Economy of Belarus

Recently, the Belarusian economy has shifted into sustained high gear, along with Ukraine, Russia, and many other Commonwealth of Independent States economies. The economic boom provided by mineral wealth of Russia and other CIS nations and its key location as a transit route between the EU and Russia have enabled it to sustain this impressive growth, albeit from a low base level. Following 9.9% growth in 2006 ^{[ [http://www.menafn.com/qn_news_story_s.asp?StoryId=1093149789 MENAFN - Middle East North Africa . Financial Network News: Oman, Belarus exploring business avenues ] ]} in the first quarter 2007, the Belarus GDP grew 9%. ^{[ [http://www.rbcnews.com/free/20070403193147.shtml RosBusinessConsulting - News Online ] ]}

Overview

After the collapse of the Soviet Union all former Soviet republics faced a deep economic crisis. Belarus has however chosen its own way of overcoming this crisis. After the 1994 election of Alexander Lukashenko as the first President, he launched the country on the path of "market socialism" as opposed to what Lukashenko considered "wild capitalism" chosen by Russia at that time. In keeping with this policy, administrative controls over prices and currency exchange rates were introduced. Also the state's right to intervene in the management of private enterprise was expanded, but in March 4 2008, the President issues a decree abolishing the golden share rule in a clear movement to improve its international rating regarding the foreign investment.

In addition to the burdens imposed by high inflation, businesses have been subject to pressure on the part of central and local governments, e.g., arbitrary changes in regulations, numerous rigorous inspections, and retroactive application of new business regulations prohibiting practices that had been legal. Further economic problems are two consecutive bad harvests, 1998-1999 and trade deficits. Also as Belarusian economy has rather tight connections with Russian economy, the financial crisis of the 1998 strike hit both of them hard. In the 1990s povetry became a significant problem. Research carried out in Belarus in 1996 under the support of the World Bank showed that the number of poor has sharply increased from 5% in 1992 to 22% in 1995. According to the official statistics, 26.7% of urban population and 33.6% of rural population were below the poverty line in 2001 ( [ [http://www.belarusembassy.org/humanitarian/poverty_assessment.htm Poverty Assessment ] ] , [ [http://un.by/en/undp/news/belarus/pr18-02-3-1.html UNDP and the Government of Belarus have launched a new joint project aimed at elaborating the national poverty reduction strategy ] ] , [http://wbln0018.worldbank.org/dg/povertys.nsf/0/dae4d2c00c1c7e1585256b210075cf4d?OpenDocument] ).

However, efforts of Belarusian government and some favourable factors such as the Union with Russia which opened vast markets for Belarusian goods and also allowed Belarus to buy oil and gas at Russia's internal price, allowed Belarus to bypass the severe economic hardships and crises that many former Soviet Union transition economies encountered. It resulted in the economic growth seen in recent years. According to the UN "World Economic Situation and Prospects 2006" report Belarus registers major economic growth: GDP growth rate as low as 3% in 1999 showed 11% (2-nd place in CIS) in 2004 and 8,5% (4-th place after Azerbaijan and Kazakhstan - oil and gas exporters - and Armenia) in 2005. In terms of GDP growth rate Belarus also outperforms neighbouring Poland, Latvia and Lithuania. Major problem in mid-1990 - inflation, as high as 300% in 1999 constantly decreases, showing 12% in 2005 (which is higher than Russia's 11.5% but lower than Ukraine's 14.5%). UN experts forecast inflation in 2006 will continue to decrease, reaching 10.5% ( [http://www.un.org/esa/policy/wess/wesp2006files/wesp2006.pdf UN Report] )

As part of the former Soviet Union, Belarus had a relatively well-developed industrial base; it retained this industrial base following the break-up of the U.S.S.R. The country also has a broad agricultural base and a high education level. Among the former republics of the Soviet Union, it had one of the highest standards of living. But Belarusians now face the difficult challenge of moving from a state-run economy with high priority on military production and heavy industry to a civilian, free-market system.

After an initial outburst of capitalist reform from 1991-1994, including privatization of state enterprises, creation of institutions of private property, and entrepreneurship, Belarus under Lukashenko has greatly slowed its pace of privatization and other market reforms, emphasizing the need for a "socially oriented market economy." About 80% of all industry remains in state hands, and foreign investment has been hindered by a climate hostile to business. The banks, which had been privatized after independence, were renationalized under Lukashenko.

