Real Sector: Post-crisis growth

Vadim Sekhovich

Summary

Macroeconomic stabilization, which started with exports in late 2016, spread to the domestic market last year. Commercial lending recovery gave an impetus to business activity. The production sector showed a certain growth after two years of decline. Increases in world oil products prices and Russian food prices started and then maintained positive trends. Exports of services went up, contributing to a foreign trade surplus reported in 2017.

However, the government was not in a rush to support the public sector, which was hit by the recession the most, in previous volumes. In 2017, budget loans given to pay off public sector’s debts were cut 200-fold.

According to the new strategy aimed at liberalizing the business environment and stimulating entrepreneurship, the private sector is to create new jobs for a redistribution of workforce released in the public sector. Several initiatives were adopted with a view to increasing the share of private businesses in GDP. Some important liberalization issues remained unresolved, though, including the mitigation of supervisory measures.

As part of the structural reform of the national economy, a new momentum was given to large sectoral projects (Great Stone Industrial Park and High Technology Park).

Trends:

Long-awaited stabilization

Belarus’ GDP increased 2.4% last year to BYN 105.2 billion. Industrial output followed the overall positive trend with a 6.1% increase to BYN 93.0 billion, which was the highest rate over the past five years (2012-2017) and the long-awaited recovery after two years of decline (2015-2016). Out of the 17 items that constitute the industrial production index (IPI), growth was reported in 15 positions, except for ‘production of vehicles and equipment’ (a 9.4% drop) and ‘production of coke and oil products’ (same as in 2016).1 For comparison, in 2016, nine export items showed positive dynamics.

The processing industry, which accounted for 88% of the IPP (BYN 81.8 billion), increased 7.0%, among other things, thanks to the beginning of stabilization in oil refining, the second largest industry after food production in terms of output. In 2016, it dropped 16.8%, but, in 2017, the previous indicator was maintained. With a slight reduction in physical volumes of petroleum products exports (by 5.5%), it increased 32.1% in value terms to USD 5,337 billion. The UK was back to the top of the list of importers of Belarusian-made oil products, Ukraine being second. In 2017, British customers received oil products worth USD 2.234 billion, a 136.7% year-on-year increase.2

In terms of output, the food flavor industry led with BYN 23.051 billion reporting a 3.2% increase. Six industries, including wood processing (14.4%), and production of pharmaceuticals (10.1%) and chemicals (9.8%) were above the average in this respect.3

Agriculture, which showed good dynamics back in 2016, continued to grow last year. Output increased 4.1% to BYN 18.2 billion.

Gross yields in crop production increased by 6.2% and livestock by 2.4%, satisfying processors’ increasing need for raw materials. The agricultural sector boosted sales of meat on a carcass weight basis, production of marketable milk and all agricultural crops. In 2017, output of grain and leguminous crops increased by nearly 8 million tons, sugar by 5 million tons, and rapeseed 130% to 600,000 tons.4

Dairy factories, meat processing plants and other food producers generated USD 4.9 billion in revenues (a 16% year-on-year increase) including USD 2.3 billion in dairy, making foods the second largest export segment after oil products.

Around 90% of Belarus’ food exports still fall on the Russian market. The diversification of sales markets remained slow. Food producers voice reasonable concern about trade barriers set up by the Russian Ministry of Agriculture and the Federal Veterinary and Phytosanitary Monitoring Service (Rosselkhoznadzor).

Commodity exports, which allowed the real sector to survive the crisis and lay the groundwork for economic growth, grew by 24.0% in 2017 to USD 28,652 billion, according to the calculations made by the National Bank of Belarus (NBB). The rise in the domestic market led to a 23.3% increase in imports to USD 31.575 billion. The deficit of the trade in goods totaled USD 2,923 billion, having increased 16.4% against 2016. According to the National Statistics Committee of Belarus (Belstat), the country ran up a deficit primarily in trade with Russia (USD 6,791 billion) followed by China (2,381 billion). Exports to China dropped 23.3% to 362.7 million, whereas imports increased 28.8% to 2.743 billion.

Nonetheless, trade in services helped Belarus greatly to finish the past year with a surplus. Exports of services grew by 13.9% to USD 7,783 billion and imports by 9.3% to 4,797 billion, the surplus totaling 2,987 billion (an increase of 22.4%).

As a result, according to the NBB’s balance of payments methodology, in 2017, the surplus in the trade in goods and services amounted to USD 63.2 million against a 70.6 million deficit a year back.5

Liberalization initiatives

Private businesses proved to be quite sustainable and showed a good capacity for development amid the recession that did not go unnoticed. Last year, the government came out with a dozen legislative initiatives to give a fresh impetus to private businesses and increase their share in the national economy. They saw private SMEs as the main source of jobs for public sector workforce released in recent years.

