Analytical paper: Belarus-Lithuania Relations: Common Interests and the Nuclear Dispute

The Ostrogorski Centre presents a new analytical paper ‘Belarus-Lithuania Relations: Common Interests and the Nuclear Dispute’, written by Ryhor Astapenia.

The paper aims to improve mutual understanding between Belarus and Lithuania. The relations between two countries deteriorated when Belarus officially started the construction of a nuclear power plant (NPP) on the border with Lithuania in 2013.

The issue may dominate dealings between the two countries for a long time to come. Both countries rely on separate facts to support their position while ignoring arguments presented by the other side. Lithuania has a right to raise issues related to the security of the power plant but nonetheless over-politicises the problem.

The Two Truths of the Belarusian NPP and Playing with Security

Belarus and Lithuania disagree even regarding the purpose of the nuclear power station’s construction.  The Lithuanian elite believes that the initiative to launch the Belarusian NPP belonged to the Kremlin. According to them, the purpose of the NPP lies in keeping the Baltic States dependent on Russia’s power resources, while renouncing plans for the Visaginas NPP; a Lithuanian power station which was to be constructed on the border with Belarus.

The Belarusian ruling elite saw the Belarusian NPP as an opportunity to decrease their own dependence on gas and, most likely, to stimulate the economy as a whole and the depressed Astraviec district in particular.

The rival narratives only grew as both parties found new arguments to fuel the dispute. The Lithuanian side makes the well-grounded claim that the Belarusian authorities have a problem with transparency. For example, when a 300-ton reactor vessel fell, the authorities initially refuted reports and concealed the incident from the public for several weeks. This gives the impression that, in the event of an accident at the power station, Belarus would not inform Lithuania (and indeed its own citizens), or will do so only when it is too late.

In addition, the construction of the NPP by Belarus does not fully meet the requirements of both the ESPOO Convention and the Aarhus Convention, though in practice many similar constructions go through difficulties in order to correspond with all the regulations of these international conventions. They are based on the good will of the signatories, and even many European Union member states argue about compliance with these Conventions.

Moreover, the Lithuanian side tends to ignore several facts. First, Belarus is coping with the development of the nuclear power engineering excellently according to the International Atomic Energy Agency, the regulator (and the lobbyist) of the field. Secondly, Belarus voluntarily agreed to be subjected to the stress-tests of the European Commission. Finally, even Lithuanian energy specialists note that the station complies with high safety standards.

Relations between the two countries appear black-and-white in the sense that relations are very negative in some spheres and as positive in others. Apart from the NPP, military cooperation and intelligence services’ activities remain sore spots in bilateral relations. Lithuania was probably the biggest critic of the Zapad-2017 military drills held in Belarus and Russia last autumn and intelligence communities of both states look at each other with nearly open hostility.

Flourishing Economic Relations and Border Cooperation

However, the irony lies in the fact that, despite a poor reputation, the defence ministries of the two countries cooperate rather successfully. Lithuania was the first NATO country to sign a plan for military cooperation with Belarus. According to the plan, the countries exchange a significant volume of information and hold annual inspections of military objects. The latest such inspection was conducted in October 2017, three weeks after the Zapad-2017 military drills.

In the sphere of economic cooperation and contacts between citizens, relations show notable successes. The two countries are key economic partners: Lithuania remains one of the biggest Western investors in Belarus, having occupied first place among them, and was one of the biggest exporters from the West in some years.

Cross-border movement of people between the two countries grows constantly. The EU Programme for Border Cooperation plays a significant role in this, providing financial resources to maintaining the countries’ interests towards each other. According to an insider, when representatives of the Belarusian organisations cooperate with Western Europeans, they often feel patronised, while “in cases of working with Lithuanians and Latvians, they feel equal and engage in cooperation fully”.

However, the programme has a significant drawback for the Belarusian partners – the funds within it are allocated disproportionately among the countries. In 2017 the Steering Committee of the programme “Latvia-Lithuania-Belarus” selected 30 projects for funding. Among them, only two projects on the Belarusian side were among the main beneficiaries. In all the others, Belarusian organisations play a secondary or even marginal role. For example, Belarusians might feature as guests at a seminar in Lithuania or Latvia. The Technical Secretariat refused to provide data on the distribution of funds allocated by the European Union between the two countries, although such data exists in another programme of the cross-border cooperation which involves Belarus – “Poland-Belarus-Ukraine.”

How to Improve Belarus-Lithuania Relations

Belarusian-Lithuanian relations have a much greater potential than many think. With the deepening of the Belarusian-Lithuanian ties, Lithuania could play an increasing role in the transformation of Belarus.  For instance, at the end of 2017 Belarus signed up to its first “twinning” project, aimed at the support of the Belarusian National Bank and financed by the European Union. The Central Bank of Lithuania serves as the “twin” in this project. This is just one example how the countries can pursue their interests helping each other.

The main problem in Belarusian-Lithuanian relations is the lack of trust between the parties. The states need to learn to put one another in the partner’s place. More specific recommendations include creating a joint mechanism to monitor the Belarusian NPP, expanding bilateral expert-level dialogue, proportional re-distribution of finances from the EU Neighbourhood Program and broader information exchange between the two states’ defence ministries.

So far, Belarus and Lithuania successfully avoided arguments in the spheres where cooperation remains mutually beneficial. Now it is time to ease conflicts on the sore issues.




The Belarusian hi-tech revolution: the government drafts an ambitious decree

Last month, Belarusian IT businessman Victor Prokopenya published a post on Facebook informing the public about a new decree on High Tech Park. This led to fervent discussion in the Belarusian media, with a number of articles devoted to the topic.

After meeting with HTP head Usievalad Jancheuski and Prokopenya, Belarusian president Alexander Lukashenka repeatedly mentioned that fundamental measures would be taken to develop the IT industry. ‘We have set an ambitious goal – to turn Belarus into an IT-country,’ said Lukashenka at the plenary session of the 4th Belarus-Russia Forum.

The new IT decree, drafted by a group of representatives from HTP, state bodies, specialists from leading IT companies, and legal and financial experts, aims to address the problems of the Belarusian IT sector. From cryptocurrencies and investment funds to English law and immigration policies, the decree is groundbreaking in the number and types of reforms it sets out.

 

Optimists believe that this sensational decree could turn totalitarian Belarus into an ‘IT Hong-Kong for the Slavic world’. Others remain critical of the fact that the government has neither published the decree nor opened it up for public discussion, suggesting that certain points may be controversial. Thus, whether the decree will benefit the whole country’s economy or merely widen the already existing gap between privileged IT companies and other sectors remains unclear.

New benefits for the IT business

Most importantly, the decree prolongs already existing tax benefits for IT businesses, which will help sustain the growth of Belarus’s most successful industry. The document also makes numerous large and small amendments which remove limitations on the sector’s further growth.

With the new decree, HTP will open its doors to large IT product companies, export-oriented ITES (IT enabled services), and companies working in other hi-tech spheres (such as medicine, biotechnologies, and electronics). Not only will this create thousands of well-paid jobs for Belarusians, it will also broaden the type of activities High Tech Park engages in.

Moreover, the decree welcomes investment funds, including venture capital, which is crucial for the sphere’s growth. In March, the head of Flint Capital announced the readiness of international investment funds to come to Belarus once the necessary legislative conditions are created. Thus, if the government implements the legislative changes – such as cancellation of subsidiary liability for HTP residents in case of bankruptcy – more investment funds and venture organisations will enter HTP.

What’s more, the decree simplifies the business process, allowing IT companies to implement various business models, such as earnings on advertising, marketing activities, games with internal currencies, etc. For example, it would be possible for Google or Facebook, which make money off advertisement, to become HTP residents. At the same time, investment funds and lifted restrictions regarding earnings will encourage Belarusian companies and startups to remain in the country, as they will be able to find finances and opportunities for development in Belarus.

English law, currency control, and documentation changes

The decree stipulates the application of English law, which would stimulate shareholder agreements, investment partnerships, and non-competition agreements with employees. This measure would boost investment activity and also structure transactions for Belarusian IT business sale.

Furthermore, in order to reduce the risks associated with the unstable Belarusian economic situation, the decree would abolish control of the movement of capital. It would also eliminate a significant amount of paperwork that companies engaging in foreign trade have to deal with. Experts consider these steps crucial for making Belarus appealing to large foreign enterprises, as they do away with some of the most frustrating bureaucratic procedures with which enterprises must contend.

The decree will uproot old Soviet-style legislation, involving complex document circulation, which prevents Belarus from adopting business practices preferred in much of the rest of the developed world. Key IT players lack the incentive to enter the Belarusian market as long as these time-consuming practices continue to exist. Thus, simplification of legislation is a wise move if Belarus wants to attract big names in the tech sphere.

Cryptocurrency and unmanned vehicles

On 17 July, the National Bank of Belarus announced the introduction of blockchain technologies for solving a wide range of problems in the banking sector and outside it. This decision is rooted in the HTP decree, which legitimises cryptocurrencies, the Bitcoin profit test and tokens based on blockchain technology.

