Belarusbank: Local hero to turn national champion

Graham Stack for business new europe

Belarusbank, the country’s state-owned no 1 commercial bank, sticks out like a steady rock amid the global storm. Deputy chairman Vladimir Novik tells bne how Belarusbank is flourishing despite the international crisis and increasing domestic competition.

The Belarus banking sector has attracted recent attention mostly due to high profile acquisitions by European institutions – with Austria’s Raiffeisen taking a controlling stake in Priorbank, and Germany’s Commerzbank looking set to buy Belinvestbank. But Vladimir Novik, deputy chairman of 100% state-owned Belarusbank, says he has no apprehensions about such competition. Belarusbank was, is and will remain Belarus’ biggest commercial bank.

“In 2007-2008, Belarusbank continued to hold leading positions in all spheres of the national banking system: The bank now accounts for 40% of the total assets of Belarusian banks, and holds 60% of total national private deposits,” he points out.

“The bank also accounts for 40% of loans to corporate clients and about 60% of retail business in Belarus. So as you can see,” says Novik, “the bank’s share of all basic banking activities is extremely high.”

Lender of first resort

Before the recent retail lending boom sweeping the region, Belarusbank’s main role was funding the industrial giants that powered the ‘Belarusian economic miracle’: GDP growth around 10% since 2003. 58% of its loan book still goes to corporate customers.

“The most impressive part, around 40%, of our clients belong to the oil and chemical industries,” says Novik. “We also deal with transport, mining, machine-building, telecommunications, pharmaceuticals, and food processing.”

Novik reels off a list of Belarusian household names, and potential future blue chips, who are its major clients. The list includes Belarusian Railway, Mozyr Oil Refinery, Belaruskali (potash mining and refining), Minsk Tractor Plant, Belshina (tire manufacturing), MAZ (heavy trucks), Polymir (chemical production), Belpochta (mail services), Beltelecom and Skidel and Gorodeya Sugar Refineries.

“Our top 50 corporate clients account for approximately 80% of our total resources from corporates. Most of them have annual sales of more than USD 1 billion,” he says.

Regarding retail, Belarus Bank originates from the Soviet savings bank system, and thus “inherited a solid clientele and a vast network of branches,” says Novik.

This network, he argues, gives the banks a huge advantage when it comes to attracting deposits.

“Alone since 31 December 2007 through 30 June 2008 retail deposits grew 16% to USD 3.6 bn. The bank is by far the largest retail operator in the country with roughly 60% of private client deposits.”

Ironically, this infrastructure inheritance from Soviet times has also helped the bank fund the retail credit and consunption boom of recent years.

Belarusbank now has more than 950,000 retail borrowers, and provides about two-third of all retail loans on the market. Retail loans grew by 47% in 2007 and 42% in 2006.

“Consumer loans are now the second largest product after housing loans in the retail portfolio with a 25.6% share. House purchase loans and car loans account for just above 14% each,” Novik says.

Rock steady amid the global storm

For the last three years the bank’s assets more than doubled: from $3,631m in 2005 to $9,807m in the first half of 2008. In June 2008, the share capital amounted to $770m. The bank boasts a capital adequacy ratio of 16.90% against a statutory minimum of 8%. Non-performing loans comprise a mere 0.78% of the total loans.

Customer deposits (corporate and individual) account for 79% of total funding. Funds of National Bank and other banks comprise 18%, while debt financing only comprises 3% of funds.

So while diversification of funding for banks across eastern Europe means increasing the share of deposits, for Belarusbank it means the opposite.

“Belarusbank’s lending still depends mainly on deposits attracted from the customers, but we are trying to diversify our funding structure to lower potential liquidity risks,” says Novik.

With Belarusbank funds comprising 41% of all national banking funds, it is no surprise that the cost of international financing is cheaper than for other Belarus borrowers.

In September 2007 the Bank attracted the largest syndicated loan, of $105m, ever issued to a Belarusian borrower.

“And we also had a Eurobond issue planned, but current market turmoil prevents us from accessing the international bonds market. We will make an attempt to issue Eurobonds next year,” says Novik.

Incredible as it may sound, given current global financial mayhem, “in spite of the current financial crisis and lack of liquidity we are quite optimistic about a possible IPO.”

However, underscoring what a pioneering move this would be in Belarus, Novik says it is not just international market conditions, but also the need for domestic legislative amendments that are the main current hitch.

“Currently we have draft proposals of potential IPO arrangers from the leading financial institutions of the world,” Novik adds. “Belarusbank analysts are researching the market in order to identify windows of opportunity for an IPO. The bank will finish all pre-IPO formalities in 2009-2010 – but the final decision will, indeed, depend on the health of the market.”

Belarus Investment Agency to attract foreign investors

Graham Stack for business new europe (www.businessneweurope.eu)

The offices of the Belarus Investment Agency are small and on the outskirts of the Minsk, and a role call of 7 staff points to its embryonic status – but according to its head Oleg Zinoviev, it has a big future ahead of it.

And the first step will be its promotion to ministerial status and direct subordination to the prime minister as of January 2009.

“This status will allow us to become a fully-fledged single window for foreign investor, with powers to resolve any issues arising between foreign investors and government authorities where at national or local level,” says Zinoviev.

“Alone the fact that we will be awarded such a status and answer directly to the prime minister is testimony to the importance the government now places on attracting foreign direct investment.”

According to Zinoviev, the Belarus Investment Agency is modeled on ISPAT, the famous Investment Support and Promotion Agency of Turkey, likewise directly subordinated to the Turkish prime minister.

And if the offices are still modest, it is compensated for by a hectic itinerary through Europe and the former Soviet Union establishing contacts and putting the Belarus investment case.

Opening gambit

For many years Belarus and foreign investments entertained a mutual aversion. However, as of last year, all this has changed. In connection with Russia demanding a gradual shift to European gas prices, and also stopping duty-free oil exports to Belarus refineries, the risk of Belarus running a current account deficit suddenly emerged.

And in addition, rocketing domestic growth was outgrowing domestic, as well as new technologies and managerial capacities, to move on to the next level.

Zinoviev emphasizes the latter. “It is foreign technologies we need, and above all foreign managerial technologies. Too many of our directors still cling to the old ways.”

Zinoviev denies Belarus had ever been actively anti-FDI.

“Everyone knows we had a course aimed at primarily harnessing our internal resources, but there was never any different treatment for foreign investors than for domestic investors. And there isn’t now.”

The only really preferential treatment for foreign investors, he says, is a guarantee that existing regulations will continue to apply for five years to the investors.

FDI growing

It is undeniable that the volume of foreign investment is growing rapidly, albeit from a very low base.

FDI totaled $1.23bn in the first six months of 2008, approximately the same amount as for all 2007. FDI increased from 1.8bn dollars in 2005 to almost 4bn in 2006 and to 5.4bn in 2007, with 7bn dollars expected for this year. However, this sum is only 3.5% of fixed capital investment.

Russia accounts for 33.2% of all foreign investment, Switzerland for 20.2 %, the UK for 14.2% and Austria for 10.7%.

Zinoviev reels off happily what should make Belarus attractive for foreign investors.

Firstly, he says, Belarus combines rapid economic growth, averaging over 8% in recent years, with a high level of political stability and significantly lower corruption than in Ukraine or Russia. So investors can count on both profitability and sustainability of investment.

Secondly, Belarus geographical position at the watershed between the Black and the Baltic Seas and between Russian and Western Europe, and its cluster of road and railway connections, make it a strategic location for investors.

