of repaying of foreign debts.

Overall, the current positive macroeconomic situation cannot last long. Each production cycle does not bring substantial profits for the majority of Belarusian enterprises. Indeed, in many cases the cycles generate losses. The more they produce, the more they get bogged down in losses, which in turn leads to the growth of foreign debts.

An expert from BIPART (the Belarusian Institute for Public Administration Reform and Transformation), Vladimir Kovalkin, compares the general situation in the Belarusian economy to “walking on very thin ice that might crack at any moment and fall in.” In Particular, the Belarusian budget possesses insufficient funds to pay both foreign debts and the interest building upon them.

As a result, according to experts, any problem or any differences in foreign economic relations may first prevent the refinancing of foreign debts from previous years, and then eventually lead to a default.

In sum, while the Belarusian economy gradually recovers, it still suffers from long-standing structural problems. Failure to resolve these problems may not only reduce economic growth, but also lay the groundwork for a new type of crisis for Belarus—a debt crisis.

Aleh Mazol

Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

State debt and weak trade policy test Belarus recovery – digest of the Belarusian economy

On 5 September 2017, Belarusian president Alexander Lukashenka once again declared the need to accelerate the government’s efforts to improve legislation concerning economic embezzlement and other abuses that are slowing down the economic development of the country.

Meanwhile, export are recovering briskly, although mostly due to goods based on raw materials. What’s more, the debt burden on the economy is rising, reaching a historical maximum. This is now the most significant risk to the national economy.

Trade Policy: exporting to the European Union

In the first half of the year, Belarus increased its export of goods, although this is primarily due to the price factor and goods based on raw materials. The dominant exports include fuel, meat, milk and other food products, chemical products (especially potash fertilizers), and metals.

Thus, the main export items comprise goods with relatively low value added. Meanwhile, on 11 July 2017, Lukashenka officially demanded that export partners be diversified, first of all to the EU market. According to him, all Belarusian economic authorities and enterprises need to ‘bite’ into the European market, given its status as the most most effective and technologically advanced.

However, in the first half of the year, the share of EU countries accounted for only about a quarter of Belarusian exports. This is in stark contrast to the early 2000s, when Belarus delivered almost half of its exports to Europe.

In 2012, Belarusian exports to EU countries reached a record of $17bn, primarily due to the export of petroleum products produced from duty-free Russian oil.  Afterwards, disputes with Russia concerning the price of supplied oil and the redistribution of duties from oil products, along with  a decline in world oil prices, has resulted in a drop of export to EU countries of approximately 67% in 2014-2016 (see Figure 1).

Nevertheless, the share of raw materials in exports to the EU remains huge – approximately 80 per cent of Belarusian sales still consist of fuel, wood, chemical products, and metals. Therefore, it is evident that an increase in exports of high-tech products remains a very important task for the economy as a whole.

According to the President of the Mises Scientific Research Centre, Jaroslav Romanchuk, Belarus’s economy still lacks the prerequisites for increasing and diversifying its exports in the Western direction. On the contrary, economic self-isolation threatens Belarus, as competitors displace Belarusian exporters even on the Russian market.

State debt: increasing pressure

The debt burden on the economy is on the rise. The national debt relative to GDP has reached 40.4 per cent – a historical maximum. As a result, continuing with existing growth dynamics creates serious challenges for the economic development of the country.

According to official data, in 1997-2006, the debt burden on the Belarusian economy remained at very low levels — external and internal debt were less than 10% of GDP. Low energy prices from Russia and the growing Russian market allowed the Belarusian economy to grow rapidly in the early 2000s without the need for additional borrowing.

In 2007, however, Russia revised energy prices on oil and gas for Belarus. As a result, in order to ensure a high rate of economic growth and the stability of the exchange rate of the Belarusian Ruble, the government became actively involved in external borrowing.

Thus, starting in 2007, the debt burden on the economy began to rise. From 2007 to 2012, the national debt relative to GDP increased by more than four times. Moreover, due to the devaluation of the Belarusian Ruble and the economic recession of the last two years, by the beginning of this year the national debt has grown by almost half, reaching 39.4 per cent.

As a result, today the debt service costs alone for the national budget make up approximately 10 per cent of its expenditures; to repay the main part of its debt, Belarus needs keep borrowing.

According to the Honorary Chairman of the Business Union of Entrepreneurs and Employers, Georgiy Badei, such dynamics will remain negative until Belarus has an acceptable rate of economic growth: to pay the debt, the economy needs to generate growth. If the economy grows, the budget revenues will increase and we Belarus can begin to repay accumulated debts.

At the same time, the reduction of investment in fixed capital over the past several years (such as plant machinery and equipment) does not lead to optimism regarding acceleration of growth of output and employment. Therefore, the only significant steps to be taken to liberalise the economy include reducing taxes on enterprises. This could will stimulate economic activity and help to repay accumulated debts.

The budget: balancing fiscal stability

Meanwhile, the consolidated budget in Belarus has boasted a surplus since 2011, which is used for repayment of state debt (see Figure 2). The structure of revenues and expenditures of the budget has remained stable over the last eight years.

However, securing a surplus is posing more and more of a challenge. In real terms, budget revenues shrank in 2015-2016 because of a recession (although revenues remain relatively stable as a share of GDP), becoming the reason for expenditure restraint from the government.

In recent years, capital expenditures have decreased the most. As a result, fiscal policy has become persistently procyclical. What’s more, steady growth in social transfers has become a major instrument of the government to provide a certain level of social protection and limit the poverty level in the country.

Taking together, the physical volumes of foreign trade have led to strong growth, thus helping the government fulfil budget obligations. However, debt sustainability is becoming the largest risk for the national economy.


Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Plans to transform the old economy into a new IT-economy – digest of the Belarusian economy

According to Belstat, Belarus’s official statistical agency, in the first half of the year the Belarusian economy sped up, improving four months in a row.

Meanwhile, on 17 July 2017, the authorities announced plans to transform Belarus’s IT-sector into a full-fledged economic driver, aiming to create new jobs and increase tax revenues.

Finally, on 25 July 2017, the government announced a new modernization strategy for the manufacturing industry – the plan involves building a new tractor factory.

Economic growth: rising from the ashes

In the first half of the year, GDP growth was 1 per cent. By year-end however, GDP growth should reach 1.7 per cent according to the official forecast (see Figure 1). Industrial production has increased by 6.1 per cent and exports of goods by 23 per cent (in January-May).

As a result of these positive half-year economic figures, the government has started to think about new drivers of economic growth. However, according to the First Deputy Minister of Finance, Maxim Ermolovich, artificial stimulation of the economy (through the budget or monetary policy of the National Bank) should not be considered an economic policy tool.

The IT-economy: thinking about a prosperous future

On 17 July 2017, the authorities announced plans to transform Belarus’s IT-sector into a full-fledged economic driver. At present, approximately 30,000 IT-specialists work in the country, providing about $1bn of foreign exchange earnings annually. The average IT-specialist, with a salary of $1,500, delivers twice as much tax revenue as the average non-IT worker.

Although these plans are still only on paper, the authorities have already hammered out the main ideas of their new revolutionary presidential decree for the IT-sector.

The most significant changes have to do with the following issues: first, the decree opens up the Belarusian IT-market for new companies from high-tech industries (electronics, machine engineering, medicine, and biotechnology) and foreign organisations (for example, Google, Facebook, Microsoft, Apple) which monetise IT-products through advertising and paid subscriptions.

Second, the decree creates the necessary legal basis for opening a centre for scientific and technological development of driverless cars in Belarus. What’s more, the decree would allow said cars to navigate on Belarusian roads.

Third, the decree aims to develop educational activities in the IT-field, such as teaching modern IT-subjects in English in universities and schools.

Fourth, the decree opens up the Belarusian market for international investment funds and venture capital organisations. In particular, it would liberalise economic legislation in the event of bankruptcy of an IT-project – this measure would limit investor obligations in terms of their invested money, but not their entire property.

