2018 EaP Summit, October Economic Forum, limits to Belarus’s sovereignty – digest of Belarusian analytics

Jury Drakachrust ponders upon reasons and consequences of the invitation of Aliaksandr Lukashenka to attend the Eastern Partnership Summit in Brussels on 24 November, while Dzianis Mieljancoŭ analyses benefits of the Summit for Lukashenka.

Belarus Security Blog argues that Belarus is working hard to establish itself as an independent actor in regional security matters, despite sсepticism from the West and Ukraine.

IPM Research Centre assures that despite the fact that the authorities ceased negotiations with the IMF, they did not stop the reforms.

Belarus in Focus experts observe that before the local election campaign, the Belarusian authorities are becoming more sensitive to local civic initiatives and opinions of the expert community about the information policy and national security issues.

This and more in the new edition of the digest of Belarusian analytics.

2018 EaP Summit

Lukashenka Receives an Invitation to Brussels – Grigory Ioffe analyses the media reaction to the fact that Brussels extended an invitation to Alexander Lukashenka to participate in the 25 November summit of the EU’s Eastern Partnership (EaP). The experts believe that in any case, there is a chance the EU initiative may start a new chapter in Europe’s relationship with Belarus.

 Lukashenka, For the First Time, Formally Invited to the EaP Summit – Sources report, that the EU extended a formal invitation to Aliaksandr Lukashenka to attend the Eastern Partnership Summit in Brussels on 24 November. Jury Drakachrust ponders upon reasons and consequences of the invitation, while Dzianis Mieljancoŭ analyses benefits of the Summit for Lukashenka. TUT.by interviews experts to identify scenarios of Lukashenka’s participation in Brussels.

Minsk Dialogue: Prospects of EaP Ahead of the Brussels Summit – Minsk Dialogue presents a report based on an expert discussion before the Future of Eastern Partnership conference that took place on 7 September 2017. The report provides an overview of the history of EaP, analyses positions of key stakeholders and provides for scenarios of EaP future and its meaning for Belarus.


Minsk Is Trying to Establish Itself as an Equal Subject in Security Matters – Belarus Security Blog argues that Belarus is working hard to establish itself as an independent actor in regional security matters, despite scepticism from the West and Ukraine. Strengthening of security-related ties with China is deemed to be evidence of that.

Картинки по запросу парад независимости минск 2017

Photo: tut.by

Zapad 2017: Did Belarus Lose the Information War? – Dzianis Mieljancoŭ, Minsk Dialogue, analyses the materials of the Western media and debunks the assertion of some Belarusian analysts and journalists about the ‘lost information war’. In particular, a statement that Belarus’ participation in joint military exercises with Russia had a negative impact on the international image of Belarus is not supported by the facts.

What Are the Limits to Belarus’s Sovereignty? – Grigory Ioffe sums up a wide-ranging debate about the nature and geopolitical realities of Belarusian statehood and independence inspired by the joint Russian-Belarusian Zapad 2017 war games. The analyst also mentions two facts – the Catholic conference in Minsk and registration of the Albaruthenia University office – that seemingly extend the limits of Belarus’s sovereignty.


“Because I Decided So.” Rules Underlying the Decisions in the Belarusian Economy – Kiryl Rudy, former assistant to the president for Economic Affairs, explains what social characteristics can change the rules of behavior in the economy, form a community, a risk appetite, long-term planning, switch on rational laws and lead the economy to a global highway of ‘one hundred years growth’. The article is timed to KEF 2017.

Towards the ‘Minsk Consensus’: Some Personal Reflections – Ben Slay, UNDP senior advisor, considers what the ‘Minsk Consensus’ is (or might be), and how it may be of broader use. Namely, rather than laying claims to overarching development paradigms or one-size-fits-all solutions, Belarus’s experience points to the need for pragmatic combinations of private- and public-sector governance reforms.

Unexpected Growth, Unsold Reforms and Optimism in Belarusian – Aliaksandr Čubryk, IPM Research Centre, suggests some statements on the eve of the Kastryčnicki/October Economic Forum, KEF 2017, which was held on 2-3 November in Minsk. The expert, in particular, assures that despite the fact that the authorities ceased negotiations with the IMF, they did not stop the reforms.

Belarusian Economic Review, Q2 2017 – Belarusian Economic Research and Outreach Centre (BEROC) rolls out fresh quarterly economic review. In particular, consumption continues to grow; import surpasses export; monetary policy stimulates; real exchange rate reached 5-year minimum; real salaries slowly grow while available income continues to shrink.

Wargaming workers in Minsk. Photo: New York Times

How Europe’s Last Dictatorship Became a Tech Hub – Ivan Nechepurenko, The New York Times, studies the growing trend of turning Belarus into a tech hub. More than 30,000 tech specialists now work in Minsk, many of them creating mobile apps that are used by more than a billion people in 193 countries. Lukashenka began to believe that the tech industry could become a magic wand to help him end the country’s chronic dependency on Russia.

Civil society

Andrej Jahoraŭ: Belarus Leads an Authoritarian Revenge in the Region – There is a clear crisis of democracy, while human rights in Belarus are in a blockade. At the same time, the European-Belarusian relations are now enveloped in a continuous mythology, according to the director of the Centre for European Transformation, Andrej Jahoraŭ. The analyst is confident that in its current state the civil society cannot influence the EU policy.

Civil Society Has Bearing On Agenda of Belarusian Authorities – Belarus in Focus considers a case of a public campaign that has raised the attention to the situation around the death of a conscript soldier in the army. The experts conclude that civic initiatives, through social networks and the Internet, are beginning to outstrip state ideologists with traditional media and have a greater impact on public opinion.

Impact of Civic Initiatives on Local Agendas and Cultural Information Policy Has Increased – Belarus in Focus experts observe that before the local election campaign, the Belarusian authorities are becoming more sensitive to local civic initiatives and opinions of the expert community about the information policy and national security issues. Although, the authorities’ decisions are likely to remain half-hearted and criticised by civil society representatives.

Belarus Digest prepared this overview on the basis of materials provided by Pact. This digest attempts to give a richer picture of the recent political and civil society events in Belarus. It often goes beyond the hot stories already available in English-language media.

The Economy Gets Used to Sustained Recession – Belarus Economy Digest

The Belarusian economy keeps on contracting: in January-July it decreased by 4 per cent. However, a number of positive trends have arisen: wages and employment are stabilising, along with improvements in current account balances.

The latter might signal an imminent recovery, but that remains questionable. Increased sensitivity to global financial turbulence and the lack of policy capacities may cause a deeper and sustained recession.

Poor perspectives for leaving recession

In January-July 2015, the economy performed rather poorly: GDP dropped by 4 per cent, and this was accompanied by shrinking employment and wages. This means that in 2015 GDP contraction will be more than 3.5 per cent as most analysts agree. A 4.0 – 4.5 per cent contraction in 2015 seems likely. Moreover, perspectives for 2016 are deteriorating: expectations of poor growth might be soon substituted for expectations of a continuation of recession.

From the demand side, poor investment activity explains the deteriorating environment. The majority of firms have adjusted to a shock reduction in foreign demand by making fewer intermediary imports, which has a roughly neutral effect on GDP.

However, this adjustment has not been sufficient and firms have had to reduce their investments as well. High interest rates and labour costs have strengthened this trend. Such adjustments by businesses mean that the social impact of the current economic downturn has been relatively soft. However, it implies more challenges for a rapid recovery and weakens the environment for long-term growth.

Wages and employment moving towards stabilisation

At the beginning of the year, the labour market reacted sensitively to the economic slowdown: both employment and real wages contracted. However, in the last couple of months this relationship has dwindled. First, the rate of decrease in employment has slowed. Second, the quantity of ‘idle hours’ initiated by employers has begun to go down. Third, real wages have recovered from a huge drop at the beginning of the year, and have actually stabilised near the average level of 2014 (see Figure 1).

A number of factors can explain the stabilisation of the labour market. First, the private sector (or part of it) might be satisfied with the current level of labour costs which resulted from substantial cuts at the beginning of the year because it it more competitive.

Second, in May and June some positive signals in foreign demand may have pushed firms to stop making further adjustments to labour costs. Third, the government might have intensified its administrative tools ahead of the presidential election. From this perspective, Lukashenka’s statement that state-owned enterprises should do their best to save their labour force despite the recession might have had an impact.

Recession improves trade balance

Contraction of demand abroad triggered the current recession in Belarus. Similar shocks in previous years led to a significant deterioration in the trade balance, as a reduction in exports was not compensated enough by a reduction in imports. However, this time the adjustment to foreign demand shocks has been different. Currently Belarus is demonstrating substantial improvements in its trade balance (see Figure 2).

First, this is due to a shift to a floating exchange rate regime, which provides near stable price competitiveness for Belarusian producers. Second, the recession environment contributes to a better merchandise trade balance: less disposable income guarantees less demand for imports. Third, the government has tightened its administrative pressure on imports. Finally, during this year Belarus has displayed a persistent surplus in its trade of goods and services.

Surplus in trade together with the inflow of oil duties which were previously ​re-channeled to the Russian budget will lead to significant improvements for Belarus. In fact, it means that Belarus in 2015 does not need foreign borrowing to finance its current needs. However new borrowing for repayment of old debts is still on the agenda.

Overall, one may argue that the current recession and new policy mix is a painful but purifying treatment for the Belarusian economy. However, such a conclusion may be challenged because of the increased sensitivity of the national economy to external shocks. This sensitivity stems from structural weaknesses and distortions accumulated during the periods of voluntary policies.

Sensitivity to turbulence in international markets increased

In the current policy mix, the nominal exchange rate should absorb a huge part of the external shocks. Given the relatively stable external environment, this mechanism works properly. That was the case, say, in the second quarter, when foreign financial markets, oil prices and exchange rates of major currencies for Belarus (USD, EUR, RUB) were relatively stable.