Economic output, which declined for several years, revived somewhat in the late 1990s, but the economy remains dependent on Russian subsidies. Until 2000, subsidies to state enterprises and price controls on industrial and consumer staples constituted a major feature of the Belarusian economy. Inflationary monetary practices, including the printing of money also has been regularly used to finance real sector growth and to cover the payment of salaries and pensions.

Peat, the country's most valuable mineral resource, is used for fuel and fertilizer and in the chemical industry. Belarus also has deposits of clay, sand, chalk, dolomite, phosphorite, and rock and potassium salt. Forests cover about a third of the land, and lumbering is an important occupation. Potatoes, flax, hemp, sugarbeets, rye, oats, and wheat are the chief agricultural products. Dairy and beef cattle, pigs, and chickens are raised. Belarus has only small reserves of petroleum and natural gas and imports most of its oil and gas from Russia. The main branches of industry produce tractors and trucks, earth movers for use in construction and mining, metal-cutting machine tools, agricultural equipment, motorcycles, chemicals, fertilizer, textiles, and consumer goods. The chief trading partners are Russia, Ukraine, Poland, and Germany.

The massive nuclear accident (April 26, 1986) at the Chernobyl nuclear power plant, across the border in Ukraine, had a devastating effect on Belarus; as a result of the radiation release, agriculture in a large part of the country was destroyed, and many villages were abandoned. Resettlement and medical costs were substantial and long-term.

Fiscal Policy

Budget

There is little transparency with regard to the national budget. The comparatively small state budget deficit combined with the government’s efficient utilization of the budget might at first seem to indicate an efficient use of resources by the government. However, despite these positive indicators, the Belarusian national budget has considerable fiscal problems. The state in general and President Lukashenko’s executive power, in particular, intervene directly in the granting of loans, the setting of interest rates and the evolution of prices. This involves not only the extension of loans to the public sector but also the forced extension of loans by commercial banks, for example, to subsidize the sensitive agricultural sector. This policy eases the burden on current state budgets, but in doing so the deficit spending is only delegated to the banking sector. If these quasi-fiscal activities were no longer shifted to the banking sector, the state budget deficit would be substantially higher.

Monetary Policy

During 1995-1998 monetary policy was highly expansionary. Net domesticcredit of NBB was increasing at the rate of over 100 percent from 1996 till mid-1998 as a consequence of numerous presidential decrees and resolution of the Council of Ministers instructing NBB to extend credits. Since no external sources were available for covering state budget deficit, the NBB emission activity provided its financing. Also, through authorized banks serving governmental programs, the NBB extended preferential targeted loans to state-owned enterprises. The list of credited enterprises is prepared by the government and sometimes depends on the ad-hoc strategies of development. In 2000, Belarus managed to unify its currency exchange rates, tightened its monetary policy, and partially liberalized the foreign currency market. Starting from the period of an administrative peg of the exchange rate of the Belarusian ruble in 1995, the monetary policy was based on administrative regulation of interest rates. In November 1995, administrative limitations of the inter-bank credit market activity were initiated and still remain in force. In spite of the Central Bank Law passed in 1994 guaranteeing its independence, President Lukashenko has a power to nominate and dismiss the Chairman of the NBB. and to formulate monetary and foreign exchange policy. Over the past years, preferential credits, administrative price setting, and decline of the interests rate spread below 15 percentage points in the second quarter of 1997 resulted in damaging consequences to enterprises and especially banks. As the process of exhaustion of the Central Bank's hard currency reserves exhibits a dangerous tendency, government introduced restrictions on currency transactions. These have resulted in inconvertibility of the Belarusian ruble for the current transactions since March 1998.

Inflation

Since 1996, in accordance with the presidential decree, enterprises, irrespective of their forms of ownership, and governmental bodies in charge of economic management have been given forecast figures of monthly and yearly inflation and devaluation as practically administrative directives. Over 70 percent of the goods consisted in the consumption basket have controlled prices, therefore indices of inflation are hardly reliable. In 1998, administratively imposed limit on maximum price growth was 2 percent per month (or 27 percent per year). However, monetary expansion and devaluation of the officialexchange rates had to lead to increase in official index of inflation above the planned level.