Thirdly, Belarus, which had one of the highest living standards in the USSR, with considerable investment in electronic and light industry made in the 1980s, has a plethora of technical universities and research institutes.

It is Zinoviev’s job to match up investment opportunities in Belarus with potental investors abroad, and to this effect a good deal of the time he is traveling.

The Belarus Investment Agency is tasked with turnkey provision of investment projects, from drawing up investment proposals and finding an investor to facilitating all bureaucratic and infrastructural measures in Belarus on behalf of the investor.

Zinoviev and his colleagues say their work was recently made a whole lot easier by the publication of the World Bank’s ‘Ease of Doing Business’ survey.

Belarus officials had been actively collaborating with World Bank staff to implement measures to boost Belarus’ lowly ranking. Those efforts paid off – with Belarus leaping from place 110 in the world ranking to place 85, leapfrogging Russia and Ukraine, the fourth highest climber of the year.

One point that World Bank officials says Belarus still has to work on is tax legislation.

“It is by far the most complicated I have ever seen, with 42 taxes meaning that huge administrative efforts are needed for compliance,” agrees Helmut Duhs, CEO of Telekom Austria-owned Velcom, Belarus’ second largest mobile operator told bne. “And it’s not just the number of taxes: taken together, Belarus has the highest tax rates in region,” he added.

However Zinoviev points out that the tax burden is being decreased from year to year, and many ‘taxes’ are in fact merely local dues. “It’s not much different from what you find anywhere else,” he argues.

The ‘Ease of Doing Business Ranking’ World Bank ranking serves Belarus as a target – with the goal being to enter the top 25 in the within the next three years. And the president’s office has set government officials targets for attracting FDI.

Opposition figures decry President Aleksandr Lukashenko’s swerve towards foreign investment as mere opportunism and unlikely to last. Zinoviev, however, points out that all the main normative acts improving the investment climate come direct from the president’s office.

“These are not government resolutions or local administrative acts,” says Zinoviev. “They are presidential decrees. So they won’t change. All the main decisions to open up for foreign investors have been presidential decisions, signed by the president. This is simply the strategic course he has chosen.”

Belgazprombank: A bank for Belarus’ budding private sector

Graham Stack for business new europe
Interview with Sergei Shaban, deputy chairman of Belgazprombank

Q: How did it come about that Belgazprombank – whose two main shareholders are Russian state-owned giants Gazprombank (48.1%) and Gazprom (48.1%) – has its main focus on private small and midsize enterprises?

A: The Bank was founded in 1990 under another name and bought by Gazprom in 1997. But in those seven years, we had decided on this strategy of targeting small and medium enterprises. When Gazprom acquired us, it set Belgazprombank the task of handling gas payments beween Belarus and Russia. But we made sure we retained the SME business line. In two years, we had unraveled the gas payments, and settled the indebtedness of the Belarusian structures to Gazprom, and were finished with the main task. Then we focused again on our work with SMEs”

Q: So what does your loan book look like?

A: 99% of our credits go to private business. We have a 10-25% market share of SMEs in Belarus, and two thirds of the market for microcredits from $1000-10,000, where we have a partnership with the European Bank for Reconstruction and Development (EBRD). And in retail, 30% of the car loan market, which is 52% of our retail loans.

We credit businesses across all sectors. Import operations for retail, however, are declining in significance. Our client basis has outgrown that stage, which makes us very happy. Only 23% of our loan portfolio goes to trade now, with 18% going to construction and real estate, and 14% to manufacturing. 42% goes to private individuals. We are proud to have credited construction of the first modern logistic centres in Belarus, and the Vitebsk Condensed Gas Plant.

Q: Is the SME segment not very restricted in Belarus, where government policy has traditionally focused on state-owned large industry?

It is true that small and medium business is still only a niche in Belarus, but, thanks to the new investment climate created by the government, we expect it to grow very rapidly.

We’re very happy about government reforms, especially the state programme for support of small and medium sized towns with less than 50,000. They have created a whole series of special conditions ranging from tax rebates to lifting price controls. Food producers have a big future here.

But we’re also proud to have financed larger projects such as Belarus’ first state of the art logistics centre and the Vitebsk Plant for Condensed Gas.

Q: How does it help to have such powerful backers as Gazprombank and Gazprom?

A: It of course makes a fundamental difference, especially in times of financial crisis. Gazprombank and Gazprom took the decision in April this year to increase shareholders’ equity from $45m to $195m over two years. After disbursal of the first tranche, shareholders’ equity has risen to $120m, making Belgazprombank third largest in the country in terms of shareholder equity. As a result of this expansion, Belgazprombank can now issue credits of up to $30m.

Q: Is there demand for such credits?

A: No, there’s no demand for $30m credits. Not yet anyway. The previous maximum credit we could give was $10m, so our customer base is oriented towards that size of crediting – around $5-7m. Now we have three times the potential, we still have to create a new client base to match the new possibilities.

Of course, such clients will not be from import operations, but from construction and production – such as financing the Vitebsk Plant for Condensed Gas. And there are a lot of large real estate projects.

Q: How will privatization affect your client base?

A: The largest Belarus companies are going to stay under state control for the foreseeable future. But midsize companies will more and more shift to private hands. And this creates chances for us.

By the way, the start of the privatization drive was marked by Gazprom’s purchase of Belarusian pipeline operator Belgaztrans, another of our shareholders. When this deal was completed, and nothing terrible happened, the state realized it had nothing to fear from privatization”

Q: Does Russia use the gas price issue to persuade Belarus to open its economy to investors?

A: Yes of course, it is definitely a lever of influence. I believe Russia has understood that it is more effective to use economic levers than political ones. If Russia raises prices gradually, giving Belarus the chance to adapt economically while becoming more open to Russian investment, then it is profitable for both sides.

Belarus turns to IMF for loan, as current account deficit grows

Graham Stack for business new europe (www.businessneweurope.eu)

For all its image as ’safe haven’ and its low level of international integration, Belarus became the latest East European country to turn to the International Monetary Fund (IMF) for a loan last week, as its current account deficit widens. But deputy chairman of the National Bank of Belarus Yury Alymov told bne that the banking sector is still stable.

Belarus appealed on Thursday October 24 to the IMF for a $2bn loan to stabilise the country’s economy in the face of the global financial crisis. This makes Belarus the third East European country following Ukraine and Hungary to turn to the IMF in October. Belarus is also negotiating a $2bn loan from Russia.

«It is small wonder that Belarus has asked for an IMF loan. The global financial turmoil has caused cash deficiency, and our trade partners have delayed payments for our services and products” NBB Spokesman Anatoly Drozdov told Prime-Tass October 24.

But most analysts agree the problem goes a lot deeper than merely delays in payment. Instead, Belarus is facing a widening trade deficit. Hard currency revenues are plummeting along with global commodity prices, while domestic demand for imports is still driven by the peak in commodity prices earlier in the year.

Add to this the fact that Belarus was already struggling to deal with successive price hikes for Russian gas in 2007 and 2008.

Commenting to bne before last week’s application for an IMF loan, the deputy chairman of the National Bank of Belarus, Alymov explained that the 2007 hike in the gas price caused the current account deficit to reach -6.6%, but that the economy had quickly adjusted to the new price. In the first half 2008, despite a second 20% gas price hike at the start of the year, the current account deficit in fact dropped to -5.5%.

But already in the third quarter of 2008, as the value of commodity exports dropped precipitously, the deficit doubled again to reach $1bn. Foreign currency reserves fell by $459.7m in September alone, to reach $4.12bn as of October 1.

