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Belarus Do you want Sausage or Freedom? Thomson Valliyakalayil September 3, 2008 GPES Summer U3

Overview Belarus is a landlocked country in Eastern Europe bordered by Latvia, Lithuania, Poland, Ukraine and Russia. With its population of 9.6 million concentrated in its urban centers, much of Belarus consists of flat marsh land dotted by lakes. Although it has a declining population growth rate, there is immigration into the country and the majority of the population is Belarusian with Russians, Poles and Ukrainians making up the significant minorities. Belarus is divided into 6 provinces and the capital municipality of Minsk2. Belarus has a well developed infrastructure, built to facilitate the transport of goods east to west between Germany and Russia, and north to south between the Ukraine and the Baltic Coast3. An independent country since 1991, Belarus has been held back from economic upheaval by its authoritarian government and statist1, planned economic policies. GDP per capita in 2007 was around $10,9002, 3 (Figure 1) and the growth rate was 8.1% (Figure 2). This growth rate has been fueled by policies that are not sustainable in the long run, including selling stakes in state enterprises4 and re-exporting oil purchased at subsidized rates5, 6. When analyzed against the growth “diamond� model, Belarus has failed to establish a strong non predatory government and has mismanaged its financial systems through state intervention. This interference, along with restrictions on private enterprise, has created a difficult climate for entrepreneurship in Belarus, with a resultant lack of competitive private domestic firms, and a concentration of existing management expertise in state controlled companies.

History Belarus declared itself an independent country only in the 20th century7, since it has historically been a part of several other countries including the Grand Duchy of Lithuania8, Polish-Lithuanian Commonwealth9 and the Russian empire10. The Rus’, Swedish Vikings who settled around Kiev, created the first empire to rule the area and established a clear political identity for the region11. After their empire crumbled, the region of Belarus was absorbed by the Grand Duchy of Lithuania, and then control of the region swung between the Polish and Russian power centers in the region12 until the beginning of the 20th century. After World War I, the Belarusians were supported by the Germans in their quest for an independent country. They called the country the Belarusian People’s Republic, and it was recognized by most of the countries in the world. However, due to the expansionist tendencies of both Poland and Russia, Belarus was divided between the two and did not enjoy independence again until the fall of the Soviet Union. During World War II, Belarus was invaded by Nazi Germany, and lost a quarter of its population, most of its Jewish population, and a significant amount of its economic resources. Germany destroyed 209 cities in the Belarus region13, and over 95% of Minsk by the end of the War14. The Soviets took over Belarus after the war, and established the Byelorussian Soviet Socialist Republic. Belarus was granted a seat in the UN for its losses during World War II, and did not rise to pre-war population levels until the 1970s. Under the Soviet Union, Belarus was subject to communist control and the Belarusian cultural identity was suppressed. Under Stalin, Russians were moved into key positions of power in Belarus, and there was a focused effort on russifying the region.

Communism was popular due to the liberation from German occupation, and an effort towards independence was only made after Gorbachev’s reform efforts, in the 1980s. The Chernobyl nuclear power plan explosion, which resulted in about 70% of the fallout impacting Belarus, angered the population and created resentment towards the government. The discovery in 1988 of mass graves containing Stalin’s Belarusian victims also affected the populace and led to the creation of the Belarusian Popular Front (BPF). In March 1990, elections were held for seats to the governing body, and Belarus declared its sovereignty on July 27, 1990 as the Belarusian Soviet Socialist Republic. However, after the elections in 1990, only 10% of the representatives were from the opposition party that wanted independence and there was little public reaction to calls for independence. On August 25, 1991, Belarus declared independence and changed its name to the Republic of Belarus. Stanislav Shushkevich was named as the chairman of the Parliament, while Vyachaslaw Kyebich was the prime minister. Belarus formed the CIS with Russia and Ukraine in December 1991, and signed the Alma-Ata Declaration later that month, which resulted in adding eight states to the CIS and also established the headquarters of the CIS at Minsk. After independence, the opposition continued to call for a national referendum and new elections. While there seemed to be interest among the electorate, the elected deputies rejected the referendum citing violations in the signature collection drive. This led to a dispute between the opposition and the ruling majority with accusations of constitutional violation thrown back, finally resulting in elections being held a year early. The ruling party, which consisted of former communists, was extremely conservative about economic and political reform, and was reluctant to privatize collectives and state

farms. The Supreme Soviet adopted a constitution that created the office of the President, who would be the new head of the government instead of the prime minister. In the election held soon after, in 1994, Kyebich was defeated by a relatively unknown contender who campaigned on an anti-corruption agenda, Alyaksandr Lukashyenka (Alexander Lukashenko)15 16. Lukashenko has been in power ever since, with no signs of stepping down, and his influence on the government structure of Belarus will be discussed in the following section.

