Belarus 2020: Turning the Vicious Circle Into an Upward Spiral

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Pavel A Laschenko

About Pavel A Laschenko

Pavel A Laschenko is EY Country Managing Partner for Belarus, Assurance with 22 year working experience in auditing and banking in Belarus, Baltic States and CIS countries. He opened the EY office in 2000. He is a certified Belarusian auditor and a fellow of the Association of Chartered Certified Accountants of Great Britain (FCCA). He is also a member of the Foreign Investment Advisory Council under the Council of Ministers of Belarus (FIAC). Since 2004, he has been advising the Belarusian National Bank.

The latest presidential elections were held on 11 October 2015, when the incumbent President Alexander Lukashenko registered a first-round landslide victory with 83.5 per cent of the vote. His fifth term will end in the autumn of 2020. 

In the twenty-some years since his election as the first president of Belarus, no major changes have been made that would give the economy a market orientation. The private sector still accounts for less than 30 per cent of the economy, while it has long passed the 60 per cent mark in all other countries bordering Belarus (Russia, Ukraine, Poland, Lithuania and Latvia).

There are no plans for large-scale privatisation projects, making it highly unlikely that this figure will improve much in the near future. Talks on accession to the WTO have dragged on since 1993 without visible result. The main reason in both cases is the lack of political will and the president’s reluctance to lose any levers of control over the economy by handing the private sector more of a significant role. As a result, the economy continues to be dominated by a massive and unprofitable state sector with low labour productivity.

In the first three quarters of 2015, the top twenty five loss-making enterprises posted combined losses of nearly $380 million. Until recently, Russia was the main source of demand for the output of Belarus state companies but, with the neighbouring countries going through an economic crisis and demand for Belarus’s products falling, the 50 per cent drop in sales to Russia seems like a catastrophe that was waiting to happen. The latter contributed to the overall negative GDP growth of 3.9 per cent in 2015, compared to positive growth in previous years (2014: 1.7 per cent GDP positive growth).

Competition can no longer be based solely on price, as this niche has been taken by more productive and profitable Chinese manufacturers. Following the recent modernisation in a number of industries, state enterprises can’t repay their loans without help and are suffering an acute shortage of working capital and the country’s major employers, with hundreds of thousands of employees, are unable to pay salaries. In the second half of 2015 and early 2016, the state was thus forced to provide targeted financial support to eighteen enterprises by creatively restructuring almost $2.3 billion in debt.

A key feature of this scheme is that, if the titans of Belarus’s machine building, glass, cement and wood-processing industries continue to experience financial distress, it will be up to the state to pay off their creditors using budget revenues – the taxpayers’ money.

Debt restructuring is obviously no more than a stopgap; postponing the problem for two or three years but ultimately resolving nothing. Enterprises aren’t interested in solving their financial problems independently. IPOs and Eurobond issues have been under discussion for the last decade but most state enterprises still don’t prepare IFRS (International Financial Reporting Standards) financial statements.

At formal meetings, high-level officials with personal responsibility for the state of affairs in industry and for company investment projects report, without blinking an eye, that restructuring has resulted in rising profitability and an improved financial and economic situation, thus passing these problems on to the next generation of officials. And so the vicious cycle has continued for the last twenty years…

In early 2015, judging from a meeting of the “club of creditors of 106 state enterprises,” under the direction of the National Bank’s new and progressively-minded leadership, it seemed that the authorities had realised that they couldn’t go on subsidising inefficient and unprofitable enterprises and were threatening to take these industrial giants off the dole. Promises to this effect were made to the Eurasian Fund for Stabilisation and Development and the International Monetary Fund, but the hoped-for assistance never materialised. The EFSD postponed a decision on $2 billion in aid until 2016, and talks with the IMF on $3 billion in technical aid are still under way in the first quarter of 2016.

However, moderate growth in the private sector is still possible. Following the adoption of the PPP Law in late 2015 and the announcement of seven PPP pilot projects worth over $1.1 billion, there is reason to hope that public-private partnerships will be introduced in 2016.

There have even been success stories: the PPP Law still hadn’t been passed in February 2012 when the Austrian Kapsch began operating in the area of transport infrastructure (upwards of $270 million in investments over the last three years).

There are also hopes for the expansion of greenfield projects. Swiss Stadler entered the market in January 2012 (€76 million in planned investment) with plans to expand throughout the Customs Union. The China-Belarus Industrial Park “Great Stone,” which opened in 2014, enjoys unprecedented customs and tax benefits, but the Chinese don’t seem to be in any hurry. There are still only eight residents with combined investments of $90 million. The total investment of $550 million is planned by 2020, but the current economic downturn in China doesn’t inspire much optimism about the Great Stone’s rapid development.

Hi-Tech Park in Minsk
Hi-Park in Minsk

One successful park – the Hi-Tech Park – has indeed been gathering momentum and currently employs over 22,000 “eggheads.” Over the last decade, annual growth in the park’s revenue has been around 30 per cent, passing the $600 million mark in 2015. The park’s core residents – IHS, EPAM Systems and Bell Integrator – consistently rank high in ratings of global software developers. Game Stream, a development centre of the world famous Wargaming.net, is also a resident.

The world is clearly heading into a post-industrial and innovation-based future if it follows the current spiral of development. It is also clear that Belarus’s current economic woes are the result of state subsidies and directive planning that ignore the laws of the market and the forces of supply and demand.

Today’s top priority is to transform the entire management and corporate governance structure of state enterprises, which otherwise face economic collapse with severe social repercussions for the state. And such transformation is fastest and most effective when it involves a change in ownership all the more so, as the authorities have realised. And that happens when issues of product quality and cost, effective management, labour productivity and diversification of sales come to the fore.

The main thrust of the needed reforms is to end the economy’s domination by a massive and inefficient state sector, meaning that the state must deliberately give up some of its powers to free the economy from interference. Rapid and transparent privatisation would mean an infusion of investments and is an absolutely essential step on the path of innovation-based development.

Carriages manufactured by Stadler in Minsk
Carriages manufactured by Stadler in Minsk

Strange as it may seem, it would be hard to imagine a more favourable time for economic transformation. There are already new faces in the new/old government; professionals who could potentially form a team to direct reforms and take the ownership.

Following the presidential elections, the country is now, more than ever, politically and economically manageable. The authorities have already provided required social care and stable average cost of living to the “Soviet Union generation” after the USSR collapse in 1991, to ensure a smooth and clear transition to the new Belarus generation, with the overall aim to support and gradually develop a national entrepreneurial spirit.

There’s no need to wait for a social consensus, as success depends on the political will of the country’s leader and on the speed and scale of reform. The process must be set in motion in 2016 so that by autumn 2020, society will be able to see some of the desired economic benefits.

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