Doing Business in Belarus: Threats and opportunities

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Belarus is an Eastern Europe country that gained independence from the USSR only in 1991. From this year on, the country opened to free trade but, because of the lack of any consequent production industry, Belarus had to cope with an acute consumer goods crisis that dragged the economy during several years. Besides, as most people could not afford to launch their own business after the collapse of the Soviet Union, importations from abroad began to develop actively.

Nowadays though, more than fifteen years after the country’s independence, Belarus can display a relatively modern retail sector. Five strong hypermarket chains (including Euroopt ltd) currently control about 80 % of the country’s retail market. However, the country is still quasi devoid of any high-tech or modern production factories even though there is a growing demand for high-tech products from the part of Belarusian people themselves. Today, Belarus’ biggest business partner is still Russia, by far. For example, about 60% of all Belarusian export goes to Russia. Cultural, economic and political differences with Western European countries still act as a barrier for any successful cooperation between the two regions.

Political and economic systems

Mr Lukashenko, President of Belarus since 1994

Belarus is a unitary state divided into six main regions. Councils of deputies make up the local authorities and are elected for a period of 4 years.

The head of state is the President of the Republic of Belarus and is elected by its people for a period of 5 years even though he or she might be reelected an unlimited number of times (president Lukashenko has been president of Belarus since 1994…). The Executive power is embodied by the Council of Ministers, which is a central government body, accountable to the President and responsible to the Parliament. The Parliament of Belarus embodies the legislative power.

Belarus’ economic system is characterized by the coexistence of a state-command system inherited by the Soviet Union period and the development of free market relations. The state-command system can be seen in the dominance of administrative methods in all spheres of public life and in the nationalization of many parts of the country’s economic sectors. With this regard, the lack of private financial incentives is systematically compensated by a strong administrative intervention by the state. Banks are entirely controlled by and dependent on the National Bank of the Republic of Belarus and the government which are closely interconnected. The exchange rate is also thoroughly controlled by the two institutions. As it stands, the situation in Belarus can be described as a typical example of the “trilemma” in international economics. According to this theory, it is impossible for a government to have a fixed exchange rate, free movement of capital, and an independent monetary policy in the same time.

The Belarus state, however, has been trying to control all three aspects of the trilemma, i.e. controlling movements of capital, maintaining fixed exchange rate, while controlling the central bank’s monetary policy. The consequences of such a wrong policy have been dramatic. Exchange rate of the national currency, the Belarusian ruble, to the USD felt down by 1000% for the last 8 years and the country got close to bankruptcy twice for the last two years. As usual, the country went through the crisis thanks to Russian credits. Belarusian public debt currently stands at USD 50 bn, mostly to Russian creditors, which is a relatively small amount given, for example, Greece’s total public debt which stands at USD 700 bn.

70% of Belarusian enterprises are state-owned and, in most cases, these enterprises are also unprofitable, despite some notable exceptions such as the raw materials sector. Belarus’ main source of wealth stems from its strategic geographic position between Russia and Western European countries. Belarus can import crude oil at a cheap price from Russia and then re-export it to the West. Therefore, it could be said that Belarus also sits on the Russian “oil needle”. Also, Belarus is the worldwide leader in the exportation of potash fertilizer…

A key advantage for foreign businesses to invest in Belarus, though, is the relatively low level of competition compared to Western economies even if it does not advantage the Belarusian people who, as a consequence of low competition, lack choice in consumer goods and often have to pay crazy prices on imported goods. Custom duties on Western goods can go up to 40% for some goods.

Belarus joining the WTO or the EU?

Belarus is currently negotiating to enter the World Trade Organization (WTO) which would potentially increase the competition within the country. However, the government will have to remove or, at least, lower its custom duties in order for foreign product prices to be competitive. Moreover, since Belarus mostly has an agrarian and processing industry economy, it is likely that the government will try to keep high import duties on these industries in order to protect them from international competitors.

 If Belarus was to join the EU (which is very unlikely today), import duties will automatically disappear and first-movers could enter the country and make significant profit at first, thanks to cheap labor costs. However, profit margins are likely to shrink in the middle-to-long term due to increased competition in the Belarus market.

Currently though, Belarus is part of the Eurasian Custom Union, made up of four countries, i.e. Armenia, Belarus, Kazakhstan, and Russia. As in every custom union, no custom duties or economic restrictions apply to the union members (except on some very exceptional products). Besides, members use a single tariff rate to trade with third countries.

Potential risks of doing business in Belarus

The investor or entrepreneur who would like to do business in Belarus will still have to face potential risks that are typical for emerging Eastern countries. First of all, laws in Belarus can be very unpredictable and can change on a very abrupt manner. Moreover, in case of a court trial between a private and a governmental body, judges will always support the position of the government because of the interpenetration of the different layers of power in Belarus.

Besides, foreign exchange control is very strict and private firms willing to import goods from abroad are not allowed to make prepayments in foreign currency.

Another issue is the country’s banking system. Banks often apply preferential rates to state enterprises and, thus higher credit rates for private companies. For example, some lending rates can reach 60% for loans in Belarusian rubles (BLR) for private companies. Besides, foreign exchange control is very strict and private firms willing to import goods from abroad are not allowed to make prepayments in foreign currency. Instead, the foreign supplier will have to deliver its good to the border, declare it and, only then, will the firm be entitled to pay its supplier in a foreign currency. As one can easily imagine, this situation is very uncomfortable for both parties as most suppliers do not want to send their goods without prepayment, especially if the firm has no reputation. On the other hand, firms that export from Belarus are obliged by law to exchange up to 50% percent of their foreign currency revenue on the Belarusian Stock Exchange.

Furthermore, the level of corruption in Belarus leads to unfair competition as well as to flagrant incompetence and lack of education among senior government executives, which harms the credibility and the performance of the state economy. For example, in December 2014, in an attempt to keep fixed interest exchange rates, the Belarus government imposed a 30% commission on the purchase of foreign currencies while, in the same time, prohibiting companies and businesses to raise the price of their goods, which is technically impossible, since, in a market economy, prices should automatically adapt to reflect the implementation of the 30% commission. The reason behind such absurd measures lies in the trilemma explained before. More importantly, Belarusians have no choice on where to invest their money, except putting it on a deposit or buying foreign currencies. The Belarusian stock market is not developed in comparison with other Western stock markets. Government bonds are way too risky and buying land is also risky as one may face expropriation by the government.

To conclude, one could say that doing business in Belarus implies a lot of risks that only very low risk-averse entrepreneurs would like to take. However, entrepreneurs and investors can be remunerated for that risk thanks to the low level of competition in the country, cheap (and still educated) labor forces and the possibility to reach other markets within the Eurasian Custom Union. This being said, the way to a free market economy is still long for Belarus.

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