Real Economy: A Force Majeure Collapse

Nikolai Suboshich

Summary

The half-war environment and persistent sanctions, which were expanded and thereby directly affected up to a third of the Belarusian economy, compelled the authorities to pursue structural readjustments. Their response, albeit poorly timed, was enough to curb the slump in GDP, which was nonetheless the worst since 1995. All sectors suffered, most of all the manufacturing industry. Oil refining and the chemical industry were the first to feel the effects of the old and new sanctions. Agricultural sector avoided external restrictions, and so that it grew, , whereas the broadening food deficit and growing prices in the world market resulted in a higher proportion of food in the country’s overall exports.

Manual adjustment of the national economy, which is increasingly applied in Belarus and is being introduced in Russia, is a constraint on business initiative. It is clearly not the best time to develop existing or create new companies, now that the economy is transformed to meet wartime needs, laws to protect individual rights and investments are no longer enforced, and most resources are distributed in favor of the public sector and confidants.

Trends:

Half-war: the end of recovery

The war in Ukraine, in which Belarus became involved, frustrated the post-pandemic economic recovery efforts and thwarted the early year plans for its continued growth. GDP dropped by 4.7% year-on-year (to BYN 191.4 billion), a new record fall since 1995.

The collapse in industry (by 5.4% year-on-year, to BYN 169.6 billion), and especially in its most critical component — manufacturing — contributed to the downturn the most. The volume of output in that latter segment, which accounts for more than 25% of gross value added in the country, went down by 6.2%. Because the Belstat statistics authority has not published detailed data since 2022, it is impossible to say which of the ten groups in the manufacturing sector were the worst underperformers. The Minsk Region, where the Belaruskali potash giant is located, which suffered from both sectoral and corporate sanctions, reported the most sizable fall in manufacturing output.

The Minsk Region therefore became the country’s leader in terms of decline in the manufacturing industry: minus 16.0% from the level registered in 2021. The Vitsebsk Region was second with minus 6.8%, the Mahilyou Region third with minus 6.7%, followed by the Hrodna, Homyel, and Brest Regions with minus 3.6%, minus 3.1%, and minus 1.1%, respectively. The city of Minsk as a region was the only one where the manufacturing industry grew in volume terms on a year-on-year basis, by 1.9%.1

Of the other three industrial production index components (around 15% of its total volume), only the mining industry managed to increase output, by 2.5%. Output in the group “supply of electricity, natural gas, steam, hot water and conditioned air” edged down by 2.3% from the 2021 level, and in the group “water supply; collection, treatment and disposal of waste, activities to eliminate pollution”, edged down by 2.6%.

The sanctions had a negative impact on such crucial sectors as wholesale and retail trade, transportation, and information and communications, which, taken together, are comparable to the manufacturing industry by the volume of its gross value added. Cargo turnover went down by 25.4%, wholesale shrank by 17.8%, and retail, by 3.7%. The information industry is increasingly suffering from outflows of workers: in 2022, the number of professionals who terminated their employment in the industry exceeded the number of newly employed specialists by 16,500 people.

Agricultural sector contributed positively to the country’s GDP. After the unsuccessful year 2021, when the sector’s production dropped by 4.2% year-on-year, in 2022, agricultural organizations, farmers and part-time farms reported BYN 31.8 billion worth of output in current prices, an increase by 3.6% in comparable prices. Gross output went up in all of the five key crop categories (cereals and legumes, potatoes, vegetables, sugar beet and colza), along with the production of milk, the most important export item of the livestock industry. The output of eggs, livestock and poultry to produce meat (in live weight) went down from 2021.

Rotation of minuses

The priority objective of the structural rearrangement of the national economy was to rapidly find new outlets for oil products, fertilizers, and timber, which were under sectoral sanctions, as well as to expand the range of exported products, primarily by supplying more items to Russia, which seeks substitution for Western goods.

Losses were unavoidable. According to the National Bank of Belarus, exports of commodities and services totaled $46.8 billion in 2022, down by 5.4% year-on-year. Imports of commodities and services came to $42.4 billion, a decrease by 6.7%. Therefore, a surplus of $4.3 billion was reported in the country’s trade in 2022, up by 8.5% year-on-year, which was for the most part attributed to the fact that import deliveries fell faster than export supplies dropped.

The commodity trade surplus amounted to $172.4 million, while trade in services accounted for the remaining $4.2 billion of the surplus. The latter contracted faster than trade in goods: exports of services went down by 10.8% (to $9.2 billion), and imports shrank by 11.3% (to $5.0 billion).2

Due to its methodology, Belstat reported foreign trade data that differ from those presented by the National Bank. Furthermore, Belstat’s data shed light on how foreign trade activities evolved in 2022 in terms of both their quality and volumes in the two key areas — within the CIS and beyond it.

For the first time since 2006, a surplus was attained in commodity trade with the CIS, at $2.27 billion. This shift is due in almost equal parts to increased export deliveries to that region and lower volumes of imports, primarily of energy products from Russia. The surplus can be viewed as an achievement, since Belarusian exporters reported it despite the virtually complete loss of the Ukrainian market — formerly Belarus' second largest trading partner and the main contributor to the country’s surplus in commodity trade.