Fifth, the decree intends to create favourable conditions not only for Belarusian IT-specialists, but also to poach talent from Ukrainian and Russian IT companies. For example, the decree simplifies the procedure for obtaining a residence permit for qualified foreign IT-specialists and introduces long-term visas for them.

Finally, the decree would introduce cryptocurrency into civil circulation (the consumer market).

Thus, the government plans to create new jobs and increase tax revenue. According to experts, state tax revenue from IT may increase by two or three times if the number of IT-specialists in the country triples.

Manufacturing: promoting a new tractor factory

On 25 July 2017, President Lukashenka decided the fate of the Belarusian tractor industry at a meeting: the government would organise the production of new technologically advanced types of heavy tractor. However, in recent years, this manufacturing sector has shown substantial decline.

Over the past five years, the production volume of tractors in Belarus has decreased by half, from 71,000 to 34,400 units (see Figure 2). The amount of people employed by MTZ (the Belarusian tractor producer) has shrunk by a quarter. Likewise, exports have also decreased significantly – from $1bn in 2012 to only $425m in 2016.

The decline in exports of Belarusian tractors (90% go to foreign markets) was mainly caused because the primary market (Russia) has in recent years experienced recession (due to reduced oil revenues). Therefore, subsidies for the purchase of agricultural machinery (including Belarusian) has also decreased.

In 2017, the export of Belarusian tractors finally began to grow. According to Belstat, in January-May tractor sales increased by 12.2 per cent in comparison with the same period last year, mainly due to improvements in the Russian market.

Thus, Russian subsidies for agriculture have reached $1bn, providing buyers a discount (from 15% to 20%) for agricultural machinery, including purchase of tractors assembled in Belarus.

According to the Director of the IPM Research Center, Alexander Chubrik, the Belarusian authorities plan to take advantage of the recovery of the Russian market to accelerate economic growth. One of their primary strategies will be establishing production of new tractor models.

According to Deputy Prime Minister Vladimir Semashka, this project could cost around $300m-350m, financed by Chinese credit resources. However, the use of Chinese loans may not please Russian partners, who may rethink the subsidies for new tractor models.

Thus, Deputy Chairman of the Belarusian Scientific and Industrial Association Georgy Grits has proposed joint production with Russia (which already has factories for such tractors). This would provide favourable conditions for the sales of the new Belarusian tractors on the Russian market.

All things considered, the positive external economic conditions have helped the authorities get back on a path of economic growth. However, the economy still lacks new drivers for economic growth which could more than double GDP growth. The new tractor factory remains a project for the Old Economy while the new IT-economy still seems a distant prospect.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Remember reforms and forget about oil – digest of the Belarusian economy

On 1 June 2017, Belarusian President Alexander Lukashenka announced that the oil refining industry was experiencing substantial problems.

Meanwhile, the economy is still showing signs of recovery, growing three months in a row. This will encourage the government to make even better economic projections for next year.

However, according to Belstat, Belarus's official statistical body, the real price of this economic miracle continues to come at the cost of simple people – every month, half of all Belarusians bring home less than half the average monthly wage.

The oil sector: sinking giants

On 1 June 2017, Alexander Lukashenka declared that refining had turned from the bulwark of the economy into a loss-making industry (see Figure 1). He admitted that for the most part, inclement external conditions (falling oil prices) were to blame, but he also noted the failure of modernisation.

According to the President, the value added by oil refining to Belarus's GDP dropped last year to only half a percent. As a result, the contribution of two Belarusian refineries, Mozyr and Novopolotsk, is now equal to companies such as Beltelecom, a state-owned telecommunication company.

However, any radical change in the management of the oil industry still appears unlikely. Moreover, the authorities are once again planning to invest more money – as much as $1.2bn – to complete the modernisation of the two refinery companies by the end of 2019.

According to a recent statement by Uladzimir Siamashka, Vice Prime Minister of Belarus, this modernisation should allow the the depth of oil refining to increase by up to 90 per cent, turning these companies into 'aerobatics plants' – enterprises able to provide oil processing as deep as the world's best refinery companies and featuring a wider range of petroleum products.

However, these promises remain dubious for several reasons. First of all, Belarus is experiencing a shortage of money for large investment projects. According to the First Deputy Minister of Finance Maxim Ermolovich, approximately 10 per cent of the budget goes to repayment of the state debt (both external and internal).

Second, the country lacks high-level management skills at state-owned enterprises. Finally, Lukashenka has admitted that preparation for the project is not yet complete and points to inappropriate distribution of resources.

In light of this, on 27 June, Alexander Lukashenka announced radical measures for rapid development of the IT sector, which remains the only industry which still possesses competitive advantages.

Economic growth: waiting for better results

On 26 June 2017, First Deputy Prime Minister Vasily Matyushevsky declared that last month's results show that the economy is gradually emerging from recession – economic growth is increasing month to month.

The GDP did indeed increase by 0.9 per cent during the first half of the year in comparison with the corresponding period of the previous year (see Figure 2). Inflation has stayed at the lowest level in Belarusian economic history – for the five months of the year it reached only 2.7 per cent, less than half of what was predicted.

Export in January-April grew by 19.5 per cent. However, according to Vasily Matyushevsky, this was mainly thanks to technological products (motor vehicles, tractors, and machinery), rather than sales of commodities (petroleum products and potash fertilisers).

However, according to economic expert Anton Boltochko, the current positive economic figures reflect only conjunctural growth caused by the low base of the economy, the result of the past two years of recession. With a projected GDP growth of 1.1 per cent in the next year, this looks more like a stagnation scenario, not so much a development plan.

Moreover, even Vasily Matyushevsky reluctantly agrees with this statement. He emphasises the need for structural reforms accompanied by improvements in the institutional environment in order to fulfil the more dynamic target economic scenario.

Wages: directive planning may rise again

Meanwhile, it seems that while reforms remain only in the planning stage, directive tools of governance of the economy are once again gaining momentum. This is especially true for the growth of real wages.

According to the Belstat, the average salary in Belarus reached BYN795 ($414) in May 2017. Taking into account growth of consumer prices, the corresponding real wages have increased by 4.1 per cent in comparison with May 2016. However, it is necessary to take into account that the average wage fails to reflect the differences in regions and industries.

In comparison with economic centres (such as Minsk and regional capitals) this problem is exacerbated by the low level of economic activity. Differences between industries add additional pain.

On one side, light industry and agriculture are still largely loss-making, one the other side, telecommunications, logistics, banking, and information technology remain profitable.

Finally, in the public sector the average wage hovers at approximately 77 per cent of the country average. As a result, according to data revealed by Belstat on 29 June 2017, every second Belarusian has less than BYN370 ($192).

Given such low growth rates for wages and the significant differentiation across regions and sectors, it would take a miracle to fulfil the authorities' goal of achieving an average wage of BYN1,000 or $520 (growth by 26 per cent) by the end of this year using standard market methods.

Thus, taking all this together, the authorities may attempt to use directive (administrative) methods in order to ensure the growth of industrial production and wages. However, manual control over Belarusian companies may result in a chronically dire economic scenario: increased inflation and an economy threatened by financial instability.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

The end of a long-lasting recession? – Digest of the Belarusian economy

On 17 May 2017, Belstat, Belarus's official statistical body, announced that Belarus's economy is growing for the second straight month.

Thus, on 24 May, Deputy Prime Minister Vladimir Semashka declared new investment plans for the industrial sector assuming further economic recovery.

Nevertheless, the economic environment remains complex and the debt burden of enterprises is high, threatening the stability of the banking system.

Economic growth: good prospects for the future

On 17 May, Belstat announced that in January-April, GDP increased by 0.5 per cent in comparison with the corresponding period of the previous year, thus extending March's positive dynamics (see Figure 1).

The main contributor to the recent economic growth remains export. Figures for the first quarter of the year indicate that export of goods has increased by 20 per cent, thanks to the steady recovery of the Russian economy and increase in consumer demand for Belarusian food products.

