Real Economy: Relying on private initiative

Vadim Sekhovich

Summary

The year 2014 saw the worst recession in the Belarusian economy in the last 15 years. Back in 2011, another year hit by the crisis, Belarusian business was able to make up for the losses caused by the drop in purchasing power domestically by boosting sales in Russia and Ukraine; however, this option is unavailable now, because in 2014, crisis developments in Belarus and those two countries synchronized.

The policy of the Belarusian government to curb the depreciation of the ruble amid devaluation moves in the key export markets affected the profitability of export supplies and the financial status of many domestic companies, especially those controlled by the state. The country’s major GDP generating enterprises – MAZ, MTZ, BelAZ, Gomselmash – reported massive losses in 2014.

Growth was recorded in the potash sector and oil processing, which accounted for the bulk of budget revenues. Belarusian food-processing companies benefited from the sanctions imposed by Russia; however, the embargo was enforced only for 12 months, whereas growth in the food-processing sector is limited by internal (reductions in pig stock) and external (ban on pork import from the EU, non-tariff restrictions by Russian regulators) factors. In the service sector, road carriers suffered the most from the sanctions and the food embargo. The IT sector, which managed to attract major strategic investors from Japan, the United States, South Korea, and Russia, reported growth in 2014.

Trends:

Manufacturing sector: mechanical engineering underperforms

Last year, the Belarusian manufacturing sector showed a growth of 1.9% from the 2013 level to BYR 668,386.9 billion at current prices. The main contributors to that growth were potash and oil production, manufacturing of potash fertilizers, and oil processing. The mining industry reported a growth of 41.7% year-on-year, the chemical industry (including fertilizer production) increased its output by 25.1%, and the oil-processing sector expanded by 8.5%.1

The chemical industry and oil processing are parts of the processing sector, which accounts for approximately 90% of Belarus’s manufacturing output, at BYR 599,721.9 billion in 2014, which represents a 0.4% increase from 2013. The chemical industry and oil processing were the only components of the processing sector that showed growth last year.

The reduction in oil prices, narrowing of the capital market on the back of the sanctions imposed by the West, and resulting drop in the purchasing power of Russian importers affected the Belarusian manufacturing sector, which remains focused on the Russian market (50% of Belarusian manufacturing export is sold in Russia). Mechanical engineering suffered the most from the reduction in export revenues.2 The output of vehicles and equipment fell by 21.3% year-on-year in 2014, of machinery and equipment by 19.8%, of mine dump trucks by 41.9%, of trucks by 31.4%, of buses by 30.8%, of internal combustion engines by 22.7%, of tractors by 16.7%, or grain harvesters by 14.4%, of refrigerators and freezers by 18.4%.

Some enterprises had to be shut down because of problems with sales. In the spring of 2014, the joint Belarusian-Russian venture Atlant-SM, which produced Atlant refrigerators and freezers in Russia’s Smolensk, was declared bankrupt.

The policy of Michail Miasnikovič’s government aimed at maintaining the exchange rate of the Belarusian ruble amid the devaluation of the national currencies of Russia, Ukraine, and Kazakhstan affected the profitability of export supplies. Some 95% of Belarusian export to Russia was paid for in Russian rubles, which resulted in a plunge in export revenues in U.S. dollar terms. Belarusian mechanical engineering reported losses for the first time in recent years. The three open joint-stock companies with most losses in the first three quarters of 2014 were BelAZ, MAZ and MTZ. Gomselmash and some other mechanical engineering companies also reported significant losses. Some of them had to change to a four-day work week and reduce the average number of employees.

The political and economic instability in Ukraine resulted in a reduction in supplies of Belarusian commodities and services (except for fuel) to the second most important export market.

Belarusian exporters that traditionally work with the Russian and Ukrainian markets sought to diversify their sales by approaching the markets of Asia, Africa, and Latin America. However, they failed to make up for the losses in Russia and Ukraine. Uganda was the only new export market for Belarus in 2014.3

The food embargo imposed by the Russian government against the United States, the European Union, Norway, Australia, and Japan in response to their sanctions enabled Belarusian food manufacturers to increase their export supplies to Russia. Cheese export increased by 26.3% year-on-year, and poultry meat deliveries went up by 19.5%. However, because of the situation with the exchange rate of the Russian ruble, the profitability of foreign supplies dropped. Furthermore, Belarusian exporters lost an additional USD 100 million as a result of restrictions imposed by Russian supervisory agencies. Overall, food output (including beverages and tobacco goods) edged down by 1.8% year-on-year in 2014.