Foreign Exchange Market

The NBB regulates the foreign currency market by means of administrativeinstruments that support a system of multiple exchange rates. Such an activity of the central bank should be regarded as quasi-fiscal and taken into account in the state budget. However, it is not the case. The NBB sells foreign currency at preferential exchange rate to a selected pool of importers that means latent financing of certain import operations. Through the channels of critical import funding, large enterprises with indebtedness for energy carriers enjoy financial benefits. Also critical import, like medicines, food-staff, raw materials, machinery and equipment is subject to preferential exchange rate. To finance critical import, a mechanism of mandatory sale of foreign currency receipts is in operation. In January 1996, the obligatory surrender requirement was 100 percent. In July 1996, it slimmed down to 50 percent, and further down to 30 percent in June 1997. On January 22, 1998, an additional trade session was introduced at the Minsk Currency Exchange, which subsisted until August 22, 1998. For the second time, the additional session was restored starting from December 16, 1998 and was cancelled again on March 1, 1999. In July 1998, the government forced exporters to sell 10 percent of their export receipts at the second session of the Minsk Currency Exchange, in addition to the existing authorized 30-percent ratio. In August 1998, following the closure of the second Minsk Currency Exchange session, the rate of mandatory sale of foreign currency was set at 40 percent.

Privatization

In 1991, state ownership restructuring began in the first 40 enterprises. On January 19, 1993 the Law "On destatization and privatization of state property in the Republic of Belarus" was adopted, which should have become the basis for wide privatization in Belarus.

Wages & Labor market

The Belarusian labour market is highly regulated. Important elements of the central-planning system are still in place. In principle, the decision to determine wages is left to firms, but the Government can affect the structure of wages through the so-called tariff system, a type of centrally determined wage grid. The tariff system is binding in the budget sector, including enterprises and organisations mainly financed and subsidised within the state and/or the local budgets. The private (so-called self-financing sector) sector, representing, as already noted, only a small share of employment, has little autonomy. [The Distribution of Wages in Belarus]

Economy Sectors

Industry

In the Soviet period, Belarus specialized mainly in machine building and instrument building (especially tractors, large trucks, machine tools, and automation equipment), in Computers and electronics industry and in agricultural production. In 1992 industry in Belarus accounted for approximately 38 percent of GDP, down from 51 percent in 1991. This figure reflects a decline in the availability of imported inputs (especially crude oil and deliveries from Russia), a drop in investments, and decreased demand from Belarus's traditional export markets among the former Soviet republics. Belarus's economy has also been affected by decreased demand for military equipment, traditionally an important sector.

In 1994 gross industrial output declined by 19 percent. At the beginning of 1995, every industrial sector had decreased output, including fuel and energy extracting (down by 27 percent); chemical and oil refining (18 percent); ferrous metallurgy (13 percent); machine building and metal working (17 percent); truck production (31 percent); tractor production (48 percent); light industry (33 percent); wood, paper, and pulp production (14 percent); construction materials (32 percent); and consumer goods (16 percent).

Energy

Oil

All the activities related to prospecting, exploration and production of oil and associated gas in the country are carried out by the government-controlled concern “Belneftekhim” via its subsidiary, the unitary republic enterprise “Belorusneft”. Belorusneft exports about 50% of its oil output. Oil deposits on the territory of Belarus are located in a single oil and gas basin, the Pripyat depression, which covers approximately 30,000 km². About 50 out of total of 70 known fields are currently under production. Belaru's own production covers only about 30% of domestic oil consumption. For this reason, the Government is seeking ways to access oil and gas resources on the territory of the Russia and other countries, so that oil produced there could be delivered to refineries in Belarus and refined products would be sold domestically and on export markets.

Belarus has two state-owned oil pipeline operating companies, both inherited from Glavtransneft in 1991. Gomel Oil Transportation Enterprise (RUP Gomeltransneft Druzhba) operates pipelines to the west and southwest directions, and Novopolotsk Oil Transportation Enterprise (NRUPTN “Druzhba”) for the north (Belarus-Lithuania) direction. All decisions concerning plans to increase capacity or build new capacity are taken by these two state-owned companies.

The activities of oil pipeline operating companies are regulated in accordance with the Law on Natural Monopolies, which explicitly prescribes a mechanism for their regulation by a state regulator. The Law on Natural Monopolies considers oil pipeline transport operators to be natural monopolies (Article 3). The Law also has certain requirements for transparency of their activities. Domestic oil transportation via pipelines is primarily regulated by the Law on Trunk Pipelines (2002), n 87-3. Article 27 of the Law regulates pipeline transport service in accordance with the capacity of the pipelines and actual throughput, based on the principle of equal access and non-discrimination.