With NBB reserves falling, and FDI likely to slow rather than accelerate as washoped, the situation is becoming critical. And adding insult to injury, Belarus does not stand to benefit from falling oil prices, since it already receives subsidised oil and gas from Russia. Instead it is faced with another substantial gas price hike come the new year.

Peaking commodity prices skewer capital accounts

Belarus has been caught out by the same double whammy as Russia and Ukraine.

With the start of the financial crisis in 2007, money moved out of securities into commodities, causing prices for everything from wheat to oil and gold to soar all round the world. According to the Minsk Institute of Privatisation and Management, in 2007, the value of Belarus exports increased by 20%, almost entirely due to rising commodity prices. Belarus is a major exporter of fertilisers, especially potash, and of refined oil products.

But as the global financial crisis developed, the record-breaking commodity prices proved shortlived. As speculators started to get nervous about a looming global slowdown, they moved out of commodities – into dollars. And commodity prices dropped like a stone- exemplified by the world oil price halving over five months.

This lurch is now putting pressure on the currencies of commodity exporters, as their trade deficits widen.

Crucially, as Renasisance Capital analyst Elena Shapirova has argued for commodity exporting countries, there is a time lag between the impact of a price drop on export revenues, and its impact on domestic demand for imports. While hard currency receipts drop with commodity prices, domestic demand for imported consumer goods is staying high, as last year’s windfall still works its way through the economy.

And now this time lag is causing the trade balance of commodity exporter countries like Belarus, Ukraine and Russia to do the splits, causing exchange rates to wobble, – and the IMF to arrive in town.

Banks still standing

However, while the growing trade deficit is looking ominous, Belarus’ banks are still holding up better than in Russia and Ukraine. But NBB’s Alymov does not deny that the global crisis could still hurt the domestic banking sector.

«Over the last few years, Belarus banks have constantly increased their level of borrowing from non-residents,» explains Alymov. «At the same time, their level of lending in foreign currency has accelerated, mostly using funds borrowed from non-residents. Funds borrowed from non-residents, are, however, to a very large extent short-term.»

This means, according to Alymov, that «a potential threat … posed by the global financial crisis could be difficulties for Belarus banks in borrowing on international financial markets and problems connected with foreign currency liquidity.»

Alymov, however, also points out that increased international borrowing by Belarus banks has been accompanied by increased involvement of foreign banks in the sector.

«The arrival of new foreign investors can compensate decreased borrowing opportunities on foreign markets through growth in equity and capital and also make it easier to attract foreign loans.»

«In addition,» says Alymov, «it’s important to note that in the case of difficulties, banks belonging to large western financial concerns can count on effective support from their foreign shareholders.»

However, the theory that banks with strong foreign parents are safer than local banks is increasingly being questioned. This week throughout Eastern Europe there were reports that foreign banks, facing problems at home, are restricting lending to their local subsidaries – thus exporting the financial crisis by the back door.

Alymov refused to comment on rumours that Germany’s Commerzbank, which in the summer seemed on the verge of acquiring 100% in Belinvestbank, Belarus’ fourth largest, is backing out of the deal.

He did say unsurprisingly that the planned London IPO for the country’s largest bank, state-owned Belarusbank, had now been postponed due to the «unpleasant market situation.»

But as a silver lining, Alymov sees opportunities beckoning for Belarusbank to develop as a ‘national champion’ by expanding internationally through acquisitions. «We believe that such a large banking institution as Belarusbank, uniting 38.8% of the country’s banking assets and 28.8% of capital, is perfectly capable of expanding onto global financial markets through acquiring subsidiaries in countries to which we are closely linked by trade and economic ties.»

Belarus stock exchange is finally in the starting blocks

Graham Stack for business new europe (www.businessneweurope.eu)

Belarus is staying true to its tradition of bucking trends. In the 1990s, Belarus stuck to state ownership and dirigism, while its neighbours embraced privatization and the free market. And in 2008, with the world’s stock markets in freefall, Belarus is about to finally launch its stock market, and expects share prices to soar when trading takes off.

“Stock market participants here are like sprinters waiting on their starting blocks,” says Valery Kalazhenko, deputy head of the Belarus Ministry of Finance’s Securities Department, responsible for regulating the stock market. “Everything is ready and in place, all they are waiting for is the starting gun.”

An equity market has been a long time in coming in Belarus. The Belarus Currency and Securities Exchange (BSCE) is 16 years old, but in 2007 share trading comprised a miniscule 0.7% of trading volume, with the lion’s share trading in state securities. And yet, says Kalazhenko, there are formally over 3,000 public companies in Belarus as a result of the mass privatisation launched in 1992.

But that privatization effort was mothballed just as it began to roll. The state imposed a moratorium on the selling of shares obtained by the public for their privatization cheques. And following a backlash against market reforms symbolised by Alexander Lukashenko’s rise to power in 1994, the state introduced a “golden share” rule for privatized companies, giving it the right to intervene in company management in a wide range of scenarios. As a result of these two measures, says Kalazhenko, “although all the necessary infrastructure for the stock market has been created, there has until now been nothing to trade.”

This all changed in 2008. On January 23, the government passed a programme on “Development of the Equity Market 2008-2011,” envisaging the emergence of a fully-fledged stock exchange. Implementation of the programme started almost immediately, says Kalazhenko, with a presidential decree in February abolishing the state’s golden shares, which he calls “a revolutionary step.”

The government followed up by slashing capital gains tax from a prohibitive 42% to a profit tax level of 24%, and then with the abolition of the moratorium on alienation of shares held by the population as of June 1. “These measures will ensure development of a Belarusian stock market,” claims Sergei Tinnikov, deputy head of the BCSE. “All that is required is for them to be fully implemented.”

False start

Instead of a big bang, however, the June date proved to be a false start. Similar to the hesitant steps it is making toward some democratization, the Lukashenko administration, while liberalizing the economy, is also intending to keep control of its “commanding heights.” As a result, a list is still being drawn up of around 150 strategic companies that will be excluded from exchange trading, at least in the initial phases. And until the list appears, the moratorium remains in effect. “We’re all waiting for this list to appear,” says Tinnikov. “Only when it does, will the market will take off.”

However, even when the list does appear, it will only mark the start of phasing out the moratorium over three stages. Firstly, this year the moratorium will only be lifted on companies where there is either no state stake, or the state owns over 75%. Then in 2009, shares will be admitted to trading for companies where the state owns over 50%. Only in 2011 will the shares of companies where the state is only a minority shareholder start to trade. “This is to allow our colleagues in the State Property Fund time to optimize the state holdings,” explains Kalazhenko, indicating the state is likely to increase its stake to a majority one in companies it wishes to retain control over.

Added to this is the fact that key Belarusian companies such as petrochemical giant Belneftekhim and potash giant Belaruskali, accounting together for around 40% of budget revenues, are state unitary companies yet to be corporatised. “But there remain a huge number of companies where the state is already a majority shareholder,” says Tinnikov, “and these will be free for trading very shortly.”

In fact, according to Tinnikov, while potential blue chips remain in state hands, too many run-of-the-mill companies will list on the exchange, many of them of little interest to investors. This is partly a legacy of the mass privatization in the 1990s. It is also due to the government’s decision in the interest of transparency to close the over-the-counter (OTC) market. As of June, all share trading must take place via the exchange. “We don’t need 1000 companies, we only need 100 good companies that are interesting for investors,” Tinnikov says. “We are not very happy about the decision to end OTC trading, since it means we will have far too many companies on the exchange.”

