Credibility gap
At first glance, Belarus, once the most prosperous region in the former Soviet Union, appears to be in better shape than ever.
The dual carriageway from the airport into the capital Minsk is flanked by new construction. The facades in the city centre (entirely rebuilt after World War II with the help of German prisoners of war) show signs of a recent coat of paint and the streets are brightly lit, despite supposed power shortages.
Growing numbers of Mercedes now compete with the ubiquitous Ladas, trams and trolley buses. The young people milling about outside McDonald’s each evening flaunt examples of retro chic that would not look out of place in London or Amsterdam.
According to official statistics, moreover, the beleaguered Belarus economy is showing signs of improvement. In the seven months to August, the budget deficit was an impressive 1% of GDP. Admittedly much expenditure is off budget, but the government says that Belarus is the only former Soviet republic where revenues are above projection.
“We’ve made the system far stricter and more systematic, and reduced the number of exemptions,” says Nickolai Rumas, first deputy finance minister. “A new tax code is in the process of being designed, and it is planned that no other laws will influence it.”
GDP, meanwhile, is up 11% for the first seven months of 1997, while industrial production has risen 14%. Investment rose by 17% and real incomes by 16%. The number of unemployed fell for the first time in six years, and housebuilding increased by one and a half times. Trade was up 20% compared with the same period last year, and purchases of non-food items grew by one and a half times, with only 16% of these goods imported.
The government is hopeful of gaining closer economic ties with its biggest trading partner, Russia, following the signing of a union treaty in April. President Alexander Lukashenko, who would reputedly like to lead a Slavic union, is in favour of a unified customs and economic zone and “within a few years, a level of integration comparable with that which exists in the European Union today”.
The government, meanwhile, has embarked on a new programme of economic development until 2000. According to deputy prime minister Pyotr Prokopovitsh, this involves the development of a “socially orientated market economy”. GDP is planned to grow at between 5% and 6% a year. “Before there was much discussion,” he says. “Now there is only one way for us to go.”
But such upbeat words are at odds with the views of international observers. The go-slow attitude to market reform of the maverick president Lukashenko has led the World Bank to describe the country as the least liberalized economy in Europe, ahead of only Azerbaijan, Tajikistan and Turkmenistan in the former Soviet Union in terms of market economy, open foreign trade, free prices and a freely convertible currency.
The IMF has not lent the country any money since 1995 (it suspended its programme in January 1996 because of lack of progress on reform), and European countries such as Germany, Austria and Switzerland have this year frozen their credit lines. The announcement in March that Belarus intends to issue a Eurobond as an alternative means of funding was greeted with amusement among international bankers. “Albania would be the only one I’d laugh harder at,” says one.
Economic growth for the moment is heavily reliant on the government printing more money and directing credit to various areas of the economy. Inflation (39% in 1996) is kept in check only by Soviet-style price controls. Thus, foreign investment has a key role to play in sustaining growth, but Belarus has so far seen only a trickle, considerably less than $100 million.
In July, outgoing US ambassador Kenneth Yalowitz recommended American business people not to invest in Belarus, citing the lack of laws to protect entrepreneurs and regulate their activities, the bureaucratic obstacles foreign investors face and the lack of democracy.
Lukashenko tightened his grip on power by introducing a new constitution last November, with no official media coverage of the alternative. The new parliament has not been recognized by international bodies, and EU mediators are trying to persuade the government to agree to a new formula.
Meanwhile, several Russian television journalists responsible for reports unfavourable to his regime have been arrested for alleged infringements while filming a report on the border with Lithuania. One appeared on television in August in an apparently drugged state, to confess his “guilt” at being part of a wider conspiracy. The confession was compared by Russian observers to Stalinist show trials of the 1930s.
Not all companies are deterred by such events, and a handful of high-profile investors had in any case already decided to take the plunge. McDonald’s has invested $6 million to open six fast-food restaurants; Coca-Cola is building its largest bottling plant in the former Soviet Union at a cost of $20 million; and Westray is thought to have paid $24 million for a controlling interest in a television factory in Gomol.
Ford opened its $19 million assembly plant in Obchak just outside Minsk on July 30. The plant will start with annual production of 6,000 Escort cars and Transit vans. Ford went ahead only after parliament approved red-carpet status to its joint venture, leaving it exempt from income tax for five years (compared with the normal three), and entitled to discounts on the rates of customs duties and excise payable for imports of parts and components for an indefinite period. Attending the opening ceremony, Lukashenko said that if potential investors had any doubts, they should “come to Obchak. Everything will be the same [for other investors]”.
A handful of investors – of which Westray is the largest example – have expressed interest in engineering niches where Belarus has traditional strengths. Once known as the assembly line of the Soviet Union, Belarus boasts a Soviet-era tractor plant employing 40,000 – though it is now somewhat out of date and operating way short of capacity – and a clutch of what would have once been regarded as high-tech industries.