The proposed legal regulations would allow HTP residents to provide crypto-exchange services, use cryptocurrencies in everyday life, and attract ICO financing. Potentially, this could also lead to the creation of crypto-centres for generating crypto-code. Given the increasing legal status of cryptocurrencies around the world, their legitimization could allow Belarus to directly benefit from this trend. If you are one of many looking to start investing in bitcoins and cryptocurrency legally, go here to this guide that will show you how to Buy bitcoin with payoneer.

The decree also creates the legal basis for the development of unmanned vehicle technologies in Belarus. In May, Uber’s regional head and the CEO of Gett announced the opening of R&D centres in Minsk. Their motives for doing business in Belarus relate to existing information about upcoming reforms for HTP. Additionally, the decree makes provisions for a legal act which would even allow the circulation of 3rd-class unmanned vehicles on Belarusian roads. Hence, Belarus could become one of the first countries in the world to launch driverless cars.

One country – two systems?

The decree sets the ambitious goal of turning Belarus into a world centre for IT development and innovation. However, its critics insist that the decree would enforce a ‘one country, two systems’ formula, by which HTP would function according to capitalist laws while the rest of the country remains socialist. This would exclude non-IT spheres from the same privileges and reforms, creating an unfair and unbalanced economy.

Furthermore, some criticise the fact that Belarusian society has no access to information on the development of the decree. Thus, the public cannot influence the decision-making process. Key IT figures participating in the drafting of the decree are struggling to attain privileges for themselves, let alone campaigning to amend the Civil Code for everyone. Thus, critics claim that the decree will foster the IT industry exclusively and question whether it will benefit the rest of the country.

However, IT specialists respond that although the decree primarily targets HTP, it will also allow the expansion of IT activities to education, science, finance, and other fields. Moreover, it will create more well-paid jobs, thus increasing the size of the wealthy class of Belarusian programmers and preventing brain drain.

More well-paid workers will consequently increase Belarus’s tax revenue. Additionally, the decree will foster improvement in IT education as HTP residents will be able to carry out educational activities, contributing to IT education at schools and universities.

Nevertheless, the question remains of how an authoritarian state with no experience in regulating investment funds or venture organisations will ensure everything functions at an optimal level. Despite doubts, experts are expressing hope that once the decree is fully implemented, it might eventually de-bureaucratise the Belarusian economy and bring positive changes to the conservative state apparatus.

 




Testing the Waters: High-Level EBRD Delegation Visits Belarus

The removal of sanctions against Belarus earlier this year has led to increased interest from institutional investors such as the European Bank for Reconstruction and Development (EBRD).

Alain Pilloux, Acting Vice President of this major development bank visited Belarus last week as a part of a delegation, which met with Belarusian officials, including the president, businesses, representatives of think tanks and other stakeholders.

EBRD officials expressed cautious optimism about the prospect of extending their cooperation to Belarusian authorities. In the past, their role in the country was limited to supporting the private sector and very limited contact with the government. With EBRD activities in Russia nearly frozen after the Ukraine crisis and instability in the Arab world, Belarus has good chances of attracting EBRD funding.

EBRD's troubled times

The EBRD was set up in 1991 to help the transition of the former socialist block countries. Although the focus of the bank’s work has traditionally been on Europe, the United States has the largest capital subscription and voting rights followed by the somewhat smaller shares held by Japan, Italy, Germany, the United Kingdom and France.

The EBRD expanded its activities in recent years to include Mongolia, Turkey, Greece and Cyprus as well as countries affected by the Arab Spring uprisings, such as Egypt, Morocco and Jordan.

In 2014, the majority of the bank’s shareholders decided to stop funding new projects in Russia, which used to be the main investment destination. The decision followed Western sanctions against Moscow over its role in the conflict in eastern Ukraine.

In 2014 the EBRD also suffered its first annual loss because its portfolio in Russia and Ukraine had tumbled (in 2015, the EBRD became profitable again). Political instability and corruption in the Arab world also affect its investment plans.

The removal of European sanctions against Belarus has created a better environment for the EBRD to extend its activities in the country.

With 74 projects, the EBRD already has significant experience in Belarus. So far most of the projects have focused on financial institutions and the corporate sector. The EBRD remains a major investor in Belarus. As of 1 June 2015 the Bank had invested nearly €1.8 bn.

Some of the recent projects which the EBRD has supported include a project to support women entrepreneurs in Belarus, a joint venture with Swiss company Stadler Rail AG and funding for facilities to develop the wood processing sector in Mahilioŭ and Smarhoń.

However, compared to other countries in the region, Belarus has failed to attract much EBRD funding. For instance, Moldova has received $313 per capita investments from the EBRD since 1991, Ukraine $271 and Belarus only managed to attract $187.

In Belarus, nearly all EBRD investments (94 per cent) went to the private sector, compared to a much lower level of investments that went to the private sector in Ukraine. Since 1996 the bank’s activities in Belarus have been limited by the country’s unsatisfactory progress in democratic and market-oriented transition.

The bank adopted a calibrated strategic approach to Belarus in 2009 and in its subsequent country strategy documents and focused primarily on the private sector. The Bank’s engagement in the public sector was calibrated against Belarus progress against certain political and economic benchmarks while the main focus remained on private sector development and entrepreneurial activity in the country.

EBRD's new approach to Belarus

Now the EBRD is working on a new country strategy for 2016-2020, which will be adopted in July 2016. The draft strategy proposes to focus on private sector development and public infrastructure to support the government reform agenda.

According to information which has become available to Belarus Digest, over the next few years the EBRD plans to continue stimulating economic competitiveness by supporting growth, efficiency and innovation in the private sector, both directly through debt and equity and indirectly through credit lines to the banking sector. The Bank also plans to promote the privatisation of state-owned companies.

As far as their work with the government is concerned, the bank plans to improve the sustainability and service quality of public infrastructure through policy and regulatory reforms and the introduction of commercial solutions.

Although the proposed strategy will continue to focus primarily on private sector development it will also provide for broader engagement by the Bank to support the Government's reform agenda.

Will the new approach work in Belarus?

The Bank officials at March meetings in Minsk expressed their willingness to extend cooperation with the Belarusian authorities as long as they show concrete steps to reform and stick to undertaken commitments. Although the Belarusian authorities fear any significant changes in the economy which may affect the political status quote, two main factors work in favour of reforms.

First, the dramatic fall in oil prices ended many profitable schemes, which usually involved processing oil products and selling them to the West. The Russian market, the main destination of Belarusian goods, has also suffered as a result of low oil prices and Western sanctions.

Second, the pro-reform camp within the government is growing stronger. Although many see Prime Minister Andrej Kabiakoŭ as a pro-Russian conservative, many influential figures in the National Bank, the Ministry of Economy and the Ministry of Finance have other views.

For example, the First Deputy Prime Minister and graduate of London Business School Vasil ​Maciušeŭski, as well as presidential economic advisor Kiryl Rudy, a former Fulbright fellow at the University of Chicago, recently became more influential and strongly advocate economic reforms.

With massive layoffs already starting to bite major Belarusian state enterprises, the authorities desperately need foreign investment. With no IMF loan in sight and cautious private investors, the EBRD could play an important role.

However, the political leadership of Belarus is not in a rush to implement reforms. They think they have time. After the crisis in Ukraine the public appetite for revolution is at its lowest for many years. But a growing number of officials seem to understand that Belarusian statehood itself depends on the viability of its economy.

Given the rapidly declining Russian economy, turning to the West seems like a logical response. However, this should not be mistaken for a geopolitical change of heart from the Belarusian leadership. Belarus' dependance on Russia is too strong for any radical moves.




Strengthening Links with Autocratic Friends – Belarus Foreign Policy Digest

Despite his regained ability to travel to Europe, President Alexander Lukashenka’s 'social circle' has so far remained limited to leaders of countries that have difficulties in their relations with Western democracies.

In the past month, the Belarusian president has become his country’s most diligent diplomat. He welcomed his Serbian and Azerbaijani counterparts in Minsk and travelled to Vietnam and Turkmenistan on official visits, focusing on trade and investment but also working on reinforcing political ties.

However, he had to postpone his most important foreign trip – to Moscow to meet Vladimir Putin – due to the two countries’ disagreements over relations with Turkey and the Russian air base in Belarus.

Serbia: trading political support for investment

On 18 – 20 November, Serbian president Tomislav Nikolic visited Belarus on an official visit. According to his Belarusian counterpart, Serbia remains Belarus’ 'key trade and economic partner in the Balkans'.

Trade and investment issues dominated the bilateral agenda. Trade has been growing steadily since 2009 and reached $245m in 2014. However, the two countries are unlikely to reach their declared target of a $500m turnover in the coming years.