Not only will there be a huge number of companies, but also a huge number of shareholders. According to Kalazhenko, a legacy of the 1990s mass privatization is that there are around 1.5m shareholders in Belarus, out of a population of just 10m. “Our stockbrokers are currently occupied fulltime with entering shareholder data into their systems,” says Tinnikov.

The government is thus not only concerned with retaining control over strategic companies, but is also intent on avoiding a rerun of the chaotic Russian mass privatization of the 1990s that saw companies bought for pennies. Banning OTC trading is intended to stop the workers selling company shares too cheaply, especially to company management, says Kalazhenko.

Another problem is that over the last decade and a half, many shareholders have forgotten they have shares deposited at the central depository. Former workers may have died without their heirs knowing about their shares, and many Belarusians have emigrated. “Companies may find it difficult to get a quorum for their shareholders’ meetings,” says Kalazhenko.

In addition, with such an overhang of shares, Kalazhenko and Tinnikov are concerned lest punters divest their shares too quickly and too cheaply in the initial phase, before the market has formed realistic prices. “We say – wait, don’t be in any rush to sell. Prices will rise,” says Tinnikov. “But many people will think ‘a bird in the hand is worth two in the bush,’ and sell their shares straight off for easy money. In general, people here have no experience with the share market, and do not regard shares as a form of investment that will grow in value over the long term.”

Bluish chips

Most analysts say that share prices will be way undervalued at the start and are set to soar initially. With the Belarusian economy powering ahead at 8-10% growth per year, and seemingly immune to the global financial crisis so far, most companies are profitable.

However, with around 1.5m small shareholders looking to sell, it is still not very clear who is going to be buying. “We have very few structures that are potential investors,” admits Tinnikov. “Banks and insurance companies are not allowed to work on the stock market because of the risks, and the population is used to keeping money in the banks. And, most significantly, in Belarus there is still simply no such thing as a collective investor, although legislation is being considered.”

Tinnikov also expects Belarusian private capital to buy heavily into public companies. “Belarusian oligarchs will emerge – this is simply how business develops, capital concentrates. Up to now, the state has held this development back, but, as we say in Russian, ‘money goes to where money is’.”

Management ownership is also a possibility – but, as Kalazhenko emphasizes, management can buy shares in “their” companies only via the exchange and after six months notice to ensure transparency. Far from welcoming the development, Tinnikov says Belarusian factory directors are often disconcerted by the process. “Factory directors have little experience in dealing with minorities, and they are worried about what will happen with such a wide dispersion of shareholders. If large groups compete for control of the company, will they change management?”

Moreover, state companies still get cheap credits from state banks, meaning the stock market does not figure in their plans for raising finance. “But,” says Tinnikov, “the state will stop or restrict cheap credits, and then the only option is to IPO, change communication with shareholders, do everything that is completely natural in the West, and even in Russia.”

Tinnikov is expecting foreign investors to arrive. “Russians, Ukrainians, our neighbours, will buy stakes in companies they know because they work with them.” Kalazhenko emphasizes that foreign investors are also perfectly free to trade on the exchange. “The system is totally open for non-residents. You just need to open an account in the depository, and buy shares and bonds. There’s no need for approval, except when buying banks. There are only questions of tax and currency to handle, and there is very good earning potential.”

Neither Tinnikov nor Kalazhenko believe that the Belarus stock market is going to be a major regional player in the near future. But they believe it will be interesting for foreign investors as a safe haven as Russia and Ukraine nosedive. “In five years time, it won’t not a large market here, even compared to Ukraine, but there we should reach $2bn-3bn annual turnover.” says Tinnikov. “There will be 20-30 companies with good trading volume. Not fully blue chips, but certainly somewhat blueish.”

Belarus’ stage-managed democracy fails its test from the West

Graham Stack in Minsk for business new europe (www.businessneweurope.eu)

Belarus President Alexander Lukashenko has recently been trumpeting his desire to hold ‘unprecedently fair and open’ parliamentary elections as part of a thaw in relations with the West. Underlining his intentions, he demonstratively provided a warm welcome to a contingent of 450 observers from the Organisation for Security and Cooperation in Europe (OSCE).

He also promised major improvements to the electoral process in a country widely billed as ‘Europe’s last dictatorship’. But today, Monday September 29, revealed the limits of ’stage-managed’ democracy. The OSCE observers refused to play their scripted role – and declined to recognize the elections as free and fair.

In contrast to Russia’s ‘managed democracy’ where only a handful of Western election observers were invited to elections in 2007, Belarus’s ’stage-managed democracy’ actively welcomed a large OSCE contingent, a fact that Anne-Marie Lizin, Vice President of the OSCE Parliamentary Assembly and special coordinator of the OSCE short-term observers, warmly praised in a Minsk press conference discussing the OSCE mission’s findings September 29.

However, despite opposition fears, the OSCE observers did not allow themselves to deceived by appearances, and refused to find the elections democratic.

“The clear signals to improve the election process were not implemented and substantial improvements are required if Belarus is to conduct genuinely democratic elections,” said Lizin, adding that the elections “fell short” of democratic standards.

The OSCE’s findings will be a setback for Lukashenko who has staked a lot of personal credibility on securing Western recognition for the parliamentary elections.

Lukashenko declared last week that if the West failed to recognize the elections as democratic, he would break off the nascent thaw in relations.

The OSCE observers criticized specifically the lack of transparency in vote counting. In 48% of polling stations, the transparency of counting was assessed as bad or very bad. In 35% of cases, OSCE observers were prevented or hindered from observing the count.

The OSCE was broadly critical of most aspects of the elections, saying in a statement that “the legislative framework continues to present obstacles for elections in line with OSCE commitments. The media coverage of the campaign did not provide meaningful information for voters to be able to make an informed choice. Political parties played a minor role and restrictions imposed by the state authorities did not allow for a vibrant campaign with real competition.”

OSCE representative Geert Ahrens however expressed optimism that the originally expressed intentions on the parts of the Belarus authorities to hold fully democratic elections, while not properly implemented, still provided the basis for ongoing dialogue and for improving relations with Europe.

“We would only be too happy to come up with a positive report,” said Ahrens, who still spoke of a ‘wind of change’ in Belarus. Lizin also said it was possible that the good intentions expressed by the country’s leadership had simply not be adequately communicated down the line.

But for all the diplomatic phrases, OSCE’s refusal to recognize the elections as democratic is a blow to authoritarian President Alexander Lukashenko, who likes to be seen as in control of everything.

The OSCE formula that Belarus has shown enough good intentions and made sufficient minor improvements for dialogue to continue could be face-saving on both sides.

However, putting all the diplomatese into perspective, Lizin, when asked to compare Belarus elections with Russia’s ‘managed democracy’ parliamentary elections of 2007, where she had been an observer in Vladivostok, stated unequivocally that the Russian poll had been much more democratic.

Opposition also lose

The elections were not only disappointing for Lukashenko, but also for his opponents. No democratic candidates managed to win their constituencies in Belarus’ first past the vote system where party allegiance plays virtually no role.

This constituted a major surprise. It was widely anticipated that the authorities would actively ensure the election of a number of opposition candidates to the parliament. Lists of opposition candidates supposedly prescripted for election victories were circulating on the Internet on the eve of elections.

However, when late in the night head of the Central Election Commission Lidia Yermoshina announced the voting results in 100 out of 110 electoral districts, not a single opposition candidate had won in his or her constituency. The opposition alliance United Democratic Forces fielded 70 candidates out of a total of 264 competing for the 110 seats.

Opposition figures attributed their failure to enter parliament to lack of access to media and electoral manipulation.