Existing plants with their skilled yet poorly paid workers offer enticing opportunities for investors with the capital and expertise to lick them into shape. “Sometimes the potential is so good, businessmen feel able to overlook the general situation in the country,” says one diplomat. According to foreign economic relations minister Mikhail Marinich, foreign credits totalling $400 million have been used to transform chemical plants and other large factories.
An agency to assist foreign investors with legal hurdles, potential areas for investment and suitable local partners was set up in December last year. A new law concerning improved guarantees for repatriating profits in dollars is expected in October, says Marinich, along with the new tax code.
Embassies, though, still warn potential investors off. “We are still recommending to companies that they do not invest,” says one diplomat. “The government still has not made enough progress on market reform, and in the last couple of months it has introduced even more command-type measures entitling it to further regulate prices and raise customs duties. There remains the danger of arbitrary and capricious government interference. There are too many members of the government who simply don’t accept the concept of private property.”
For the vast majority of foreign investors, an essential precondition is that Belarus concludes another agreement with the IMF. The country joined the IMF in 1992, when the first agreement was signed. It received a first tranche of $98 million to carry out structural reform in 1993 and a further $102 million in 1995. In September 1995 the country signed up to a second economic programme in return for standby credit lines, but only the $66 million first tranche was received.
One step in the right direction appeared to be the memorandum of understanding signed on July 18 with the World Bank, committing the government to a range of measures to liberalize the economy in exchange for loan pledges. But by the beginning of August the government was already in breach over exchange rate liberalization.
The freeing of the exchange rate is one of the main sticking points for the IMF, along with price liberalization, and the slow pace of privatization. In addition, the fund is concerned at the rate of increase in the money supply, central bank independence, fiscal policy and the overall business environment. “The stuff that we want done could be done in a matter of weeks,” says a senior IMF official. “If they’re willing to change tomorrow, we could have a programme within 90 days. But the government has failed to follow through on its commitments in the past.”
A more liberal forex market is of central concern to foreign investors, which have difficulty getting hard currency at market rates to enable them to repatriate their profits. At present they must either sell Belarussian goods in Russia for dollars or buy dollars in Minsk at 20%-30% premiums.
The credibility of the government’s exchange rate policy has not been helped by the rapid turnover of central bank presidents. In January Gennadi Aleinikov, previously chairman of Vnesheconombank, became the fourth to hold the post since September 1995, after the previous incumbent, Tamara Vinnikova, was sacked and arrested for alleged fraud carried out before she joined the bank. In August she was still languishing in prison with no charges against her.
The government says it fears hyperinflation and economic collapse if the currency is allowed to devalue too quickly. “It is the function of government to prevent this,” says first deputy finance minister Rumas. Central bank officials admit that foreign exchange reserves, although not published, amount to a mere $150 million, equivalent to two days’ worth of imports (three months’ cover is normally regarded as a minimum safety net). “With limited reserves to support the currency, the only option they have if they don’t want to let the currency float is to control access [to the forex market],” says a senior IMF official.
A planned devaluation was attempted in the first half of this year. The Belarus rouble/US dollar band rate was adjusted to Br15,500-21,000 but then effectively disbanded in January. By the end of July the rate was around Br30,000 to the dollar, before the process of regulation started once again in August. “We are well aware of what the IMF is saying,” says Nikolai Kuzmich, first deputy board chairman of the central bank, “but we cannot move too quickly to market operations. We still have a negative balance of payments, and no outside source of outside funds. So we need a transition period. A liberal exchange regime is included in our plans, though.”
The government has so far reduced the 50% conversion requirement for hard-currency earnings to 30%, but foreign observers say this is of little practical consequence. Very few companies had been surrendering more than 15% because of various exemptions. The extent of government control is reflected in the fact that you get a third more Belarus roubles for your dollar in Moscow than you do in Minsk.
Although some attempts at price liberalization have been made, many controls remain in place to offset the effects of the growth in the money supply. Observers believe continued price controls, in conjunction with a policy of excessive monetary expansion, can only lead to higher future inflation. According to Belarussian Economic Trends (BET), a project funded by the European Union’s Tacis programme, “a tighter monetary policy coupled with price liberalization are two planks of stabilization, and which broadly have been successfully addressed by all countries in Europe with the exception of Belarus”. Without a credible adjustment towards a market-based approach, it adds, “there remain serious concerns about the sustainability of the reported increase in production and GDP in the medium term”.
Privatization progressed relatively well between 1991 and 1995, but has moved rather more slowly since. According to official figures, of some 8,000 enterprises, 2,429 have so far been privatized, including 526 last year and 308 during the first half of this year. “One third have been privatized through auctions,” says Prokopovitsh. “The major aim is to make them more efficient and to attract investment. Any foreign investor can invest in our privatized companies.”
