Depending on which rate is used, the Belarusian ruble is worth anywhere from 300,000 to 550,000 to the dollar. That’s from a fixed starting rate of 20 to to the dollar in 1992. The fall in the value of the currency has mirrored the collapse of the Russian ruble. Ditto the Belarusian economy. Seventy per cent of its exports are directed to Russia.
The problem of currency conversion puts Belarus at a disadvantage to all of its more favourably regarded neighbours countries which are competing to attract foreign investment using precisely the same selling points of skilled, low-wage workforces and low operating costs.
Even if a potential foreign investor can find a promising niche in the Belarusian market not too difficult a proposition given that few foreign investors have established themselves in the country there is still no reliable method to convert Belarusian ruble revenues into dollars and to repatriate the proceeds. That is unlike the situation with, for example, Russian rubles, Kazakh tenges, and Ukrainian hyrvnas.
The National Bank of Belarus (NBB) is trying to tackle the currency problem. “Of course we recognize that a non-convertible currency presents a significant obstacle for any type of foreign investment,” says deputy board chairman Pavel Kallur. Both the National Bank and the government are working on developing a monetary policy that will be in effect for the next two years. The policy, it can be presumed, will be designed in the hope of achieving a single exchange rate and a convertible Belarusian ruble.
The NBB is trying to improve the country’s image in other ways. It is one of the few former Soviet central banks that is pushing for adoption of industry-wide IAS accounting standards. It openly welcomes any type of foreign investment into a banking sector which is free of foreign-ownership restrictions. And it monitors closely the activities of the six largest banks, which hold over 80% of total banking assets.
No speculators, thanks
But, in difficult circumstances, the central bank’s most significant achievement has been to insulate commercial banks from the devastating effects of the crisis in Russia. As bank after bank in Moscow was collapsing or defaulting on external debts, the Belarusian banking sector managed to remain relatively stable. Speculation in securities, a practice widespread throughout Russia, is prohibited in Belarus. And the NBB and the banking sector overall demonstrated remarkable probity in substantially reducing, if not completely eliminating, exposure to the Russian market months before the crisis there began in August 1988.
MinskComplexBank, the most highly regarded commercial bank in Belarus, shifted its investment portfolio out of Russia and into relatively more stable markets such as Poland and Turkey. The result was that MCB emerged with a stronger capital base and heightened public confidence in its performance. “We had analysts in Moscow looking at the Russian situation very closely and realized that, sooner or later, the pyramid was going to collapse,” says MCB chairman Eugene Kravtsov. “We saw that there was a highly volatile, distressed region surrounding all of Russia and took steps well in advance to eliminate any exposure to this area.”
Credit analysis, an alien concept in most of the Commonwealth of Independent States of former Soviet territories, is being pursued in Belarus in the hope of developing a stable, diversified corporate loan portfolio. MCB likes to concentrate on export-orientated clients, particularly in the machinery, electronics and agricultural areas.
Corporate credits extended to the huge Belarusian defence industry offer perhaps the best risk-reward deal. Kravtsov, showing off a weighty tome entitled Products of the Defence Industry of Belarus, which details an array of state-of-the-art military hardware, says: “If the country can manufacture and sell equipment like this, we obviously have a far stronger economy than most foreign analysts think.”
Belarusian bankers are keen to point out the high value-added element of the economy which boasts such eyebrow-raising specialities as surface-to-air missiles and radar-jamming equipment along with more prosaic heavy-duty trucks and refrigerators. All are major national exports and have a substantially higher value-added element than the oil, gas, and metals that comprise the bulk of Russian industry.
Much of the hardware comprising the Yugoslavian air-defence system, which managed to protect most of Serbia’s military assets during Nato bombardment in the Balkan conflict, originated in Belarus.
Indeed, the traditional defence and manufacturing orientation of the country has resulted in a highly trained workforce whose average wage is around $50 a month. Yet there are few markets in the world were multilingual rocket scientists and nuclear engineers are forced to work as waiters and taxi drivers.
Made in Belarus
The largest foreign investor in the country, Ford Motor Company, uses Belarus as a base for cheap assembly of imported components. From its plant in a suburb of Minsk, Ford exports finished automobiles to locations throughout the former Soviet Union. Similar types of assembly projects for International Harvester, the world’s largest tractor manufacturer and Continental Tire are being discussed. Textile firms import cheap raw materials, use cheap local factories and human resources and then export finished goods to markets in the European Union and the US. It may come as a surprise that at many major New York department stores a variety of moderately priced clothing and fashion accessories carry a “Made in Belarus” label.