In addition to the non-transparency of vote counting referred to by the OSCE, opposition figures pointed to the prevalence of early voting, which reached up to 92% in voting wards largely populated by students.

Alla Salivonchik, 42, the head of a student dorm, told bne how she checked off the names of the students who had been to vote, “a relict from Soviet times” she said.

Opposition figures argue that, during early voting, sealed urns were not protected at night against simple substitution. In comments to bne on the day of voting, Jens Eschenbacher, member of the OSCE election observation team, confirmed to bne that the high level of early voting was a “Belarus peculiarity” and the overwhelming majority of election observers arrived too late to monitor the early voting adequately.

However, the final OSCE report had little to say on the prevalence of early voting.

“International observers just don’t grasp that it’s possible to substitute entire urns of votes,” Sergei Kolyakin, leader of the Belarus Communist party said at a press conference on election day. “They can’t get their mind around the idea. It’s not European.”

Kolyakin and Vladimir Nistyuk, both opposition candidates running for Minsk constituencies, also alleged that a major goal of electoral manipulation was to ensure the minimum turnout of 50% in Minsk, where voting activity on election day seemed very low frequency.

The final turnout countrywide was 75% according to the Central Election Committee,

Most people questioned by bne on the streets of Minsk confirmed that they had already or intended to vote.

Their almost unanimous complaint, however, was about the lack of information on candidates. Most voters talking to bne said they only learnt in the polling station which candidates were running in their constituency. They made their decision on the basis of the scarce information provided about the candidates on the premises of the polling station itself.

“We chose the youngest candidate, because the country’s future is in the hands of the young. Older people will simply sit in the parliament and do nothing,” said Anna, 54 and Anatolia, 57, now pensioners, formerly engineer and doctor respectively. Like most Minsk inhabitants interviewed on the strets, they declined to provide a surname. The 30 year old candidate they chose was in fact a communist.

“I chose the candidate on the basis of from a big rather than a small town, and high level of education,” said a 19 year old student who declined to give her name.

Lena, a 30 year old university lecturer said she did not yet know who she would vote for, but she would choose an opposition candidate if there was one running in her constituency. Otherwise she would go by level of education. She declined to give a surname in case she lost her job.

Alla Salivonchik, 42, and Elena Panuryna, 44, both said that she had voted for factory directors, as people who had achieved something and were not interested in power in and for itself.

Asked about their attitude to Lukashenko, passers by either declined to answer or said there was no current alternative. Only Sergei, a 21 year old student who wasn’t intending to vote, said that he was against the president.

Protestors allowed on the streets

While failing the electoral test, stage-managed democracy’s one real masterstroke yesterday was to allow opposition forces to take to the streets without any accompanying police presence.

This contrasted sharply with the harsh treatment meted out by Russian riot police to  similar unauthorised rallies last year, which was broadcast round the world.

Following the end of polling, 1000-1500 opposition supporters, mostly young, assembled outside the headquarters of the Central Electoral Committee on Minsk’s October Square for an unapproved demonstration together with opposition leaders Alexander Kozulin and Alexander Milinkevich and a large foreign press contingent.

Among the crowd were an Orange-style youth group called Young Guard who pitched symbolic tents on the square, reminiscent of the tent cities of Ukraine’s Orange Revolution in 2004. Young Guard chanted for an end to the Lukashenko regime.

Young Guard members however refused to comments on ties to organization in the Ukraine.

With no police presence anywhere to be seen, the Young Guard lit flares, hoisted flags and led the rally on an colourful unapproved march down Minsk’s main street, Independence Prospect, even pausing provocatively in front of the feared KGB headquarters. They then proceeded to the Government building on Lenin Square, where they called for the release of a number of political prisoners.

With still no single policeman in sight, the demonstrators marched back up to October square where they were addressed by Kozulin, who asked them to disperse peacefully.

In comments made to bne during the demonstration, Kozulin, recently released from jail, expressed fears that the West could lower its demands of Belarus regarding human rights and democracy in exchange for Belarus moving away from its close alliance with Russia.

“The danger exists, especially after the Georgian conflict. Lukashenko knows to exploit it,” he said.

Belarus’ stage-managed democracy still to lack opposition

Graham Stack for business new europe

Despite numerous declarations by President Alexander Lukashenko in advance that the parliamentary elections held yesterday September 29 would be democratic, not a single Belarusian opposition candidate was elected to the Belarusian House of Representatives.

During an opposition demonstration after end of polling, opposition leader Alexander Kozulin, only recently released from prison, said it was already clear that leading opposition candidates were trailing in their constituencies.

This was despite the fact it was widely anticipated that the Lukashenko administration would allow a number of opposition candidates to be elected to improve the country’s standing in the West.

Kozulin’s fears were later confirmed when head of the Central Election Commission Lidia Yermoshina announced the voting results in 100 out of 110 electoral districts. Not a single opposition candidate had won in his or her constituency.

Belarus operates a first past the post electoral system without party lists. Many voters questioned by bne on the streets complained about the lack of information about the candidates provided. Most voters seem to have decided on the premises of the polling station for whom to vote, basing their decision on age, education and experience of the candidates, as detailed briefly in the electoral information provided at the polling station.

In addition to the lack of information, opposition figures pointed to the very high level of early voting as providing opportunity for falsification of the elections by simply substituting sealed urns.

Belarus had demonstratively extended a warm welcome to international election observers, including a large contingent from the Organisation for Security and Cooperation in Europe (OSCE).

The ’stage-managed’ democracy approach differed strongly from Russia’s ‘managed democracy’ where the number of Western election observers for parliamentary  elections in 2007 was strictly limited.

In comments to bne on the day of voting, Jens Eschenbacher, member of the OSCE election observation team, confirmed that the high level of early voting was a ‘Belarus peculiarity’ and most election observers arrived too late to monitor the early voting adequately.

The OSCE will present its findings on the elections at a press conference later today.

Opposition leaders also pointed to the fact that very few opposition representatives were allowed to monitor the vote counting process.

However, the Belarus regime will claim that the presence of OSCE observers and the participation of opposition candidates in elections suffices for the elections to be declared free and fair.

In an interview with Western press last week, Lukashenko said he would break off the nascent thaw in relations with the West if the elections were not recognized as such.

In a further manifestation of Alexander Lukashenko’s ’stage-managed democracy’, a unapproved Orange-style opposition demonstration numbering 1000-1500 marched last night from the Central Election Commission headquarters in the Palace of the Republic on Oktyabrskaya Square past the feared KGB headquarters on Independence Prospect down to the Parliament on Lenin Square.

They encountered absoutely no police presence – in strong contrast to the harsh treatment meted out by Russian riot police to similar unapproved rallies in Russia last year, and broadcast worldwide by TV channels.

The demonstration then returned to Oktyabrskaya square where Kozulin called on it to disperse peacefully.

In comments to bne, Kozulin called Belarus' new economic policy of privatization and improving the investment climate “superficial and only for show”. He said he did not expect any improvement in the political climate to come from increasing foreign investment in the country. However, he declined to expressly warn Western investors from investing in the country.

Kozulin told bne he feared that the West would lower the demands it was making of the Belarus regime in an effort to woo Belarus away from its alliance with Russia, and in return for opening the economy to Western investment.

Eurasian frontier markets are top reformers in World Bank ranking

Graham Stack for business new europe

Azerbaijan is today celebrating its meteoric rise in the World Bank’s authoritative annual “Ease of Doing Business” ranking, released September 11. The Caucasian oil oasis shot up from last year’s place 97 to this year place 33, just one below Israel, making it the world’s top reformer. And it is not alone at the top: placed two, three and four among the world’s swiftest regulatory streamliners were fellow Eurasian frontier markets Albania, Kyrgyzstan and Belarus respectively.