However, in case of more severe shocks and correspondingly large exchange rate adjustments, the mechanism stalls. Belarusian households still perceive large exchange rate swings as a signal of further financial turbulence, rather than a shock absorber. This leads to deposit dollarization and demand for hard currency to increase, thus propagating the shock for domestic financial markets rather than dampening it.

A similar story took place in July and, especially, in August. A new round of global financial market downturns led to cheaper oil and depreciation of the Russian ruble. The Belarusian ruble followed a similar path to the Russian one, which resulted in a roughly 15 per cent depreciation in July-August against the US dollar.

Lowering demand for national currency accompanied depreciation. The worries of households also amplified it: Belarus had to redeem Eurobonds issue worth $1bn given a very low level of international reserves. However, a new loan from Russia (the equivalent of $760m) allowed passing the Eurobond redemption without reduction of reserves, which mitigated the pressure on the financial markets.

Although depreciation has not triggered a new wave of panic on the domestic market, it exposed existing challenges. First, the current policy mix is still weak in the face of huge shocks. Second, the authorities cannot afford a rapid reduction in interest rates as it increases sensitivity to shocks. This means that getting out of recession will take a long time, especially against the backdrop of global financial instability. Hence, a deep and sustained recession seems the most likely scenario for Belarus.

Dzmitry Kruk, 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)

Will Belarus Ever Become a WTO Member?

Two weeks ago, Belarusian Deputy Foreign Minister Aliaksandr Hurjanau declared Belarus was planning to finish all of the necessary technical work for the country’s accession to the World Trade Organisation (WTO) in one year's time. However, exactly three years ago he also projected that Belarus would join the WTO by the end of 2013. Is this time going to be any different?

The history of Belarus applying to join the WTO is a story of unfulfilled promises to liberalise and privatise the economy. Instead of firmly declaring its aspirations to join the WTO by establishing its strong political commitment that could motivate it to introduce reforms, the Belarusian authorities have preferred to imitate engagement.

Belarus remains one of the very few countries in the world that does not belong to the WTO. To name but two issues, the overwhelming role of the state in the economy and its extensive agricultural subsidies are the clearest obstacles for Belarus' accession to the WTO.

Everyone but Belarus

The WTO's mission is to negotiate global rules for export-import relationships, developing multilateral trade agreements and reducing trade barriers. To date, 161 countries, which account for over 98 per cent of global GDP, have joined the WTO. Another 23 countries, including Belarus, are in the process of negotiating their accession, and only 14 states have shown no interest in joining. No country has ever left the WTO.

Russia's accession to the WTO in 2012 automatically forced other members of the Customs Union of Belarus, Kazakhstan, and Russia to comply with trade liberalisation policies in accordance with Russia’s obligations to the WTO.

Therefore, since 2012 Belarus has experienced the negative impact of Russia’s membership in the WTO with no direct benefits to its own economy. Goods made in Belarus neither have easier access to foreign markets, nor does Belarus have the right to use the WTO’s protection regulations for litigation purposes. Yet, Russia’s accession to the WTO has raised the level of competition within the Customs Union and squeezed out a number Belarusian manufacturers from the market.


Unfulfilled Promises of Successive Governments

Belarus started negotiations on entering the WTO in 1993. After 22 years its WTO membership remains a distant prospect, though other countries in the world have a track record of between 3 years (Kyrgyzstan) to 19 years (Russia) in their attempts to join the organisation.

In 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO

In over 20 years Belarus participated in numerous events to bring the national economy closer to the global organisation. The Working Party on the Accession of Belarus to the WTO, which is comprised of 41 countries, assesses the progress of Belarus in bringing national legislation into compliance with WTO agreements. To date, the Working Party has already held 7 formal meetings in 1997-2005 and five rounds of informal consultations between 2006-2013.

In 2008-2013 the UN Conference on Trade and Development (UNCTAD) and the United Nations Development Programme (UNDP) Country Office in Belarus conducted a technical assistance project in support of reforms. The project consisted of many analytical studies, expert study tours, technical know-how exchange, seminars, and round tables. Two independent think tanks, Warsaw-based CASE and Minsk-based IPM, implemented another minor project in 2013. Last but not least, in December 2014 the Russian government decreed it would spend $0.6m on initiatives supporting Belarus’ accession to the WTO.

Minsk, however, has only been putting on a facade of deep concern about its quick accession to the WTO. Belarus’ application process is abound with numerous declarations by the Belarusian authorities to accelerate the process. In 2005, 2010 and 2012 Minsk claimed that it would successfully wrap up negotiations in a year. Meanwhile, all of its neighbours and all of the current members of the Eurasian Economic Union have already joined the WTO (see the table below).​

Stumbling Blocks for Belarus's Accession to the WTO

With an economy where state-owned enterprises produce about 70 per cent of GDP according to the European Bank for Reconstruction and Development (many of which are subsidised), Belarus does not have the slightest chance of joining the WTO.

WTO membership requires that candidate-country commits to liberalise their economy and reduce the role of the state. The WTO has never admitted a country with such a quasi-socialist economy. For instance, the private sector in all 22 (out of 29) post-socialist countries in Central and Eastern Europe and in Central Asia that have successfully joined the WTO accounted for 50 to 75 per cent of GDP at the moment of accession. The private sector's minor role in Belarus's GDP clearly reflects the scope of its lack of transition towards a market economy.

The agricultural sector would immediately go bankrupt without the support of state subsidies

State support for the agricultural sector remains a particularly sensitive area of negotiations for Belarus’ potential accession to the WTO. Although its role in the economy has been diminishing over the last 25 years – from 23 per cent GDP in 1990 to 7 per cent in 2013, it still accounts for a rather significant part of the economy, employing 9.5 per cent of the total workforce according to the official government statistics.

The agricultural sector is comprised mainly of state-owned collective farms which would immediately go bankrupt without the support of state subsidies. Only 10 per cent of agricultural firms could operate profitably without this support according to a study published in December 2013 by the Economic Research Institute of the Ministry of Economy. If Belarus were to join the WTO, it would have to cut significantly its financial support to this sector. Without the prior liberalisation and privatisation of the agricultural sector, this would likely signal its collapse.

Yet, Belarus’s membership in the Eurasian Economic Union does not interfere with its aspiration of joining the WTO. On the contrary, since the customs policy in the Eurasian Economic Union is the same for Belarus and all other member-countries that have already joined the WTO, it means that Belarus is generally ready to instate a WTO-compliant customs policy. In other words, Belarus and the WTO could rather easily find some compromise in negotiations on tariff and non-tariff regulations of market access for goods and services.

Keeping The Quasi-Socialist Economy Alive

Though international competition defines growth in the long run, for an unreformed economy it poses a significant threat. The Belarusian authorities are aware of all of this, but remain reluctant to transform the economy. This is precisely why they continue to stall on implementing their promises towards quickly gaining membership in the WTO.

Without deep structural reforms, Belarus neither has a chance of join the WTO nor will it receive the benefits from accession. For the sake of its own national interests Belarus should at first advance its economic transition towards a market economy, including small and large scale privatisation, and at a later point focus on further foreign trade liberalisation, including its accession to the WTO.

Belarusian Economy Creeping into Recession

The first quarter of 2015 displayed a number of distressing trends in Belarusian economy.

The adjustment of the exchange rate has not secured the restoration of competitiveness. Furthermore, the government has to resort to conservative policies for mitigating structural weaknesses.

The economy has gone into recession, which was accompanied by lower real wages and levels of employment. However, a tough environment may become a trigger for structural reforms.

A New Economic Pattern: Shrinking Economy and Conservative Policies

The first quarter of 2015 has been distinct because of some of the novelties witnessed in economic dynamics and policies. A couple of months ago, the low competitiveness of Belarusian goods had become a key reason for the exchange rate's adjustment. But this time around, the authorities have minimised the impact of devaluation, as they were afraid of a new full-fledged financial crisis.

Hence, they have been deferring to ‘austerity policies’ to mitigate structural weaknesses and to restore competitiveness. Such policies include constraints on wages, fiscal expenditures, and a rather conservative monetary policy.

This scenario has changed the traditional landscape. First, the government has thus far refused to engage in a policy of wage stimulation. More than this, the government has actually begun to restrain wages, for instance, like those found in budgetary sector, and through administrative measures. Hence, a trend of real wage contraction has become persistent.


Second, a new reality has expressed itself through declining levels of employment and growing unemployment. Official statistics only report registered unemployment. In the 1st quarter it grew by 8.6%, reaching 0.9% of labor force. However, the absolute value of official unemployment is rather far from the actual figure. But, its growth rate may be used as a proxy for showing actual unemployment. Given the assessments of the latter at around 4.5% in December, one may argue that currently, the actual rate of unemployment tends is climbing towards its historical maximum from the last decade.

The new environment has resulted in a contraction in economic output. In the 1st quarter GDP fell 2%. The scope of this contraction seems to be relatively modest, as the depressed environment has also led to a tremendous contraction in imports. However, a mitigating recession due to fewer imports might be exhaustible: roughly all of the options for import restrictions have already been invoked. Hence, the additional competitiveness of enhancing the policies employed are necessary in order to ensure that the recession will continue to be modest and/or short-lived.

Sustainable Weaknesses May Secure Long-Lasting Recession

During the 1st quarter, Belarusian exports saw a significant decline. However, the adjustments in the exchange rate for the Belarusian ruble and the ‘austerity policies’ in place helped to mitigate this trend. Being accompanied by rapidly contracting imports, it helped to secure rather attractive foreign trade statistics.

For instance, the trade balance (goods and services) in January-February turned was in the green. From the perspective of current accounts, this means that it is likely to shift upwards into the positive in the first quarter as well (especially, taking into account that oil duties are going to the Belarusian budget this year, while previously they were being sent to Russia).

Improvements in its external positioning assisted in stabilising the exchange rate. The latter pushed the households to deposit more actively in the Belarusian ruble as they try to take advantage of a period of high real interest rates. This, in turn, created an impulse to drive interest rates down on financial markets. The authorities have begun to argue about stability and Lukashenka has characterised it as ‘a certain equilibrium between the economy and finance’.