Nikolic came to Minsk to launch the latest project of Dragomir and Bogoljub Karic, two Serbian brothers who have been implementing several investment deals in Belarus. The businessmen have undertaken the construction of multifunctional complex Minsk-Mir at an estimated cost of $3.5bn, having received undisclosed incentives from the Belarusian president.

At the inauguration ceremony both presidents made public the surprising idea of gathering the presidents of the former Yugoslavian republics in Minsk in 2016 and involving these countries in the construction of Minsk-Mir.

Nikolic also thanked Lukashenka for his continued support of Serbia’s territorial integrity. In fact, ten days earlier Belarus voted against admitting Kosovo to UNESCO. This initiative fell three votes short of being adopted.

Azerbaijan: a scheduled meeting of close friends

Azerbaijani President Ilham Aliyev came to Belarus on a one-day official visit on 28 November. As the trip took place only a few days after Turkey downed a Russian warplane, some analysts hurried to suggest that Belarus and Azerbaijan, both close to Russia and Turkey, arranged an express meeting to discuss possibilities for mediating the emerging conflict.

However, these conclusions are groundless. The presidents of Belarus and Azerbaijan keep a regular schedule of yearly meetings. This time around they signed a number of important bilateral documents, which had been drafted well in advance, including an agreement on social and economic cooperation valid up to 2025.

Lukashenka and Aliyev reiterated the strategic nature of their relationship. However, Azerbaijan fails to see Belarus as a strategic market for its goods. Bilateral trade is strongly one-directional. In 2014, Belarusian exports to Azerbaijan were worth $318m and its imports from Azerbaijan a mere $8.7m.

Belarus is looking to further increase its exports and to attract Azerbaijani investments. Azerbaijan may be more interested in military-industrial and scientific cooperation and technology transfers. Both countries support each other in the international arena.

Vietnam: reinforcing an outpost in South-East Asia

Lukashenka made his first foreign trip following his re-election to Vietnam on 9 December. This was not an intentional tribute to the two countries’ strategic partnership.

During his one day visit to Hanoi, Lukashenka met all the top leaders of the country. Belarus and Vietnam agreed to foster their bilateral ties in a wide range of areas, going well beyond the prioritised trade relationship.

Vietnam has been seeking technology transfers and industrial cooperation with Belarus, particularly in the petrochemical industry, engineering, and automobile assembly. Reportedly, the Belarusian businessmen who accompanied Lukashenka on this trip signed contracts with their Vietnamese colleagues worth $350m.

This is a huge amount taking into account the existing trade turnover (only $169.3m in 2014). Routinely, Belarus and Vietnam agreed to aim at a $500m turnover in the near future.

The Belarusian president postponed his visit to Moscow, which was originally scheduled for 25 – 26 November. Belarus and Russia explained the postponement as a result of the extreme workload of both Lukashenka and Putin. However, a more plausible explanation is Belarus’ unwillingness to jeopardise its relations with Turkey by having to comment in Moscow on the warplane shoot-down incident. Another reason might be a lack of an agreement on the issue of a Russian air base in Belarus.

Turkmenistan: supporting falling trade and playing peacemaker

On his way back to Minsk, Alexander Lukashenka made a stopover in Ashgabat on 10 – 12 December for an official visit and a celebration of the 20th anniversary of Turkmenistan’s neutrality.

Bilateral turnover has been falling dramatically since 2013. It amounted to $67.7m in January- September 2015. As with Azerbaijan, it remains a one-way street with Belarusian exports largely dominating.

The ‘flagship project' of the two countries’ economic relations remains the Garlyk mining and processing complex for potash fertilisers in Turkmenistan, which is being built by a Belarusian company. Turkmenistan is also one of the largest buyers of Belarusian MAZ trucks.

Furthermore, Belarus has become a preferred destination for Turkmen students. Over 9,000 Turkmens have been studying in Belarusian universities.

On his third day in Ashgabat, Lukashenka used a statement at an international conference dedicated to Turkmenistan’s neutrality to call for dialogue between Russia and Turkey. 'It is essential to find a solution, to make a concession. At least, a way to take a half-step towards each other should be found to de-escalate the tension', Lukashenka said.

It is highly probable that Lukashenka met Turkish president Recep Tayyip Erdogan on the sidelines of the summit in Ashgabat. However, publicising such a meeting, if it indeed took place, would not be in Lukashenka’s best interests. Russian public would be unlikely to respond positively to its ally’s contacts with Russia’s sworn enemy. It is already unhappy with Belarus’ neutrality in this conflict.

Lukashenka has been trying to capitalise on his good personal contacts with a number of foreign leaders, seeking investments and exports revenues for his currency-stripped county. It appears that he is not willing to engage in political liberalisation to gain access to the West’s much larger financial assistance and further decrease his dependence on Russia.




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)




Protests in Ukraine, Investment from Iran, Presidency in the CIS – Belarus State TV Digest

Over the last two weeks Belarusian state Channel 1 has regularly covered the protests taking place in the eastern regions of Ukraine. It also commented upon the economic repercussions of the crisis for ordinary Ukrainians and an increase in living costs.

Lukashenka visited a few state enterprises. In one of them he met with happy workers who thanked him for their favourable workplace conditions. At another company, things took a different turn and he reprimanded the management.

Minsk will be taking over the presidency of the Commonwealth of Independent States, after Kyiv rejected to chair the organisation.

Internal Affairs

The Belarusian Leader Visits a Well-managed State Company. State TV covered Lukashenka’s visit to several state enterprises, including one that is famous ‘Sluck belts’. In its nearly 20 minutes of coverage, state TV showed how the factory is the inheritor of the cultural legacy of Sluck belts which were famous throughout Europe. The head of state expressed his enthusiasm and support for the revival of manufacturing these traditional belts and other similar initiatives.

A state TV reporter also went into great detail explaining the technology of how the belts are produced. Later, the head of state met with some women working in the factory. They were thankful for having such good working conditions, and also for the prevailing peace in the country.

The report's narrator emphasised that Lukashenka has changed his plans at the last minute and decided to visit also another company. On his way there, he spoke with people who were gathered on the street. They asked him for increased wages. The general atmosphere was from this segment appeared to be generally positive, and the Belarusian leader was in his element, joking with the crowd.

And Reprimands for Bad Management. The head of state visited another state enterprise, this time a meat-processing plant. From the outset, the footage on state TV showed a dirty and neglected enterprise. According to the narrating reporter, the absence of strong leadership was the reason for the plant's desperate appearance. Lukashenka immediately dismissed the director of the enterprise and ordered to improve things by 1 September. The managers will be held legal responsible for the negligence of the enterprise, the report concluded.

Belarus Encourages More Investment from Iran. Lukashenka met with Ali Larijani, the chairman of the Iranian parliament. The report emphasised that both countries had maintained close economic ties and their friendly relations. The coverage notes that Iranian companies have invested over $700m in Belarus.

In the past the countries planned to carry out a joint oil and gas production project as well as a facility for processing Iranian diamonds. However, in 2013 the USA and EU imposed tough sanctions against Iran, and Minsk and Tehran were forced to cease their work these projects as a result.

The Belarusian leader was actively trying to persuade Ali Larijani that investing in Belarus would bring Iran significant financial gains. Tehran could demonstrate to everyone that the country ‘exists, but also will persist for a long time, and to make it worse for our enemy, it will be flourishing,’ he said.

Lukashenka Praised the State's Official Trade Unions. Lukashenka met with the head of the pro-government (state-run) trade unions, Leanid Kozik. They discussed the level of preparedness of their sanatoriums for their potential foreign and Belarusian guests who will soon be arriving to watch the Ice Hockey World championship. Lukashenka commented that these places would also serve the Belarusian public once the championship is over.

Kozik also reported on the state of the nation's trade unions and commented that the situation remained ‘normal and there is nothing to be worried about.’ Albeit there being 23,000 organisations associated with the official trade unions, he confirmed that he was well aware of what people were saying and what they wanted.

Lukashenka also thanked the trade unions for their ‘calm, quiet and unobtrusive work organising the local elections.’ A number of trade unions’ activists not only sat in on the electoral commissions throughout the country, but also were elected to the local government bodies.

International Affairs

The Collective Security Treaty Organisation Discusses Regional and International Security. One of the main topics remained Syria and Ukraine. The coverage relayed that the CSTO urges Kyiv to curb the activity of radicals and disarm illegal military units. The CTSO believes that the situation in Ukraine should be settled in compliance with its Constitution.

Kyiv Should Deal with Its Problems on its Own. Nikolay Bardiuzha, general secretary of the CSTO, said that international organisations, such as his own and the EU, should not interfere in the internal affairs of Ukraine. ‘The very people of Ukraine themselves should be the ones to work out a position towards for settlement of their problems,’ Bardiuzha emphasised.