Another key factor is that the export of oil refinery products has risen from the ashes after the upward correction of world oil prices and a long-awaited deal with Russian authorities on oil import. This will mostly add up in the second half of the year.

According to economist Vyacheslav Yaroshevich, the Russia-Belarus oil deal will encourage the entire economy, thus resulting in 30 per cent year-on-year export growth and an additional 0.7 per cent GDP growth by the end of May.

Furthermore, in the second half of the year, industrial production will also start contributing to overall GDP growth. According to Vyacheslav Yaroshevich, the industry shows signs not only of growth in production volumes, but also improvements in the financial situation, including increase in revenues, efficiency of sales, and net profits.

The financial sector: disappearing savings

According to data from the National Bank of Belarus, as of 1 May 2017 the amount of foreign currency deposits in banks amounted to $6.8bn – the lowest since December 2013. This trend of constant decline in foreign-currency savings has been observable since November 2015. As a result, after 18 months, savings declined by almost $1bn.

Three factors explain this trend. First is the the constant decrease in the profitability of deposits for Belarusians both in foreign and national currency.

For many years, the deposit rates on bank savings nominated in Belarusian rubles exceeded two-digit numbers. Even during periods when the Belarusian ruble was stable (the 2000s – a period of generous oil subsidies), their yield came to more than 10 per cent per year. Only in the summer of 2006, due to declining inflation, did the average deposit rate fall to 9.7 per cent.

Over the next decade, it was always expressed in double figures due to the high inflation rate. It even exceeded 50 per cent per annum during the 2011 and 2014 financial crises. However, in 2015-2017, after the National Bank of Belarus committed to reduce inflation, these rates dropped to the historically low level of 8.4 per cent. They will supposedly continue to decrease (see Figure 2).

The second factor is that there are very few profitable investment projects for banks to finance. Moreover, on 1 May, the share of bad assets (generated by current operations of enterprises) in Belarusian banks reached 14.2 per cent.

According to the Senior Director of the Moscow office of Fitch Ratings, Olga Ignatieva, the quality of assets in banks will continue to deteriorate, as the economic environment is complex and the debt burden of enterprises remains high. Thus, banks have less motivation to attract new deposits.

Finally, Belarusians, who are facing a decline in their real incomes, try to maintain the same level of consumption at the expense of their savings.

Manufacturing sector: modernization 2.0

On 24 May, Deputy Prime Minister Vladimir Semashka announced plans to invest $500mln in the modernization of MAZ (the largest manufacturer of trucks in Belarus), $800-850mln in the development of BMZ (a large metallurgical plant), and commit additional financial resources to the modernization of refineries.

According to Vladimir Semashka, MAZ struggles with production volumes. Three years ago, the enterprise produced 24,000 trucks per year, whereas by the end of 2017 it was producing no more than than 11,000. The refineries performed better, but endured financial losses due to the drop in world oil prices and the decrease in oil suppliers from Russia in 2016.

However, in light of the absence of internal financial resources, the government has only two options if it wants to fulfil its plans for modernization and foreign direct investments.

According to the opinion of economists from the investment company UNITER, Belarus must increase the annual inflow of foreign direct investments (FDI) to $3-4bn if it wants to increase economic development. However, data for 2013-2016 shows that the volume of FDI has stabilised at $1.3-1.5bn per year without significant changes in recent years.

The second option is obtaining loans from international financial organisations. Once again, negotiations with the IMF remain incomplete (nobody knows for how long), and the Eurasian Development Bank still requires more profound reforms in the Belarusian state sector (including privatisation).

Thus, in May, Belarus's economy showed its first signs of recovery – the rise in export and industrial production point to positive prospects for the second half of the year. However, problems in the financial system, which have accumulated over the previous years, have not disappeared. This threatens the sustainability of the economy.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Privatization: one step forward, two steps back – digest of the Belarus economy

On 4 May 2017 Belarusian president Alexander Lukashenka declared that Belarus plans to gain approximately $50bn in exports off goods produced in the Great Stone industrial park.

Meanwhile, on 3 April 2017, Moscow and Minsk resolved all their disputes in the oil and gas sector.

On 18 April 2017, Belarusian prime minister Andrey Kobyakov announced that the Belarusian economy has avoided recession, with 0.3 per cent GDP growth in the first quarter of the year.

Privatisation: standby mode

On 21 April 2017, the authorities once again announced that state-owned enterprises (SOEs) would not be privatised in the near future.

However, for the IMF, privatisation of major SOEs is a key condition if Belarus wants to receive a new credit line (worth approximately $3bn). More precisely, the IMF wants Belarus to prepare approximately 10 SOEs for pre-sale. The government has so far failed to begin any stage of this process.

Although the official list of state enterprises up for sale in 2017 includes 38 joint-stock companies, almost nothing has been transferred into private hands – neither auctions nor tenders of sale for the SOEs have been declared so far. The Belarusian government insists that this is due to lack of interest from potential investors.

This is unsurprising, as many SOEs are in a difficult financial position due to high credit indebtedness (see Figure 1). According to the National Bank of Belarus, at the beginning of 2017 the debt load of the real sector exceeded its monthly revenue by 3.2 times. These SOEs, suffering from chronic debt and a failed business model, have proved impossible to sell as whole business entities.

As a result, on 21 April 2017, Lukashenka stated that privatisation is unrealistic, essentially ending discussion about the fate of the largest SOEs.

Instead, the Belarusian authorities want to attract foreign investment. Each regional governor has been ordered by the president to bring in no less than $100m in investment each year. However, the Belarusian economy remains unattractive to foreign investors, which is reflected in the reduction of foreign direct investment in 2015 and 2016.

The oil and gas dispute: finally resolved

On 3 April 2017, Belarus and Russia resolved their longstanding oil and gas dispute and signed the corresponding documents on 13 April 2017.

As a result, Russia agreed to increase oil supplies to Belarus to up to 24m tonnes and sell gas to Belarus at a discount. Over the next year, the price of Russian gas for Belarus will fall to $129; in 2019 the price will decrease even more. Nevertheless, experts are dubious that the pursuit of a unified gas market by 2025 will encourage Russia to supply Belarus with gas at domestic prices.

According to the Scientific Director of the IPM Research Center, Irina Tochitskaya, if Belarus paid Russian gas prices, all other countries in the Eurasian Economic Union would insist on similar discounts. This would be a significant loss of income for Russia.

In turn, the Deputy Chairman of the Belarusian Scientific and Industrial Association, Georgy Grits, admitted that according to the agreement, independent gas operators would be able to sell gas to Belarus, not just Gazprom. However, if this were the case, the stock market would determine the price of gas, precluding preferential conditions for Belarus.

What's more, he also noted that the gas transportation system in Belarus belongs to Gazprom. Therefore, it would be difficult to deliver gas from independent operators without agreements with Russian authorities.

Thus, the dependence of Belarus on Russian gas supplies will only increase, guaranteeing new tensions in the oil-gas sector in the near future.

Economic growth: first time in 24 months

For the first time in two years, the Belarusian GDP has grown. According to the National Statistical Committee of Belarus, in January-March 2017 GDP growth reached 0.3 per cent year on year (see Figure 2).

On 18 April 2017, Belarusian Prime Minister Andrey Kobyakov stated that the economy was gradually recovering from an economic downturn and is on track for its forecasted targets, which include 1.7 per cent GDP growth. However, the authorities' optimistic forecasts are largely dependent on growth of oil refining and export of petroleum products.

Meanwhile, the IMF and the World Bank still predict that the recession in Belarus will continue. The Russian bank Sberbank has stated that given sluggish economic growth, the recession in Belarus will end only in 2018.

The considerable volume of foreign debt payments for the current year, the prolonged reduction in real household income, the limited effectiveness of monetary policy (due to high level of dollarisation in the economy), and the lack of significant resources for the state budget to finance its investment programmes all constrain possibilities for further growth.

Independent experts maintain a similar position, adding that the Belarusian GDP needs to improve by 7 per cent just to return to its 2014 level (in Belarusian constant prices).