But in a broader context, the situation remains far ideal. First of all, despite improvements in foreign trade, international reserves continue to shrink (see Figure 2).

Payments towards external debts are the main culprit behind this development. Moreover, future payments due this year will lead to a further decrease of the reserves, unless some of the debts are not be refinanced.

Second, devaluation and inflation expectations are still high and not sustainable. Hence, any serious shock may generate a new wave of disturbances on domestic financial markets. From this perspective, dwindling reserves is alarming, as just it may trigger new financial turmoil.

Third, while the current policies have improved the competitiveness of the firms somehow, but the situation is still far from normal. A majority of firms still cannot restore their financial position because a huge part of their working capital is frozen in the pipeline. For instance, manufacturing firms have accumulated 84% of their monthly average production as finished goods inventories.

These frozen inventories can simultaneously cause a number of other events to unfold. First, the share of borrowed funds (bank loans) in firms’ working capital is increasing, substituting their frozen funds. Given the high interest rates, these will only worsen firms’ financial positions. Second, the lack of liquid assets influences the growth of non-payment in the real sector. Third, firms have to restrict their output, make further cuts in wages, which generate negative impulses for output patterns. Hence, the overall lack of competitiveness is likely to make the current recession deeper and more prolonged.

Authorities Apply for New Credit, Promising Structural Reforms

The authorities suffer from a lack of available instruments to smooth over the recession and reduce its potential length. Hence, their search for a new chunk of external financial support has once more become their primary target to solve the issue. In March and April they launched negotiations with Russia, the EurAzEC anti-crisis fund and the IMF for new funds.

However, the government is trying to show (albeit indirectly and without issuing any official statements) that this time is different – they are not just applying for more credit, but they want to use these funds as a kind of umbrella for structural reforms. For instance, a visit by the Belarusian authorities to the IMF's Spring Meetings included a presentation on a structural reform ‘road map’ that had been developed in cooperation with the World Bank. This ‘road map’ contains a wide range of measures, which indeed could lead to systemic structural reforms, if it were to be implemented.

However, there are still doubts amongst the Belarusian public about the willingness and readiness of the authorities to start the reforms. Given their negative past experiences, many experts argue that the agenda for structural reforms is simply being used as a justification for filling the state's coffers. It is up to the authorities to show what their real intentions are in the coming weeks and months.

Dzmitry Kruk

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

Belarusian Economy Sinks to Uncertainty – Belarus Economy Digest

Belarus displayed modest but stable growth during past couple of months.

However, future prospects for growth remain uncertain, given the deteriorating economic situation in Russia along with the desire of the authorities to carry out several growth stimulating policies.

Moreover, there are questions with respect to both the exchange rate and interest rate policy that the authorities cannot decide how to deal with the issues.

Output: Sluggish growth stayed put, but its further path is uncertain

During last four months Belarusian economy performs modest and extremely stable growth rate on annual basis – 1.5%. In terms of business cycle, it means that Belarusian economy is still reviving, although the power of this revival is fading away (see Figure 1).

Two factors lay behind these developments. On the one hand, a recent revival of capital investment, a huge expansion in potash fertilisers exports and bitumen mixtures, and less demand on intermediary non-energy imports are all pushing the economy to grow. From the production side, these trends have resulted in confident and strengthening growth in both mining and quarrying, as well as chemical production. This all goes to show that growth actually stems from a very limited number of industries.

On the other hand, weakening consumption growth and a deteriorating external environment have become serious obstacles for growth. At present real wages are stagnating. This new trend has become more or less established as the government gives up on artificially stimulating wages (given the serious challenges with price competitiveness that Belarusian producers face).

The influence of Russian economic problems

Moreover, labour migration dropped as well, largely due to declining wages in Russia — which is the main destination for labour migration — in US dollar terms. Frozen wages began to drive household consumption down. For instance in October, retail turnover recorded growth of just 1.7% in annual terms, while it grew by 13.1% and 9.0% in the first and second quarters of 2014 correspondingly. By the end of the year household consumption growth is will continue to decline and is unlikely to be a source of growth in the near future.

Furthermore, the quickly deteriorating economic situation in Russia is turning into a major issue for the Belarusian economy. According to the available data, there are signs that in October Belarusian producers began to have some problems with sending their goods for export to Russian markets.

These problems are twofold. First, contracting demand in Russia hit Belarusian producers as well as other competitors on Russia's markets. Second, a sharp decrease in price competitiveness for Belarusian producers on Russian markets also unfolded in October.

Russian ruble depreciated enormously against the US dollar in October, while Belarusian ruble kept on modest rate of depreciation vs. dollar. Hence, in real terms Belarusian ruble appreciated to Russian ruble in October by 6.6%, and by 17.6% since the beginning of the year. These figures display the scale of price competitiveness reduction for Belarusian producers (see Figure 2), which restricts their exports.

A more expensive Belarusian ruble (vs. the Russian ruble) also triggered a boost in the demand for imports from Belarus's eastern neighbour. The prices in Russia in dollar terms turned out to become much cheaper for Belarusians in comparison to the domestic market, especially for durable and capital goods.

The combination of growth of promotion and the growth of restrictive factors has created a large amount of uncertainty. This uncertainty alone presents a challenge for the economy. In such an environment many economic agents shift their behaviour to be conservative in tone – they postpone planned investments and purchases of durable goods and/or refrain from new plans until more clarity and certainty about the economic situation is apparent.

In this respect, the government should raise confidence levels by offering reliable response to the crisis. However, the new external environment seems to have completely preoccupied the Belarusian authorities, as they still have not elaborated a clear response. During the last couple of weeks different officials have stated radically different positions in respect to the exchange rate, interest rate, fiscal and wage policy. This forms a threat not only to production dynamics, but also to financial markets.

Monetary Environment: Threats to financial stability are accruing

The National bank of Belarus is trying to keep the USD/BYR exchange rate roughly stable to suppress inflation and lower devaluation expectations. At the same time, it needs to provide at least a stable level of price competitiveness for exporters, especially on the Russian market.

A modest depreciation and stable price competitiveness may co-exist when Belarusian and Russian rates of depreciation against the US dollar are closer to each other (or even if the Belarusian one is more significant). In this case, a stable USD/BYR exchange rate is going to be in line with domestic expectations, while a generally stable (or depreciating) RUB/BYR exchange rate is going to provide accessible level of price competitiveness on the Russian market for Belarusian companies.

Given the sharp depreciation of Russian ruble over last two months, the National Bank had to sacrifice one of its priorities. It preferred to provide a stable USD/BYR rate in order to prevent a new wave of deposit outflows and/or deposit dollarization. A sharp appreciation in the real exchange rate vs. Russian ruble has become another element that (see Figure 2).

However, the current policy mix might not offer up a sufficient solution. External imbalances are likely to progress, which reduces the credibility of the National Bank’s exchange rate policy. Further deposit dollarization is the standard response by Belarusian households in these circumstances.

According to preliminary data, the process of changing the currency of deposits was restored in October and rapidly expanded in November. Hence, the policy of modest depreciation against the US dollar is failing in respect to both priorities: the fragility of domestic financial market is growing, while external price competitiveness has been dampened.

A good solution for the National Bank assumes that the Russian ruble will stabilise shortly against the US dollar, or even appreciate somehow, compensating for its all too rapid depreciation. In this case, the National Bank can ‘catch up’ with the Russian ruble in several months time by holding a modest depreciation rate against the US dollar.

However, the Russian ruble is continuing to depreciate due to dropping oil prices. To make matters worse, oil prices may not have reached rock bottom yet. At the same time, reducing the credibility of Belarus's monetary policy requires new incentives for mitigating deposit dollarization. This would mean that they would have to raise interest rates. But the latter will restrict output growth despite the desire of the authorities to stimulate it.

As such, a huge degree of uncertainty in respect to future path of the economy and the government’s policy was a major characteristic of the Belarusian economy in November.

Dzmitry Kruk

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

Output Grows, but Inflation Hurting Macroeconomic Stability – Digest of Belarusian Economy

The economy of Belarus is showing signs of rising levels of output with most industries increasing their overall output figures throughout May. At the same time foreign and domestic investment demand are exhibiting signs of recovery.

However, this recovery does not itself necessarily signal a return to high output growth. The growth rate is likely to remain weak in the coming months and a new challenge – climbing inflation – might hurt the economy.

Output: Growth is Reviving, but Remains Poor

The Belarusian economy has entered a period of recovery (see Figure 1). Belstat reported that in January-May output grew by 1.5% (0.5% in the 1st quarter, and 1.1% in January-April). Indeed, broad positive trends in output have become more systematic and noticeable.

On the production side, major industries displayed gradual output growth across different sectors (trade, manufacturing, agriculture, electric power production) in May. Only construction and a number of manufacturing sub-industries (mainly machinery and equipment manufacturing) seem to be exceptions to this general trend.

On the demand side, an increase in investment activity and on external markets set the stage for recovery. External factors have also played an important role in Belarus' economic revival through May. In particular increased potash fertiliser exports, having recovered after demand was driven down in 2013, has become one of the most notable changes. Consumer activity remained strong, although its growth is likely to weaken in the near future due to real wages stagnating.

Despite a number of encouraging trends in the real economy, in general the overall economy's prospects have not significantly improved. Several factors are hampering its growth. First, its poor growth potential remains one of Belarus' core issues. Even according to the most optimistic forecasts for 2014, the GDP's growth rate will remain extremely modest (up to 3% by the end of the year).

Second, financial markets and the monetary environment continue to be in a very fragile state. The authorities achieved some success in making them more stabile and reducing interest rates over the past couple of months. However, they will hardly succeed in sustaining it if another shockwave ripples through the economy, especially if they fail to find a way get access new foreign loans.

Should things start to fall apart, the authorities will have to tighten their interest rate policy against a backdrop of growing inflation. However, if they are able to continue to build momentum for sustained domestic investment, which has been successful thus far thanks to reduced interest rates and increased liquidity in the banking system, they might be able to reverse this negative trend.