Minsk to Take Over Presiding CIS after Kyiv's Rejection. The coverage points out that Belarus ‘was always an active participant in [many] integration processes and advocated for the preservation of Commonwealth of Independent States.’ And while Minsk has quickly reacted, it has done so 'with understanding' with regards to Kyiv's decision. Sergey Lavrov, the Russian Minister for Foreign Affairs, thanked their ‘Belarusian partners’ for their decision.

While presiding over the organisation, Minsk wants to focus on security issues. So far, state TV reports, the members of the CIS having been arguing for the immediate stabilisation of the situation in Ukraine and continuation of a multilateral dialogue.

Ukraine

‘Conflict in Ukraine Concerns the International Community’. The opponents of the new authorities in Kyiv continue their protests in a few Ukrainian cities, including Kharkiv, Donetsk and Luhansk. The protesters reject the legitimacy of the authorities in Kyiv. According to a Russian Ministry of Foreign Affairs representative, the extremist ‘Right Sector’ has also entered Ukraine's eastern regions. That information, however, remains unconfirmed – the report notes.

Members of the Ukrainian Parliament argued over the official status of Russian language. The Communists advocated for elevating its status to that of a second state language, whereas the nationalists from Svaboda disagreed with their proposal. ‘The political and social crisis in Ukraine seriously concerns the world community,’ the reporting journalist concludes, while not delving into more details.

Costs of the Political Crisis. Beginning 1 April Ukraine will pay up to 80% more for gas. Thus, Kyiv is planning to negotiate its current contract with Gazprom. The report also discusses the ongoing protests in Ukraine's eastern regions. However, the tone of the protesters has softened, they note. An atmosphere of unease also remains in the western regions of Ukraine. In Lviv, protesters seized the office building of the general prosecutor and demanded his dismissal.

Kyiv: Massive Military Costs and No Perspective for NATO Membership. Despite its economic difficulties, the Ukrainian authorities will not cut back on its military expenses. Kyiv has planned eight joint military drills with NATO. The coverage also made mention of a statement by Radoslaw Sikorski, the Polish Minister for Foreign Affairs, that NATO is not even considering Ukraine's membership in the military alliance.

Meanwhile, Brussels is reviewing possibly imposing further sanctions against Moscow for its annexation of Crimea.

Recently the Russian Ministry of Defence has opened up its archives and published on its web site documents on the activity of Ukrainian nationalists in western Ukraine during World War II. The documents show the development of a nationalist movement in the country, but also its relation to the Nazis and its part in repression aimed against peaceful people.

Belarus Digest prepared this overview on the basis of materials available on the web site of Belarusian State Television 1 (BT1). Freedom of the press in Belarus remains restricted and state media convey primarily the point of view of the Belarusian authorities. This review attempts to give the English-speaking audience a better understanding of how Belarusian state media shape public opinion in the country.




Need For External Financing and Ambiguous Business Perspectives – November Digest of Belarus Economy

This November showed the need for foreign capital in the Belarusian economy is becoming more and more acute.

By the end of October the international reserves of Belarus decreased by $575m and amounted to $6.813bn. This number is much lower than the $8,500 predicted by the authorities in the beginning of 2013 and makes the problem of attracting capital all the more severe.

At the same time likely changes in the regulation of individual entrepreneurship will create additional pressure on the sector and may negatively impact the business environment of the country. Finally, opposed evaluations of the economic situation exist within the country.

While authorities officially tend to have an optimistic assessment of the situation, the banking and real sector show a rather uncertain attitude.

Reluctant attempt to activate privatisation process

The unsatisfactory results with the volume of international reserves fostered activities of authorities in terms of the privatisation of state assets. At present, it can be stated that Belarus missed out on the privatisation process in 2012, with just a few sales of state assets occurring last year.

Belarus is peculiar in its ability to attract foreign capital at a rather steady level throughout the years (Graph 1). However, this capital mostly comes in the form of reinvested earnings and not sources obtained because of privatisation.

Therefore, the State Property Committee created a list of 80 open joint-stock companies, the selling of which will bring around USD 4.5bn into the state budget.  For their part, the EurAzEC Anti-Crisis Fund is evaluating the readiness of the Belarusian economy for massive privatisation. This evaluation will impact the decision to be made by the Fund on whether or not to provide the 6th tranche of a EurAzEC loan at amount of USD 440m.

Another sign of possible revitalisation of the privatisation process and the readiness of authorities to get rid of state property is the administrative transfer of state enterprises from privately owned telecom operator OJSC “Velcom” to OJSC “MTS”, which the state controls 50% of its shares. The reason for this transfer from state to private hands is still unclear. However, it could potentially help the state to sell its shares in “MTS”, which the authorities have been trying to do over the last 4 years.

Until now the main problem consisted in finding a compromise on the price. Belarus planned to get around USD 1bn from that sale. However, the maximum price from investor offered was around USD 600-700m, and this occurred before the crisis hit the Belarusian economy in 2011.

This action will likely have a positive impact on the successful sale of the state's shares. The transfer of state enterprises from one telecom to another will increase the client base of the state asset in the latter. Moreover, the corporate segment of a client base always brings in a large portion of a companies’ revenue. The increase of this segment will raise the estimated real value of the company and help Belarus sell it for the maximum possible price.

Nervousness in the entrepreneurial sector

The forthcoming highly likely implementation of new technical regulations, that oblige entrepreneurs to certify light industry produced goods, is an issue of great concern for individual entrepreneurs due to the fact that this novelty will negatively impact business performance as a result of the expensiveness and length of the procedure to receive certification.

These regulations will possibly come into force by 1 January 2014. Thereafter entrepreneurs will have either to provide the required documentation, which is unlikely, or go through certification procedure, which will bring additional costs for them to do business.

It should be mentioned that during the meeting of subcommittees of Eurasian Economic Commission in August 2013 it became clear that these technical regulations apply only to importers and producers, and not entrepreneurs involved in retail trade. However, it looks like the authorities unreasonably expanded the scope of appliance of technical regulations all on their own.

As a result, entrepreneurs reacted to this situation in the form of a declaration of their unwillingness to work under these circumstances, an action, that if it were to be carried out, is very undesirable for the weak economy. 

Ambiguous perception of the economic situation

At the end of October the Ministry of Economy repeatedly revised its estimations of GDP growth towards a more and more optimistic scenario and changed the number from 2.4 to 3.3 percent.  The officials explained that these changes occurred due to adjustments in foreign trade and an expectation to end up with a surplus in the country's trade balance.

They relied on additional sales of potash, coupled with the growth of exports of meat and automobile industries. These optimistic expectations regarding the exports of potash fertilisers raise certain concerns because of the ongoing conflict with Uralkali and the decreased price of potash on the world market.

On the other hand, very different views on the situation are present in the banking and real sector. In the beginning of November the last state bank stopped issuing loans for purchasing housing. Thus, there is only one commercial bank left in the market and it provides loans with 55% interest rates. Uncertainty in the market appears to be the main reason for suspending lending, and forces banks to hold out until interest rates become stable.

This indicates that the current tendencies remain unsatisfactory for the banking sector and raises concern regarding the latest developments. As for the real sector, the results of the latest monitoring of enterprises, conducted by the National Bank, showed that the enterprises evaluate their economic situation as more pessimistic when compared with similar evaluations a year ago.  

According to the survey, the real sector deteriorated due to lending conditions and the volatility of the currency exchange rate explain such a negative trend. Nearly all respondents expect a significant slowdown in the growth of the physical volume of production due to uncertain economic situation.    

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)




Belarus-Russia: History of Disintegration

In the last days of July, the backbone of Belarusian economy – the potash industry – suffered a severe blow dealt by its Russian partner.

The Russian company Uralkali refused to work anymore with the Belarusian Potash Company (BKK), a joint enterprise of Uralkali and Belaruskali authorised to sell their products throughout the world.

These developments have seriously weakened the global position of Belaruskali. The “potash collapse” is just one more illustration of the problematic relations between Belarus and Russia.

Both Russian private business and the government do not perceive their Belarusian counterparts as equal partners. Additionally, Belarusians have to work with Russian business without a sufficient legal framework. In these circumstances, integration between the two countries has had no real chance from the very beginning.

Some bigger agreements simply failed or fell apart like the joint companies in the potash or oil industry. Other projects were implemented many years behind the schedule – whether it be military cooperation or the sale of Belarusian pipelines to Russia.

Younger Brother Is Always Wrong

Russian Uralkali, of course, immediately blamed Belarus for the failures of the joint business venture. The Director of Uralkali said to the Vedomosti daily newspaper that it was Lukashenka who allowed the national mining company Belaruskali to sell potash without involving the Belarusian Potash Company and violated thus the previous agreement to work through this company. Yet the Uralkali itself has sold a bulk of its own goods without the Belarusian Potash Company. In the least, the Russian position looks dubious.

An information war followed soon afterwards. “This situation confirms only one truth – Belarusians, as always, are incapable of working with partners in a civilised way,” said the well-known Russian political commentator Andrei Suzdaltsev Radio of Liberty.