The World Bank ranking, that surveys legislation and regulation and includes feedback from companies on registration and tax matters, is the recognized global benchmark for business environment and market entry conditions, in particular for small and midsize business.

And, according to the results of the new survey, Eurasian countries are proving to be the World Bank’s most diligent students: 34% of all reforms improving the business environment across the world 2007-2008 were enacted in Eastern Europe and Central Asia.

The surprise is, however, which countries within this regions were responsible for the lion’s share of reforms. Not the heartland of Poland, Russia and Ukraine, but a splurge of frontier markets, led by Azerbaijan.

Azerbaijan notched up improvements on seven out of 10 indicators of regulatory reform, according to the World Bank. Azerbaijan started operating a one-stop shop in January 2008 that halved the time, cost, and number of procedures to start a business. Business registrations increased by 40% in the first 6 months. Azerbaijan also eliminated the minimum loan cutoff of $1,100, more than doubling the number of borrowers covered at the credit registry, and set up an e-government system allowing taxpayers to file and pay taxes online.

Belarus, aka ‘Europe’s last dictatorship’ and where the state still owns most industry, this year shot up to place 85 from a lowly 110 in 2008.

This was the result of a year’s concerted reforms that won it the number 4th top reformer spot in the ranking. Starting a business became a whole lot easier thanks to a unified registry database, a time limit for registration, and halving of the minimum capital requirement. In addition, a one-stop shop for property registration caused time required to register property to fall from 231 days to 21.

As mountainous as Belarus is flat, and as politically turbulent as Belarus is authoritarian, Kyrgyzstan came in one place below Belarus in the overall ranking, but third place globally as reformer, with one-stop shops for registration and streamlining of construction permission.

Follow my leader

The trailblazer among Eurasian countries, however, remains Georgia. Previous years’ star reformer is this year’s star performer. Georgia takes place 15 in the world for ease of doing business, making it number 1 among the post-Soviet states, far ahead even of the Baltic states, and only one place behind business paradise Finland.

This has made it an example to follow in countries across the region. For as the World Bank’s Doing Business team explains, “if there is any advantage to starting late in anything, it’s that you can learn from others.”

This copycat effect could lead to further sudden leaps towards liberalization in states that seem to be suffocating in red tape. Belarus reformers for one often refer to the Georgian example when arguing that their goal to reach the ranking’s top 25 is feasible.

One example no one is following is Russia’s. Russia languishes at place 120, a drop of eight places over last year. The World Bank comment on Russia is brief and sad: “In the Russian Federation no major reforms were recorded.”

The only silver lining for Russia might be that newly-elected President Dmitry Medvedev has named improving the regulatory environment for small business and tackling corruption priorities for his presidency.

But even that may not help much: Ukraine for all its four years of Orange liberal rhetoric, fares even worse than Russia in the ranking. It came in at place 145, between Surinam and Madagascar.

Cosmetic surgery

However, there are question marks about the report’s findings.

One problem is that the ranking could become a victim of its own success. Governments actively boost their Doing Business ranking by initiating reforms on paper that lack follow-through in enforcement – and thus remain largely cosmetic.

World Bank representative in Belarus Martin Raiser sounded a cautionary note in comments made to bne in July.

“The Belarus authorities have set themselves ambitious goals to improve their rankings in international rankings on the costs of doing business,” Raiser said. “While we welcome the ambition to tackle these challenges broadly, we recognize that the authorities are aiming at efficiency improvements rather than wholehearted institutional change.”

Indeed, the Belarus government’s commitment to moving up the ranking in did not stop hundreds of individual entrepreneurs taking to the streets to demonstrate against the government in early 2008, a bold undertaking in Aleksandr Lukashenko’s Belarus. They were protesting against new government regulations forbidding individual entrepreneurs to hire additional workers, demanding they re-register as firms. The new regulations forced many individual entrepreneurs to quit their business.

“There were demonstrations on the part of individual entrepreneurs in the centre of Minsk, but nothing appeared about them on TV, it was all hushed up and then they were dispersed by force,” a former stall owner forced to turn taxi driver told bne in Minsk in June.

So, before rushing off to set up a bar in Azerbaijan – placed higher than Israel in the Word Bank ranking – listen to what people on the ground are saying as well.

A high-placed foreign advisor in Azerbaidzhan recently made the following comments to the bne blog:

“Petty corruption has indeed been reduced here – you don’t really see policemen hassling people for bribes anymore. But this is not the kind of corruption that anyone is worried about. We’re talking about massive corruption on a scale that is unimaginable by Western standards.”

“Take for example a well-known international oil and gas company which has been working in Azerbaijan for many years. When they have to import a small, specialized part such as a pump, say, that is only worth some $500, they end up paying around $10,000 to get it across the border,” claims the source.

“In the West, when people consider Azerbaijan, they expect corruption but they have no idea about the level it has reached. If someone were to say: ‘give me 100% of the value of the goods’, people would be like ‘are you crazy?’ But here 100% is nothing – 500%, 600% or 700% is completely normal. It’s ridiculous, but that’s the reality.”

“It’s human habit, you push things as far as they’ll go. No one has done anything to stamp out corruption, so it’s gone completely out of control and is killing the country.”

Belarus coming in from the cold?

Graham Stack for Russia Profile

In a deep-reaching move, but still little noticed in the West, Belarus, aka ‘Europe’s last dictatorship’, has shifted the tenets of its economic strategy and is actively looking to attract foreign investment – and targeting the West.

Many analysts in Minsk see the energy dispute with Moscow at the start of 2007 over subsidized gas prices and customs-free oil exports as marking a caesura in Belarus economic strategy. In 2007, Russia put Belarus on a one way track to paying European prices for its gas by 2011, and also ended duty-free oil exports that allowed its small neighbour to earn millions by refining and exporting oil to Europe.

The booming Belarus economy, running at full capacity, with 8% annual GDP growth par for the course, was urgently demanding capital investment to stop bursting at the seams. The price rises punctured the idea the state could do it all itself.

Moreover, the Kremlin actively backed liberalization in Belarus – in the hope that Russian capital would move in powerfully.

Having learnt bitterly from the Ukrainian experience under Kutchma, where Russia subsidized Ukraine with cheap gas, but Russian companies were cut out of the privatization process, Russia has step-by-step shifted to a ‘non-ideological’ approach to dealing with its neighbours.

New president Dmitry Medvedev confirmed this shift July 15th in his first major speech on foreign policy principles:

“We are fed up with ideological investments. As you know, they were made in the previous period, and it is absolutely clear how they were paid back. And there should be no clawing at our money, which was inefficiently spent to support corrupted regimes, in the future,” Medvedev told the Russian diplomatic corps, as quoted by Interfax.

So if bumping up energy prices forced Belarus to open its economy to investors, it was a win-win game for Russia.

In fact, new head of the World Bank mission to Belarus as of July 2008, Martin Raiser, dates the Russia-prompted shift in Belarus policy even further back than January 2007.

“Key aspects of economic policy changed already a few years back. In particular, the unification of the exchange rate and the customs union with Russia meant that key market signals have already been in operation for some time,” says Raiser in emailed comments.

“With the rise in energy import prices from Russia, there has been an additional push for greater efficiency and competitiveness,” according to Raiser, “and this has led to a renewed emphasis on private investment and initiative in Belarus. This is new and it is welcome.”