Third, a contraction the volume of intermediary imports has had an enormous impact on improving the environment of the nation's net exports. However, there are doubts about the origins of this shift (i.e. was it driven by the preferences of firms or was it the outcome of an administrative restriction being placed on imports) and its sustainability (i.e. can firms maintain their current levels of production if they receive fewer imported intermediate inputs).

Monetary Environment: The Threat of a New Inflation Spike

In 2013, the inflation rate steadily fell, reflecting a gradual shift in inflation forecasts (which, nevertheless, remained high and volatile), contracting domestic demand for investment and a relatively strict economic policy. Growing inflation appeared to be relatively consistent in 2014, as the majority of the factors that contribute to it persisting in the economy.

However, recently the situation appears to have changed. Since the beginning of the year the rate of inflation has began to gain momentum with the annual CPI (consumer price index) inflation rate reaching 19% (see Figure 2) in May.

Administratively regulated prices for services are the main culprit. Since the beginning of the year the tariffs on utilities and transportation have grown considerably (by 20.6% and 15.5% correspondingly). In reality, raising these tariffs is sound policy, and despite the opaqueness of how the new rates were reached, it was necessary to adjust them to a more fiscally responsible and economically reasonable level.

Another contributing factor has been the government's decision to dealing with the Belarusian rubles exchange rate. Given its lack of access to external financing, along with a huge deficit of current account, they could not avoid employing this tool for mitigating the nation's currency deficit. A more rapid pace for depreciation also contributed to prices going up.

There was also a significant spike in foodstuff prices in 2014 (up 12% since the beginning of the year). Meat prices (particularly pork prices) lead the pack in terms of growth. Prices for meat and poultry grew by 25.3% from January-May, with pork jumping 51.0%.

A substantial reduction in the nation's pig stock (due to an outbreak of African hog cholera in 2013) the primary driver behind this trend. Still, trying to explain the sharp jump in foodstuff prices in terms of African hog cholera alone seems to be misleading.

In 2014, agriculture's growth rate of costs has been considerable, making it among the leading industries of the economy. In the 1st quarter, expenses in this sector grew 25.4%, while the average rate of expenses throughout the economy was just 10.6%.

Such a pronounced growth in costs cannot be explained away by African hog cholera. The low levels of efficiency witnessed throughout agricultural sector as a result of large direct and indirect subsidies to it may provide a better explanation, or at least an alternative one, for rising costs and the subsequent price adjustments.

A new round of inflation rate hikes has developed into a serious potential threat for the national economy.

A new round of inflation rate hikes has developed into a serious potential threat for the national economy. Accelerating inflation may drive up expectations about its future direction. Alternatively, increased inflation expectations may lead to a new wave of deposits being tied to dollars. If this is the case, the authorities will have to enforce a strict interest rate policy in order to cease deposits being done in dollars, which would result in additional output losses.

Furthermore, a sharp spike in prices for a small group of goods and services (especially intermediate goods like fuel and utilities) may distort the structure of relative prices and correspondingly cause adjustments in other prices to eliminate these distortions.

Finally, increasing prices will lead to less a lower level of competiveness for the Belarus' producers and manufacturers. In battling to fend it off, it may become clear that a rapid pace of depreciation will become necessary. However, given the closer relationship between exchange rates and prices, the threat of a new inflation-depreciation downward spiral may arise alongside output losses.

Dzmitry Kruk, 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)

A New Loan from Russia – A Temporary Lifejacket

The growth rate of inflation in the 1st quarter of 2014 amounted to 6.6% and made plans for reaching the official targets for annual inflation highly unlikely.

Despite this, a gradual reduction in refinancing rates with a second round of cuts has been preserved. It was also accompanied fixing the maximum rate of ruble loans at a rate of 39.4% for companies.

By the end of April the international reserves of Belarus decreased by $238m, bringing them to a total of $5.477bn. This number signals the lowest amount of reserves that Belarus has seen since November and makes the problem of attracting capital all the more difficult.

However, a new loan from Russia will allow officials to postpone making any macroeconomic adjustment policy decisions for now. The authorities are not keen on introducing any unpopular reforms in a pre-election year.

Inflation and Refinancing Rates

Consumer prices grew by 1.6% in April, and in January-April inflation reached 6.6%. It appears rather obvious at this point that the authorities will not succeed in reaching their planned annual inflation rate of 11% and it will likely rise at least 5-6 points beyond what the government had planned for.

At the same time a reduced refinancing rate of 21.5% was set in April and May and signals the possibility of a decrease in rates for for the Belarusian ruble. This move supports the decision of the National Bank of Belarus (NBB) to fix the maximum interest rates on loans to legal entities in national currency at a maximum rate of 39.4%.

This decision came into force on 8 May 2015 and will be in effect until at least till 1 January 2015. An attempt to make it easier for for the enterprises to access financing is the primary function of this decision.  However, there is a good chance that this will boost inflation, with its’ already high rates. 

The possibility of rising inflation together with devaluation expectations from average Belarusians may increase the volatility of national exchange rate vs. foreign currencies and decrease demand for the Belarusian ruble.

Dynamics of the currency market

Over the past months there has been a noticeable trend on the currency exchange market with U.S. dollar vs. BYR (Belarusian Ruble) finally reaching the psychologically round figure of 10000 BYR for $1. 

In general the situation for the currency market remained stable, including its more negative tendencies. In recent months the smooth nominal devaluation of the Belarusian ruble has continued with the main factors influencing the situation being inflation, a decline in foreign currency reserves together with rising devaluation expectations among Belarusians.

Demand for foreign currency serves as evidence of increasing devaluation expectations. In January 2014 the net demand on foreign currency was $(-99)m, while in March 2014 it amounted to just $(-10.3)m. The situation which has developed means that Belarus must attract external sources of financing as only the nation's meagre foreign reserves are available to prop up the Belarusian ruble.

New Loan to Help Stabilise Foreign Currency Reserves

In April, there were no signs of improvement with the foreign exchange reserves of Belarus. The prior downward trend did not abate and a monthly reduction to the tune of $238m hit the state's coffers, while the cumulative drop from January – April 2014 has reach a sizeable $1.2bn. At the beginning of May the total reserves sunk to $5.477bn. This reduction in the nation's currency reserves signals that Belarus has only limited resources available for the maintenance of its economy.

Belarus' inability to attract foreign investment partially explains the dip in foreign exchange reserves. According to official statistics in the 1st quarter of 2014 the net FDI in Belarus was $822m. This figure, however, is deceptive as it was likely the result of money being reinvested in the economy. In other words, there was likely no new foreign capital investment into the Belarusian economy. 

However, it appears that the authorities will be able to sand off the rough edges of the current economic situation. In the beginning of May it was reported that Russia will provide a loan in order to help Belarus maintain its foreign reserves. Belarus expects to obtain the promised funds in May. The expected sum to be transferred is about $1.5bn, the remainder of a $2bn loan, that was approved by Russia at the end of last December.

Moreover, it looks like Russia’s decision to allocate the rest of the loan will be accompanied by a reduction of export duties on oil and oil-related goods. This welcome news means that Belarus may acquire a significant sum of money through reselling the oil, though it does not come without a hitch. Russia is planning on introducing a new tax for mining operations that will raise the costs associated with delievering oil to Belarus and will mitigate the benefits that Belarus had hoped to gain through reduced export duties.

One possible reason for the generosity and pliability of Russia is to ensure that Belarus will sign the agreement on the formation of Eurasian Economic Union after negotiations felt flat in Minsk at the end of April. Nevertheless, obtaining these funds will allow the Belarusian ruble to sit at a stable level and postpone any threats of its devaluation. Taking into account that presidential elections will occur in 2015, the authorities are doing their best to prevent Belarus from facing any severe economic shocks.

Maryia Akulava, 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)

External Environment Poses New Risks for the Belarusian Economy

Economic performance during first two months of 2014 has been rather disappointing. First, almost all industries reduced their output which led to a decline in GDP by 1.6% year-on-year in January-February. 

Second, Belarus has faced new challenges on foreign markets, which are a consequence of capital outflows and weakening growth in Russia.

These economic shocks will deteriorate short-term prospects for Belarus, although the scope and scale of the negative impact is still not clear. Nevertheless, the government will have to react to the new environment it finds itself in, as the volume of accumulated imbalances is too high to be ignored.

GDP Growth: Controversial Trends

Belstat reports that in January-February GDP fell by 1.6% year-on-year. The drop in output occurred in all major industries of the economy: manufacturing, agriculture, construction. The trade sector has become the only significant exception to this trend: it witnessed 7.8% year-on-year growth thanks, in large part, to retail trade (the value added of wholesale trade was roughly constant).

A number of controversial trends were seen developing in the Belarusian economy. For instance, it can be argued that the economic downturn has become more systematic, as some large sectors (e.g. construction, agriculture) have also become members of the long-term recession club in manufacturing.

At the same time a majority of branches in manufacturing (e.g.food, chemicals, woodworking) have begun to exhibit the signs of recovery. These manufacturers have already hit rock bottom in terms of their output and are now reemerging.

Nevertheless, the latter trend does not capture a number of the largest branches of manufacturing in Belarus including the production of transportation vehicles, electric equipment, and metallurgy. Overall, from a production point-of-view, the economic environment appears to be unstable and exudes a very low level of confidence.

When looking at demand, the only component that seems to be doing well is households consumption. It continues to provide a regular, positive contribution to GDP. For example, consider the fact that retail turnover, which is closely tied to households consumption, grew by 12.9% year-on-year In January-February.

However, this tendency seems to be more an issue of inertia than progress and can be attributed to a substantial hike in wages the previous year. Nowadays, the growth of wages has all but come to an end (see Figure 1), which is likely to diminish consumption in near future.


Capital investments, on the one hand, exhibited a huge drop of roughly 20% year-on-year in January-February. On the other hand, it does not necessarily imply a further recession in investment demand, as poor performance in January-February reflected high interest rates, though the authorities intend to bolster lower rates soon, and some statistical effects.