Yet the background of this story indicates that something different might have happened. Suleiman Kerimov, the Russian owner of Uralkali, wanted to acquire Belaruskali as he previously acquired another competitor of Uralkali – Silvinit. If he only managed to add Belaruskali to its business empire, he could control up to 43% of global potash market. Kiryl Koktysh of the Moscow State Institute of International Relations says that Uralkali’s actions may indicate Kerimov’s attempt to force Minsk into selling Belaruskali.

With all of its problems, the Belarusian Potash Company was, according to Belarusian economic web-portal zautra.by “probably, one of the most successful strategic Belarusian-Russian economic alliances to have existed since the moment of the Soviet Union’s demise”. This begs a question: if this was the best, how exactly have the other projects? 

Belarusian-Russian Integration: History of the Decline and Fall

The chronicle of Belarusian-Russian integration looks like a tug-of-war between Minsk and Moscow. Pompous rhetoric are dismissed by the reality of trade wars and agreements’ delayed implementation. The list of failed major projects between the two countries is another skeleton in the closet of bilateral relations.

Project Years of Implementation Costs (planned or factual)
International Potash Company 1992-2005 No data
Belarus-Russian oil company Slavneft 1994-2002 Sold in 2002 for USD1.86 billion
Belarus-Russian oil companies Rosbelnafta and LYUBel-Oil 1995-2001 Russian investment by 2002 was planned to reach USD 550 million
Modernisation of Minsk brewery Krynica by Russian Baltika beer company 2000-2003 Factual Russian investments reached USD 10.5 million, a controlling block of shares was promised to be sold in 2001 for USD 50 million
Project on PET-granules production on facilities of Mahilyou’s company “BelPAK” by the Russian Itera 2001-2006 By 2003, Itera allegedly invested more than USD14 million.
Development project Minsk-City by Itera
2008-2012 Planned amount – USD 4.8 billion

 

It is more to the point at this time to talk about Belarus-Russian disintegration rather than integration. Some experts admit that the problems in Belarus-Russian relations exist yet believe that some areas are integrating smoothly, defence cooperation in particular.

Anaïs Marin of the Finnish Institute of International Affairs argues in a publication of the Polish Centre for Eastern Studies that defence cooperation is “unfold[ing] regardless of the disputes that sporadically sour relations between Minsk and Moscow, standing out as the main achievement of the Union State [of Belarus and Russia] – if not the only one”. Yet, Minsk has delayed the implementation of every military agreement with Moscow, sometimes for years – as happened with the Single System of Air Defence.

On the other hand, Moscow failed to equip its closest ally with adequate arms – only now, has Belarus finally replaced its remaining old air defence systems, the S-200, with the S-300. The Russian army meanwhile is already replacing the S-300 with S-400. Belarus has no real prospects to get any S-400 in coming years. It is no wonder, then, that the Kremlin does not care about its Belarusian allies. Despite the rhetoric of Belarusians defending Moscow, Belarus pursues its own military policy and enters military agreements with Russia when it wants Moscow to foot the bill.

No Friends in Moscow

There are numerous reasons explain the failure of individual projects in Belarus-Russian relations. Yet there is one fundamental factor. Russia does not perceive Belarus as an independent state with its own needs and interests. “Russia believes that Belarus is its property,” said once in Belsat TV Belarusian analyst Paval Usau. Actually Moscow looks in the same patrimonial way on all post-Soviet nations. The latest Russian-Ukrainian trade war proved this point once more.

Partly, Belarus itself is guilty of the discriminatory behaviour that has been coming from Russia. First, Belarus is still failing to consolidate its own nation and to draw a dividing line with Russia. After all, good fences – both physical and mental – make good neighbours. The very close alliance between the US and Israel is a model proposed by Lukashenka for Belarus-Russia relations. Yet Washington looks on Tel-Aviv as an independent nation not as a breakaway territory. In particular, this means that Washington wishes for Israel to be robust and powerful. It is better to have a stronger ally.

On the contrary, Moscow considers any Belarusian success as a threat. Thus, in recent years it did not welcome attempts by Minsk to diversify its sources of imported oil. Russia actively counteracted Belarus’ policy of buying Venezuelan oil, which is quite logical from the Kremlin’s perspective. If the Kremlin considers Belarus not as an ally but simply a breakaway territory, then this territory should not become strong. The reasons that Moscow does not give Belarus new military equipment become clearer when this is considered. As Anais Marin put it, the Russian establishment sees Belarus as a territory, and not real ally.

Second factor between Russian dismissive stance towards Belarus is lack of a Belarusian lobby in Russia. The Belarusian government has done a lot to find such support in Russia. Minsk tried – rather successfully to present itself as the last island of sunk empire and to mobilise Russian right-wing political groups. The Belarusian regime clearly could find some support among Soviet-time generals, right-wing intellectuals and regional industrial bosses. Yet this support appears rather unorganised and gives Belarus little leverage in disputes with the Kremlin.

A Civilised Divorce

In last decade, Russian officials have effectively renounced earlier rhetoric of integration with Russia. They apparently had no illusions that what Lukashenka has done – at least in the last decade – resembles a gradual separation from Russia. Furthermore, Minsk is not Russia’s marionette. For all its services, the Belarusian state received from Russia subsidies which last year amounted to ca. USD10 billion (16 per cent of GDP).

Oddly enough, it is often Western policies which drives Belarus into the Kremlin’s hands. So, for example, the problems of the Belarusian Potash Company began last year when the EU threatened to impose sanctions on Belarus. It created a favourable atmosphere for Russians to put pressure on Minsk to sell Belaruskali to Russian potash magnate Kerimov. The media then reported about plans to found a new Russian-dominated potash company – Soyuzkali – whose office had to move from Belarus to Switzerland, i.e., under control of Kerimov. It did not happen, yet contributed to a crisis inside the Belarusian Potash Company.

The Russian option for Belarus remains elusive. Objective opportunities which exist for Belarusian business and individual Belarusians in Russia are offset by huge biases against them that are regularly demonstrated by Russia. Moreover, aggressive Russian attempts to take over Belarusian assets leave little space for integration and cooperation between two countries. In a word, Belarus is not as close to Russia as frequently assumed and the West should never dismiss Belarus as an active actor.




Lukashenka’s Chinese Dream

On 17 July, the Belarusian state leader completed his visit to China. According to Lukashenka, Belarus will become a pillow for the Chinese Empire in Europe. The meetings were full of pomposity, but the results seem modest.

Although Belarus has signed the Joint Declaration on the Establishment of Relations and Comprehensive Strategic Partnership, a number of contracts and agreements, the authorities have not achieved their main goal – to attract direct investments.

Lukashenka’s regime has been repeating the mantra of a strategic partnership with the Middle Kingdom for years, but Belarus so far failed to receive significant benefits from this cooperation. China sets strict conditions for lending to Belarusian and is in no hurry to invest. Some Chinese projects in Belarus slip because of the poor quality of Chinese equipment and services.

The future of economic relations remain an uncertain one for Belarus. As a result of the low level of Belarus’ public administration, its non-modernised economy and a lack of sinologists, the relationship will develop according to a Chinese-led scenario. Belarus will play a passive role.

Lukashenka in the Middle Kingdom 

Lukashenka had many reasons to visit China. First, Belarus wants direct investments, and does not get any. Secondly, Lukashenka wants to soften the strict demands typically placed by China during joint projects. It is unusual for Lukashenka that someone dictates to him what to do, even Russia has no such power. In addition, the Belarusian authorities keep trying to sell overflowing stocks of agricultural machinery. 

It should also be noted that the Chinese lobby inside the Belarusian authorities has strengthened. A Former employee of the embassy in China, Kiryl Rudy, recently became an economic advisor to Lukashenka.

In China, the Belarusian ruler has had several important meetings. He held talks with head of the PRC Xi Jinping, Premier of the State Council Li Keqiang and Chairman of the National Committee of the People’s Political Consultative Conference Yu Cheng-sheng. On 16 July, Lukashenka and Xi Jinping inked a Joint Declaration on the Establishment of Relations and Comprehensive Strategic Partnership.

The sides traditionally mentioned that no one could interfere in the internal affairs of a country using human rights issues. Belarus reaffirmed their commitment to the principle of “One China” and China has pledged to support Belarusian sovereignty.

During the visit, the countries signed 36 documents for $1.5 bn worth of projects. However, most of these contracts relate to China’s exports to Belarus. Moreover, Belarus will pay for Chinese goods or services with Chinese soft loans. As Belarusian economist Syarhei Chaly noted, “the Chinese give credit to Belarus to expand its own exports.”

Belarus Lose in Relations with China

Lukashenka likes to hyberbolise the benefits of relations with China. The results of the cooperation remain rather poor.

Although official Minsk does have credit lines for $16bn, this credit remains restricted – and they lead to an increase in Chinese imports.