The IMF is not impressed. “The government figures on privatization are misleading,” says a senior IMF official. “Issuing shares in companies and giving them all to the government does nothing to change corporate governance or the way credit is allocated. But it does nothing to change corporate governance or the way that credit is allocated. The only meaningful statistic is the number of companies where the government shareholding is less than 50%.” That figure is in the region of 10%, measured either by number of companies or employees.
Nominal unemployment is low, but many state factories are running at as low as 15% of capacity, paying workers to stay at home. Hence there are legitimate fears over unemployment. Memories of 1991, when thousands of state factory workers took part in violent street demonstrations over inflation, are still fresh in most people’s minds.
Nevertheless, the government denies that it is dragging its feet for fear of unemployment, or for that matter due to a reluctance to relinquish control. “The only obstacle is lack of willing investors,” says Prokopovitsh. According to foreign economic minister Marinich, the government is actively pursuing a policy that removes hurdles in the way of privatization where there is an opportunity for investment.
The IMF is also concerned at the growth in money supply due to subsdidized credit directed by the government. According to some sources, broad money has been growing by 90%. “The directed credit accounts for much of the growth in GDP,” says the IMF official. “If there really was a boom you’d see profitability rising and the number of loss-making industries decline, but it didn’t happen. If, on the other hand, it is due to a temporary pumping up of the economy, one would expect pressure on inflation and the exchange rate, and you saw all that.”
Few observers expect a complete collapse in Belarus, with its geographical position, huge grey economy, good working infrastructure and many skilled workers – whatever the government decides to do next. But many feel the country has lost valuable time, and in the words of Rupinder Singh, an economist at BET, it has thereby “widened the restructuring gap”.
Banks’ stately progress
President Alexander Lukashenko is known for his ambivalent attitude to bankers, having first risen to power accusing them of being thieves and bloodsuckers.
Since then, he has on occasion been more supportive, but his government’s latest controversial move has been to increase its shareholdings in the six largest formerly state-owned banks. Some commentators talk of the banking system being renationalized.
The government argues that, when shares in the banks were sold off after 1991, there was no indexation to take account of the real depreciation in the Belarus rouble. Hence later investors were able to buy shares on the cheap, and it is their shareholdings that are now being reduced. The state plans to increase its stake in Belbusinessbank to 49.8%, in Priorbank to 48%, and in Belpromstroybank to 38%.
Bankers says there is still too much directed credit, although much of it is via the National Bank or Belarus Savings Bank, rather than through the commercial banks. But with privatization virtually at a standstill, the commercial banks have very few alternative clients. Nor is the heavily regulated foreign exchange regime conducive to strengthening the banking system.
On a brighter note, the larger commercial banks have nonetheless – according to a source who has examined their balance sheets – been consistently profitable over the past five years, apart from in 1995, a year of very high inflation. Some are also apparently quite well capitalized: Priorbank has a capital adequacy ratio of over 10%.
Thomson Bankwatch recently assigned it a senior debt rating of C and a short-term local currency debt rating of LC-3. Thomson cited “capable management, supported by relatively good systems, [which] has thus far steered the bank clear of major problems in a difficult market”. Banks such as Priorbank are largely excluded from borrowing abroad, although they do have some very short-term letters of credit from German banks for foreign exchange dealing purposes.
Priorbank was one of the first Belarussian banks accredited to the EBRD’s small and medium-sized enterprise credit line, a $20 million facility that allocated loans varying from $200,000 to $2 million through local banks to 20 small and medium-sized companies to assist transition. The credit line is also designed to support the banking system by giving the four banks involved – Priorbank, Belbusinessbank, Belvnesheconombank and Bank Olimp – opportunities to develop their capabilities and reputation under the technical guidance of EBRD bankers. The banks have to fulfil various accounting, auditing and strategic criteria in order to qualify for handling the loans.
Another positive sign is the amount of Russian capital either involved in or waiting to come into Belarussian banks. Russia’s Gazprombank owns 70% of Bank Olimp, while Uneximbank has built up a substantial shareholding in MinskKomplexbank. Mosbusinessbank has also opened a branch in Minsk. Most other Belarussian banks have had interest from Russian investors.
Almost all Russian mineral and oil exports to the west pass through Belarus. Russian banks see opportunities in financing oil refineries and pipelines there. Despite its difficulties, Belarus is still perceived in Russia as an industrious country: according to World Bank figures, its GDP per capita remains higher than Russia’s. Germany’s Commerzbank and Dresdner Bank have also opened offices in the past four years, mainly doing corporate finance, helping Belarussian companies find partners in the west and arranging finance.