According to the head of the analytical centre Strategy, Leonid Zaiko, if we compare dollar equivalents, the GDP must grow by nearly 40 per cent (from $47bn up to $76bn). Thus, he concludes that even with a 4 per cent growth per year, the economy will need more than ten years to return to its 2014 level.

All in all, it seems that the past two years of recession have not shaken the official economic policy of the last two decades. The authorities still rely on the public sector and oil revenues. Meanwhile, the lack of progress in privatisation limits Belarus's investment appeal and hinders further prospects for sustainable long-term growth.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Macroeconomic stabilization on shaky ground – digest of the Belarusian economy

On 3 April 2017, Economy Minister Vladimir Zinovsky​ announced a negative forecast for first quarter GDP growth in Belarus. This comes despite an increase in industrial output and exports at the end of March.

In this context, on 6 March a new IMF mission arrived in Belarus in an attempt to encourage the authorities to implement further economic reforms.

Meanwhile, insufficient efforts at liberalising the private sector still hinder the emergence of a new pillar of the Belarusian economy.

Economic growth: shaky stabilisation

Economic data for the first two months of the year show mixed results. On one hand, industrial production and exports have improved (see Figure 1).

On the other hand, the government continues to postpone measures which would aid in the financial recovery of enterprises. Authorities are also putting off fundamental decisions on structural reform, thus prolonging the economic recession.

For example, investment demand remains in deep trouble, shrinking for the 14th quarter in a row. During the first two months of 2017, it dropped by about 17.4 per cent year on year (see Figure 1).

Therefore, during the rest of the year, the economy faces the delayed effects of investment depression, such as reduction in output due to the reduction of production capacity; this affects such important industrial enterprises as Gomselmash, MAZ and MTZ. Moreover, firms facing financial losses influence not only the amount of investment and production, but also the employment rate and wages.

To address the latter issue, on 21 March President Alexander Lukashenka banned job cuts without the initial approval of local authorities. The promised $500 average monthly wage for 2017, however, remains off the table (it currently hovers around $370).

Therefore, taking into account the implausibility of reducing SOE costs, the painful process of sustainable stabilisation of their operations will be postponed even further.

For these reasons, the entire economy will take even longer to emerge from economic imbalances. Given the prospects of economic dynamics, such a pattern means that in 2016 the 'price' for structural weaknesses remains unpaid, and structural corrections will continue in the upcoming months of 2017.

The financial system: feeling the pressure of the money shortage

Under these conditions, on 16 November 2017 representatives of the IMF once again discussed the terms for a new credit programme with Belarusian authorities.

Six months before, during the IMF's previous visit, the economy was experiencing a long-lasting recession which called the stability of the banking system further into question. However, this time the National Bank of Belarus (NBB) tried to win over its sceptical visitors.

On 6 March 2017, regulators unveiled a new report, which evaluated the impact of potential shocks on the banking system. In particular, the NBB evaluated the impact of the devaluation of the Belarusian ruble on banking stability.

Judging by the results of the report, Belarusian banks are sufficiently strong. Banks would feasibly survive even a 30 per cent devaluation of the Belarusian ruble.

However, independent experts believe that the stability of Belarusian banks depends mostly on the state of public finances, first and foremost because struggling state-owned enterprises urgently need fresh money to repay their debts. According to the NBB, in 2016 SOEs contributed to a total of 81 per cent of bad-asset growth in the banking system.

Nevertheless, before signing a new credit programme with Belarus, the IMF will still insist on implementation of decisive structural reforms in the near future, regardless of what official figures say.

Private sector: prolonged liberalisation

In turn, the underdevelopment of the Belarusian private sector (in particular small and medium enterprises, or SME) still remains one of the key problems of the Belarusian economy.

For example, SMEs' share in the Belarusian GDP accounts for approximately 30 per cent, which limits competition on the domestic market and leads to inefficient allocation of both material and labour resources. In contrast, according to the World Bank, in other developing countries this parameter ranges from 60 to 75 per cent of GDP.

In this light, on 2 March 2017 a new presidential decree intending to improve the procedures of state registration and liquidation of economic entities was launched. The document limits the right of the tax ministry and other authorised bodies to invalidate the state registration of a business entity or its liquidation through the court to three-year periods.

The head of the Association of SMEs, lawyer Syarhei Balykin, considers the decree a progressive step, but he thinks that by and large it will make things easier only for official registrars. Moreover, according to him, this legislative act partially degrades the position of entrepreneurship.

For example, the document actually limits possibilities of creating new companies. In particular, the decree prohibits the registration of new business entities for founders of liquidated entities or for those going through bankruptcy proceedings.

In addition, the principle of collective responsibility (meaning that all of a given company's co-founders bear responsibility for violations in economic activity of any individual co-founder) still remains in force. In the opinion of Syarhei Balykin, such restrictions violate the rights of entrepreneurs to implement business projects.

The last month has shown certain positive trends in the stabilisation of industrial production and exports. However, the Belarusian economy still struggles with problems with its banking system, lack of external finance, and the unresolved issue of increasing private sector involvement.


Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Consumption in stand-by mode, investments and trade – digest of the Belarusian economy

On 20 February 2017, Belstat, Belarus's official statistical agency, announced that the GDP has once again dropped by 0.5 per cent in January compared with the same month in 2016.

However, on 21 February 2017, Prime Minister of Belarus Alexey Kobyakov tried to mitigate the country's economic problems by claiming that Russia's oil cuts are the main cause of current economic woes.

Meanwhile, the real consequences of recession have led to a decrease in private consumption, lack of investments (especially foreign), and problems with trade diversification.

Consumption: a painful scenario

According to Belstat, in January 2017 the retail trade turnover in Belarus decreased by 4.6 per cent year on year, culminating in a record decline in private consumption over the past two years (see Figure 1). Experts attribute the fall in retail trade turnover with the economy's prolonged recession, which has in turn led to a reduction of the real monetary income of the population.

The Chairman of the Belarusian Union of Entrepreneurs, Alexander Kalinin, believes that this drop reflects a significant decline in the purchasing power of the population. Economist Yaroslav Romanchuk has explained the fall in income by the absence of efficient production and investments and a subsequent drop in sales, which has lowered wages.

As a result, the Swiss company Credit Suisse, in its global welfare report, placed Belarus in the group of poorest countries, with an income below $5,000 per person per year. However, it named the significant reduction of 'oil rent' as the main reason for Belarusians' increasing impoverishment. This, in turn, has been caused by the fall in oil prices worldwide and a reduction of oil supplies from Russia.

FDI: doubtful prospects

Meantime, the Belarusian authorities still consider China to be the country's main investment pillar in recent years, and try to encourage Beijing to participate more substantially in the privatisation of distressed industrial enterprises.

On 21 February 2017, First Deputy Chairman of the State Property Committee Alexey Vasilyev announced that China is considering investing in OJSCs such as Horizont, Vityaz, BATE, and Gomselmash as well as a total of 22 Belarusian state-owned enterprises (SOEs).

However, such prospects seem dubious, as, according to Alexey Vasilyev, the number of successful privatisation transactions in Belarus in 2016 was zero. This can be explained by the absence of privatisation proposals and hence a lack of interest from potential investors in the indebted enterprises offered.

State authorities have yet to draw up a list of profitable SOEs confirmed for compulsory privatisation. This process is still in its early stages, starting with a study of demand from potential investors. Additionally, the government is trying to find a way to improve the efficiency of management of state organisations by elaborating a new strategy for this purpose.

The new programme will define the principles of state policy in the field of SOE management, including the state's attitude towards state property. For example, the strategy will outline which enterprises are to remain the property of the republic and which are not, as well as what will happen to the stocks of privatised companies and the state's share in strategic enterprises.

A particularly interesting point concerns the proposition to sell up to 25 per cent of SOE shares on the stock market. The authorities think that the stock exchange could stir up the Belarusian market, which, in turn, could help them sell large blocks of shares at a higher price. However, these rushed attempts should have been completed twenty years ago.

