Belarus Takes Steps to Strengthen Economy Despite Negative Relations with West

Publication: Eurasia Daily Monitor Volume: 9 Issue: 171

(Source: RIA Novosti)
During the first six months of 2012, the export of refined oil products from Belarus has grown by $2.4 billion compared with the same period in 2011, and the export of solvents has grown by $1.8 billion (to the total of $2.5 billion)—thus reversing the economic downturn the country experienced following the breakdown of its relations with the West. However, in June, this export of solvents began to decline in conjunction with Russia’s suspicion that Belarus has been re-exporting Russian oil disguised as solvents and thus avoiding paying export duties to the Russian treasury (see EDM, August 2). Such payments, stipulated by a bilateral agreement, are due to the fact that Belarusian refined oil exports originate from processing Russian oil. If, as a result of Russia’s investigation into the issue, export duties for solvents are set at 90 percent of export duties on oil, as some commentators suggest, it would no longer make economic sense for Belarus to export solvents (http://naviny.by/rubrics/economic/2012/08/29/ic_articles_113_179008/). So far, the top three buyers of Belarusian solvents have been Latvia, the Netherlands and Estonia. The Netherlands, along with the UK, have been the top buyers of refined oil products from Belarus (http://prokopovi.ch/node/172789) while at the same time they have been the most vocal critics of the Belarusian regime in the EU. The Belarusian opposition has long been accusing these countries of hypocrisy, but the ambivalent situation in Europe, whereby politics and trade have not been practiced in unison, has not changed to date.
One of the major non-EU destinations for Belarusian refined oil products is Ukraine. During the second quarter of 2012, Belarus increased its export of diesel fuel to its southern neighbor. While diesel fuel accounts for 61.6 percent of Belarus’s fuel export to Ukraine, one-half of the exported diesel fuel is biodiesel. Belarus is currently selling to Ukraine more than 150,000 tons of biodiesel fuel per month. The export of this category of fuel beyond the Customs Union (of Russia, Belarus, and Kazakhstan) is not subject to export duties. But this arrangement has concerned Ukrainian authorities, who worry that the increase in Belarusian tariff-free biodiesel imports will present unfair competition for the domestic Ukrainian fuel sector. Ukrainian producers face higher production costs and may wish to maintain a higher profit margin than is possible with Belarus’s cheaper product saturating the domestic market (http://naviny.by/rubrics/economic/2012/08/29/ic_articles_113_179008/). Nevertheless, by expanding its trade relationship with Ukraine, Belarus has been able to not only boost exports but also to minimize export-related payments to the Russian treasury. 
Overall, from January to July 2012, Belarusian exports exceeded imports by $3.96 billion whereas during the same period of 2011 imports exceeded exports by $1.6 billion (http://belstat.gov.by/homep/ru/indicators/doclad/2012_8/09.pdf). This reversal is notable because Belarus’s trade deficit was the most important reason behind the country’s 2011 financial crisis.
A more long-term positive economic story in Belarus has been that of privatization. However slowly and inconsistently, Belarus continues to implement its privatization program. Until recently, no more than 25 percent of Belarus’s GDP was produced in the private sector. But in July 2011, a Belgazeta interview with Georgy Kouznetsov, Chairman of the State Committee on Property, created controversy. According to Kouznetsov, it was not Belarus’s government that has been inhibiting privatization but the state enterprises’ bosses and their personnel, frightened by the prospect of losing jobs as a result of a takeover by a private owner (http://www.belgazeta.by/ru/2011_07_25/sobytiya_otsenki/23093/).
The halting privatization process cannot be so neatly blamed entirely on the state enterprise owners, however. In the spring of 2011, the government issued a program according to which 240 enterprises were to be privatized until the end of 2013. Throughout 2011, however, only 36 large industrial production units were sold, mostly to foreigners. The plans for 2012 envisaged selling 133 enterprises, but by July 2012 only 7 had been sold. There are several factors impeding the process. First, the government has been trying to sell companies with very low profit margins and those producing at a loss. Second, the state wants each prospective investor/owner to commit to modernization of the enterprise and yet to refrain from laying off its personnel. Third, the selling price of an existing enterprise in Belarus is calculated based on the replacement method. In other words, the proposed company price equals the full construction costs of a new production unit with the same specialization and production capacity. The investors, however, are actually interested in buying existing firms that are, in fact, cheaper than their would-be replacements. Last but not least, there are conflicting messages about the initial steps of the privatization procedure. For quite some time, the government announced the list of production units subject to sale. But in the spring of 2012, President Alyaksandr Lukashenka ordered an end to this practice in order keep the workers of these state enterprises calm. Rather, the government should wait for offers from the interested investors (http://naviny.by/rubrics/economic/2012/07/19/ic_articles_113_178522/).  
Nevertheless, the state has continued to initiate privatization. For example, during the summer of 2012, four large wood processing enterprises went on sale. In August, prospective investors were offered a controlling block of shares of an enterprise that specializes in enforced concrete installation. While the selling price was only $1.6 million, the sale offer included three conditions that the investor is expected to honor. First, the investor must issue a one-percent, five-year $1 million loan to the management team. Second, the investor has to retain the specialization of the enterprise and its personnel throughout five years. Third, the investor needs to ensure the export of construction services worth no less than $50 million a year. Because the overall export of construction services from Belarus amounted in 2011 to $195 million, the aforementioned enterprise alone would be responsible for one-quarter of that total. Such strings attached to a sale offer may further explain the slow pace of privatization in Belarus. Yet one needs to understand that the underlying obstacle has to do not so much with somebody’s ill will as with pervasive conservatism of the Belarusian society. In light of the ongoing reappraisal of state capitalism in the wake of the international financial crisis (www.economist.com/node/21543160), this conservatism may be far from unhealthy. Still, privatization is progressing, however slowly but surely. One more sign of that is the pending choice of the state privatization program’s external financial consultant. Three companies are now competing for that role—US financial firm Ernst & Young FLLC, UNITER Investment Company CJSC of Belarus, and the Lithuanian-based Quantum Capital UAB. The choice is expected to be made before the end of this year (http://naviny.by/rubrics/economic/2012/09/13/ic_articles_113_179185/). 
Despite sanctions and cold relations with Brussels, as well as threats from Moscow, Minsk has been remarkably successful in reversing the economic difficulties Belarus faced since 2010. By regaining a net trade surplus and continuing to cautiously move forward with privatization, the government has ensured a healthy economic climate and domestic stability on which the Lukashenka regime rests.