The big yet all-but-inevitable problem for Belarus following the break-up of the Soviet Union in the early 1990s is that its major foreign policy emphasis remains directed toward Russia. As it has become all too clear that the Russian economy alone cannot be relied upon, Belarus is being forced to re-examine its relationships and concentrate on improving its links to the European Union and the USA.
“In reality,” says Kravtsov, “the antagonistic rhetoric of the government is irrelevant. Maybe 40% of the electorate are nostalgic for the Soviet era. Many government statements are directed specifically at winning support among this 40% and have nothing to do with the commercial environment for investment.”
Prickly relations
The one issue that elicits the most heated opinion from leaders of Belarus corporate and financial sectors is that of the prickly relations with multilaterals, particularly the IMF. So far, the country’s track record with such agencies has been perfect. There has been no default on, or restructuring of, any of a number of credit facilities arranged by the World Bank nor any difficulties in maintaining existing credit facilities with the export guarantee agencies of Germany, Austria, Holland and Belgium.
“If it were not for the Russian crisis, we would have had excellent macroeconomic results this year despite the fact that we have virtually no access to external financing,” says Nicolai Korbut, the minister of finance.
Belarus’s outstanding foreign debt is less than $900 million, half of this owed to Russia. This amounts to approximately $90 per capita one of the lowest figures in emerging Europe. Further, the fiscal deficit is low at less than 3% of GDP. The budget for this year envisages the deficit even lower at less than 1.8% of GDP.
Despite these positive factors, negotiations between Belarus and the IMF are usually described officially as “cordial but frank” the diplomatic term for ice-cold. The view in Minsk is that the multilaterals have arrived at their low assessment of Belarus on a basis of inaccurate external sources of information and that they rarely, if ever, visit the country.
A particularly disappointing multilateral decision for Minsk came early this summer when the government was faced by a crisis in the agricultural sector caused by the worst drought for more than a decade. The ministry of finance approached the World Bank, which has a special agricultural support fund designed to assist drought-stricken countries. The bank refused assistance. Its explanation, according to Belarusian officials, was that the country’s stagnant economic reform programme was the main problem.
This type of antagonism between the central government and a handful of multilaterals has a direct and significant effect on attracting foreign investment. As Belarus has yet to establish a formal agreement with the IMF, many potential foreign investors are put off even visiting the country. Country reports prepared by IMF delegations and freely available on the internet act like a Fodor’s restaurant guide used by corporates scouting the emerging markets for investment opportunities.
“The reason why foreign investment in the country is very restricted is purely and simply because of the relation between Belarus and the IMF,” says Vladimir Novik, deputy chairperson of Belarusbank. “The country just has too low a rating with the multilateral and rating agencies.”
Poor external relations have had a crushing effect on private-sector financing. Take the case of Belaruskali, one of Belarus’s largest corporations. Belaruskali exports $500 million annually in potassium fertilizer to more than 50 countries. It enjoys stable cashflow from abroad, a cheap workforce, a huge market for its output and an almost unlimited domestic supply of potassium from underground mines. Despite these fundamentals, which normally would have European bankers flooding into the company’s head office, credit for equipment purchases and investment is scarce.
A consortium of Polish banks recently agreed to finance export of Polish-made mining equipment to Belaruskali. But at the last minute the National Bank of Poland stepped in and required the banks to create a 100% bad-debt reserve to cover the possible loss on the deal. Faced with such an onerous requirement, the Polish banks withdrew the offer, the export consignment never took place and Belaruskali was left without the equipment it so badly needed for modernization.
Major corporations have investigated the country. Some have even made an initial investment but then left. They were scared away either by what they saw as political risk or, in many cases, were warned off by their embassies. “The main problem is the political image of the country which, from a purely commercial standpoint, is completely unjustified”, says Yuri Sidorvich, director of Deloitte & Touche Belarus.
For those who have put politics aside, there are dollars out there for the making. Just looking at the consumer-durables sector, the local market clearly is supplied by all the leading multinationals from Nestlé and Procter & Gamble to Coca-Cola and Samsung. “We make money in this country and so do most of our clients,” says one banker. And for seasoned veterans of dealing in emerging markets, there are some admittedly tricky and far from transparent ways of converting rubles and taking out hard currency.
Belarus has a far more favourable tax and regulatory environment than neighbouring Russia, Ukraine or Poland. There are numerous tax breaks for foreign investors setting up in the country.
To begin with, there is a three-year tax holiday eliminating all income tax, customs duties and VAT on imports. For the following three years investors enjoy a 50% reduction in these taxes. In a situation where an investor plays a strategically important role in the national economy, such as Ford, this 100% tax holiday is extended to five years and can be further extended by negotiation. And a border-free market exists between Belarus and Russia with no customs controls in force between the two countries. This means that production from any Belarusian facility can be freely exported and distributed throughout Russia.
