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.”

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.

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.