Belarus: Belarus Finance Profile

Market competition operates under a weak institutional framework. President Lukashenka has pursued a policy of pervasive state involvement in the economy. Private enterprise is massively discouraged by the authorities. Nevertheless, the World Bank counts Belarus among its top 10 regulatory reformers.

Belarus reformed in six of 10 areas studied by the World Bank statement between June 2007 and June 2008. Its in general rank on the relieve of doing business climbed to 85 from 115. The country created a one-stop shop for property registration and introduced a broad administrative simplification program that set strict registration time limits and computerized its records. As a result, the time required to register property in Belarus fell from 231 days to just 21.  To meet all current tax requirements, businesses must pay 117.5% of profits. Although this % decreased at the beginning of 2009, it continues to significantly hinder any form of entrepreneurship. Government price regulation is widespread. About 80% of all industry remains in national hands; the industrial base has become obsolete. According to the Heritage Index of Economic Freedom 2009, Belarus’ economic freedom score is 45, ranking at 167th place worldwide.

Aside from announcing an in general liberalization of the economy, Belarus in practice has not pursued a authentic process of privatization. The emphasis of large-scale privatization has been limited to corporatization. Belarus is the only country in the world where the government has the right to introduce a golden share (similar to the institution of eminent domain in Western nations) next a firm has been incorporated and privatized.

The formation of monopolies and oligopolies is regulated by law, as for instance the Law of the Republic of Belarus on Natural Monopolies (adopted 16 December 2002). However, national actors are not interested in privatization.

Russia remains Belarus’ major trading partner, accounting for 35.5% of exports and 55.2% of imports in 2007, according to the IMF. Trade increase with non-Commonwealth of Independent States (CIS) nations has been much slower than the regional average.

Until January 2007, the country profited from cheap subsidized energy imports from Russia, which were sold to Western Europe at high prices. This decreased the pressure on the country’s Soviet-style industries to modernize and allowed for expensive social programs. Russia’s recent policy of bringing energy prices for Belarus to world market levels may result in a slowdown in economic increase over the next years.

This change in energy policy may indicate a deadlock for the Lukashenka regime, and has been threatening the government’s stability.

Belarus’ banking system is largely in national hands. The national uses various measures to control the private banking sector, which only plays a minor role. National banks grant loans as the government demands, reducing the banking system’s liquidity and efficiency.

According to the Belarusian National Statistics Committee, in 2014 the primary investors to Belarus came from Russia (41.6% of all total investment ), the United Kingdom (18.6%), Netherlands (13%), Cyprus (6.2%), Austria (3.5%), and Germany (2.5%). In 2014, foreign direct investment in Belarus dropped 0.7% annually according to the World Bank's data on foreign direct investment net inflows.

Investment Climate In Belarus: Room For Growth

While the major investment sums traditionally come from Russia, Western companies are finding their way into the market too, though prefer to profit from Belarus mainly through franchises. Two major examples are McDonald’s and TGI Friday’s. Both of these franchises opened restaurants, but they did so through their Russian franchises. The owner of TGI Friday’s franchise, the Russian company “Rosinter Restaurants Holding”, as well owns the KFC franchise, which makes it the likely franchise owner for KFC's restaurants in Belarus as well.

The franchise of McDonald’s competitor Burger King actually belongs to a Russian businessman Alexander Kolobov, who recently became the owner of Germany's major Burger King franchise and has started to intensively push the expansion of his new business.

While its financial and fuel dependence on neighbouring Russia has helped it to fasten its own investment interests in Belarus, the country’s economic freedom has witnessed a decline in 2015. Belarus scored 0.3 points lower than the last year in the 2015 Index of Economic Freedom, setting it back to the “repressed” category. Belarus is ranked 42nd part the 43 nations in Europe, outperforming only Ukraine, a country in deep political and economic turmoil.

Gains from the Ukrainian Crisis

While Belarus’s ranking has been falling, there is hope that the country can improve its FDI. The Ukrainian crisis not only allowed Belarus to rid itself of its renowned brand as “The Last Dictatorship of Eastern Europe”, it as well ended the country's isolation, and created some potential to create gains in the Belarusian economy.

The armed conflict and lawlessness in Ukraine has made Belarus a much additional reliable partner and transit country for China’s “Silk Road” project. Chinese President Xi Jinping visited Belarus on 10-12 May for the initial national visit in the completed 14 years. In addition to improving infrastructure, the “Silk Road” project could bring much needed investment and develop industry. China’s cooperation with Belarus suggests a solid package of investment may be on the horizon, inclunding a package of industrial projects such as the cooperative industrial park in Belarus which is in the works.

The Ukrainian crisis as well triggered Russia to freeze its contracts for the transit of gas through Ukraine by 2019 and redirect transit through the Turkish Stream pipeline. A similar situation has the potential to develop with the Ukrainian branch of the “Druzhba” oil pipeline, a key transit corridor for Russian oil exports. Belarus, which has two “branches”: the southern (“Gomeltransneft Friendship”) and northern (Novopolotsk oil transportation enterprise “Druzhba”) lines, has critical potential to grab a larger strategic share of the lucrative transit and refining of Russian oil.

Risks to Conduct Business in Belarus

Belarusian Viktar Kisly, the chief of the Wargaming company, which based one of the major office buildings in Minsk, has overseen the creation of one the majority popular war games in Russia and the former Soviet Union “World of Tanks” has seen the effects of the changing regional economic landscape. In an interview to Russian paper Vedomosti, he confirmed that the economic crisis in Russia has led to his audience shrinking and a loss of revenue. The successful businessman, whose company made additional than $500 million in 2014, says that the business development in post-Soviet nations has enormous unrealised potential. According to him, however, Belarus should make a lot of additional steps to achieve favourable conditions for international business, something which it has from presently on to do.

The recent thaw in international political relations with Western nations cannot influence foreign investors’ intentions all by itself. Their initial priority is naturally concerned with being profitable. From their perspective Belarus continues to be one of of the world’s most national-managed economies, or in other words, a place where the national interferes and influences a lot of aspects of the economy.

Presidential decrees are embedded in a hierarchical web of regulations and are often in direct competition with laws and codes, which regularly contradict one an extra. This kind of a high-risk environment is unsuitable for potential investors as it is not clear by which set of rules they should be playing. Macroeconomic instability, which manifests in the devaluation of the Belarusian ruble, increases the risk of inflation in the country. In an inflationary economy prices cease to provide accurate signals for investment and, in turn, creates distortions and disorients potential investors.

To attract international companies, Belarus needs to ensure a predictable business environment and reduce the investment risks for international business. This can be done by creating a common, uniform and equal set of rules and regulations for investing in Belarus. In order to stabilise the macroeconomic situation in Belarus, the national needs to introduce a series of gradual reforms as the economy is not prepared for an immediate conversion to a strict market economy, one that could lead to a sharp rise in inflation and send the economy into a nosedive.