As for foreign demand, preliminary data appears to provide an argument for it being in a state of stagnation. Hence, demand tends to be rather sluggish and there are not any options apparent to provide its rapid improvement.

Macroeconomic Policy: Less Effectiveness and More Uncertainty

Macroeconomic policy during the beginning of 2014 was, to put it crudely, roughly neutral. For its part, the government intended to stimulate demand given its poor state at present. With this in mind, the authorities proceeded to somehow reduce policy interest rates and allowed for a minimal level of depreciation of the national currency.

Still, the government is concerned with the dangers of future financial turmoil, especially given its huge external imbalances and the fragility of the state's current financial equilibrium. The National Bank has subsequently decided to restrict banking activity, while the government abandoned its policy of wage stimulation.

Overall, stagnation with a high degree of uncertainty would be a good way to characterise the current domestic macro-economic situation. Weaknesses on many different fronts created this situation, and these weaknesses interact with each other, which influences the overall state of the economy.

First, a lack of natural mechanisms for growth has become a structural constraint that reflects the absence of incentives and sources for productivity growth. Second, unfavourable and volatile expectations propagate uncertainty and result in poor demand. Third, economic policy has fallen into a trap: the low effectiveness of traditional tools, given unfavourable expectations, results in uncertainty about the priorities of any potential policy.


External Environment: New Sources of Instability

In the beginning of 2014, capital outflow from emerging markets all over the world strengthened. In the case of Russia, the relative volume of outflow exceeded the average value for emerging markets (in relative terms), as weaknesses in Belarus' growth potential became more evident.

Furthermore, Russian involvement in the political tensions in Ukraine might have led more investors to withdraw from being exposed to Russian markets.

In this situation Russia has faced a considerable depreciation of its currency against all other major world currencies, including the US dollar against which it depreciated 10.8% in January-February. Moreover, other large CIS countries (Ukraine and Kazakhstan) also decided to undergo a round of currency devaluation as well.

As a result, the competitive environment on the markets of these countries has changed considerably. Alongside the capacity of these markets were shrinking due to their deteriorating growth prospects.

A new situation on foreign markets has created a new challenge for Belarus. Trying to restrain inflation and devaluation expectations, the National Bank preferred to follow a course of gradual depreciation in respect to US dollar, and actually ignored the devaluation happening throughout the CIS. This policy, however, led to a considerable appreciation of the national currency (see Table 1).

Table 1. The Evolution of Exchange Rate of Belarusian Rouble in January-February, %


vs. Russian Rouble

vs. Ukranian Hryvna

vs. Kazakh Tenge

Belarusian Rouble




Note: The exchange rates from 1 January – 1 March.

Thus, Belarus has faced a severe external shock, which is likely to hurt its exports considerably (and promote imports from other CIS countries). The already huge external imbalance that currently exists might increase even further, although it remains to be seen precisely what will be the effect of this phenomenon.

The economy has not yet fully felt the effects, which is rather typical, since there is usually a lag between the shock itself and its impact on the economy. For instance, the majority of foreign trade transactions that were finalised in January and February were negotiated before the shock set in. This means that the economy has yet to see the effects of the economic shock waves that hit the Belurasian economy.

Given the bulk of the already accumulated distortions, a new shock might trigger a more radical policy response by the authorities in near future. The government is doing its best to avoid intensive implementing either a policy of austerity and/or depreciation.

However, modest usage of these instruments cannot guarantee the successful neutralisation of new economic shocks. Most likely the government will try to provide rapid access to a new chunk of external financing, either due to political agreements and/or due to privatisation deals. Otherwise, automatic macro-economic adjustments in exchange rate and prices might pose a threat to Belarus.

Dzmitry Kruk, 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)

What Policy Can The Belarusian Economy Sustain?

The official forecasts for socio-economic development in 2014 is as conservative as it has ever been: the projected GDP growth is only 3.3%. International organisations and independent forecasters are even less optimistic. 

The economic authorities' plans for 2014 are also unusual. Less than two years before the next presidential election, the "pillars" of the Belarusian social contract – wages and employment – are being affected. It has been stated officially that the real wages in the budget sector will only grow in the case of layoffs.

According to official projections, employment levels will decrease in 2014 by about 3.4%, mostly through the "optimisation" of employees in state-owned enterprises and budgetary organisations. Against abackground of such major changes, there are plans to significantly raise utility costs for households – a very unpopular move.

Why are the authorities adopting such measures? In 2013, the current account deficit reached alarming levels and households turned into a net buyer of foreign currency. If it had not been for tight monetary and fiscal policies, which were launched under the Joint Action Plan of the Government and the National Bank, the situation on the currency market in late 2013 could have been much more complicated.

Will the implementation of the initiatives already announced by the economic authorities be sufficient to stabilise the situation in 2014? If yes, how stable will the balance they strike be? And what happened to the economy that was called the "Eastern European Tiger" just a couple of years ago by some official media outlets?

End of economic growth

Indeed, economic growth has all but come to a halt in recent years. In 2009–2013, the average annual real GDP growth rate was only 3.2%, and this was after a 10% average annual growth rate in 2004–2008.

Even in the early 2000s, when the country was experiencing the effects of the Russian financial crisis and its own inconsistent policies, economic growth was higher (5.1% during 1999–2003). It seems that the Belarusian economy cannot grow at a rate consistent with the status of a country that is "catching up" in its development with more advanced economies.

A very simple illustration of the situation with long-term economic growth is the decomposition of the real GDP in a time series that considers both long-term trends and a cyclical element. The corresponding estimates of the IPM Research Centre show a steady decline of the long-term trends for the real GDP growth rate.

According to the most recent estimates, in December 2013 they barely exceeded 1.8% a year and five years ago (in December 2008) they reached 6.5% a year (see Figure 1). Moreover, the cyclical component of real GDP has been declining for more than two years, i.e. the authorities' attempts to revitalise the economy are not producing any real effects.

One can come to the same conclusions through an analysis of aggregate demand. Growth in domestic demand, which was a stimulus for GDP growth over the last 10 years, is no longer having a positive effect for economic growth due to the negative contribution of net exports. Imbalances grow while the economy does not.

Currency crises in 2009 and 2011 and imbalances in 2013

The accumulation of imbalances provoked by "bad policies" (enhancing of growth in domestic demand through directed loans, quasi-fiscal budget operations and income policy) was the main cause of the currency crises in 2009 and 2011. Negative external shocks played an additional role both in 2007–2009 and in 2010.

Once again, Belarus is facing a series of negative external shocks. In the first half of the 2013, a decline in exports occurred as a result of 2012's high levels of re-exported Russian petroleum products.

In the second half of 2013 exports fell because of a sharp decrease in exports of potash fertilisers (due to a conflict with Uralkali, a partner in the Belarusian Potash Company) and petroleum products (Russia cut its crude oil supplies to Belarus as a result of the "potash conflict").

Finally, from 2013 to the present moment, Belarusian exports (especially exports of investment goods) suffered from stagnation/recession in the Russian economy.

External shocks, which adversely affect its exports, were accompanied by an increase in imports under the influence of a rather rapid increase in domestic demand (both in consumption and investment). As a result, the current account deficit rapidly increased during the year and exceeded 10% of GDP in 2013, which is 2 percentage points more than on the eve of the 2009 crisis (see Figure 2). 

A loss of confidence in the national currency supplemented an increase in external imbalances. Again, the situation became even worse in Belarus when compared to previous crisis episodes: in the second half of 2013 very high interest rates scarcely helped to contain the outflow of Belarusian rouble deposits from the banking system, although in the beginning of 2014 the situation saw some slight improvement.

The story is as follows: the economy of Belarus entered 2014 with a high current account deficit, unstable situation in the currency market and sub-optimal monetary policy – and all this against a backdrop of an unfavourable position in external markets, especially in Russia. It seems that there are many reasons to regard the Belarusian rouble as overvalued and growth in domestic demand as too high to maintain macroeconomic stability.


From the perspective of macroeconomic stability (if we do not take into account changes in any external conditions), the possible scenarios for 2014 are tied to the country's exchange rate policy and macroeconomic (monetary and fiscal) policy.

A return to a policy of credit or fiscal expansion would ruin rather quickly the current fragile stability, there are two options left: (i) a strict macroeconomic policy with a crawling band/peg or (ii) a stringent macroeconomic policy with a floating currency and inflation targeting as a new nominal anchor. From the perspective of external imbalances, the efficact of the first scenario depends on how far the economic authorities will go down the path of reducing domestic demand.

The efficacy of the second scenario depends on how successfully the transition to a flexible exchange rate regime will be supported by monetary and fiscal policy measures. Both scenarios imply a curtailment of imports and some stimulus for exports, but if there is a transition to a free-floating exchange rate the effects will be considerably stronger and faster. Both scenarios mean that the economy of Belarus will endure recession or, at least, it will not grow by the 3.3% which the official forecast envisaged.

There is one significant difference between the current situation and that of 2011. Even if the Belarusian rouble is adjusted in real terms by, let us say, 20%, it will result, according to our estimates, in about a 4% of growth in exports, which are not related to crude oil, petrol products or potash fertilisers. During a recession in Russia, even this potential effect appears to be highly debatable.

However, since a fall in exchange rates will negatively affect domestic demand (this is eloquently demonstrated by Belarus' experience in 2009 and 2011), a growth in exports will be insufficient to ensure any growth in GDP. 

Will it be sustainable?

Thus, to maintain macroeconomic stability, it is desirable to combine the transition to a free floating exchange rate, backed up with a strict monetary and fiscal policy. However, even if this were to occur several important questions remain. First, a tight monetary policy implies a serious reduction in support for state-owned enterprises.

A set of restrictive measures implemented by the economic authorities in late 2013 already led to decline in the financial status of Belarusian enterprises. Further curtailment of direct and indirect government support endangers the basic functioning of many state-owned enterprises. Accordingly, the restructuring and privatisation of state-owned enterprises will become pressing issues for the economic authorities.