Trade manoeuvres: lacking a long-term strategy

According to new data released by Belstat on 13 February 2017, the trade turnover between Belarus and Russia has dropped to its lowest point since 2009, when trade fell due to the global financial and economic crisis. Right now, the main cause lies in the unresolved oil and gas dispute between the two countries.

At the moment, it seems unlikely that Russia will agree to subsidise Belarus on previous terms. This is first and foremost because of its own economic problems (for example, growth of wage arrears, especially in the southern regions of the country), and secondly due to the need for economic reforms, which will consume additional financial resources.

As a result, revenues from petroleum product exports fell by 40 per cent in 2016 year on year. Export deliveries of Belarusian oil products have decreased in physical terms by 23 per cent and amounted to 13m tonnes (see Figure 2).

Additionally, the geographical structure has also changed, with Ukraine experiencing the largest increase – by one third, and the EU experiencing the largest decline – approximately by 33 per cent. Sales of the second most important Belarusian export, potash fertilisers, have also tumbled by 23 per cent compared to 2015.

Exports of agricultural and food products, Belarus's third most significant export item, have dropped as well. In previous year, exports came to $4.15bn, with almost 90 per cent going to Russia. However, due to constant bans from Rosselkhoznadzor, export growth of this trade item has not occurred either.

As a result, the authorities are trying to rectify two decades worth of one-sidedness in state external trade policy. However, the multi-vector trade policy remains mostly rhetorical. A recent example of this is the attempt to supposedly diversify imports of crude oil by trading with Iran. However, this is a questionable option for Belarusian refineries from a technological point of view.

Therefore, taken all together, the recession will make things difficult for Belarus. Economic hardships are being followed by decreased incomes, hesitant foreign investment, and badly implemented external trade policy.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

The 2019 European Games: circuses instead of bread

Although the Belarus is struggling to deal with a dramatic economic decline, the authorities are considering hosting a large international sporting event in 2019. On 9 January, Belarus established a committee to organise the 2019 European Games.

The games, managed by the European Olympic Committee, resemble the Pan-American and Asian games. Last October, Lukashenka stated that Belarus was ready to host the games in 2019. But Belarus, with its struggling economy, is unlikely to benefit from the second European Games, as money raised from tourism will not cover the significant expense of organising them.

What are the European games and how much do they cost?

The European Games are a competition similar to the Asian and Pan-American games; the idea was devised by Patrick Hickey, head of the European Olympic Committees. Hickey's main goal was to stimulate sports development in the region and improve the service and commercial sectors linked to it.

At a meeting of the European Olympic Committees in 2012, members voted for Azerbaijan as the first hosting country. The choice, however, was not controversial, as Azerbaijan was the only candidate.

Azerbaijan saw the games as an opportunity to attract as many tourists as possible, and spent lavishly on the organisation of the first Games. In 2013, Azerbaijan constructed a new stadium capable of seating 68,000 spectators, as well as almost 20 other large sporting facilities. Lady Gaga, one of today's most expensive pop-stars, sang at the opening ceremony of the games.

An investigation conducted by the BBC showed that the budget of the games came to more than $5bn, but some analysts believe the figure to be closer to $9bn.

Considering the scope of the first European Games, Belarus should be ready for large expenditures. At the same time, the current economic situation in Belarus indicates that the second European Games will be less of a luxury affair than in Azerbaijan. Although the European Olympic Committee will contribute to financing the event, the hosting country nevertheless bears the major costs.

Benefiting from the games

Belarus is actively preparing for the 2019 games. Andrej Kabiakoŭ, the Belarusian Prime Minister, became the head of the recently launched organising committee and in the beginning of January, a representative of the European Olympic Committee paid a visit to Minsk. He concluded that the sports facilities, such as the Minsk Arena, the rowing channel in Zaslaul, and the Sports Palace are ready for the European Games.

By hosting the 2019 European Games, Belarus hopes to attract more visitors and significantly increase income from tourism, especially given the new visa-free regime.

The low prices of food, drinks, and entertainment in Belarus might bring in more spectators to the 2019 games. For example, in the beginning of 2017 the prices for milk (0,6$), eggs (1,2$), rice (1,8$), table wine (4,0$), and lunch in a cafe (3$) are one and a half times lower than in Lithuania and twice lower than in Italy.

The games in Belarus could also have a positive effect on the service sector. Recently, Belarus started to open up to the world, first introducing a visa-free zone, then later allowing visa-free entrance through the Minsk airport. In order to live up to a more international standard, new restaurants, hotels, and entertainment already offer Belarusians better service than before. For example, in 2016 Uber grew faster in Minsk than in Warsaw, Moscow, or Rome.

The Games could also have a positive impact on the country by improving its image. If Belarus continues down the road of simplifying visa restrictions and developing its tourism industry, the image of Belarus as a poor dictatorship could soften.

Is it worth the effort?

Although the second European Games could have a positive effect on the country, whether the Games are really worth the effort overall is dubious.

The financial instability in the country and political and economic uncertainty raise questions about the capability of Belarus to host the games. The GDP of the country is falling – since 2014 it has decreased by $30bn.

Despite the possible financial boon for restaurants, hotels, and entertainment, the state budget will most likely incur large costs.

The budget of the games risks being funded by redirecting money from other, more deserving sectors. Thus, the state could try to transfer money from the budget of other fields to invest in the games, although other spheres, such as education, are underdeveloped.

Despite the fact that the unemployment level has dropped to 0.8%, the level of poverty in the country is growing, and now almost every 20th person lives below the poverty line, despite being employed. Authorities could provide significant assistance for people in need. For example, Belarus currently taxes "social parasites" to boost the state budget instead of supporting unemployed people.

Belarus already had a negative experience with the World Hockey Championship, when it spent a lot of money but failed to make a profit. According to various estimates, Belarus spent anywhere from $12m to $2bn on the championship.

During the 2014 World Hockey Championship, Belarus had to deal with many inadequacies in the service sector. The country had not built enough affordably-priced accommodation such as hostels or apartments on student campuses. For visitors, it was often difficult to communicate, as the majority of people in Minsk do not speak English.

As a result, Belarus could not be consistent with providing quality conditions for spectators nor did it financially benefit from the Championship. However, it seems that the financial difficulties of the Hockey Championship have not stopped Belarus from hosting the European Games in 2019.

Belarus has just started preparing for the Games. However, many people are already criticising the country's snap decision to take a responsibility for hosting them. While poverty in Belarus is on the rise, the state prefers to invest in sporting events, distracting attention from the economic problems and human rights violations. It still remains to be seen whether the game will be worth the effort.

Surviving year two of recession – digest of the Belarusian economy

On 3 January 2017, The Eurasian Development Bank​ announced that Belarus is the only economy among CIS countries with a forecasted GDP decline in 2017.

Meantime, the biggest problem of 2016 remains unresolved – on 28 January 2017, the Deputy Prime Minister of Russia Arkady Dvorkovich once again raised the bill for Belarus's supposed oil-gas debt.

In this light, the authorities are trying to find a path to new external markets by intensifying negotiations on WTO accession.

Economic growth: an uncertain future

According to official forecasts for 2016, recovery should be on the way. Instead, the economy has remained unhealthy: the GDP contracted by 2.6 per cent in 2016 and will continue down this path in 2017, according to the Eurasian Development Bank. Industrial production fell by 0.4 per cent, year on year; investment in fixed capital collapsed by 17.9 per cent (see Figure 1).

Thus, economic output has decreased for the second straight year and the pain will almost certainly extend into 2017. This is primarily because Russia (as the main export market) will not make a strong recovery. Moreover, Belarus still struggles with weak internal demand and poor productivity growth.

Belarus's industrial sector, weighted down by debt, will still generate losses in 2017. As a result, the National Bank (NBB), searching for more ways to jump start the languishing economy, will lower the interest rate even further.

