Belarus pushes private-sector plans

Belarus’s first deputy economy minister Alexander Zaborovsky insists that policymakers are keen to boost the share of the private sector in the economy through the development of new businesses. This meets with a high degree of scepticism locally, given the government’s record on the treatment of entrepreneurs.

Belarus boasts a few high-profile private-sector companies – such as NYSE-listed EPAM Systems, Skype competitor Viber and World of Tanks creator Wargaming – but nearly all are in new hi-tech sectors.

Alexander_Zaborovsky-160x186
First deputy economy
minister Alexander Zaborovsk

Successful entrepreneurs in more traditional sectors, say locals, take care to stay under the government’s radar. "They’re very discreet, they don’t have websites and they won’t meet outsiders," says an expatriate in Minsk. "If they do want to grow and go public, they have to come to an 'arrangement’ with the government."

The penalties for failing to do so or for encroaching on government preserves, which in Belarus cover everything from chemical plants to flower shops, are severe. The expatriate cites several examples, including that of a local developer who refused to hand over to the presidential administration a stake in a newly constructed apartment block in central Minsk, only to have it confiscated and to receive a lengthy jail sentence.

Foreign investors might not face the same fate but are unlikely to be able to escape the long arm of the state, say independent observers, particularly if they take stakes in former state-owned firms. "Such companies, whether under local or foreign ownership, find it very hard to cut the umbilical cord to the state," says Francis Delaey, country head for Belarus at the European Bank for Reconstruction and Development (EBRD).

Even the government’s own investment agency, set up in 2011 to attract foreign capital, concedes that partnering with the state can be "challenging" for external investors. "It’s because we have different valuation systems from other countries," says Natallia Nikandrava, head of the National Agency of Investment and Privatization (NAIP). "We have high social standards so we look for companies that have a high level of social responsibility."

In practice, she says, that means guaranteeing not to reduce staff numbers for several years, as well as making a commitment to support local regions by upgrading schools, building roads or providing homes for employees. Other foreign firms have been required to "sponsor" loss-making local industries such as collective farms as a condition of buying Belarusian state assets.

Even investment in greenfield projects in value-added sectors such as biotech, IT and food processing, which the government is eager to attract, comes with conditions in the form of social commitments. In return, policymakers promise tax breaks and other incentives, as well as "unique" presidential guarantees of state patronage and access to state resources.

This is reportedly attracting some interest from Chinese investors – Nikandrava claims that nearly 40 firms have signed up for a new industrial park near Minsk. Observers in contact with western investors, however, say most find the idea of regulation by presidential diktat more worrying than reassuring.

No one is going to bother for a country like Belarus
with a population of 9.5 million

Expatriate in Minsk

Delaey at the EBRD notes: "The legal and regulatory environment is in a constant state of flux and there is a lack of a clear long-term direction for the country, which can make the business environment quite unpredictable." He cites the example of the capital and price controls introduced in December to halt the fall of the Belarusian rubel, the latter of which were finally legislated on in February – nearly two months after thousands of retailers had been closed at the behest of president Alexander Lukashenko’s administration for alleged violations.

That the operating environment is an effective deterrent for external investors is clearly shown by the paucity of western firms present in Belarus. A handful of FMCG (fast-moving consumer goods) companies – notably Carlsberg, Heineken and Danone – have been operating successfully in the country since the early years of transition and more recently wood-processing firms such as Austria’s Kronospan and Lithuania’s VMG have moved in to take advantage of Belarus’s ample forest resources.

Swiss train maker Stadler has also established a manufacturing base in Minsk in cooperation with Belarusian state operators, and Austrian road technology firm Kapsch recently collaborated with the government on the country’s first toll road. (Touted as a ground-breaking PPP project, the latter was initiated by World Bank officials but abandoned by them after Belarusian policymakers declined to follow the bank’s procurement rules.)

With these few exceptions, western firms have steered clear of Belarus. Of course, many of the reservations about the country also apply to Russia – but, as one expatriate in Minsk points out, investors have been prepared to brave the notoriously difficult Russian operating environment for the sake of access to a relatively prosperous market of 140 million. "No one is going to bother for a country like Belarus with a population of 9.5 million," he says.

Belarusian policymakers are, however, hoping to persuade investors to see the country as an entry point for Russia, particularly as both are members of the Eurasian Economic Union (EEU) – the successor of the Eurasian Customs Union, formed in 2012 – and therefore enjoy unfettered market access. "Belarus is closer to Europe than Russia, and not as big and wild, so European firms may feel more comfortable," says a banker in Minsk.