The Current Economy The Belarusian economy resembles a developed economy with its predominant focus on industry and service sectors (Figure 3). The Lukashenko government is focused on accomplishing specific social goals for its electorate, including full employment and a lower GINI coefficient. To this end, the government pursues policies that rely on keeping state controlled firms operational even while inefficient and also pursues closer relations with Russia in order to capitalize on any trade advantages through that relationship (Figure 4). Due to trade rules that removed export duties on Russian crude oil supplied to Belarus from 2000 to 2006, Belarusian oil refineries were able to sell refined petroleum products in Europe and Russia. However, Russia reinstated trade duties, and insisted on further Belarusian trade duties on its exports, a percentage of which is also due to Russia. Belarus is also highly dependent on Russian natural gas supplier Gazprom for its urban residential heating needs. While sales have traditionally been subsidized, Gazprom has raised rates and plans to raise prices further. Belarus offered Gazprom control of Beltransgaz, which operates natural gas pipelines in the region in lieu of concessions, but has still had to deal with higher energy prices, which has created increasing interest in

greater energy efficiency. Belarus does not have a strong telecommunications infrastructure, and internet adoption has also been slow in the country. Under continued pressure from Russia to privatize key industrial sector assets, Lukashenko has resisted and shows no interest in moving towards significant privatization. Belarus continues to face economic pressure due to the changing external conditions and Lukashenko’s focus on supporting the agricultural sector3. Lukashenko’s focus on a planned economy has also left Belarus at another disadvantage. As part of the Soviet Union, Belarus had a strongly developed heavy industrial machinery base, and also had large state controlled farms. After independence, these firms experienced increased competition and unable to compete with the rest of Western Europe, focused on selling their products to interior markets in Russia and other markets where they had a competitive advantage. However, over the years, they have increased their manufacturing capacity to its limit, and have also reached a stage where much of their capital machinery is becoming obsolete. This will create a crisis for these manufacturing firms. Belarusian state owned farms have been very inefficient in producing crops, and have not found markets outside the country. Even inside the country, citizens grow a majority of the country’s vegetables on their personal vegetable plots, and do not source it from the inefficient farms3.

The Political System After independence in 1991, the Belarusian political system consisted of a unicameral legislature, but the constitution was amended in 1996 to create a bicameral parliament with a 110 member House of Representatives and a 64 member Council of the Republic. The President has a term for five years, and after referendums in 1996 and

2004, presidential powers were extended to allow the president to disband parliament if necessary and hold office for more than two terms. The political system has been controlled by Lukashenko after his victory in 1994, and foreign observers like the Organization for Security and Co-operation in Europe (OSCE) have called the elections unfair. Lukashenko’s terms have been marred by violence against political opponents and many Western countries have described Lukashenko as a dictator. The President also has the power to appoint leaders to each of the regional districts, the voblasts, as well as the power to appoint the Supreme Court judges. This constitution, with its lack of checks and balances has resulted in a considerable amount of power being wielded by Lukashenko. The U.S. has enacted legislation in 2006 supporting funding for pro democracy groups in Belarus17, and to oppose its increasing isolation on the world stage, Belarus has been cultivating its relationships with China and Venezuela, while remaining focused on Russia as its major trading partner and ally. While Lukashenko has problems with his political image outside the country, he has had the support of his electorate in his pro-Russian policies18. Belarus has reduced its poverty levels since independence and has provided comprehensive social security and basic health and education services. Belarus has emphasized a strong central government and has managed resource allocation with the help of government planning6. Internal and external threats to Belarus have been minimal since independence, as internal government opposition has been weak and fragmented. Internal opposition has not had the benefit of a free press, since the major television and news organizations are state controlled. Its neighbors, Latvia, Lithuania, Poland, Russia and Ukraine, do not have any serious disputes with Belarus2. Its close strategic alliance with Russia has been

undermined by its conflict over natural gas prices with Gazprom, and Lukashenko has been considering closer relations with the EU to offset some dependence19. However, the Belarusian situation remains closely linked with Russia due to its heavy dependence on Russian natural gas for internal energy consumption and its booming refinery and pipeline industry that re-exports a large amount of Russian crude3. While the Belarusian government has provided basic services to the majority of its population, it still suffers from several predatory behaviors that limit its ability to provide a credible commitment to the protection of property rights and order. While the government under Lukashenko has passed several reforms aimed at reducing corruption6, Transparency International ranks it 150th in the world in corruption20 and the Heritage Foundation comments – “Owners of import-export businesses in particular complain that corruption exists at every point in a transaction.”21 Lukashenko’s constitutional referendums allowing him to hold additional terms in office2 have been a prominent exercise in rent-seeking with further signs that he is preparing his son, Viktar Lukashenko, for office22 . In addition to its predatory behavior, the government is also under pressure from its elected mandate. A common question heard before the 1991 and 1994 elections, “What is more useful, sausage or freedom?”23 still permeates the ideological bent of Belarusians, who have seen the effects of free market economics on its neighbors like Russia and would like to avoid the upheavals of an economy undergoing sweeping financial reforms. This has led to support for conservative action, furthered state intervention in the economy and created conditions that make it difficult for entrepreneurs to obtain capital or run their businesses easily. Thus the very political