Reform moves

It was in 2007 that the Belarus administration startled analysts by announcing and launching implementation of a raft of reforms aimed at improving the investment climate.

There was and is a lot to improve. Pro-private sector measures introduced in 2007 saw Belarus leap up thirteen places on the World Bank’s ‘Ease of doing business index’ – from 123rd place to an only slightly less embarrassing 110th place in the world.

But this is only the start, say analysts. According to the World Bank’s Doing Business blog, “in February 2008 the Doing Business team met with 45 government officials from 17 different agencies of the Republic of Belarus. Every single one of these representatives expressed their absolute commitment to ease business regulation in the country. Their aim is to be among the top 25 countries in the ease of doing business and top 10 reformers in the World Bank’s Doing Business 2009 report.”

In 2007, Belarus also took crucial steps such as acquiring a credit rating, and launching large-scale privatization – with the sale of second largest mobile operator, Velcom, to Telecom Austria, for over 500m euros.

An indication of the dominant state role in the Belarus economy until 2007 was that all three mobile phone operators were joint ventures with the state. But in 2008 the state is looking to sell its remaining stakes in operators MTS and BeST. Bank privatization is also in the cards, with Germany’s Commerzbank looking set to acquire fifth-largest Belinvestbank. Austria’s Raiffeisen International already owns the country’s third largest bank, Prior Bank.

This burst of reform activity in 2008 has caught many observers by surprise.
Many expected the reform drive to slow, as energy prices in 2008 have shifted back in Belarus’ favour: the country looks likely to run in a record trade surplus instead of the feared deficit this year. But, according to Dmitry Kruk of Minsk’s Institute of Privatisation and Management, the government has redoubled its liberalization efforts this year, indicating that ‘a strategic decision’ has been taken by the president.

Key challenges

World Bank’s Martin Raiser sees three key challenges facing the government:

“Belarus in some sense benefits from the fact that several of its key industrial assets are relatively new (built in the late 1980s) and that government-led efforts have achieved some success in modernizing the flagship companies.”

“But a lot of inefficient often state-owned enterprises still exist in smaller towns which will need to attract private strategic investment if they are to survive.”

“Secondly, Belarus needs to make better use of its key assets – an educated labor force and strategic location as a bridge between Russia and western Europe. For this, it needs to encourage innovation and entrepreneurship to complement the high human capital and it needs to reorient trade and transport links towards Europe and make it easier and cheaper to transit across its territory.”

“Thirdly, Belarus will need to cope with a deteriorating demographic outlook and the implications this has for the social inclusiveness of future economic growth. As the labor force declines due to aging and migration, the financing of generous social transfers through high levels of payroll taxes will come under pressure and the need to improve targeting of social assistance to the truly vulnerable and to encourage greater labor force participation will become ever more pressing.”

The question facing Belarus is whether the top-down approach pursued by the government is sufficient to master these challenges. World Bank’s Raiser notes that, while the government has “the ambition to tackle these challenges broadly”, the authorities “are aiming at efficiency improvements rather than wholehearted institutional change.”

Between Europe and a hard place

Nevertheless, the logic of reform in Belarus might yet kick-start some political liberalization, to make the country more acceptable in the West.

If economic reform in Belarus was initially prompted by relations with Russia shifting to market principles, then reforms now seem to target West European investors, according to Viktar Strachuk of Deloitte, precisely to avoid Russian capital predominating in the country.

So the government wants Western investors to counterbalance Russian influence. But Western investors are still wary of Belarus, because of the stigma attached to ‘Europe’s last dictatorship.’ So ultimately, economic reform will require some degree of political liberalization at least as window-dressing. Lukashenko seems to have recognized himself that image is important: in early 2008 he hired famous British spin doctor Lord Tim Bell, who has worked for General Pinochet, Boris Berezovsky and the British Conservative Party.

Lukashenko has even promised that the upcoming parliamentary elections in September 2008 will be a ‘model of democracy.’ The claim has met with understandable skepticism from opponents. However, there is considerable room for Lukashenko to liberalise and allow opposition, without losing his iron grip on power, since he enjoys Putinesque levels of popularity, as the economy surges ahead.

On the other hand, such a move would require Belarus’ ‘Batka’ to at least allow public questioning of his infallibility – and there has been little sign that he is psychologically ready for this.

Belarus’ surprise opening gambit

Graham Stack for business new europe

For a country long regarded as a regional backwater, Belarus has been full of surprises since 2007.

First came the “gas war” with Russia in January 2007, where Russia hiked prices for gas and slapped export duties on oil – contradicting preconceptions about Russia using energy prices to punish enemies, such as Ukraine, and reward friends like Belarus. Then came a bigger surprise from the Belarusian side. After a decade of anti-Western rhetoric, the government announced a whole raft of measures to open up the economy to foreign investment and liberalise the economy. But doesn’t take much to link the two.

“For a whole decade, nothing was done to support the private sector, and no one expected these measures. Now we are hearing at a frequency of once a week cardinal measures decided on from the president or government. And all these measures are extremely positive for entrepreneurs and the private sector,” says Sergei Shaban, deputy chairman of the board of Belgazprombank.

Belgazprombank, the country’s seventh largest bank in terms of assets and third largest in terms of share capital, owned jointly by Gazprom and Gazprombank, handles the Belarus gas trade accounting for the Russian giant, while lending to Belarusian small and medium-sized enterprises. As such, it enjoys a unique insight into both state and private sectors. “Our opinion is that the measures taken by the government and president are conditioned by the need to adapt to new prices for energy,” Shaban says. “Before the price hike, there were enough resources – internal and also subsidized energy prices from Russia. This has ended, and companies need to become more competitive, to upgrade their facilities, and this requires extra capital,” says Viktar Strachuk, senior partner in the Minsk branch of Deloitte & Touche.

Dmitry Kruk of the Institute of Privatization and Management, a think-tank that drew up privatisation plans in the 1990s only to see them mothballed when Lukashenko came to power, explains that the price hike for gas and the imposition of export duties on oil shipped to Belarus threatened a lurch into the red for the trade balance, jeopardizing macroeconomic stability. The hike in energy prices also looked certain to hit enterprise profitability, making investment in upgrading facilities and making it more imperative to raise energy efficiency. But soaring world oil prices in 2008 have removed any immediate necessity to liberalise. Belarus still enjoys a “political” gas price of $128 per 1,000 cubic meters, and Belarus oil refining is still very profitable. “So it’s a paradox,” says Kruk. “This year, the trade balance will be much more favourable than last year, but the government efforts to attract investment are much more concerted that ever before.”

“It seems to be a strategic decision,” he concludes. “Everybody actually expected a slowing of reforms this year due to favourable external circumstances.”

Between Europe and a hard place

Opening up the Belarusian economy seems both a concession to Russian demands, as well as an attempt to limit Russian influence. “There is pressure from the Kremlin to open the economy. Russia understood that it’s more useful to use economic influence than political,” argues Shaban.

According to Shaban, the move to privatization was sealed by the sale to Gazprom of Belarus gas pipelines operator Beltransgaz as part of the gas deal reached in 2007. “Beltransgaz had important symbolic value in terms of privatisation. We reckoned if this deal goes ahead, privatization will continue. The Belarus government saw that nothing had changed, nothing terrible happened.”

But analysts also argue that this year’s wooing of foreign direct investment (FDI) is aimed at western investors to prevent Russian economic domination. “The priority is investment from western Europe, not Russian investment,” says Kryuk. “There’s a specific policy of restricting Russian investment proportionally, it is evident at investment forums. Russian investment is too political.”