It is also necessary to first improve the efficiency and flexibility of Belarus' labour and capital markets. But making the decision to start structural reforms is very difficult for the Belarusian authorities. The last currency crisis took place almost three years ago and they still have not made the "new (old) decision" in favour of reforming state-owned enterprises.

Without this choice, every possible scenario involves the risk of a return to supporting state-owned enterprises and the consequent risk of preserving of the current "model" for the economy, one which is prone to regular crisis and stagnation.

The beginning of structural reforms can improve Belarus' position in any negotiations with the IMF and other international financial institutions. Regardless, the authorities will have to launch reforms without any financial support. It remains to be seen whether the economic authorities will be able to introduce a policy that the economy can sustain.

Alexander Chubrik

IPM Research Center, Minsk

IMF Loans: The Money We Do Not Need?

A controversial event took place next to the International Monetary Fund (IMF) office in the middle of the summer in Washington, DC.

Why the IMF is ready to support empty-handed countries?

Belarus draws its loans from a special IMF fund called the Poverty Reduction and Growth Trust (PRGT).  According to Kryptoszene.de, its money covers the difference, when a country buys more than it actually sells. The Belarusian government cannot “buy votes” with the IMF, since it can neither cash in on these funds, nor use it to increase the salaries of public sector employees and or boost retirement plans.  Belarus, however, has other opportunities to abuse the money it receives from the fund.

How could the IMF money be misused?

More realistically, the Belarusian government may exploit the IMF funds by indeed using it to cover any excess imports, but it should be noted that only the political elite makes foreign purchases. This happens when the political elite buys from outside exclusively for its own consumption. In this case, the products bought with the IMF money benefit a very closed group.

Pursuing similar goals

Before going continuing to protest against the IMF, we should understand what the IMF expects from Belarus. Those Belarusians who advocate for democratisation through reforms should understand that the IMF, led by its main donors, has the same vision for change in Belarus. Belarusians would benefit more if civil society organisations would protest for as the lowest possible interest rates on IMF loans rather than struggling against the receiving the funds in the first place.

Palina Prysmakova

Palina is a PhD Candidate in Public Affairs at Florida International University

External and Domestic Shocks – Digest of Belarusian Economy

In July, GDP growth somehow gained momentum, but was still very modest and difficult to place confidence in. Shrinking external demand is one of the core problems for the national economy, although the authorities attempt to compensate these losses of output through stimulating domestic demand.

But this mixture of policies is becoming more and more dangerous, as it leads to a rapidly growing external deficit that is unsustainable due to the absence of resources to maintain its financing. The result has been a surge in pressure in the foreign exchange market.

The authorities are afraid of making macroeconomic adjustment based on exchange rates as it may provoke a new wave of uncontrolled inflation-depreciation.

In July, they resorted to a number of monetary mechanisms to halt any major fluctuations and maintain a fragile equilibrium. From a short-term view, they have succeeded, but from a medium-term view, the problem has been postponed rather than solved. 

GDP constantly growing

The Belarusian Statistical Committee Belstat reported that GDP growth rate in January-July was 1.4% year-on-year, i.e. it remained constant in comparison to the first half of 2013. According to our estimations, it means that in July the growth rate was somehow stronger when compared to April, May, and June. Growth, however, remains rather modest.

From the supply side, only a handful of industries displayed a growth in their output, and correspondingly, contributed to GDP growth positively: both the retailers and wholesale traders saw gains, as did construction. Other key industries of the economy – manufacturing, transport, communications, and agriculture – were still in recession.

On the demand side, household consumption still retained its position as a leading contributor to GDP growth. This was due to a perserved growth rate of real wages. For instance the growth of real wages (on a seasonally adjusted basis) in the 2nd quarter with respect to the 1st quarter amounted to 4.6%.

The intention of the government to maintain this growth is disturbing, because there are no sound reasons for it. Consider the fact that the return of a previous long-term trend after the crisis of 2011 has already occurred, which means that the further growth of the cost of a unit of labour will result in either a lower level of competitiveness and profitability of firms, or further monetary inflation pressure, or perhaps both.

In July, a sudden jump in the growth rate of capital investments took place: it grew by 18.4% year-on-year, which followed a relatively modest growth of 6.7% year-on-year in the second quarter. In a sense, July might be seen as a turning point in the government’s policy: having exhausted the potential for stimulating GDP growth based on real wages, it is likely to reorient itself to stimulating output through capital investments. To succeed it needs a space to manoeuvre in both its external and financial sectors. But the problem is that there are plenty of obstacles in both these areas.

The balance of internal trade deteriorates

The balance of the foreign trade of merchandise deteriorated during the first half of 2013 and by the end of the same period with the trade deficit amounting to 1.7bn USD against the surplus of 1.9bn USD in the first half of 2012. Roughly a third of this trade balance deterioration is due to the impact of thinners and solvents schemes (which, thanks to them, exports flourished in the first half of 2012).

However, the deterioration of trade in other areas is of much more of concern, as the complete halt of thinners and solvents exports was only a single adverse shock to the economy, while the latter might be a long-lasting development and it is much harder to neutralise its impact on the economy.

Apart from the issues surrounding thinners and solvents, a number of additional reasons explain the deteriorating trading environment. First, Belarus has lost a substantial number of its advantages in price competitiveness that were inherited from the currency crisis of 2011: by the end of the first half of 2013 the real exchange rate appreciated by 53.7% in comparison to its low point in August 2011.

This means Belarusian producers became less competitive both in domestic and external markets.

Second, growth prospects in other countries, even with its trading partners (Russia first and foremost) worsened, which led to a contraction in the demand for Belarusian goods. Third, global trends aggravated trade conditions (i.e. the relationship between exports and imports prices) for Belarus. Fourth, domestic expansionary policy led to higher demand for imports by firms and households.

As the table demonstrates the first half of 2013, roughly all groups of commodities displayed a reverse trend in the direction of exports and imports in real terms on year-on-year basis (except energy goods). In other words, exports fell, while imports grew. 

New loans or macroeconomic adjustment?

Given this pitiable external environment, the government is expected either to resort to securing new external loans, or to carry out a macroeconomic adjustment.

The problem with this is that not only are there hardly any available or affordable sources from which they could secure loans, the authorities are also reluctant to carry out any macroeconomic adjustment. Currently the government has resorted to its only alternative – spending its international reserves – but this option is of limited usage, whether one considers it from the perspective of the how long it can be done and the value of its reserves, or from the perspective of how dangerous the issue of credibility of such an economic policy is. 

In late July and August, a new external shock occurred. The Russian producer of potash fertilisers Uralkali decided to abandon an agreement with Belaruskali on joint sales. The coordination of their sales policy enabled the companies to be the main players in the global potash market and affect the dynamics of world prices. However, Uralkali stated that it would be going to change its strategy and would resort to the strategy of maximising its output.

If this is the case, global prices will definitely go down, but the scope of such a decrease is questionable. The most radical scenario assumes a double reduction in global prices. For Belarus, this scenario will lead to a loss of export revenues of about 1.5bn USD, i.e. an increase of the trade deficit by roughly 2% of GDP.

Financial Dollarisation

Given the drastic deterioration of the external environment surrounding the economy, one would expect the authorities to carry out macroeconomic adjustment. An adjustment based on exchange rates seems to be the most natural and least painful in this case. In July, there were some signs of readiness on the part of the authorities to this approach and the nominal exchange rates began to depreciate. 

However, soon thereafter the authorities decided to prevent a rapid exchange rate adjustment, because many households began to withdraw their deposits in their national currency and convert them into hard currency. This problem is a chronic one for Belarus and many households traditionally react through deposit dollarisation (i.e. change their deposits from the national currency to a foreign currency) to even small fluctuations of the exchange rates, which causes further fluctuations in the financial markets.

Ultimately, financial dollarisation hints at a problem of a higher order – the lack of credibility of the government’s monetary policy (and its economic policy as a whole). However, the authorities lack the capacity to battle with this fundamental problem and have to struggle against a ‘symptom of decline’, i.e. deposit dollarisation. 

Hence, they use the instruments of monetary policy in order to maintain fragile stability at the foreign exchange market. In July, monetary policy authorities reduced their money supply and facilitated a liquidity shortage in the money market. A jump in interest rates in the national currency was the main outcome of this policy, which ultimately stopped the outflow of deposits in the national currency from banks and mitigated the pressure in the foreign exchange market.

These actions, however, seem to be effective in postponing the problem, rather than solving it, as this volatile mixture of policies has nothing to do the progressively growing external trade deficits. 

Dzmitry Kruk, 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)

Belarusian Economy in March: Warming Up

Amidst the snowy spring of 2013, the National Bank of Belarus finally gave up on its attempts to maintain macroeconomic stability and turned its attention to the real sector.  

The National Bank began carrying out a policy of providing cheap credit to carry out modernization, the new holy cow of the government. It also set its sights on meeting the forecasted 8.5% of GDP growth till the end of the year. Meanwhile, independent experts agree that this policy is incompatible with the inflation forecast of 12% in 2013.

The GDP growth rate is rising again – in January-February 2013 the Belarusian economy grew 4.4% compared with the same period last year. However, there is no macroeconomic miracle unfolding.

Just as the oil refining business was a driver of growth last year, this year a surge in potash exports that explains the economy's success. As a result, the growth across regions has not been homogenous: the Vitsebsk oblast, which is in recession, can explained by declines in oil refining and oil trade; the Minsk oblast, home of a major potash trading company, experienced record growth at 8.3%.

This year’s growth, though, differs substantially from last year’s. The major difference is in investment activity. If the year before investment was in decline, now investment activities have been speeding up.

Again, the growth in investment is not homogenous, and on the regional level some of the regions, like the city of Minsk or Hrodna oblast, continue to witness a decline in investment, while others, like Vitsebsk oblast, almost doubled their investment activities.

This heterogeneity in investment suggests that the aggregate investment growth is not a result of macroeconomic stabilisation or increased optimism from the real sector. Rather it is a sign of directed modernization, which has already begun in certain state-controlled enterprises.

