Lukashenko's heavy hand proves no obstacle to growth

Belarus

Lukashenko: equates Belarus's stability with a proposed constitutional amendment that would allow him to stand for president for another term

If so, he said, they should vote for him in an October 17 referendum empowering him to alter the constitution and run again for president in 2006. Some observers believe he intends to stay in power for life.

The move was greeted with dismay but little surprise internationally. US senator John McCain, speaking in Latvia alongside leaders of the Belarussian opposition-in-exile, condemned the “tyranny” of Lukashenko's rule, saying: “He runs Belarus as if it were the Soviet Union, instilling a climate of fear, repression, and arbitrary rule.”

But Lukashenko's recent moves to alter Belarus's constitution could hardly worsen relations with the west. The US and EU recently refused entry to several senior government figures, saying they were connected to “politically motivated disappearances” of opposition politicians and journalists.

The US Treasury also recently accused a Belarussian bank, Infobank, of laundering money for Saddam Hussein from the UN oil-for-food programme. The Treasury severed all ties between the bank and the US financial system.

Relations with multilaterals are little better. Belarus is one of just two countries in the whole of eastern Europe and central Asia that is shunned by the European Bank for Reconstruction and Development. The other is Turkmenistan. That means the EBRD does no business with the government. The International Finance Corporation also recently refused to increase lending to Belarus, citing the lack of political and economic reforms.

It's not surprising the free market multilaterals are loth to lend to Lukashenko. His economic policy directly conflicts with what is happening everywhere else in Europe. Every other country proceeded with privatization in the 1990s in line with IMF and World Bank demands but Lukashenko halted Belarus's programme in 1996.

The private sector now contributes just 20% of GDP, with the rest of the economy made up of large state concerns that enjoy the support and guarantee of the government. Very little occurs without a government licence and the direct approval of the presidential administration.

So clearly, with such a Soviet-style structure, the economy must be “in a shambles” as a US newspaper recently put it. Not so – it seems to be doing quite well.

Estimates of GDP vary widely, even within the government. However, the most conservative estimate of GDP growth puts it at 6.4% this year, while Priorbank, the third-largest bank in the country, in which RZB has a stake, thinks it ran as high as 10% in the first seven months.

Government debt, which might be expected to be dangerously high in such a centrally controlled economy, is actually quite low. Again, estimates vary, but the finance ministry puts the foreign debt at about $621 million, and falling.

Inflation, which was high in the mid-1990s, halved this year from 44% to 22%, and government revenues, helped by corporate taxes of about 50%, exceeded expectations, yieldng a small surplus.

What has led to this minor economic miracle? The answer is simple – Russia's economic recovery. About 65% of Belarus's exports go to Russia, and they grew by 55% in the first half of 2004, on the back of strong oil-assisted growth in Russia.

A powerhouse for Russia

Vladimir Vassilevski, chairman of the Uniter Group in Belarus, says: “Many Belarussian industrial enterprises are deeply vertically integrated into the Russian industrial sector. In the USSR, the role of Belarus was as the final producer of investment goods and consumer goods.”

After the destruction of World War II, the USSR set about investing heavily in the infrastructure and industrial sector of what is now Belarus. Sergei Kostyuchenko, chairman of Priorbank, thinks it invested more than $200 billion in the country in the 30 years after the war. Only the Czech Republic had a similarly advanced level of industrialization among Warsaw Pact countries.

Belarus specialized in trucks, refrigerators, tractors, car parts, petrochemicals, oil refining and agricultural commodities. To some extent, it is still reaping the harvest of massive investment, and the links established with former USSR states during that time.

For example, two truck companies, the Minsk Automobile Plant and BelAz, have about a 60% market share throughout the former Soviet Union.

The country has several other regional leaders with strong balance sheets. The Belarussian Metallurgy Plant, which Kostyuchenko of Priorbank describes as one of the best Belarussian companies, has annual revenue of about $700 million.

The economy also boasts one of the biggest potash fertilizer producers in the world, Belaruskalii, and one of the largest producers of chemical fibres, Mogilevshimvolokno. The government is not up to its eyes in debt because these companies don't need a lot of state support – they generate cash themselves.

Few western banks, however, are doing much business in Belarus, in part because of the country's bad image. One exception is Austrian bank RZB, which has a 60% stake in Priorbank. Economically, the investment is paying off – the bank made e16 million profit last year and return on equity is 31%.

The government claims that it intends to continue its delayed privatization programme but that the only companies willing to bid for assets – Russian ones – are bidding too low.

Kostyuchenko says: “The government put a tender out for the Naftan refinery some time ago. It evaluated the refinery at $1.2 billion, which is a fair price considering it makes around $110 million a year after tax. But Russian oligarchs bid just $250 million for it. They were trying to do what they did in Russia here. So the government refused.”