Natural Gas

Almost all of the natural gas used in Belarus is imported from Russia (about 99% of consumption). Domestic gas prices continue to be regulated by the government and in many instances cover only a fraction of the actual cost. Belarus has a well-developed gas transportation and gas distribution networks that ensure reliable supplies of natural gas to the consumers in the country. Beltransgas, 100% state-owned joint stock company, owns and operates the system of main natural gas pipelines. In November 2002, the Belarusian parliament passed a law allowing for the privatization of Beltransgaz. An agreement was reached in 2006 with Gazprom about the acquisition of a 50% plus a share stake in Beltransgaz at a price of $2.5 billion

Electricity

The electricity sector of Belarus is a dynamically expanding, highly automated system consisting of regional power systems united in the power system of the country. the electric power sector of the country is amalgamated into the state-owned production union of the power sector “Belenergo”, which consists, apart from the central dispatch unit ODU, of six republican unitary regional power system enterprises (RUP-Oblenergo) and of entities of all kinds of ownership that carry out repair, maintenance and rehabilitation of facilities, research and development, service activities, and construction of new power sector facilities. RUP-Oblenergo are set up on particular territory (the regional power systems cover the relevant geographic administrative units of Belarus). RUP-Oblenergo are vertically integrated companies that perform generation, transmission, distribution and supply of electricity.

Mining

Although not rich in minerals, Belarus has been found to have small deposits of iron ore, nonferrous metal ores, dolomite, potash (for fertilizer production), rock salt, phosphorites, refractory clay, molding sand, sand for glass production, and various building materials. Belarus also has deposits of industrial diamonds, titanium, copper ore, lead, mercury, bauxite, nickel, vanadium, and amber.

Defense

During Soviet times, Belarus’ radio-electronic industry was primarily oriented towards military applications. With the break-up of the Soviet military and the reduction in the size of the newly state’s military establishments, the Belarus defense sector desperately needs to export to survive. Currently, under Belarusian law, its weapons exports are required to be carried out through one of four licensed weapons trade exporters: Belspetsvneshtekhnika, Beltekhexport, Belvneshpromservis and Belorusintorg. Certain other enterprises are permitted to sell products that they developed or control.

Banking

Six commercial banks, four formerly state-owned specialized banksAgroprombank (agricultura sector), Promstroibank (industrial sector), Vneshekonombank (foreign trade), and Belarusbank (savings bank) and two universal banks (Priorbank and Belbusinessbank) dominated the banking system. These former state-owned specialized banks accounts for over 80 percent of the banking system outstanding loans, over 70 percent of domestic currency deposits, and all the NBB's refinancing credit. Many commercial banks are subject to direct and personal influence of the government since many officials at the ministerial level participate in chairing and managing banks. Commercial banks act as agents of the central bank distributing state financial resources. Therefore, also the Central Bank of Belarus fulfills mostly technical functions as the President and government is permanently interfering into operation of the whole banking sector by decrees and resolutions.

See also: List of banks in Belarus

Agriculture

Cumulative decline of value-added reached 30 percent since 1991, and 15 percent since 1995. Share of agriculture in GDP declined by over 10-percentage point to 14 percent in 1997. This happened, irrespective to the president’s economic strategy of self-sufficiency in food production in 2000. The decline in overall agriculture production partly could be attributed to unfavorable weather conditions (like floods), but declines in the harvests of potatoes, vegetables, and other crops that grow mostly in private plots were smaller than in produce grown by collective farms. Also, animal breeding has been in decline and it is concentrated in the state sector. Subsidization of agricultural sector in Belarus amounted to 1-2 percent of GDP in the form of direct government credits, advanced payments for realization of state orders of major crops, at strongly negative interest rates. Additionally, a state budget fund, Agriculture Support Fund provides funds to compensate food producers for the costs of inputs (fertilizers and equipment) that amounted to another 1-2 percent of GDP in 1996-1997. Finally, the Central Bank of Belarus issued subsidized credits to the agriculture sector at an interest rate of half the refinance rate. However, in spite of the fact that state owned and collective farms cultivate about 83 percent of agricultural land and benefited the most from the government subsidies, privately run farms and private plots produce more than 40 percent of gross output.

Belarus can be divided into three agricultural regions: north (flax, fodder, grasses, and cattle), central (potatoes and pigs), and south (pastureland, hemp, and cattle). Belarus's cool climate and dense soil are well suited to fodder crops, which support herds of cattle and pigs, and temperate-zone crops (wheat, barley, oats, buckwheat, potatoes, flax, and sugar beets). Belarus's soils are generally fertile, especially in the river valleys, except in the southern marshy regions.