Meanwhile, the imbalances in the real sector continue to accumulate. The Belarusian economy still suffers from the same old ailments: real wages are growing faster than productivity, directed increases in output result in increases in inventory stocks, and the country's foreign trade balance is negative.

Monetary Policy

Despite the significant efforts to stabilise inflation in 2012, in the beginning of 2013 Belarus was the clear leader in inflation in comparison to its neighbouring countries. Over January and February 2013 the prices in Russia increased by only 1.5%, while in Belarus the increase was 4.3%.
Ironically, as the government fights to keep inflation within the yearly limit of 12%, spikes in government-controlled prices are responsible for consumer inflation. After the slight inflation slowdown in February the National Bank decided to cut its main interest rate – the refinancing rate.
Since March 13, the Bank has cut refinaning rate by 1.5% to the level of 28.5%. That is the first cut in the rates since September. While the initial plan for 2012 was to cut the refinancing rate each month, this process had to be stopped in September as the National Bank saw that further cuts could increase currency demand and pose a threat to macroeconomic stability.
The economic situation has remained the same since September: monthly inflation rates do not show significant decline and the trade balance continues to deteriorate. The only reason, which could motivate the national Bank to cut the refinance rate (and a 1.5% cut is a significant change), is a desire to stimulate the real sector by providing cheaper credit. As a result, in March banks no longer had problems with liquidity.

The softer monetary policy may be premature and may result in deterioration of Belarus' macroeconomic stability. Lower rates do stimulate credit and economic activity, but they also stimulate imports (in particular, of intermediate goods) and make ruble-nominated deposits less attractive, which may result in a higher demand for currency.

Given Belarus’ limited currency reserves coupled with the high debt repayments due this year and the negative current account balance, these factors create inflationary and devaluation pressure. Luckily, there are no signs of the realisation of this pressure in the immediate future. 

Expectations already reflect the possibility of devaluation: 32.1% of people consider devaluation a real threat according to a survey by the Independent Institute of Socio-Economic and Political Studies (IISEPS) conducted in March 2013. The exchange rate, it should be noted, is quickly approaching the psychological barrier of 8700 rubles per 1 USD.

Hoping for IMF Credit

The negative current account balance and a large amount of debt to repay this year are probably the main challenges facing Belarusian economy. The hopes of getting a $2bn loan from Russia are fading away, and the IMF loan seems like an attractive option, even if it comes with strings attached.

On 14-15 March the IMF mission spent time working in Minsk. IMF officials praised the government for its achieving macroeconomic stability, but warned about the possibility of another round of devaluation if the government puts in to play a stimulation policy to boost growth. IMF mission head David Hofman did not exclude the possibility of the Fund’s cooperation with the Belarusian government, but stressed again that the joint program will be possible only if Belarus agrees to specific reforms.

After the mission concluded its work, the Ministry of Economy announced that it was drafting a project of cooperation with the IMF. This project will not include a standard stand-by credit line. Rather it would be a development program with the IMF dealing with financing reforms and modernization in the real sector. The government plans to present its project to the IMF in April.

The last IMF experience in Belarus was not a pleasant one: a stand-by program, initiated in 2009, resulted in a serious currency crisis in 2011. IMF has since realised that the National Bank and the government do not always follow their recommendations, and now the IMF wants “a credible commitment at the highest level”.

Kateryna Bornukova, BEROC

This article is a part of a new joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC) – a Minsk-based economic think tank. 


Economy Recuperates but Slower than Forcasted – Digest of Belarusian Economy

While economic growth seems to be recuperating in January and February, it remains below the wishful forecasts of the government.

At the same time, the situation with current account balance continues to be the pressing matter, as the government is looking for the money both to repay the debts and to finance its modernization projects.

The economic policy is once again trying to accommodate both the stagnating real sector and the need for macroeconomic stabilisation necessary to attract foreign funds.

GDP and The Real Sector

In January 2013 the year-on-year GDP growth was at the level of 103.1 per cent.  It is significantly below the official forecast of 8.5 per cent for 2013. Compared to the same period of last year the slowdown in growth took place in most economic activities.

The ban on exports of solvents and thinners, reduced export of potash and some deterioration in terms of oil deliveries from Russia explain the negative dynamics in manufacturing.

In January 2013, growth in the inventories of finished goods in stock accompanied output growth. If at the beginning of January 2013 the stock of inventories in manufacturing industry was equal to 52.8% of average monthly industrial production, and on February 1, 2013 it grew to 79.1%.

In the first months of 2013, the companies, according to the National Bank report, report reduction in volume of production and demand. At the same time demand for loans increases, and the liquidity-constrained banking system can not meet this demand.

Incomes, Savings and Consumer Market

In January 2013, an average wage decreased in nominal and real terms relative to December 2012. Average nominal wage amounted to 4368 thousand rubles (505 U.S. dollars), while last month it was 4741.3 thousand rubles (552.2 U.S. dollars). At the beginning of the year decline in revenue in general and population wages in particular had seasonal nature. Traditionally, wages grow at the end of each year due to bonuses and other additional payments.

A similar dynamic is also typical for consumer market. In January 2013 compared to the same period of previous year the retail trade turnover increased by 20.3%. At the same time, the reduction of the indicator relative to December 2012 was 21.9%. Retail trade boom in New Year and Christmas time stimulates the rise in consumer demand.

However, at the beginning of the next year businesses slow down and consumption declines. In January 2013 a decline of wages and consumption took place against the household deposit growth in national and foreign currencies. High degree of confidence to the banking system and income growth in previous periods stimulated the growth of household deposits, but also contributed to the decline in consumption.

Monetary System and Exchange Rate

In January 2013, the banking system was experiencing the lack of ruble liquidity. Credit growth at the second half of 2012 and decline of real sector deposits in national currency in January 2013 have predetermined the shortage of ruble resources. Some factors, i.e. slowdown in production sector and reduction of sales, explain the reduction of ruble resources at the accounts of enterprises.

Because of problems with liquidity in January and early February 2013 the interest rates on interbank market reached the level of 37-38% per annum. National Bank was forced to carry out a number of operations in order to maintain short-term liquidity of commercial banks.

As a result, the lack of resources has been eliminated from the second decade of February. Interest rates at the interbank market declined to 19-20% per annum. Moreover, since the second half of February, there was a surplus of Belarusian rubles at the banking system.

The situation at the currency market can be characterised as relatively stable. In January-February 2013, the fluctuations of Belarusian ruble were more of opportunistic nature and ranged from 8570-8680 rubles per U.S. dollar. One of the negative factors on currency market was the excess demand for  foreign currency from the enterprises in January 2013. The net demand on foreign currency at this segment of currency market has developed as the result of reduction of foreign revenue.

At the currency market for population the excess demand on foreign currency compared to supply has been observed since the middle of 2012. Incomes growth and weak confidence to Belarusian ruble are the main reasons of the increased currency demand.

In February 2013, the Government has been considering the possibility to allow lending in foreign currency. However, the National Bank decided that this measure is untimely.


2013 and 2014 are the years when Belarus will have to make major payments on foreign debt. The amounts to be paid in 2013 and 2014 are equal to USD 1.7 bn and USD 1.4 bn. There are three possible ways to attract additional financing, which are eurobonds, privatization and FDI, and foreign loans.

Because of the economic crisis of 2011, in 2012 Belarus was not able to attract foreign capital through Eurobonds. Yields of 2015 and 2018 Belarusian Eurobonds were highly volatile throughout the last year. However, wise policy implemented by the authorities and National Bank, focused on macroeconomic stability together with punctual repayment of external liabilities, had a positive impact on the quotes of placed notes.

As a result, in the middle of February yields declined. Active preparation to the next issue of Belarusian Eurobonds started at the end of 2012. In November, a road show in Singapore and Hong Kong was organised with support of Russian banks “VTB Capital” and “Sberbank CIB”. In February, a similar event occurred in Europe. The placement of the next issue (worth around USD 700-900 mln) is expected to occur in March 2013.

Privatisation and Foreign Direct Investment

Among other sources of external financing, foreign loans and privatisation continue to be the most important one. At the end of January Belarus received the 4th tranche of USD 440 mln of EvrAzES loan. In 2012, despite obtaining 3rd and 4th tranches, Belarus was not able to fulfil the requirements of state assets privatisation at amount of at least USD 2.5 bln.

Therefore, results of negotiations on allocation of 5th and 6th tranches will depend on success of privatisation process. According to the agreement, Belarus will have to sell at least USD 2.5 bln of state assets to obtain the rest of the loan.

However, there are threats of a slowdown in privatisation process in the nearest future. The law “On Amendments to the Law on Privatisation of State Property and Transformation of State Enterprises into Joint Stock Companies” will most probably come into force in April 2013 and will revive the golden share institute, which was cancelled in 2008.  This law brings changes to the management of the enterprises. It assumes appointment of state representatives even in joint stock companies without government ownership shares.

In joint stock companies, which were privatised or created on the base of rental companies, the governors will appoint state representative who will protect rights of the citizens/minority shareholders. State representatives will obtain the right to attend general meetings and represent votes of minority shareholders as well as to impose ban on decisions of general meeting of shareholders.

This law will have a negative impact on investors’ interest in Belarusian state assets or assets with minority shareholders, as their property rights would not be protected. Therefore, we can expect low demand on small and mediums state-owned enterprises. The only privatisation that one can realistically expect is the privatisation of big government enterprises by Russian corporations affiliated with Russian government.

Anastasia Luzgina and Maryia Akulava, BEROC

This article is a part of a  joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC) – a Minsk-based economic think tank. 

How to Make Belarusian Privatisation More Sensible

Belarus will need to pay over $3 billion this year to serve its mounting external debt. This payment is more than twice than in 2012.

In the absence of significant foreign investments and additional Russian subsidies, Belarusian authorities may have to privatise more state enterprises.

Although a number of foreign companies have been operating in Belarus for decades, the process for privatisation is far from transparent and often unpredictable, a recent study from the Belarus Public Policy Fund suggests. 