The authorities made a list of 18 lines of business, for which it is enough to notify local administrations to start operations. They include retail and wholesale trade, hotel and tourist business, household services, public catering, etc. The Emergency Ministry and sanitary and veterinary services are instructed not to intervene to exercise preventive monitoring.

The presumption of innocence is applied again to bankrupts. Founders and managers bear subsidiary liability only in case of fraudulent bankruptcy. A three-year moratorium was declared on tax increase and new taxes (except for excises). Extra payments may only be charged on liabilities no older than five years.

A renewed Entrepreneurship Development Council chaired by government chief of staff Alexander Turchin resumed activities in late 2017. It includes leading businessmen (owners of Santa Bremor and Savushkin Product, Tabak-Invest, Conte Spa, Amkodor and Marco among them). The Council will be delegated more functions to stimulate business activity that will make it stronger in terms of lobbying capacity. It will have the opportunity to submit proposals directly to the government and contribute to the polishing of draft regulatory acts.

The announced liberalization, however, was accompanied by several arrests of big businessmen. The case of Vitaly Arbuzov, the owner of the automotive components manufacturer Fenox Global Group and co-founder of Fenox Venture Capital charged with tax evasion, was widely covered by the media.

Liberalization policy often contradicts the established practice of squeezing money from private businesses by fiscal and law enforcement agencies. It should be admitted, though, that many private businesses tend to stray into the gray market (the share of which in Belarus, according to the IMF, is over 30%) in times of crisis that gives grounds for prosecution.

Sectoral orientation

In search of new niches, which could substitute the public sector in raising revenues for the budget and become drivers of the national economy, the government promoted two infrastructure projects: the Chinese Industrial Park Great Stone and transport and logistics hub Bremino-Orsha.

After several years of stagnation, last year, Great Stone registered a record number of new residents, not only Chinese investors, but also Belarusian and European entities seeking to develop high-tech projects.

Private investors working in the industrial and logistical cluster Bremino-Orsha will likely be given a status similar to that granted to the Great Stone residents. Last year, they started the construction of one of the largest transshipment transport and logistics terminals between Europe and Asia.

The decree on the High Technologies Park was the main event of the structural reform of the Belarusian economy. Its special regime, which has been in effect since 2005, giving the residents considerable tax reliefs, was extended until 2045. New privileges were awarded to food companies. The list of businesses that make it possible to become residents of the High-Tech Park expanded to almost four dozen. There is a completely different pattern of relations between the state and investors in the IT industry now, including the introduction of legal institutions inherent to Anglo-Saxon law.

Investors dealing with blockchain, tokens, crypto currencies exchange and mining were given the green light. The decree also simplified visa and migration procedures applying to qualified specialists in order to create a world center of a new economy, and introduced measures aimed at de-bureaucratization of High-Tech Park operations and creating the most attractive conditions for global IT investors.

Conclusion

An increase in oil prices and a certain recovery of the Russian market (the key consumer of Belarusian industrial and agricultural products) were the main factors of the national economy growth. However, the heavy dependence on these factors makes economic growth unstable and problematic in terms of the planning of medium- and long-term investment programs aimed at increasing the competitiveness of private and public companies. Competitiveness on the domestic market is largely a result of protectionist policies, which got weaker in foreign trade in 2015-2016, when enterprises were concerned about survival, rather than development.

State-controlled and private companies of Belarus increasingly face similar measures taken by Russia to protect its domestic market. These measures are the toughest in relation to food supplies, which are often restricted, allegedly for failure to meet safety standards under the pretext of re-export of foods subject to the Russian embargo. With state support, enterprises are instructed to redouble efforts to approach new markets in line with the diversification policy. South-East and South Asia and Africa are considered a priority in this respect.

The sectoral development of the economy, in which less promising sectors turn out to be disadvantaged, can work provided that a quick enough return is secured. Otherwise, these projects will be regarded as a state budget drain and will be closed under the pressure of lobbyists from the traditional industries. The uncontrolled use of new technologies for illegal purposes would be the worst-case scenario. This could damage the image of some industries and the whole country.

The political confrontation between the West and Russia and the latter’s worsened relations with Turkey force portfolio investors to reconsider their strategies and look for better options in other countries. Belarus is among them, and funds of international institutions become available to the public sector. Belarusian government bonds are of quite high interest on the world market. One private company created a precedent last year when it entered the European financial market.