Testing the Limits of Investment Crisis – Belarus Economy Digest
On 25 August 2016 the National Statistic Committee of Belarus (Belstat) publicised new macroeconomic data for July, which showed that the economy is suffering from a lack of investment flows.
Meanwhile, according to the National Bank of Belarus the continuing decline of companies' profits threatens the financial stability of the country.
Finally, the CEO of "Great Stone" Hu Zheng tries to convince authorities of the profitability of the "Great Stone" industrial park, teaching Belarusians about high-level commercial science.
Economic Recession: Investment Drought
In January-July 2016 investment in fixed capital in Belarus has dropped by a fifth since the same period last year. Belarus has not witnessed such a decline in investment activity since the 1990s, a period of investment disaster in the economy.
2016 has brought a third straight year of investment drought, bringing the total amount of years of drought up to four over the last five years. Moreover, the process of investment "deforestation" is speeding up: from -5.9 per cent in 2014 up to 20.6 per cent right now (see Figure 1).
The main explanation lies in the economic structure of the Belarusian economy – the greatest "stake" still belongs to the state. It thus continues to play the leading role in the investment scenario. As a result, the decline in investment expenditures of public industries has pulled down the whole investment activity in the country.
The second reason concerns foreign investors: they spend money mainly on sectors with high domestic demand – finance, communications, retail trade, restaurants, and so on. With the reduction of the "life-giving" source of superprofits the additional commercial investments have also greatly diminished.
Finally, in order to help the National Bank reduce inflation, the government has committed itself to cut funding of state programmes by approximately BYN28tn this year and by BYN20tn the next one.
Therefore, given the significant dependence of investment programmes of state enterprises on state funding, the government’s hopes for an investment recovery in the following years seem dubious.
The Financial System: Destabilising Loss-Makers
According to Belarus's statistical agency Belstat, the profits of enterprises have decreased by a fifth in the first half of the year, while the number of loss-making companies has increased by a quarter compared to the same period last year. On 1 July 2016 the number of loss-makers reached 1,738 (or 22.8 per cent in total) and outperformed the corresponding figures of the previous year by 24.8 per cent.
On 28 July 2016 representatives of the National Bank said that the situation with loss-makers is even more complicated, as over the last several years, in order to expand production, a large share of enterprises took out more loans without an adequate assessment of their ability to pay them back.
Correspondingly, in the first half of the year the amount of troubled assets in Belarusian banks doubled, thus increasing the risk of financial instability in the country.
Moreover, according to the National Bank, due to the devaluation of the national currency the debt burden (formed mostly by foreign currency liabilities) of the enterprises has increased significantly over the past two years.
As a result, the positive effect of the devaluation on price competitiveness of Belarusian exporters has been cancelled out. In January-July 2016 exports fell by more than a fifth in comparison with the same period last year.
Trade Policy: Low-ball from the Great Wall
On 5 June 2012 President Aliaksandr Lukashenka signed a decree on the creation of the Belarusian-Chinese industrial park "Great Stone," aimed at attracting over 100 companies from China and Europe. However, to this day only eight residents have agreed to participate, and only two of them have started the building process.
On 19 August 2016 the CEO of "Great Stone" Hu Zheng tried to dispel any uncertainty about the future of the project by claiming that the conditions for entering the project are too restrictive (the size of the company and its business area: electronics, pharmaceutics, R&D, engineering, biotechnology, fine chemistry, new materials, warehouse logistics), which restrains investors.
Hu Zheng has suggested that the criteria for residents must initially be relaxed and their areas of activity expanded. He gave several examples, including firms engaged in processing of raw materials on a tolling basis (for example, processing of stone or metal).
However, such "extraordinarily helpful" advice may turn the innovative project into a simple excuse to transfer the above mentioned enterprises with low added value (which are also potentially harmful to the environment) from China to Belarus.
Due to prohibitive tax benefits (10 years of "all inclusive" tax vacation plus a subsequent 10 years of half-priced tax bills) for the investors, acting on such advice could undermine the competitiveness of Belarusian enterprises, contribute to additional job losses of Belarusians and lead to even more severe budget problems.
In Belarus this is an unpopular position: the first Deputy General Director of the "Company for the development of the industrial park" Kirill Koroteyev has admitted that the primary aim of "Great Stone" is to attract only high-tech companies.
Thus, the government is still searching for additional sources of economic growth, preferring to bet on foreigners and forgetting about the entrepreneurial abilities of their own citizens. Meanwhile, investments continue to evaporate and additional fiscal risks threaten the financial stability of the country.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)
Renaissance of Political Parties, Eurasian Currency, Palanez Rocket Launchers – State Press Digest
Political parties see a renaissance during the ongoing parliamentary campaign, as 64% of all candidates are party affiliated. However, society still has only a vague understanding of the role parties play in the Belarusian political system.
The Polish vice speaker emphasises a need for closer cooperation between Belarus and Poland in order to maintain security at the EU border. The Belarusian army receives the newest Belarus-produced multiple rocket launch system, Palanez, capable of simultaneously striking up to eight targets at a distance of 50 to 200 kilometres.