Although official Minsk does have credit lines for $16bn, this credit remains restricted – and they lead to an increase in Chinese imports, usually of low quality, and to the and an increase in foreign debt. China has hardly made any direct investments in Belarus and cannot grant Belarusian workers the conditions that Western investors would likely grant.

In addition, the Chinese demand from Lukashenka’s regime more than any other country. Political activist Mikhail Pashkevich said that at present the Chinese authorities are demanding an enlargement of the area for the Belarusian-Chinese industrial park by 1,000 acres, the construction of an internal communication and logging park using Belarusian money, as well as the right to use subsoil.

However, as Belarus cannot get cheap loans or credit in any other place, the authorities continue to borrow money from China. 30-50 % of credit winds up back in China in the form of goods or services.  Chinese credit does have a significant upside – payments start after 3-5 years, and the interest rate is about 3-4 %.

The actions of the Chinese manufacturers caused a blast at the Minsk Thermal Power Plant and the introduction of new capacities at cement factories has been postponed for two years, which in effect led to a $0.5bn loss for Belarus.

According to the National Statistics Agency, Belarus’ exports to China remains five times less than that of its imports, and a negative balance of trade is $2bn. Potash fertilizers make up half of Belarusian exports.

Can Belarus Win?

According to the Economist, the Chinese economy may leave American economy behind by 2019. The fact that China is may becoming the largest economy in the world in six years time ,and has a lot of money to invest, prompted the Belarusian authorities to strengthen their relationship with China.

The Belarusian authorities know what they want, but have no idea how to get it. Belarus lacks enough sinologists with a proper knowledge of Chinese industry. This is the first reason why Belarus is on the losing end of its relations with the Middle Kingdom.

China’s domestic market is growing at an incredible pace, but Belarus remains unable to capitalize on it. To gain a foothold in the Chinese market Belarus should carry out a real modernisation of its economy and create a number of strong brands with a touch of top luxury. For example, Belarusian vodka or underwear could become significant brands in China.

Other causes of poor results in the relations with the Middle Kingdom remain standard. Belarusian officials need lectures in English and generally improve the functioning of its public administration. According to leaked US diplomatic cables, former Ambassador of China to Belarus Wu Hong Bin privately admitted to an American ambassador that “even the Tajiks are more open and less bureaucratic.” 

Until Belarus becomes capable of improving its public administration and understanding of China, getting the benefits of the bilateral relationship will remain just a dream of the authorities.




Construction Boom in Minsk: Happy Businessmen and Unhappy Public

On 13 March, Belarus hosted a high level guest – Serbian president Tomislav Nikolić. Nikolić and Serbian businessman Dragomir Karić symbolically launched a new construction project near national library. Today Serbian company Astra Investment is one of the largest investors in Belarus development sector.

Development remains one of the few industries foreigners eagerly invest in Belarus because of high and quick profit. Meanwhile, Belarus authorities struggle with other problems of urban development. They fail to properly regenerate the Old Town of Minsk and their policy of compaction of districts in already densely populated city causes protests of locals.

Thriving Capital

Although Belarus experiences economic stagnation and resists market reforms, the intensity of development and construction makes an impression of a thriving area. Indeed, development presents one of the few sectors that foreign companies readily invest in Belarus.

In this most cases foreign does not mean western, as investors come from Arab countries, Russia, Iran, Turkey and China. Serbian Astra Investment serves perhaps the biggest investor at the moment. Its projects, Majak Minska (Lighthouse of Minsk) includes a shopping and entertainment complex and several housing projects. 

Construction especially flourished after 2009, when the International Ice Hockey Federation chose Minsk the venue for the 2014 championship. The event seems especially important for regime’s image and international legitimation, therefore authorities do their best to prepare the capital for the upcoming championship. The amount of work is substantial – Minsk definitely lacks tourist infrastructure. 

However, as it usually happens in Belarus, people do not know how the deals are made.  This behind-the-scene politics causes discontent of the public. This discontent is fairly justified – very often good pieces of Belarusian land go to president’s friends without asking people’s opinion.

For example, in 2012 an official document with a mark “confidential” appeared in Belarusian Internet. According to it, Aliaksandr Lukashenka ordered to grant Qatar state (in fact its ruling family), lands near Minsk for building residence and open-air hunting cages.  Expensive lands near the capital should be granted for free for 99 years. Such generous presents of course are a part of bigger deals that the authoritarian leader makes with his Arab counterparts.   

The Tragedy of Minsk Old Town

Regeneration of old building remains a disaster in Belarus. Denationalised Belarusian bureaucracy does not realise the value of architectural heritage and do not want to stick to legislation on urban development during the restoration of old buildings.

Most famous cases from recent decade include reconstruction of Old Town in Hrodna, a town with old European architecture in Western Belarus.

Authorities conducted reconstruction with numerous violations. They did not conduct archaeological excavations and damaged a layer of remnants of the mediaeval city; changed traditional planning of Old Town; destroyed some buildings and built them from modern materials instead of restoration. As a result, the biggest Old Town in Belarus turned into typical town of Lukashenka period.

Minsk is in a similar situation now. Poor reconstruction of Old Town of Minsk started in USSR already. Today, in independent Belarus the authorities continue to destroy the historical face of the city for reasons of quickness and minimization of cost. The 2014 ice hockey world championship makes the authorities hurry in their preparations.

Among the biggest problem of renovation experts name the destruction of former planning of the streets and buildings. While a single wrongly erected building can be destroyed and restored, the rebuilding of the whole planning seems hardly possible and will be extremely costly in future. Another task during regeneration is to preserve the past cultural landscape, but Belarusian authorities prefer to turn Minsk Old Town into a business-centre.

According to historian Zachar Šybeka, one of the best experts on Minsk history, normally the Old Town becomes conservation zone, where new construction is prohibited. In Belarus, he says, such norms do not exist in law. As a result, modern buildings appear in the centre. They overshadow the historical architecture and make the whole view ridiculous.

Sadly, authorities even abuse religious monuments like church complexes. Instead of giving them back to church, officials use buildings for state purposes. In one case, they even presented a plan to turn a former monastery building into hotel with casinos.

Compaction of Housing

Rapid growth of construction results in the lack of free space in the city. Notably, Lukashenka prohibited the spread of the city and building on agricultural lands. Authorities offered an alternative solution – to boost “satellite towns” that lay near Minsk. Citizens that need housing can build it in those towns now.

However, new elite housing and business and shopping centres mushroom in the city, and somehow authorities manage to find land for them. Clearly, those projects are highly profitable and Minsk authorities do not miss a chance to earn some more cash and report to the top about their success.

The government promotes policy of compaction of some communities to create new places for profitable projects. This policy sparked social tension and protests of city dwellers. Politically indifferent Belarusian may become very active and aggressive when the deal concerns their property. Take for example the case of Uručča conflict.

In spring 2012 dwellers of Uručča district protested against building of several houses, some of them were assigned for riot police families. This fact stirred up the discontent with authorities because Belarusians perceive police as a part of the regime. Still, dwellers had no chance to win in this case. 

Similarly, owners of the housing in the central district resist the plans of authorities to evict them or rebuild the part of houses and implement other projects. Such sporadic protests appear here and there and authorities have to compromise. They organise civil discussions, where experts, architects, officials and citizens discuss the construction plans.

So far, the discussions appeared not quite fruitful, as sides do not want to listen to each other and retain their positions. Nevertheless, authorities accept that such protests indeed prevented some projects or changed them. “Prevention of social tension”, the term that authorities use, shows that even in today's Belarus people can effectively defend their interests if they organise.




Lukashenka Tours South-East Asia

On 22 March Belarus state leader completed his visit to Singapore where he was trying to find new markets. He spent a week in Indonesia and Singapore, together with a delegation of 80 people.

The state of the Belarusian economy is deteriorating, relations with the West and Russia remain complicated, the death of friends like Hugo Chavez and contradictions with Ahmadinejad made the Belarusian leadership to look for new partners.

The Belarusian authorities want to become a noticeable player in the South-East and to attract new money to the Belarusian economy. The ultimate goal is to find new trading opportunities matching those with Russia and the EU. Belarus signed contracts for $400 million. 

For the three days of the visit to Indonesia, Lukashenka lobbied increase of mutual goods turnover by two-three times for the upcoming years. President of Indonesia Susilo Bambang Yudhoyono promised to consider the opportunities of investments in Belarus and accepted the invitation to visit Minsk for further negotiations.

The Belarusian delegation did not gain great success in Singapore. Although the parties did sign an agreement to set up one joint company, official Minsk wanted to get more in the form of investments. The Asian tiger has enough economic weight to become a noticeable player in Belarus. However, it does not hurry to do so, although the regime offers a piece of Belarusian state property that the Russians want so much – a minority stock of Belaruskali, one of the world's largest producers of potash.

The visit to the South-East Asia took place after the failed trip to St. Petersburg. Alexander Lukashenka was hoping to get from Vladimir Putin a $ 2 billion loan. The Russian Minister of Finance  Anton Siluanov replied simply and ingeniously: “If Belarus carries out privatisation for $ 2.5 billion, there will be no need for a loan”. 