Agribusiness: not enough meat and efficiency

The Russian food embargo became a pleasant surprise for Belarusian food-processing enterprises; however, they were unable to exploit the full potential of the Russian sanctions mostly because of shortages of agricultural raw materials, especially meat. Last year, cattle meat and poultry meat output (on a live weight basis) shrank to 1.55 million tons, of them poultry accounted for 38%, cattle for 35% and pork for 27%.

The Belarusian agricultural sector did not manage to restore its pig population, which was cut by 22.2% in 2013 because of an outbreak of African swine fever. Moreover, throughout 2014, pig stock fell by 10.8% to approximately 2.5 million. As a result, pig farms produced 350,000 tons of pork in 2014, which represents a 13% decrease from 2013. The government has been set the task to increase pig stock to 3.3 million in 2015 and boost pork output by 100,000 tons.

Many of Belarus’s meat-packing factories suffered losses in 2014, and to make things even worse, a ban was imposed on import of pork from the European Union because of African swine fever. Belarus managed to organize supplies from Ukraine and Moldova, but Balkan exporters benefited the most – meat import from Montenegro (primarily pork) expanded by 93 times. Serbia became another important pork supplier to Belarus. In addition, Belarusian meat-packing factories started importing meat from Macedonia and Bosnia and Herzegovina.

In the dairy industry, Belarusian producers set a new merchantability (ratio of sales to milk yield) record of 89.2%. In 2014, milk yield totaled 6.2 million tons, and sales amounted to 5.6 million tons. However, when it comes to the key quality parameter of the industry – milk yield per cow – most of the largest dairy farms (Alieksandryjskaje, Žuraŭlinaje, Vasiliški) can only be found in the lower part of the nationwide list.4

However, ever the record high milk output was not enough to meet the growing demand for dairy products in Russia. In autumn, nearly all Belarusian dairy factories started importing dairy raw materials from the European Union – Poland, Lithuania and Latvia – which resulted in growing tensions with Russian supervisory agencies. Import of dairy raw materials from the European Union continued in 2015.

Overall, Belarus’s farm output went up by 3.1% year-on-year in 2014 to BYR 131.4 trillion. An apparent new trend is that the sector, which used to develop using almost exclusively state subsidies, started making use of private investment.

In 2013–2014, several big businessmen implemented investment projects in agribusiness. In 2013, the owners of Ždanovičy Trade House bought three farms in the Valožyn District and integrated them into an agricultural holding. Also in the Valožyn District, Aliaksiej Alieksin and Jury Čyž launched the country’s largest bacon pork production Danprod. The owner of a controlling stake in one of the best-equipped Belarusian dairy-processing companies Turaŭ Dairy Factory Ihar Černiaŭski (Premierleasing) last year began investing in the meat-packing facility that he is building in Bolbasava in the vicinity of Orša. The owners of Evroopt, a major retail business, acquired a poultry factory in Aliachnovičy in 2014 and began broiler chicken production.

Malaryta-based Savushkino branch of Savushkin product dairy company became one of the country’s top-20 most effective dairies in 2014. In 2015, the owner of major poultry meat companies Servolux Agro and Smaliavičy Agro (the two accounted for 26% of poultry meat made in Belarus in 2014) Jaŭhien Baskin will be investing in the construction of a new poultry factory. The businessman plans to expand his market share to 30%. Baskin’s business is already among the top seven poultry makers in the Eurasian Economic Union. Lithuanian businessman Vidmantas Kučinskas is planning to open turkey meat farms in the Lida and Salihorsk Districts, as well as in the Mahilioŭ Region.

The Presidential Administrative Department continues its work to create Belarus’s largest agricultural holding Mačuliščy. Last year, the holding was granted Belarusbank’s agricultural assets. As of today, Mačuliščy is the country’s largest dairy producer; the holding also makes pork, poultry meat, and incorporates dairy farms in Škloŭ and Pružany.

Services: Belarus’s IT market ready for global investors

Last year, Belarus’s commodity trade showed a deficit of USD 4,395.6 million (export supplies reached USD 36,392.3 million, and import amounted to USD 40,787.9 million. Meanwhile, the country’s trade in services showed a surplus of USD 2,208.4 million, with export amounting to USD 7,819.8 million and import, to USD 5,611.4 million. The Belarusian service market focuses mostly on consumers beyond the CIS, which is especially important, because the profitability of export to the Russian market dropped. Non-CIS foreign markets accounted for 66.7% of Belarus’s service export last year, meaning that Belarusian service exporters felt quite confident even amid recession.