Experts at the Eurasian Development Bank: Belarus would benefit the most from a single currency. This and more in the new edition of State Press Digest.
Parliamentary elections 2016
Political parties see revival in the parliamentary election campaign. The electoral commission registered 521 candidate for September parliamentary elections, reports Belarus Segodnia. They will compete for 110 seats in the House of Representatives. 93 were denied registration and 16 cancelled their applications.
Political parties saw a renaissance, with 64% of all candidates party affiliated, and 176 candidates representing oppositional political parties: United Civil Party, Belarusian Popular Front, Green Party, Belarusian Left Party, and Social Democrats. Candidates can now fund campaigns out of their own pocket and accept donations from individuals and companies.
Political parties will get more seats in the new parliament. Zviazda publishes an interview with political expert Piotra Piatroŭski on political parties' activity in the ongoing parliamentary campaign. This year the number of candidates running exceeds last year's by 136 people. This is due to changes in electoral law, which allowed political parties more opportunities to nominate candidates. Civil associations now also have the right to nominate candidates.
However, society still has only a vague understanding of the role of parties in the Belarusian political system. Parties suffer from personnel shortages and sometimes cannot even complete necessary documents. Piatroŭski accuses oppositional political parties supported by western governments of radicalism and inability to produce sound programmes. He predicts that the number of political parties in the new parliament will increase, yet not significantly.
Poland deepens cooperation with Belarus. Vice-speaker of the Polish Parliament Ryszard Terlecki gave an interview to Belarus Segodnia.
Poland has decided to strengthen relations with Belarus under the auspices of the EU general policy of engagement. This became possible after the visit of Polish foreign minister to Minsk in March 2016.
As a country located at the EU’s eastern border, it is in Poland's interests to cooperate with the EU's neighbours in order to maintain security.
The EU is interested in Belarus’ participation in resolving the Ukraine crisis and the migration crisis, although the latter is less relevant to Eastern Europe.
Currently, Poland and other EU countries are acting as observers of Belarus's parliamentary election; they expect them to be transparent and fair.
Eurasian Union seeks partnership with Shanghai Cooperation Organisation. This June, for the first time, a high level delegation from Belarus participated in the summit of the Shanghai Cooperation Organisation (SCO) as an observer. Lukashenka then emphasised that cooperation with the Eurasian Economic Union should become a priority for the SCO and a new continental partnership may emerge. Souyznoe Veche provides the thoughts of a number of Russian experts on the issue.
The Chinese project New Silk Road, which will go through Kazakhstan, Russia and Belarus, will bring vast investments in the transport and construction sectors. However, while Russia seeks to replace damaged links with the EU and US with China, the latter shows no interest in helping and primarily focuses on the western agenda and its own interests.
Security, economy and society
Belarus arms itself with home-produced multiple rocket launchers Palanez. The Belarusian army has never boasted such modern and powerful weapons, writes Belarus Segodnia.
After 1,5 years of tests, it received the newest Belarus-produced multiple rocket launch system, capable of simultaneously striking up to eight targets at a distance of 50 to 200 kilometres. The six Palanez launchers are now in the hand of the 336th Asipovičy reactive artillery brigade.
According to First Deputy Minister of Defence Alieh Bielakonieŭ, the manufacture of the new weapons is an element of strategic deterrence. To develop its armed forces, a country can either increase their size or change their composition by strengthening them with unique weapons such as Palanez. Belarus chose the second option, which makes creation of local armed groups around Belarus’s borders impossible.
Belarus would benefit most from a single currency in the EEU. Experts at the Eurasian Development Bank announced that according to their estimates, Belarus would receive the greatest benefit in the Eurasian Economic Union if a single currency is introduced. In the long term, membership in the currency union could lead to additional GDP growth of 15% for Armenia, 30% for Belarus, and 10% for Kyrgyzstan, writes Souyz.
The political decision to establish a monetary union has not been taken, as integration is not obligatory for the countries without the necessary macroeconomic and structural conditions. Currently, the economies of the union are insufficiently integrated, with the exception of Belarus and Russia. Another constraint for the currency union is the high dollarisation of their economies as a result of high inflation. Preparing for transition to a single currency could take from 7 to 10 years if the countries abide by their commitments.
Belarusian youth discuss politics through BRSM projects. Andrej Beliakoŭ, head of the pro-government Belarusian Republican Youth Union, spoke on the recent activity of the organisation and modern youth for Znamia Yunosti. The Open Dialogue project started as a site where young people of varying political persuasions could present their ideas to decision makers through discussion and dialogue. Within two years it became immensely popular and is now seen as a form of upbringing for youth.
The organisation has also been developing volunteer movements and has implemented many patriotic projects. Contrary to popular belief, BRSM polls show that the majority of youth demonstrate an interest in politics. Beliakoŭ claims that young Belarusians are pragmatic and would rather work to achieve results than wait for benefits from others.
The State Press Digest is based on review of state-controlled publications in Belarus. 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.