The Russian refusal inspired the Belarusian state leader. Ruling politicians realise the importance of development of relations with countries outside of Europe. Due to such contacts, the Belarusian authorities gain international legitimacy and find partners who do not demand further integration or respect of human rights. 

Indonesian Success

On 18 March, Lukashenka arrived to Indonesia for the first time in the history of relations with this country. On the one hand, the relations between the countries do not develop as quickly as the Belarusian authorities would like. In 2012, the goods turnover between Belarus and Indonesia amounted only to $132,2 million. Alongside with that, the Belarusian export still remains undiversified. Belarus shipped almost exclusively potassium fertilisers and tires to Indonesia.

On the other hand, Belarusian authorities can expect rapid start in the mutual trade. Belarus signed contracts for $400 million for the three days of the visit. According to Belta news agency apart from the traditional potassium fertilisers, Indonesia will get about 500 tipper trucks and 600 tractors manufactured in Belarus in the nearest years. Belarus also plans to earn about $150 million on shipment of milk products.

Indonesian President Susilo Bambang Yudhoyono announced that a group of businessmen would visit Minsk in the nearest future, and he would come to Belarus personally for further negotiations afterwards. Lukashenka mentioned cooperation in the military sphere separately. According to the new information provided by the Stockholm International Peace Research Institute, Belarus occupies place # 20 among the biggest exporters of weapons in 2008-2012.

The Belarusian authorities had been preparing this visit for several years. According to Lukashenka, the goods turnover is likely to grow by two-three times in the next several years. If official Minsk manages to open several joint-stock companies with Indonesia, it will become a great break-through for the Belarusian economy. In political sense, these contacts have little importance as the countries are located too far away from each other, and their spheres of interest at the international arena stay too different.

Singaporean Hopes

Success in the relations with Indonesia seems less important than the prospect of cooperation with Singapore.

The current state of the economic relations strives to the minimum: the goods turnover in 2012 made $26,5 mln, Singapore invested in Belarus only $730,000 for a year. The Belarusian authorities realise that Belarusian products cannot be competitive in Singapore. The regime hopes to set up joint companies (for example, in the IT sphere) or direct investments into the Belarusian economy.  

During the Belarusian-Singaporean business forum the parties agreed to set up a joint company for production auto parts and fittings. As for the direct investments, Singapore has taken no decision so far. The speaker of the Singaporean Parliament will visit Belarus in the near future to see the Belarusian enterprises.

Also, Lukashenka met with President of the “Riyada Group” holding company, a member of the Bahrain royal family, one of the most influential women of the Arabian world Shaikha Dheya bint Ebrahim Al Khalifa. The parties agreed to set up a joint company in Amman and about shipment of the Belarusian goods to the Arabian countries.

Multiple-Vector of the Regime as a Guarantee for Belarus’ Independence

The regime deeply appreciates the relations with countries located far away from Belarus, countries which have quite different, but not contradictory political interests with Belarus.  The Belarusian authorities want contacts with South America, Asia or Middle East to become a security cushion in case of deterioration of relations with Russia and the European Union.

When Lukashenka headed for the South-East Asia, the Belarusians started joking that the state leader “disclosed his multiple-vector nature”. The Belarusian authorities often use the concept of “multiple-vector nature” to underline importance of development of relations with all the countries of the world. Translated from the official Minsk’s language, it means creating a counterbalance to Russia.  

Although in reality only the West can replace Russia for Belarus, the Belarusian authorities continue to look for new partners. The contacts with Indonesia or Singapore look a drop in a sea in comparison with the agreements with Russia or the European Union. However these relations create appearance of the regime’s independence and stabilise its positions in the negotiations with Moscow or Brussels.




Modernization Traps for Belarus

The Belarusian government has announced its plans to modernise the national economy. However, the content of the policy package is far from clear. Given the experience accumulated by Belarus and other transition economies, there are reasons to warn about possible traps that modernization policy could set, if implemented unwisely.

The government has announced a new course for modernization to strengthen weakening economic growth. In October 2012, Prime Minister Myasnikovich emphasised that “modernization of the national economy is a priority”.

When reporting to Aleksandr Lukashenka on 14 January 2013, Myasnikovich has been warned that the pace of modernization shall not be slackened. The target of modernization is apparently the state sector of the economy, which still produces about two-thirds of Belarus’ GDP.

Lukashenka summarised  his vision of modernization policy at a press-conference on 15 January 2013. According to him, modernization is about “the installation of new equipment to the available production facilities”. Modern equipment is supposed to boost productivity and output growth as the stock of capital is increased – a necessary step to sustain a growth trajectory, which has been declining since from 2011.

In 2012, real GDP growth amounted to 1.5 per cent, while real investment dropped by 13.8 per cent (see Figure 1 below). Without investment growth, GDP dynamics is in danger of further enfeeblement.

Figure 1: Real GDP growth and real investment dynamics, 2000–2012

Source: Belstat, various years (quarterly data)

 

Both workers and managers of state-owned enterprises understand that the stakes in the “modernization game” are high. In particular, workers of the wood-processing plants are not allowed to leave their enterprises unless modernization is over.

Independent trade unions – supported in their claims by their Russian and international colleagues – criticised the emergence of “new serfdom” at the Belarusian labour market. Furthermore, a CEO and three managers of Mogilevdrev, a company with modernization underway, are being persecuted for the misuse of public funds granted for it.

Experience of Early Modernizers

In fact, intentions to revive poorly performing economies by the means of technological renovation of industries are not novel for the post-socialist world. In the late 1980s, Poland, Hungary, and Bulgaria and other countries tried to revamp their economies by using foreign money to purchase equipment from abroad. However, export revenues were not sufficient to pay back foreign loans.

First, extensive trading within the socialist block by using convertible roubles had resulted in the lack of hard currency. Second, a more fundamental challenge came from the weak capacity of socialist enterprises to innovate. Foreign equipment was insufficient to substitute a whole system of incentives for managers and workers.

Export-oriented growth of East Asia type failed to materialise. As a result, socialist economies were forced to start their transition to capitalism with considerable levels of foreign indebtedness. This fact allowed international financial institutions as the IMF to exert leverage upon reform, as, for instance, it happened in Poland.

This experience is worth to have in mind when thinking about the design and likely effects of modernization policies in Belarus. In a nutshell, Belarusian authorities see modernization as a task for the state, realised by the means of state investments to state-owned enterprises. Seeing in this light, these policies are not novel, but a continuation of lasting state investment policies.

Predecessors of Modernization

Before the currency crisis of March 2011, investment programmes were a major tool to support technological renovation. These programmes were implemented with the help of cheap loans from state-owned banks. The 2012 World Bank memorandum on Belarus reveals that directed loans are typically three times cheaper than market loans.

At the same time, the gap between factor productivity of state-owned and private companies vary from 20 to 30 per cent on average. Private firms tend to be more efficient than state-owned enterprises.

This fact implies that the efficiency of state investments is lower than private ones. Prior to the currency crisis, directed loans amounted to a half of the total volume of loans, granted typically to agriculture and housing production.

According to a study, conducted by the BEROC researchers in December 2012, the expansion of these loans has not contributed to the improvements in total factor productivity, which reflects the efficiency use of capital and labour in the economy.

Modernization appears to be a call for a more productive use of funds, but there is little evidence in favour of changes in incentives of recipients of state financial aid. Moreover – and this is probably the crucial aspect – private domestic and foreign investors are not considered seriously as major actors of modernization. If foreign borrowing, and not a foreign investment, continues to be one of the sources of foreign cash to purchase equipment from abroad, then macroeconomic stability can be threatened.

The Adverse Effects

Apparently, private investors can be more efficient in implementing modernization plans without state guidance. However, some recent steps of the authorities might keep them away from entering the scene. In particular, nationalisation of two confectioneries and planned amendments to privatisation legislation, stipulating the reservation of special places for state representatives to vote for the absent minority shareholders are the measures that lie far from improving domestic business climate.

There is a worrisome tendency that increase in real investment is associated with higher foreign indebtedness and lower net exports (see Figure 2).

Figure 2: Investment, net exports, and debt, 2000-2012 (3rd quarter)

Note: Index values, 2005=1
Source: National Bank, Belstat

 

 

 

 

 

 

 

Therefore, modernization – even it is understood narrowly as a mere technological upgrade – might bring temporary gains in the form of higher output growth rates, but it contains considerable risks. It is too early to make conclusive statements, but suspicions come from the lower capacity of state-owned enterprises to function as efficiently as enterprises in the private sector.

Without expansion of the private sector and incentives to private investment, the Belarusian economy might continuously require injections of liquidity in the form of state-guaranteed loans. These injections would increase the economy’s volatility without addressing the fundamental efficiency problem. Instead, a vicious circle of more funds–more growth could emerge, with severe inflationary repercussions and high costs of breaking with it.