The continuous progress of Belarus’s IT sector remains quite impressive. The main software suppliers led by EPAM Systems managed to further boost export (back in 2013, Belarus overtook the United States and India by export of IT services per capita). In 2014, supplies of IT services went up by 24.3% year-on-year to USD 689.9 million, and the surplus of IT services trade reached approximately USD 600 million. Now that the profitability of the transport sector decreased and trade in construction services showed a deficit, the growth in the IT sector became a most important factor for the expansion of the entire real economy.

Most of the service market developments were associated with IT product makers. Last year, they managed to attract major strategic investors. At the start of the year, Viber, whose main R D centers are based in Minsk and Brest, was acquired by the Japanese Internet concern Rakuten for USD 900 million. In the autumn of 2014, the American Internet giant InterActive Corp acquired one of the leading global developers of mobile applications Apalon. The financial transaction is estimated between USD 25 million and USD 30 million.

One of Russia’s largest IT companies Mail.Ru Group acquired the Belarusian mapmaking service Maps.Me. In 2014, South Korean SK Hynix, the world’s second-largest chip producer, acquired Softeq, a Belarus-based developer of flash memory firmware.

Belarusian investors remained traditionally active in the global IT market. In 2014, EPAM Systems made record high investments in the United States, Armenia, and Hong Kong. Wargaming.net acquired new assets in the Chinese and American markets for online games, and together with the global giants Zynga and Nexon established the capital venture fund Seed Fund to invest in Europe. Another venture capital company, Fenox Venture Capital, originally established with Belarusian capital, continued investing in IT technologies in the United States, Japan, Singapore, Malaysia, Indonesia, and entered the market of Bangladesh.

In late 2014, the Belarusian Finance Ministry, which kept looking for additional resources, suggested raising the income tax rate for the residents of the High-Technology Park to 10% from 9% and trebling transfers to the Social Security Fund. The administration of the Park and owners of IT businesses argued that the regulatory initiative would eliminate one of the main advantages of Belarusian developers in the global market. The move would produce a negative impact on the investment image of the country, because the special regulatory framework introduced for the residents of the Park for the period to 2020 might be amended.

Conclusion

Since the late 2014 devaluation of the Belarusian ruble, the real economy has operated in conditions of a marked reduction in consumers’ purchasing power in both domestic and foreign markets. The lack of significant resources and heavy dependence on external factors increased the relevance of efforts to boost efficiency and ensure a safety cushion. Unfortunately, few Belarusian companies have made substantial progress in these areas.

The new government formed at the end of 2014 – at least as far as its composition is concerned – offers hope that reasonable decision will be taken during the crisis. The government’s first moves and policy statements (declaration on equal access of private and state business to state support, focus on investment, etc.) suggest that it is ready to deliver; however, Andrej Kabiakoŭ’s Cabinet’s initiatives tend to be blocked by the supporters of command economy techniques in the Presidential Executive Office.

The economic environment in Russia that is shaped by global oil prices, and the economic sanctions, which might be further expanded, complicate the economic situation at the largest Belarusian state-controlled enterprises. They are not on the approved list of entities subject to privatization in 2015. However, we cannot rule out that such enterprises may become new examples of public-private partnerships employing primarily big national capital.

The increase in the contribution of private business to GDP is an ongoing trend. The private sector is becoming a leader in terms of many macroeconomic indicators. The retail operator Evrotorg became last year’s largest employer of the country with more than 30,000 employees as of the start of 2015, some 50% more than state-run MAZ has. The development of the private sector helps deal with the employment of personnel from stagnating state-controlled enterprises.

Belarusian companies have sufficient reserves to increase their share in the global IT market and attract significant investments. The recession in Russia makes Belarus an appealing destination for Russian companies and specialists.

In 2015, some major M A transactions with IT product companies and international IT businesses will likely be completed; however, there is a possibility that in the context of the crisis phenomena, the current business conditions may be amended. Furthermore, in 2016, Lithuania plans to open its own IT park.

Other sectors with good growth prospects in the near future are the pharmaceutical industry and processing of agricultural raw materials.