However, the banking sector, struggling with the NBB's intention to decrease credit rates, will stay in the 'red zone' due to a possible repayment crisis of bad loans generated by indebted 'giants' and excessive directed lending in previous years. As a result, the subsequent drop in investment spending will cause an additional downturn in the economy.

Given such uncertainty, businesspeople will also think twice before expanding their operations. What's more, by the end of 2016 the number of entrepreneurs in Belarus had decreased by 3.1 per cent.

The Chairman of the NGO Perspective, Anatoly Shumchanka, reckons that the reduction in their numbers reflects the generally bad business environment, a good business environment is needed to start businesses and work without excessive administrative and fiscal obstacles. The lack of incentives for development means the absence of a safe path to carry out the activity.

Consumption: the dark side of the new year

Due to the economic problems of companies, the real income of households contracted by 7.5 per cent year on year in 2016, suggesting that people will spend less on basic goods in 2017 as well.

However, the worst-case scenario will occur if the government decides to increase directive average wages. According to the new Head of the Presidential Administration, Natalia Kochanova, the task of increasing the average wages up to the equivalent of $500 still remains unquestionable.

The authorities believe that Belarusian consumers will increase their purchases in stores and the decrease in spending which occurred in 2016 will not happen again.

However, the implementation of such a stimulus plan would once again lead to a sharp depreciation of the Belarusian ruble and subsequently, a significant decline in real incomes of people at risk.

First, because the expectations of Belarusian consumers strongly correlate with the assumption that directive wage increase will lead to a devaluation of the Belarusian ruble. Thus, they will not spend their new money on products and services, but will put additional US dollars in their pockets, thus reinforcing the power of dollarisation in the country.

Second, increasing costs of utilities will keep consumption at its lowest level for nearly a decade. Finally, the government and enterprises have no extra money to pay the bills for higher wages. Therefore, the only way to increase wages without increased productivity is the power button on the printing machine at the mind, resulting in 'great devaluation' again.

Trade policy: diversifying the strategy

The government forecasts positive economic growth in 2017 based on increased agricultural exports and a long-awaited end to the wrenching recession in Russia, Belarus’s biggest trading partner.

However, neither seems assured. Russia’s strong recovery is still under question, and trade may suffer as Russia continues to discriminate against Belarusian goods in order to protect its market and gain the upper hand in the still unresolved oil-gas dispute.

According to forecasts made by analysts of the Belarusian Institute for strategic studies (BISS), prospects for Russian-Belarusian oil and gas cooperation in 2017 look 'pretty grim'. They suggest that the conditions for the supply of oil and gas will continue to deteriorate even further.

On 28 January 2017 the Deputy Prime Minister of Russia Arkady Dvorkovich announced that the Belarusian debt for gas has already reached $550mln.

Moreover, the limited influence of the economic indicators in the Eurozone, USA, and China on Belarusian economy constrains possibilities of trade and economic cooperation with other countries.

In this context, in January Belarusian authorities decided to accelerate the process of accession to the WTO.

Chairman of the Belarusian Chamber of Commerce and Industry Vladimir Ulakhovich suggests that Belarus could join the WTO before the end of this year, as the serious barriers to this have already been removed.

Belarus filed an accession application to the WTO 1993. However, due to the unwillingness of the authorities to significantly liberalise and privatise the economy, the country was not able to become a member of this club. On 29 March 2016, Alexander Lukashenko held a meeting regarding the country's engagement with the WTO and requested that the negotiating process be intensified.

Thus, macroeconomic stability at the end of the 2016 is shaky. Risks for the economy lie both outside Belarus’s borders and within them. Therefore, although the government still wants to increase the tempo of reforms, including trade policy; the foreign investors – the only easy path for recovery left – will be maintaining a distance once again.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Freedom of expression: why do Belarusian authorities fear graffiti?

On 22 December 2016, three Belarusian street artists sued an investigative committee for unfounded accusations of hooliganism. On 13 January, the court rejected the claim, pointing to the absence of any violations of the artists' rights.

Street art has became a new form of political expression. The disproportionate reaction of authorities to street art is reflected in administrative punishments, harsh beatings, and regular KGB checks.

Freedom of expression in Belarus remains highly restricted. Positive changes in visa policy, a decrease in political repression in 2016, and the release of six political prisoners in 2015 have raised hopes that the country is liberalising. However, as the prosecution of graffiti artists demonstrates, Belarusian authorities are still unwilling to make concessions to citizens and open up spaces for free expression of ideas.

How Belarusian authorities punish street artists

Street art has become a tool for expressing and illustrating political views in many European cities. However, Belarusian streets are different than in Europe in that they have almost no graffiti.

Illicit paintings in Belarus survive for no longer than a few days or sometimes even hours. Authorities usually prosecute street artists for political paintings according to article 339 of the Criminal Code on ‘hooliganism’.

The first graffiti case to elicit a disproportionate reaction occurred in 2005. The youth activist Artur Finkevich faced 12 years of imprisonment and spent more than 20 months in jail for writing the anti-Lukashenka slogan 'We want a new one (instead of Alexander Lukashenka)!' on the wall of a building in Minsk. Human rights defenders recognised Finkevich as a political prisoner who had been prosecuted for his active political position.

In 2015, street artists painted a bird in a cage, symbolising the fight of Belarusian journalists for their rights, on a building in Vitebsk. A short time after, the piece was covered in grey paint. Nevertheless, journalists who managed to photograph the painting received fines for participation in a so-called unsanctioned strike action.

Later, local authorities agreed that the painting was just an art piece and the photo-shoot was not a strike. However, journalists and human rights defenders believe that the authorities saw the graffiti as ‘ideologically dangerous’.

In 2016, an unknown artist in Minsk added thorns on the garland and bouquet of a girl and boy painted onto the face of a building. Initially the street art, painted by a Russian artist in the style of socialist realism, aimed to depict the friendly relations between Russia and Belarus. Minsk authorities are currently preparing a court case against the painter, whose name has not been disclosed to the public.

The 2015 street art affair

One of the most famous graffiti cases occurred in August 2015, when the investigative committee started a criminal case against the three street artists Maksim Piakarski, Viačaslaŭ Kasinieraŭ, and Vadzim Žaromski. The civic activists were threatened with imprisonment for one to six years for two instances of graffiti and damaging a billboard with colour.

Their graffiti message conflicted with state ideology, and therefor led to a criminal case, as the human rights centre Viasna remarked. One painting stated ‘Belarus should be Belarusian’, while the other read ‘Revolution of Consciousness’.

Violations of the artists' human rights during their detention and the disproportionate sentences they received led to a public outcry. In the end, the street artists received fines totaling 25, 000,000 BYR (around 1000 British Pounds). With the help of Art Siadziba, the activists gathered the money through a public campaign.

Human rights defenders classified the street artists as political prisoners. Ales Bialiacki, the head of the human rights centre Viasna, commented to Radyjo Racyja that any form of civic activity in Belarus which contradicts official state ideology is punishable by the state.

On 22 December 2016, the three graffiti artists initiated a claim against the investigative committee for falsely accusing the artists of extremism and hooliganism. According to the investigative committee, Maksim Piakarski, Viačaslaŭ Kasinieraŭ and Vadzim Žaromski had published extremist material, including propaganda of violence against the police.

The artists first aimed to prove the accusation false and show that the committee had violated the disclosure principle. Moreover, The committee had released photos of extremist materials which according to the painters has no relation to them. The proceeding, held on 13 January 2017, was short. The court decided that the painters' rights had not been violated, in accordance with a decision by media law and the criminal code.

Why do Belarusian authorities perceive street as a threat?

Regular restrictions of rights, the prosecution of civic activists, and violations of freedom of speech, as in the case of John Silver, who suffered during detention and received personal threats to himself and his family, hardly surprise anyone familiar with Belarusian politics. However, punishing street artists for expressing their thoughts through graffiti is a new form of oppression. The court decision regarding the case of graffiti artists versus the investigative committee is evidence of Belarus's oppressive system.