The greatest changes in agriculture in the first half of the 1990s were a decline in the amount of land under cultivation and a significant shift from livestock to crop production because crops had become a great deal more profitable than before. The sales price for crops generally increased more than production costs, while inputs for livestock (such as imported fodder) have increased in price beyond livestock sales prices.

The food processing industry in the country is lead primarily by state concerns Belgospischeprom and Bellegprom.

Tourism

* International Tourism

Belarus is a country with ancient and rich history and unique culture. It has a significant number of historical towns and cities.

The main partners in the field of international tourism are countries of the former Soviet Union, Germany, Poland, United Kingdom, Turkey, Czech Republic, Slovakia, Bulgaria, Sweden, and Netherlands.

The tourist market is still an embryo of the Belarusian economy. The country is visited, annually, by about 100,000 tourists; during at the same period about 12 million people went from the country as tourists. The profit from foreign tourism amounts to less than USD 200 per each tourist. The volume of tourism in total export makes up 1%. The most popular among the visitors are: Minsk City — 40% of visitors; Grodno Oblast — 32%; Brest Oblast — 22%, Vitebsk Oblast — 5%.

Over 250 hotels are rated to receive, at the same time, 30,000 visitors; but the average rate of use of the hotels does not exceed 40%.

At the same time Belarus has an opportunity to develop the tourist industry. World Heritage Committee session, held in Durban (South Africa) approved the addition of the Architectural, Residential and Cultural Complex of the Radziwill Family at Nesvizh into the World Heritage List. The castle in Mir was also included in this list. Now, the Radziwill Palace stands alongside the Great Wall of China, the Roman Coliseum and the Giza Pyramids. Efforts have been taken by law-makers to help tourism. Recently, the Belarusian Government adopted a national program of tourism development for the year 2006 to establish free tourist zones in Belarus.

Environmental issues

Belarus has established ministries of energy, forestry, land reclamation, and water resources and state committees to deal with ecology and safety procedures in the nuclear power industry. The most serious environmental issue in Belarus results from the 1986 accident at the Chernobyl nuclear power plant. About 70% of the nuclear fallout from the plant landed on Belarusian territory, and about 25% of the land is considered uninhabitable. But government restrictions on residence and use of contaminated land are not strictly enforced. As noted, the government receives USA assistance in its efforts to deal with the consequences of the radiation.

Other statistics

Investment (gross fixed):24.2% of GDP (2005 est.)

Household income or consumption by percentage share:
* "lowest 10%:" 5.1%
* "highest 10%:" 20% (1998)

Distribution of family income - Gini index:21.7 (1998)

Agriculture - products:grain, potatoes, vegetables, sugar beets, flax; beef, milk

Industrial production growth rate:15,6% (2005 est.)

Electricity:
* "production:" 30 TWh (2004)
* "consumption:" 34.3 TWh (2004)
* "exports:" 0.8 TWh (2004)
* "imports:" 7 TWh (2003), mainly from Russia, Ukraine, and Lithuania

Electricity - production by source:
* "fossil fuel:" 99.5%
* "hydro:" 0.1%
* "other:" 0.4% (2001)
* "nuclear:" 0%

Oil:
* "production:" 36,000 bbl/day (2004 est.)
* "consumption:" 285,000 bbl/day (2003 est.)
* "exports:" 14,500 bbl/day (2003 est.)
* "imports:" 360,000 bbl/day (2004 est.)

Natural gas:
* "production:" 250 million cu m (2004 est.)
* "consumption:" 18.8 billion cu m (2004 est.)
* "exports:" 0 cu m (2004 est.)
* "imports:" 18.5 billion cu m (2004 est.)

Current account balance:$312.4 million (2005 est.)

Exports - commodities:machinery and equipment, mineral products, chemicals, metals; textiles, foodstuffs

Imports - commodities:mineral products, machinery and equipment, chemicals, foodstuffs, metals

Reserves of foreign exchange & gold:$835.4 million (2005 est.)

Debt - external:$4.662 billion (30 June 2005 est.)

Exchange rates:Belarusian rubles per US dollar - 2,150 (2005), 2,170 (2004), 1,790.92 (2003), 1,920 (2002), 1,390 (2001), 876.75 (2000)

References

*factbook
*StateDept
*( [http://www.president.gov.by/en/press53426.html#doc

ee also

*National Bank of the Republic of Belarus
*Belarusian Ruble
*Russia-Belarus energy dispute