For the first time since 2013, the country saw a deficit in non-CIS commodity trade (minus $2.58 billion). The key factor here was the narrowing of exports to the EU, especially of oil products. Import supplies decreased a lot less.

According to Belstat, commodity exports to the CIS increased by $2.2 billion, which was not enough to cover the drop in supplies beyond the CIS (by $3.9 billion).3

Private capital: to flight or wait and see

The authorities postponed their efforts to restructure the economy during the few initial months when state-controlled industries kept growing amid the assumption that the war in Ukraine would be short-lived. That late response affected, among others, the pace of talks over Belarus' own seaport infrastructure in Russia. On the other hand, the growing deficit in the Russian market caused by the mass withdrawal of Western businesses opened a window to increase shipments of products and ensure a relative stability of mechanical engineering, food-processing, light industry and some other sectors.

Private business, which once again found itself without state support, became more susceptible to trade and financial constraints and adapted to the new challenges faster. Months’ worth of stocks of imported materials and components were created (the public sector followed suit) amid tightening sanctions, which temporarily eased procurement-related tensions and had a positive effect on GDP.

Immediate problems were addressed; however, the main challenge posed by the protracted crisis — the vague development prospects — remained to be tackled. In this regard, most private businesses took a wait-and-see attitude, counting on a political resolution of the conflict and choosing to postpone the implementation of almost all of their plans.

Other private businesses made up their minds to leave the Belarusian and Russian markets and were forging ahead with their plans at various speeds. Most of them are foreign companies and representatives of the Belarusian high-tech sector. In 2022, several dozen residents left the High Tech Park (HTP), the number of new registrations dropped several times over. One of the most prominent IT-companies with Belarusian capital, Wargaming Group, sold its business and left the market.

The startup ecosystem as good as stopped its development. Tacit migration continues: while maintaining corporate entities and minimal necessary staff, high-tech companies redirect orders and relocate employees to Eastern and Southern Europe, Central Asia, and Transcaucasia. In 2022, the Belarusian office of EPAM Systems, the country’s largest IT employer, was behind not only Ukraine, but also Poland and India by its number of employees.

Tightening of economic regulations by the authorities (in November 2022, price controls were applied to more than 85% of consumer goods, along with other unprecedented restrictions) and efforts to combat any manifestation of disloyalty (detention and conviction of Priorbank JSC Chairman Sergey Kostyuchenko and other high-profile cases) encourage representatives of other industries to leave Belarus.

The authorities took steps to prevent the mass exodus of private capital. To this end, alienation of foreign owners’ shares in some companies was restricted — a respective list of businesses was introduced in summer and has been extended since then. The list included about a third of foreign companies operating in Belarus. The drop in the number of bankruptcy cases observed throughout 2022 is associated with administrative obstacles to this way for a business to withdraw from the market, rather than improvements of the economic situation.

The global credit insurer COFACE moved Belarus into the group of countries with a very high risk of corporate default as early as the first half of 2022. Belarus remained there until the end of the year.4

The third group of entrepreneurs became involved in parallel import schemes trying to benefit from the window of opportunities in the Russian market. Sources of growth still remain there; however, their capacity is limited in the short term. This is due to tougher international sanctions compared to those imposed on Belarus and stiffer competition there, including from Chinese suppliers and investors. Furthermore, the militarization of the Russian economy leads to further tightening of regulation. In wartime, Russia has every chance to surpass the level of unlawful interference in business that is observed in Belarus today.

The Russia–Belarus integration trend spurred by the war leads to Russia’s increased presence in the local economy, which encompasses a growing number of markets and niches. At the end of 2022, Russia’s FDI in Belarus accounted for more than 56% of combined direct investments in the country. Given investments by Russians from offshore jurisdictions, the share is estimated at 75% or even more.

Conclusion

The overoptimistic official forecasts for the development of the national economy in 2023 (targets for GDP growth and commodity and service export expansion had been set at 3.8% and 5.5%, respectively) run counter to not only the much more cautious outlook offered by international institutions, but also expectations in Russia itself. According to the Bank of Russia, the best-case scenario for its economy is up to 2.5% GDP growth. The situation in Belarus almost entirely depends on developments in Russia, which appears to have been stuck in the protracted war and is suffering from growing sanctions pressures. Aggravating challenges in the global economy can additionally hinder economic growth in Belarus.

Continuous militarization of the economy may produce an effect such as production growth under import-substituting and military programs for Russia at the initial stage, alongside an extensive use of available logistics capacities to transfer products from China, Iran and in the scope of parallel import schemes. The possible effect is narrow, though, due to the insignificant number of industries involved in the process and limited estimated volumes.

New sanctions imposed as a response to the possible deployment of nuclear weapons in Belarus, as well as stricter control over the compliance with previous packages of restrictions will increase pressure on both the public and private sectors of the economy.

As a rule, poorer terms of trade (rising global prices of resources, more complicated logistics, more expensive loans, and increased risks) encourage the Belarusian authorities to recover losses in the public sector by exploiting private business. Similar processes are taking place in Russia, which used to be viewed by Belarusian business as a country with a more liberal and attractive environment for entrepreneurship. Further aggravation of conditions in the neighboring state can become a serious obstacle to attempts to make up for local losses elsewhere and compel Belarusian businesses to terminate their operations altogether.