Expressing political opinion through street art would be unlikely to mobilise citizens to protest against the regime. However, the practise of repressing dissidents, such as bloggers, anarchists, and graffiti artists reflects the state's fears: graffiti with political slogans attracts a great deal of attention in social and mass media. In this way, authorities perceive street art as a form of protest equally dangerous to demonstrations or strikes.

The ongoing prosecution of citizens who express their political opinions through the arts indicates that political repression in Belarus, despite the release of political prisoners, is ongoing. The state will most likely continue mainly to protect the political status quo rather than protecting the rights of citizens.

Belarus prepares to expand its visa-free zone

In October-December 2016, almost 2,000 tourists took advantage of new visa-free regulations to visit Hrodna Region. In response to the increasing amount of foreign tourists, Hrodna Region has started working on two important initiatives: visa-free railway voyages and launching low-cost flights to Hrodna airport.

However, making railway services and the Hrodna airport accessible visa-free will not attract many more tourists if more tourist services are not first developed. Extension of the visa-free territory to the whole of Belarus and investment in the development of services would significantly improve the popularity of Belarus for tourists.

Two months visa-free

On 26 October, Belarus announced visa-free entry for tourists. According to presidential decree 318: 'Concerning the introduction of visa-free entry and departure for foreigners', tourists can stay up to 5 days on the territory of Hrodna Region

From 26 October to 26 December, almost 2,000 foreign nationals visited the visa-free territory. The majority of tourists (1,358 people) were Lithuanians, followed by Poles (795). Belarus has also attracted tourists from Germany, Spain, Italy, and Portugal, as well the USA and even Africa.

Aleh Andreychyk, Head of the regional Sport and Tourism Management committee, told Belta that the Old Town, zoo, farmsteads, and night clubs proved the most popular destinations for tourists. Although many tourists highlighted the cheap prices, the insufficient amount of English spoken in services became an important issue.

Opinions on visa-free regulation

In December, conducted series of interviews with tourists who had came to Belarus according to the visa-free regime. A Spanish family which had recently visited Hrodna noted that Belarus should work more on its image and marketing if it wants to attract more tourists to the country, which remains unknown and under-discovered for many foreigners.

Another traveller from Brazil noted that Belarus is far from the typical Soviet country due to its architecture and developed technologies. Michal Sikorski, a Polish blogger, visited Hrodna and posted a video report. Michal called upon Belarusians to preserve their uniqueness and highlighted the architecture of Hrodna, as well as its night clubs.

Local activists from Hrodna have also noted the significant increase in tourists over the last two months. Yauhen Skarabutan told Radyjo Racyja that these are only the first steps on the way to a visa-free regime between Belarus and the EU.

The next step for visa-free regulation

The Head of Hrodna Region executive committee, Uladzimir Kraucou, reported that due to the increasing amount of tourists, the visa-free zone needs to be extended. Although this might sound as if the authorities are suggesting enlarging the visa-free zone, amendments to the law really only entail expanding visa-free access to railway and flights.

For now, it is only possible to enter Belarus visa-free by car or bus. Visa-free trains from Poland to Belarus would attract more tourists. When travelling by car, visitors have to purchase insurance and spend an unpredictable amount of time on the border. Train travel would remove these arguments.

Authorities in Hrodna Region suggest making the recently launched train route Hrodna – Białystok – Warszawa – Kraków visa-free.

Moreover, Hrodna Region is proposing to launch low-cost routes to Hrodna airport and include the airport in its visa-free zone. Today, the airport is very small and underdeveloped, with only several routes. Low-cost flights from the EU would require investment in airport equipment and better transportation with easy access to town.

The last proposal is still being discussed. Authorities suggest creating a new border checkpoint at 'Safieva – Lipchany'. Hrodna Region authorities note that they are working actively on extending visa-free regulation. Nevertheless, these proposals, even if quickly implemented, are insufficient for making tourism to Belarus truly popular.

Small steps, small achievements

So far, Belarus has taken small steps to liberalise its visa regime. The number of tourists to Belarus has significantly decreased since 2010. Introducing visa-free entrance to one of the Belarusian regions two months ago was the first attempt to open up the country. However, learning from the experience of neighbouring countries could help improve the model for developing local tourism.

For instance, Podlaskie region has created a centre for promotion of the region. The centre actively participates in campaigns aimed at attracting tourists to the region, primarily from Belarus. Recently, at the centre's initiative, the Bialystok Opera sold tickets to Belarusians in exchange for free visas. Creating such a centre in Hrodna could develop new methods of attracting tourists to the region.

The minor extensions suggested by Hrodna authorities have so far been ineffective in changing Belarus’s image and popularity among foreign tourists. Introducing low-cost flights to Hrodna will be unlikely to encourage many more tourists to visit Belarus until the airport is better-equipped and connected to the town. The low level of English knowledge, reflected in the lack of English or Latin writing in public spaces will create an additional obstacle for tourists.

Bialystok, the closest Polish town across the border with similar population, has 18 hotels on Hrodna only has five

Extending the visa-free territory to the whole of Belarus would be much more effective. A recent example of successful visa liberalisation is Kazakhstan, where visas are no loner required for citizens of 37 developed countries for up to 30 days. The country aims to create a large international financial centre and receive direct investments from states such as Austria, Canada, and Sweden. Such a measure in Belarus would make the country more popular in the West. The increased degree of openness brought about by a visa-free regime could only be beneficial economically, socially, and culturally.

However, amending visa regulations will not attract a large amount of tourists unless services are developed first. At the moment, it would be savvy for Belarus to invest in the tourism sphere, at least in Hrodna Region. For comparison, Bialystok, the closest Polish town across the border with more or less the same population, has 18 hotels. Meanwhile, according to Hrodna only has five. More hotels and hostels, along with better food and entertainment services, would encourage foreigners to visit Belarus more than once.

All that said, the successful introduction of the visa-free zone in Hrodna Region and the possible extensions to regulations still point to the intention of the country to open up and improve relations with the EU. The next logical step for Belarus could be the ratification of the cross-border movement agreement, which Poland and Lithuania have already approved, and cancellation of visas for developed countries, as in Georgia, Kazakhstan, and Ukraine.

Under pressure from Eurasian Economic Integration – digest of the Belarusian economy

As of 26 December 2016, the oil and gas dispute between Belarus and Russia remains unresolved.

Moreover, Russia persistently rejects any tradeoffs: this deprives Belarus of a substantial part its foreign exchange earnings from petroleum product sales, thus aggravating the economic recession in Belarus.

In turn, the growth of state debt points to the formation of stable insolvency for most state-owned enterprises and increases the risk of a banking crisis in the economy.

The energy sector: losing ground

The current oil and gas dispute between Russia and Belarus has deteriorated since the beginning of the year. Minsk has decided to pay its own gas price of $73 (a fair price which conforms to the agreement on the transition to equal-income prices between countries). However, the contract claims that the price should be $132.

As a result, according to the Russian gas monopoly Gazprom, Belarus owes approximately $340m for gas deliveries from January to September.

In response to this debt, Russia decided in the middle of the year to nearly halve the quantity of oil supplies to Belarusian refineries: from 5.3m to 3.5m tonnes in the third quarter of the year, and to only 3m tonnes in the fourth quarter. Moreover, on 23 December 2016 Deputy Prime Minister of Russia Arkady Dvorkovich announced the court proceedings on the gas dispute.

Meanwhile, after some improvement at the end of last year and in the first quarter of this year, the country's economic growth has worsened again. One of the main reasons for this is the reduction in the amount of Russian oil processed.

According to Prime Minister of Belarus Andrei Kobyakov, the loss of 1.6m tonnes of oil in the third quarter has led to a chain reduction in industrial production and wholesale trade resulting in a 0.3 per cent GDP drop. By the end of 2016, this drop could reach 0.5 per cent (see Figure 1).

In turn, this reduces the real income of the population and effective demand within the country, thus creating preconditions for the formation of deeper systemic problems in the economy. For example, the number of foreign companies to close has overtaken the number of newly registered ones in Belarus in 2016.

