Transition without the recipes

by Simon Pirani

Belarus’s tiny private business sector, which accounts for an estimated 8% of GDP, is expanding. “We are very optimistic”, Sergei Kostiuchenko, chairman of Priorbank, the country’s largest private bank, told Emerging Markets. “We are budgeting for our SME and retail portfolio to expand by more than 50% this year. “Sure, the authorities underestimate the role of private business, and there is no state programme to encourage its development. There is a big bureaucracy that tries to control and check everybody and everything. But private business is growing nonetheless.”

Priorbank, in which Raiffeisen Bank took a majority share in 2002, is the only private bank in the big five “system forming” banks, which are authorised to service state programmes. It generated $32.3 million in after-tax profits in 2005, a 29.1% return on equity that Kostiuchenko points out is the highest in the Raiffeisen group.

The demand for credit from private business is a key driver, he says. “We sought investors four years ago, because our clients suffered a shortage of credit. Thanks to our relationship with Raiffeisen we have access to international capital markets. Our know-how in risk management is unique: we are aware of accounting and transparency requirements sought by Vienna, and aware, too, of the Belarussian realities in which our clients have to operate.”

Belarus’s business environment is among the most hostile in Europe, according to most measures – but the government has started a dialogue with business associations and international financial institutions about improving it, and even been willing to remove some restrictions.

Ivan Ivanov, who heads the IFC’s office in Belarus, told Emerging Markets that the private sector has grown in the last three years. “It is not impossible to do business, but it is expensive and difficult.

“Established businesses can grow at the same rate as the market. But the number of private businesses hardly changes. There are high costs of entry, which distort the market and damage competitiveness.

“Administration and regulation has to change if the economy is to grow. Business and government are talking about this, and we like to think that IFC has facilitated that dialogue.”

Underneath the uneasy growth of the private business sector is an economy that defies stereotypical assumptions about market transition, and a political regime that is slow to change.

Since 1996, the economy has averaged 6.6% annual growth, a cumulative increase of 77.4% to 2004 – a boom “driven primarily by improvements in labour productivity and increases in both energy efficiency and capacity utilisation”, according to a recent study by the World Bank.

Belarus has ignored many typical transition recipes, such as rapid restructuring and privatisation. During the 1990s, capital flight was blocked and some wealth channelled into workers’ pockets. In the eight years to 2003, average earnings, measured in hard currency, doubled, accounting for 53% of growth. This was a key stimulant to demand, says the World Bank. Over the same period, the proportion of Belarussians living below the poverty line fell from 39% to 18%.

The World Bank also praises the Belarussian government for reducing economic distortions: it puts a premium on improved macroeconomic policies, and the introduction of payment discipline and phasing-out of barter in the energy and utility sector.

Here’s what some economists call “the Belarus puzzle”: how has the economy grown so fast when the country is at odds with the standard transition paradigm? The answer, says the World Bank, lies largely in Belarus’s competitive advantage in Russia, its main export market.

In 1996-2000, Belarus, which preserved its production capacity better than the rest of the former USSR, had privileged access to the Russian market. Its exporters often had first-mover advantage against Russian competitors hit by the economic slump and financial chaos. In 2001-04, the Russian oil boom carried over in to Belarus, accelerating Russian demand for its products and boosting revenues from exports of processed oil products, especially to western Europe. Domestic demand played a supporting role.

Just as Russia has been urged by economists to use the oil boom as an opportunity to push through reforms, so the World Bank warns that if Belarus does not use the current “window of opportunity” to raise its depressed level of foreign direct investment, to lift the tax and administrative burdens that deter business start-ups and to correct the distorting effect of “complicated and pervasive” state support, then big trouble lies ahead.

Lev Freinkman, the World Bank economist who lead-authored the report, told Emerging Markets: “Belarus has lost ten years of opportunities to diversify further into Europe. The main source of subsidies in the economy is the access to the Russian market, and the Belarussian government exploits these in quite a sophisticated way. But the fate of this system is in the hands of the Russian government.”

The Bank warns of the “high costs of overregulation” and repeats a list with which business people in Minsk are wearily familiar: inspections that have been “worsening over time”, the “lengthy and costly” administration of business permits, and the “excessive tax inspections” and complex tax legislation carrying “severe penalties for unintentional mistakes”.

Then there’s the politics. TV pictures of demonstrators being beaten by police and reports of journalists being arrested en masse after the 19 March presidential election will not have helped Belarus’s efforts to diversify exports from Russia to Europe.

“The presidency has stepped up the pressure on its opponents in the political, social, economic and media spheres”, Petr Maltsev, editor of Belarus’s leading business newspaper, Belarusskaya Delovaya Gazeta, told Emerging Markets. “We are living in a constitutional dictatorship.”

And straight after the election, at which president Lukashenko was returned with 83% of the vote, Maltsev announced that his paper – which has suffered shutdowns, fines, confiscations and threats to journalists regularly for ten years – was ceasing publication and retreating to an internet edition.

Prosperity and democracy are both elusive goals.
 

This article first appeared in Emerging Markets, 21 May 2006.
Posted June 2005; © 2006 Simon Pirani

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