Although the efficiency gap between Belarusian state enterprises and foreign private companies is increasing, Belarusian authorities are not in a hurry to sell off state property. They lack a clear vision of the goals that should be achieved as the result of privatisation and often impose conditions which make privatisation unattractive for foreign investors. 

The integration of Belarus with Russia and Kazakhstan within the Customs Union has been a mixed blessing for Belarus.  On the one hand, potential foreign investors have access to a bigger market, which extends from the Polish border in the West to Korea in the East. But at the same time it has intensified competition within the Customs Union.

Now the key challenge for Belarus is to compete with often more favourable business environments in Russia and Kazakhstan. The better the investment climate, the better the chances that a large foreign investor would come and, consequently, the higher the asking price for privatised state property. Belarus is missing what its eastern neighbours have: a more liberal economic climate, private ownership of land, lower taxes, and other virtues of a more market-oriented company. 

However, the not-so-favourable investment climate is not Belarus' biggest problem. 

Main Barriers to Effective Privatisation 

When it comes to selling state enterprises, a whole plethora of Belarusian state institutions comes into play. It is difficult to clearly understand differences between them and their responsibilities. 

More importantly, Belrusian authorities and foreign investors have very different approaches to valuation of state property. Belarus insists that the balance sheet value of the enterprise should be the most important factor. Foreign investors are more interested in anticipated revenues of the enterprise. The problem is that when all liabilities and losses of privatised companies are taken into account, they become not nearly as attractive for potential buyers. 

The new owners would have to deal not only with the old debts of the enterprise but also with various strings attached to the privatisation contract. They may need to guarantee that no massive layoffs would follow, that the volume of production would remain the same or that the investor would continue to inject money into the enterprise. 

Even the very process of understanding what old and new liabilities come with the enterprise is not an easy task. The Belarusian state fails to publish coherent lists of enterprises offered for privatisation and the uniform conditions for sale of state enterprises simply do not exist.

This is yet further evidence that privatisation is Belarus lacks a coherent strategy and goals. Instead, privatisation is often done on an ad hoc basis, where each deals depends on how well the foreign investor can navigate its way in the corridors of Belarusian state institutions.  

How to Make Privatisation More Effective 

The most obvious step which Belarusian authorities need to take is to concentrate various privatisation procedures in a single state agency. It is no secret that the Presidential Administration takes the most important economic decisions in the country, including the privatisation of sizable chunks of state property.

Making the already existent National Investment and Privatisation Agency accountable directly to the Presidential Administration would help ease negotiations between the state and potential investors.

Agreeing on the right price tag for privatised assets remains the most difficult hurdle for foreign investors. If the parties reach a stalemate in negotiations, the use of independent experts to evaluate the property should be accepted by both parties.

The unwillingness of the parties to defer, despite their disagreements, to independent experts would probably mean that one of the parties is not genuinely interested in the deal. Otherwise, they should unconditionally accept such a valuation. If the state is unsatisfied with the result of the valuation, it would be counterproductive to refuse the sale altogether or organise another broad auction in order to invite new bids. 

Instead of the requirement to preserve jobs at state enterprises, which are often overstaffed and inefficient, the state should insist on the mandatory retraining of personnel. A more flexible approach would also make sense in requiring the enterprise to preserve its core activities or guarantee a certain number of investments. 

Finally, the process of privatisation should be more transparent not only to the parties involved, but also to the general public. This includes publishing the lists of enterprises offered for privatisation and developing a uniform set of rules for privatisation.

Although the practise of offering special favourable conditions to certain investors should remain, the process needs to become much more open and predictable. That would benefit not only the foreign investor, but also the state and the Belarusian people at large. 

This review was prepared on the basis of Policy Brief Privatization in the Republic of Belarus: Framework Improvements and Chief Priorities of Andrej Skryba. The study was conducted by Belarus Public Policy Fund as a part of a program jointly carried out by Pontis Foundation (Slovakia) and Belarusian Institute for Strategic Studies. 

Foreign Investments Weaken the Belarusian Regime

Today the Belarus Investment Forum opens in Minsk. In recent years, Belarus has significantly improved its ranking in the Doing Business Report of the World Bank Group. This year it climbed two places, and on two parameters even made it into top 10.

Yet state plans to attract foreign investments fail year after year. Perhaps some in the ruling elite understand that the stronger the foreign investors in Belarus are, the weaker the Belarusian regime becomes.

This year, the government planned to attract $3.7bn in direct foreign investment, yet by 1 September only a quarter of this sum, $956.5m had been registered. The problems are evident not only in statistical data. Time and again the Belarusian government starts talking about large-scale ambitious projects and ends up proposing that investors just land.

Problems in the West

Only small scale investors and adventurers come to try their fortune in Belarus, economist Mikhal Zaleski  recently commented to Radio Liberty in a discussion on the sad investment situation. He emphasised that though investment laws in Belarus looked smooth, investors have questions about political stability. Nobody knows who will run the country after Lukashenka and in which direction the nation will then be headed . Moreover, as Yaraslau Ramanchuk said when commenting at a series of Belarusian investment forums two years ago, “the government itself blocks foreign investments.”

In November 2010, at the Belarusian Investment Forum in Frankfurt am Main, Belarusian Metal Works (BMZ) signed with Italian firm Danieli a memorandum of intent to build new production facilities. The project could reach an investment of $1-1.5bn. Yet nothing has been implemented, as Danieli was willing to help find $1bn only if it got shares in BMZ. The government, for its part, wanted to retain all 100 per cent of the shares it owns.

In July 2010, the Minsk Regional Executive Committee and German company Enertrag AG signed an investment agreement to build a wind park with a capacity of 160 МW. It could cost about €360m and provide electricity to two districts. The Defense Ministry blocked the project, claiming that wind generators interfere with its radars.

At the first Belarusian Investment Forum in London in 2008, the Energy Ministry and Polish company Kulczyk Holding signed a preliminary agreement to construct in Belarusian Zelva a coal power plant. Planned investments should have reached $1.3-1.8bn. The richest Polish businessman Jan Kulczyk wanted to supply the power plant with mostly Polish coal and export part of its electricity to the EU.

Two years of negotiations ended with no results and were broken up after the 2010 Belarusian presidential elections and subsequent deterioration of relations with the EU. Kulczyk explained, “Such big projects should be done together with banks. Because of the current atmosphere around Belarus, it would be difficult to finance the project.”

Hunting Estates for Arab Monarchs

The problems, however, exist not only with Western businessmen. Belarus remains a problematic place for post-Soviet and Eastern entrepreneurs as well. Many of them – Russians, Poles, Iranians, Arabs – have tried to find a common language with Lukashenka and gave up.

Influential Russian oil and gas company Itera pledged to build a residential area and business centre to be known as “Minsk City” on the territory of the old Minsk airport. The amount of investment should have been about $5bn. Yet soon Itera put the project “on hold” and until now it has invested less than one per cent of the promised money and constructed only some a few ordinary panel houses. In February, the government cancelled the agreement with Itera.

In July, Omani State Reserve Fund renounced the investment project in centre of Minsk. In 2009, Lukashenka granted Omani businessmen favourable conditions to build in the historical area of the capital. They planned to construct a residential complex, a business centre and a five-star hotel for about $150m.

Last year, visiting Qatar, Lukashenka solemnly declared a project to create a “Qatar Island” in Europe. Belarusian officials explained that it would be a business and industrial centre of Arab countries and it would be built in Brest region. The only registered follow-up of these designs was revealing in September a document issued by Minsk Regional Executive Committee. It secretively regulated giving land plots to members of Qatar's ruling family to build hunting estates and facilities in the vicinity of Minsk.

Arab investors are known for being less than eager to undertake industrial production projects. Yet there hardly could be more stark a contrast than those events which took place in September than between two post-Socialist nations dealing with Arab investors. While Belarus tried to lure Qatar emir to hunt in Belarus, Belgrade concluded an investment deal with the United Arab Emirates which enabled it to revive the Serbian aircraft industry.

Serious Investors with €20,000

In the opaque bureaucratic mechanisms of the Belarusian state even the murkiest business is possible. In 2007, the Belarusian government gave a concession to the Luxembourgish company Polar Stars Group. It included two lignite deposits and two deposits of shale oil. The declared volume of investment was $2-3bn.

“I would say frankly, we are not going to study the investors' history and look at whose money they use,” said Lukashenka in 2007 and added that he had information confirming the serious reputation of the company's owner. The owner regularly called on the highest Belarusian officials till 2010. Finally, however, the media revealed that Polar Stars was founded in 2006 and its registered capital makes up only about €20,000. In 2010, the Belarusian government cancelled this dubious agreement.

In the absence of  a noisy scandal,  Belarusian society heard little about this incident. It is reminiscent of a similar incident in 1991. Then, Prime Minister Kebich granted one shrewd Italian the status of Belarusian Ambassador to all nations of the world, as well as gaving him an office in the centre of Minsk. The Italian had only promised Kebich that he would find loans badly needed by the Belarusian government. Only after the opposition vigorously criticised this affair, the government reviewed its decision.

The Belarusian government has serious problems handling foreign investments. It manages to combine contradictory attitudes. On the one hand, it enforces rather strict and inflexible rules. On the other, it lets dubious firms do serious business in Belarus.

Meanwhile, Belarus has no choice but to attract foreign investment. It has survived all these years economically because of Russian subsidies which, according to some calculations, have totaled about 15 per cent of Belarusian GDP. They are quite unpredictable, dangerous and likely to diminish.

Belarus has to replace these subsidies, which are also the foundation of Lukashenka's rule. Yet not with other subsidies; the EU is definitely not going to take over this role as Belarusian sponsor. Minsk has to reform the economy and create new production facilities and sources of revenues. For that, it needs serious investors. Any Belarusian government aware of national interests will have to deal with this task.

Only when this mission is accomplished will Belarusian independence and democratic transition become solidified. To scare foreign investments away from Belarus means to strengthen Lukashenka's regime and Russia's dominance in the country.