Economic integration: a time of tough decisions

The main Belarusian argument in the energy dispute is grounded in the process of Eurasian integration, which implies four key economic freedoms for the participants in the Eurasian Economic Union (EAEU): free movement of goods, services, capital and labour.

However, this integration project includes various exemptions and limitations. In particular, the plans for the formation of a single energy market has been delayed until 2025.

At the same time, the creation of a common electricity market for the EAEU is scheduled for mid-2019. However, Russia and Belarus must first reach a compromise. Since Belarus produces electricity mainly from gas, the country urgently needs equal prices with the Russian regions by 2019.

However, Russia has so far shown few signs of willingness to radically amend its position (by transitioning to equal-income prices); it is offering to compensate only $300m a year for the difference in gas prices and only through resale abroad of part of the Russian oil supplied to Belarusian refineries.

This scheme thus reduces the oil flow to Belarus, as well as the amount of petroleum products produced from it, further decreasing its foreign exchange earnings. Moreover, Russia wishes to determine the volumes of oil supplies to Belarus on a quarterly basis, increasing Belarus's economic dependence even further.

In addition, Russia may insist on other tough conditions, including a requirement to redirect the export of oil products from Baltic to Russian ports and to sell the Minsk Wheel Tractor Plant – a very important asset for the Russian defence industry.

State debt: missing the target

The problems in the energy sector put pressure on the internal and external debt of Belarus. In particular, in 2017 Belarus may have to return approximately $3.5bn to its creditors.

At the same time, the economic slowdown in Russia (the main trading partner of Belarus) has led to the weakening of external demand for Belarusian products. As a result, export earnings have decreased and a substantial part of enterprises transfer from profitable to unprofitable, further limiting the ability of Belarusian enterprises to finance their debt obligations.

On 15 December 2016 Alisher Mirzoyev, the Director of the project group on financial loans of the Eurasian Fund for Stabilisation and Development, stated that the decrease in efficiency of state-owned enterprises (SOEs) and the low efficiency of long-term projects financed primarily through directed lending have formed a significant part of the debt burden in Belarus.

The directed lending has created large imbalances in the economy. For example, interest rates on preferential loans in 2015 reached only 9 per cent versus market rates of around 35 per cent. Therefore, according to the Deputy Minister of Economy of Belarus Dmitry Krutoy, in 2016 the volume of directed lending has decreased almost by half (from $20bn) in comparison with 2015.

However, risks of insolvency of SOEs still lead to loss of revenue for the country's budget. Moreover, deterioration of the financial conditions of SOEs lead to an increase in problem assets of the banking system and exacerbate the problem by creating an additional crisis in this sector of the economy.

For example, since the beginning of this year the share of problem assets of Belarusian banks has increased by 2.2 times. If at the beginning of January they constituted only 6.8 per cent of risk assets, in November they reached 14.9 per cent (see Figure 2).

Thus, the problems in the energy sector aggravate the economic recession in Belarus further, affecting the capabilities of profitable enterprises to repay their debts and harming the overall investment attractiveness of the country.

Aleh Mazol

Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)

Oil pessimism and manufacturing optimism – digest of the Belarusian economy

On 26 November Belarusian Deputy Prime Minister Vladimir Semashko announced that the recession in the Belarusian manufacturing sector has ended.

However, Belarusian banks strongly disagree with this statement. They yearn for more financially stable corporate borrowers, especially in the industrial sector.

Meantime, oil refining – currently the mainstay of Belarusian manufacturing – is under threat as Russia reduces the volume of oil it supplies to Belarus for processing. This is likely to impede Belarus's recovery from the economic recession even further.

Industrial production: an optimistic view

On 26 November, Vladimir Semashko announced that all indicators point to the fact that the manufacturing crisis has stopped – the growth rate reported by the Ministry of Industry has already reached 3 per cent; it is predicted to rise to more than 11 per cent next year.

However, such an extraordinarily positive appraisal of economic performance in the industrial sector seems slightly premature. There are several reasons to think so. First of all, in 2015 the manufacturing sector received financial assistance from the state (in the form of of foreign currency bonds) totaling more than $500m. This sum has yet to be repaid.

Secondly, due to a lack of free financial resources, the repayment of these debts will fall on the shoulders of ordinary Belarusians. The average wage in Belarus remains at historically low levels – despite several months of growth it has fallen once again and now constitutes only $379.

Finally, even though growth dynamics have reversed when it comes to several industrial product items, the overall picture in manufacturing remains disappointing (see Figure 1). In October industrial production increased by 3.6 per cent compared with September – this was slightly better than expected but hardly surprising.

The banking system: endangered risk takers

Meanwhile, the demand for loans from Belarusian enterprises remains low due to the high cost of borrowing (18 per cent on average). If the credit market were in a different condition, banks could channel unused funds into the economy in order to break the recession.

Theoretically, banks could increase their loan portfolio – they do have the money. However, the situation five years ago, when banks' credit portfolios grew by dozens of percentage points a year, seems unlikely to repeat itself in the coming years.

Belarusian Development Bank analysis shows that the economic downturn and deteriorating financial conditions of enterprises has led to changes in the internal instructions of the Belarusian banks prohibiting to increase loan portfolio if they do not first improve their quality. Belarusian banks do not trust corporate borrowers to repay their debts in the future, as most potential borrowers are classified as 'low-quality'.

For example, in January-September 2016 the number of problem loans in the banking sector increased from 6.8 per cent of the total at the beginning of the year to 14.3 per cent on 1 October. This rise in banks' problem loans coincides with the deteriorating financial conditions of enterprises.

The current economic downturn has several repercussions. First, it increases the risk for those banks who wish to raise their loan portfolio. Second, it discourages others from further risk taking. As a result, according to the National Bank, the volume of corporate loans in national and foreign currency decreased by 3.9 per cent and by 5.2 per cent in January-September respectively.

Oil negotiations: waiting for refunds

Belarusian authorities are trying to find new ways to increase the financial base of budget profits. On 25 November 2016, Igor Demin, an official representative of the Russian company Transneft, confirmed that two Belarusian oil transport companies had stated their intention to increase the cost of transit for Russian oil from 1 January 2017 by 20.5 per cent.

In October, Belarusian authorities had already threatened Moscow with a sharp increase (50 per cent) of the oil transportation tariff. Transneft representative Igor Demin responded that such changes would require a corresponding agreement with Transneft and the Russian government.

At the moment, a 2010 intergovernmental agreement regulates the calculation of the growth rate for transit tariffs. It takes into account the preliminary predetermined volume of oil transit, which remains unknown until February 2017. According to these arrangements, Belarus has the right to increase the transit tariff unilaterally only to adjust for average annual inflation.

However, the main reason behind the growth of the transit tariff remains the volume of oil reaching Belarusian oil refineries. From 2016 until 2024, Russia agreed to supply 24m tonnes of oil annually. But starting in the second half of the year, Moscow reduced the oil stream first to 3.5m tonnes (approximately 40 per cent) per quarter, and starting in October to only 3m tonnes (see Figure 2).

The main reason behind these harsh measures is the Belarusian gas debt, which has already reached $281m. In turn, authorities in Minsk are demanding that gas prices be reduced and set according to their own calculations ($73 instead of $132). Belarus has promised to close this gap by 20 October in exchange for the resumption of oil supplies, but the invoice nevertheless remains unpaid.

The decrease in the oil supply and the corresponding decline in petroleum product production have led to an additional 0.3 per cent GDP drop. Officials in Minsk urgently need a new bargaining chip for their oil manoeuvres to succeed. They are now relying on alternative oil streams from Azerbaijan.

Thus, the authorities have decided to raise the stakes in the energy dispute once again. Although such a controversial move may possibly help resolve the issue of discounted gas, it will surely not help attract new foreign investors, especially into the manufacturing sector, suffering as it is from a lack of cheap capital.

Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)

This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)