mandate of the Lukashenko regime opposes widespread financial reform, and the government is often forced to provide more reforms only as a last resort. Lukashenko might have begun with the best intentions, even with an authoritarian regime, but no credible commitment has been made to establish a non predatory government, and the outlook does not look promising in the long term.

The Financial Sector In addition to its deficient political system, Belarus has been plagued with constant government intervention in its financial sector. While the government has been trying to keep the monetary supply stable, inflation has recently hit a high of 16% and the government faces a lot of pressure to push through some market reforms that will help it stabilize the economy1. The Belarusian central bank is not an independent entity but is held to be accountable to the President of Belarus. Additionally, while the central bank is mandated to be independent and to protect the Belarusian ruble and ensure its stability, several other statutes in its charter give control to the President and allow the President to affect the bank’s operations. For instance, the Chairman of the bank is appointed by the President, and the bank’s annual reports are approved by the President24. Banks dominate the Belarusian financial sector, holding assets worth 30% of the country’s GDP in 2004. The six largest banks, which are government controlled, hold close to 87% of the total assets and about 90% of the capital. These banks, which include the Belarusbank and the Belagroprombank, participate in government programs which involve preferred lending to the agricultural and housing industries. This situation creates a moral hazard for the banks, which lack an incentive to assess risk accurately, and for

the recipients of the loans, who are state controlled enterprises with no incentives to create a return on their invested capital in addition to being less efficient in utilizing their capital. These “recommendations� have created liquidity crises for the two largest banks in Belarus and affected profitability. In order to compensate these banks for their lending activities, the government has not enforced banking regulations in some instances, and has also recapitalized through debt/equity swaps. Other weaknesses in the banking sector include a tendency among banks to concentrate on specific industry segments and a large amount of short term deposits and loans. Belarus has a small securities market, which is controlled by the Belarusian Currency and Stock Exchange. The capital market was started to help privatize state enterprises, but with a lack of commitment on the part of the government, this has resulted in few opportunities for investors to get involved. Most of the trading involves government securities and there is very low secondary trading. Belarus has a small insurance sector as well, but growth has stagnated due to restrictions on the entry of private companies into the industry sector. 25

Entrepreneurship in Belarus The failures discussed earlier in both the political and financial systems have led to difficulties for entrepreneurs in securing their property rights, accessing external funding and cheap and easy entry and exit from businesses. Additionally, the government has tightened restrictions on private enterprises, and the amount of regulations needed impede the ability to act quickly on business opportunities. These regulations have led small and medium sized private companies to concentrate on retail and catering, which have lower capital costs than other industries and provide less risk for excessive losses.

Reports over the past 3 years have shown however, that it has become easier to open a business in Belarus, with the duration of days required to get a license dropping from 69 in 2007 to 48 in 2008. Belarus has improved its ranking among countries in ease of starting a business to 119 from 154 in 2007 (Figure 5). The amount of licensing required has remained the same, and labor regulations have also remained at the same level. Registering property for a business can take up to 231 days in Belarus, giving it a global rank of 94, and credit regulations are weak, but investors are protected to a larger extent. Belarus is ranked 178th in the world in its tax payment system, with a tax rate of 144.4%26 of profit27.

Belarusian Managerial Capabilities With a significant portion of its population employed by state enterprises and living in urban areas, Belarus enjoys a high literacy rate and an educated population. However, the lack of entrepreneurial opportunities has created a situation where Belarus lacks a strong pool of talented managers. While the large state controlled enterprises provide some opportunities for managers to develop their talents, the bureaucracy involved is too closely linked to the government to be experienced in dealing with free market pressures and competition.

Conclusion Belarusians have allowed Lukashenko to overthrow the checks and balances of the constitution to create an authoritarian regime that has proven predatory through its regulatory activities. The Belarusian government focus on a planned economy has also

created difficulties for Belarus, creating financial crises that will cause economic upheaval in the future and prevent the identification of Belarus’ comparative advantages. Lukashenko’s policies have also stifled trade externally with the European Union, which has the resources to be a major trading partner, and internally, preventing entrepreneurs from accessing capital and entering and exiting businesses. Current economic growth can be explained by its strong strategic alliance with Russia, but does not provide any support that Belarus can continue its growth in the future without external support from Russia.

Charts and Tables FIGURE 1 – GDP PER CAPITA (PPP) (US$)





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