To summarise, contemporary modernization plans look so far as “old vine in new glasses”. If that is the case, then seemingly new policies would have a limited success. However, if compounded by the measures to support the development of private sector, economic growth can be made more sustainable and less volatile.

Kiryl Haiduk

Senior Research Fellow at the Belarusian Economic Research and Outreach Centre

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

 




Chinese Enclave in the Heart of Belarus?

650 thousand Chinese will be building an industrial park near Minsk and they have already obtained working visas. 

Yaraslau Ramanchuk – an ex-candidate for Belarusian presidency – has received this information from his own sources of information. Gazeta.ru, major Russian online media, also mentioned a similar figure which it obtained from government sources. 

If the information is true, Belarus will soon have one Chinese for every 14 Belarusian and an a sizable Chinese town 50 kilometres from Minsk. Belarusian state officials deny this. However, recent Belarusian history has taught the Belarusian public to be sceptical of the government’s assurances. Moreover, the whole story about the Chinese-Belarusian Industrial Park rests under a veil of mystery.

Chinese-Belarusian Industrial Park

Already in October 2011 the Belarusian Ministry of Economy and China CAMC Engineering Co., Ltd. agreed on the creation of the Chinese-Belarusian Industrial Park in Belarus.  Governments of both countries, China Exim Bank, and Belarusian Horizont Holding Management Company negotiated the project. Finally, on 5 June 2012 Lukashenka signed an Edict on the Chinese-Belarusian Industrial Park.

Under the Edict, the Park is going to occupy 8,048 hectares of the Smaliavichy region (Minsk district) and host high-tech and export-oriented companies. Electronics, biomedicine, fine chemistry and engineering will be among the Park’s priorities.

The estimated cost of the Park’s construction is about $30bn. Apparently, a great portion of this money Belarus is expected to come from China. Recently, Vice Prime Minister Anatoly Tozik has claimed China is already on the point of allocating $3bn for the Park’s development.

The large financial assets’ coming from China to Belarus are not as rare as might be expected. By now, loans from the Chinese have enabled different state ministries to implement a couple of investment projects. China investments have flown into Belarusian power generation and clean energy. By 2014 in the centre of Minsk a new Chinese hotel complex “Beijing” is going to arise thanks to a Chinese investor.  

But as a rule, money from the Celestial Empire arrives in the form of tied loans. Under such loan arrangements, Belarus does not only use the money for the purchase of Chinese equipment, but also as remuneration for Chinese workers. From a financial point of view, the situation with the Chinese-Belarus Industrial Park represents a new stage in relations between two countries. 

Belarus’ Alluring Proposals

According to the presidential edict, the Chinese-Belarusian Industrial Park will become the most favourable place to do business in Belarus. More importantly, the Chinese-Belarusian Industrial Park has borrowed and enforced the effective incentive of High-Technology Park: taxation privileges.  

Probably the most tempting perspective are the exemptions from profit, land and real estate taxes granted to all the Park’s residents for its first 10 years. In addition, the income tax of the Park’s employees is going to be a quarter less than for other Belarusians.

Under the Edict the Industrial Park Development Company can acquire the Park’s lands with a 50% discount and even dispose of it. At the same time 60% of the Industrial Park Development Company’s charter belongs to China's CAMC Engineering Co., Ltd. 

Russia Protests

Goods produced by Chinese companies in Belarus will benefit from the same special treatment in Russia and Kazakhstan as usual Belarusian goods. For example, a major Chinese automaker Geely has already become the Park’s resident.

Production of competitive automobiles in Belarus seems to disappoint its larger neighbour. Already, in June 2012 the Russian Ambassador to Belarus Alexander Surikov said that Belarus’ intent to start production of Chinese automobiles can become “a matter of serious discussions”. “We do not want to destroy our Russian automobile industry. And that is the whole issue”, – said Surikov.

Russia’s claims against automobiles’ construction have no legal foundation. Alexander Surikov admits: “Of course, we cannot forbid Belarus from assembling someone else's automobiles, but we note that some questions will arise […]”.

Unfortunately, Belarus still depends on Russia’s favourable disposition, primarily expressed in the form of subsidised energy resources. That makes Belarusian authorities look for compromises. According to some Belarusian media, the state is now making concessions to Russia within the negotiations on merger of Belarusian MAZ and Russian KAMAZ, two post-Soviet giant automobile plants. While the merger’s question has been on the allies’ agenda since 2010, this November they deadlocked again.

Still, in case of Chinese motor industry’s success in Belarus, such concessions may not suffice.

Even more, Russia can succeed in attacking the Park’s privileges from a legal point of view. The tax privileges Belarus provides to the Park’s residents may qualify as state subsidies. At the same time some international commitments of Belarus, such as the Common Economic Space’s Agreement on Unified Rules on Providing Industrial Subsidies, limit the possibilities of such state subsidies’ use. Consulting the Common Economic Space’s Commission on the permissibility of such measures in advance seems to be the only reasonable step Belarus can take now.

Inhospitable Belarusians?

The new project has lead to inner turmoil as well. The first wave of dissatisfaction came already in January 2011. Inhabitants and summer residents of the future Park’s territory protested against the construction.

At first, the reason was the fear of demolition of people’s houses.

The fear grew into a mass movement. The citizens protested not only against the need to leave the settlements, but against the whole building of the Chinese–Belarusian Park. In their opinion, it will also threaten the region's ecology. One of Belarusian opposition political groups, "Tell the Truth" campaign, managed to attract the public’s attention to the problem.

Belarusian officials, including Vice Prime Minister Anatoly Tozik and the Head of Minsk District Executive Committee Boris Batura, had to make numerous assurances.  However, the campaign failed to implement its more ambitious goal: to hold a local referendum on whether the Park should appear. Probably, the possible result of the referendum was too obvious and undesirable for the state.

The people’s strong dissatisfaction spread even far beyond the Smaliavichy region after Yaraslau Ramanchuk announced that 650,000 of Chinese are going to immigrate to Belarus for working in the Park. Russian Internet resource Gazeta.ru mentioned 600,000 Chinese. However hospitable Belarusians may be, such a change in the country’s ethnical situation seems quite shocking. The total population of Belarus is less than 9.5 million people. 

The state authorities have denied the news. According to Tozik, 600,000 people is the approximate total number of employees of the Park (including Belarusians). Time will show whether the giant Industrial Park with hundreds of thousands Chinese workers will become a fact or a myth. In the past, Belarus has negotiated many large-scale investment projects, most of which failed to materialise. 




Towards Authoritarian Capitalism in Belarus?

Despite the dark clouds of political repressions Western businesses still express interest in doing business in Belarus. Recent evidence of that is an event in Minsk organized by the Ministry of Economics called “Belarus Capital Markets Day”. Apparently, Belarus authorities want to look serious with their privatization plans.

Deutsche Bank, London Stock Exchange and reputable advisory firms were among the sponsors of the event. The event’s purpose was to educate the largest Belarusian state-owned enterprises such as MAZ, Mozyr Oil Refinery and Belarusbank about international capital markets.

That practical event was preceded by a more theoretical one. Just a few days after the election day crackdown, deputy minister of economics opened an academic conference in Minsk hosted by the Belarusian Economic Research and Outreach Center (BEROC). BEROC is a Belarusian economics think tanks which tries to attract Belarusians working abroad and international scholars to share their knowledge. The initiative belongs to Aleh Tsyvinski and Mikhail Golosov, Yale University professors who left Belarus in their mid 20s to study in the United States.

It is fortunate that Belarus starts opening up, perhaps because of economic pressures from the East and West. But while being so focused on the economics side Belarus authorities often neglect the legal side. No matter how efficient their economic policies are, investors are unlikely to pay a fair price for Belarus property if legal instability will persist in the country.

In countries with established rule of law, it takes many months if not years for a law to be passed. In Belarus, it may take just one day for the President to sign a decree which can override any other law, not to mention a contract. Such decrees can completely change the applicable tax regime, or even expropriate assets of a particular company. Moreover, such decrees occasionally have retroactive effect. Such emergency law making may be good in wartime but not in times of stability. In addition, the Belarus courts do not have reputation of being particularly independent even in matters which are far from politics.

As a result, when serious investors are coming to the country, they have to price in these legal risks in addition to political risks. Therefore, Belarus authorities should not be surprised when foreign investors are ready to pay very modest amounts for Belarus assets. For many of them it just an interesting new lottery with a very uncertain win.

Legal stability, respect of private property and independence of courts does not necessarily come hand in hand with liberal democracy. According to the World Bank, Singapore for many years is the country with the most business-friendly environment. But at the same time political freedoms and human rights are very limited. The country’s regime is often dubbed as “Authoritarian Capitalism” but it still attracts one of the highest foreign direct investments per capita in the world.

Foreign investors have little doubt that Belarus is authoritarian, but convincing that there is capitalism will be a more difficult task.

YK