Deloitte’s Strachuk agrees that the government is looking to balance sources of investment, because there’s already a lot of Russian capital, especially in the banking sphere. “Western countries are still wary, but Belarus’ neighbours such as Poland, Latvia and Ukraine are interested. Also Persian Gulf countries are quite active here in real estate, and there are some contacts with China and Korea. Basically, they want a mix,” he says.

Not only has juggling east and west given liberalization a momentum of its own. The very success to date of the “Belarusian economic miracle” – with regular 8%-plus GDP growth rates – means that fixed capital investment is urgently required to renew and expand capacities. This was illustrated on June 25, when the Lukomi power station, the country’s largest, suddenly packed up, causing outages across the country for both industrial and residential consumers.

Moreover, while the economy has benefited hugely from the export of goods to the booming Russian market, competitiveness in terms of market share has been falling, as Soviet-era technologies become obsolete. And with the government still the owner of most large companies, it could cash out to harvest a bonanza to finance infrastructural measures, such as constructing a nuclear power plant to reduce its energy dependence on Russia.

Belarus simply has everything to gain from opening up, as Shaban argues: it is slap in the heart of Europe, with an educated workforce, social stability, and good production capacities. And, despite the conflict in 2007, “Belarus still has a huge price advantage in energy relative to other European countries, and the government can exploit this to attract extra capital,” according to Shaban.

Targets for investment

“Every ministry and every authority now has a major priority to attract foreign investments, having all been assigned certain targets in terms of millions of dollars of FDI to be attracted. Now a major part of their day is spent meeting with foreign investors to achieve these targets,” says Strachuk.

As evidence of the government’s reform efforts, it has publicly committed itself to leapfrogging up the World Bank’s ease-of-doing-business ranking from its current 110th position to a top-25 place by 2011. The most telling proof is that the privatisation of major companies is back on the agenda. That includes the imminent privatization of the two remaining state-owned mobile operators to Russia’s MTS and Turkey’s Turkcell; of fourth-largest Belinvest bank to Germany’s Commerzbank; and of giant truck builder MAZ to Oleg Deripaska’s Russian Machines. Michelin is also known to be interested in tyre producer Belshina. “There is an ambiguous logic about privatization,” says Kruk. “Enterprises that are currently profitable but facing an uncertain future will be sold, as companies in a tight situation will also be sold.” According to Kruk, companies with stable profits such as Minsk Tractor Factory, potash giant Belaruskali, and the largest oil refineries will remain in state ownership.

Crucial to stimulating investor interest in privatisation was the abolition in February of the notorious golden share rule, which gave the government the right to intervene in the running of a privatised company in the event of layoffs or losses.

Parallel to case-by-case privatization, as part of an institutional shift towards an investment-friendly economy, government unitary enterprises are to be transformed en masse into joint stock companies (JSC): 30% this year, and the remaining 70%, around 500 companies, through 2010. Government plans then envisage IPOs for the new JSCs, but current market conditions, and also the need to establish credit histories and introduce international accounting standards, make such ambitious claims seem unrealistic for the immediate future, according to most analysts

Besides attracting strategic investors, the privatization of majority and minority stakes is intended to stimulate the development of a stock market. To support this, earlier this year the tax on securities trading was slashed from a prohibitive 40% to a profit tax level of 24%. A moratorium imposed in the 1990s on trading shares in privatized companies was also lifted, and the government passed an umbrella programme on “corporate securities market expansion program for 2008-2010″ in January, envisaging 25% free float of total shares by 2010. However, considering the current embryonic state of the Belarus stock market, in conjunction with the disarray on the global capital markets, most analysts agree it will be a long time before things really start to take off here.

More significant in the short term are moves to streamline the tortuous tax system. With 42 different taxes, compliance is currently a nightmare, and the overall take high in comparison to neighbouring countries. But in 2009, the government will introduce a flat rate income tax of 12%, and reduce turnover tax, a major burden, by 2% to 1%, and possible phase it out entirely in 2010.

And it’s not just taxes. “Worse than taxes themselves are the many mandatory payments that are not taxes, but contributions to sector support funds not covered by tax law, but only by the budget law,” Deloitte’s Strachuk says.

Too much bureaucracy, not enough democracy

Nevertheless, a poll taken of foreign investors at the recent Minsk Investment Forum showed that taxes were not the main obstacle to investment. “More serious was a general lack of transparency, difficulties with regulations regarding pricing, and regulations regarding accounting in general, which is very formalistic,” Strachuk says. “The basic problem is bureaucracy and slow decision-making.”

Belgazprombank’s Shaban agrees: “In Belarus, corruption, for example, is significantly lower than in Ukraine and Russia. The problem lies in the speed of taking decisions.”

The government has a number of programmes that provide tax incentives for investors, such as a development programme for small and midsize towns, for “agricultural cities,” and for technology parks. However, some of these programmes also include administrative measures compelling companies to contribute. There is still a mix of policies being applied.

An excess of bureaucracy is twinned with a dearth of democracy. It’s still too early to say whether the Belarusian economic liberalization could prompt political liberalization. To secure the foreign investment from Western Europe needed to balance Russian money, President Alexander Lukashenko has to do something about his image – and he promptly took first steps in this direction in 2007, hiring Tim Bell, legendary British spin doctor for late Chilean dictator Augusto Pinochet, Russian oligarch Boris Berezovsky and the McCanns, among others. The upcoming parliamentary elections in September will be a litmus test of how far the administration is prepared to put substance behind spin.

Minsk cabbies

Moving from the “Batka” of Belarus, as Lukashenko is referred to, to the Minsk cabby for a view from the grassroots, Svetlana, one of Mink’s few female taxi drivers, told bne that government regulations forced her to change jobs. “Previously, I had a stall trading textiles,” she says, but new government regulations now forbid the self-employed from hiring additional workers, demanding they re-register as firms, with all the accompanying costs and hassle. “There were demonstrations against the regulations on the part of small-scale entrepreneurs in the centre of Minsk, but nothing appeared about them on TV, it was all hushed up and then they were dispersed by force.”

Another Minsk cabby, Grigory, a Hare Krishna acolyte, says he earns enough as a taxi driver, without a family to support, to have visited India for six weeks this spring. Freedom to travel is one thing. “But Hare Krishna are not allowed to celebrate on the streets in Minsk – in Moscow, yes, but not in Minsk,” he complains.

However, as a taxi driver in Moscow, he could hardly afford a six-week trip to India. This is one of the paradoxes of Belarus. In Moscow, “official” cabs are rare; instead there are myriad of gypsy cabs driven by migrant workers. In Minsk, the iron grip of Lukashenko means there is an organized, competitive and efficient taxi market. Late night revellers debate which taxi service is cheaper, much as they might discuss which mobile operator gives the best deal.

Under Lukashenko, Belarus identity is openly Soviet-rooted. Independence Day is no longer July 27, the declaration of sovereignty from the Soviet Union in 1991, but July 3, the liberation of Minsk by Soviet troops in 1944.

But this is not the same as subservience to modern Russia. In some ways it’s the opposite. Belarus is proud of the “Soviet virtues” abandoned by Russia for “corruption and low morals.” Ordinary people often echo Lukashenko’s boasts that he has prevented the appearance of oligarchs, bandits, graft and ethnic strife – the plagues of modern Russia. As a visitor to Minsk watches diners in Macdonald’s actually clear their tables after eating, something unheard of in Moscow, there’s a possibility that this proud Soviet vestige might yet take on a European tinge.