One leading independent Belarusian researcher, Leonid Zlotnikov, says there is a historical antecedent to the Belarusian economy, though not the one that most readily comes to mind.
“If you want to understand the [economy], you must return to the 1930s, not to Soviet Russia, but to Nazi Germany,” says Zlotnikov, who is also the project economist for IFC’s SME program in Belarus .
As in pre-war Germany , private property exists in Belarus , but more in form than in fact. Meanwhile, the state dominates the economy not through comprehensive plans and production indicators, but through a rigid system of licensing and price controls, as well as control over trade and financial flows.
After first gaining power in 1994, Lukashenka stopped privatization virtually dead in its tracks, and to date the state controls all but a few significant enterprises. By one estimate, the largest privately owned enterprise in Belarus is a construction firm employing roughly 500. But it gets the majority of its orders from state companies. Private commercial farmers control only around 1% of the country’s arable land, with the balance controlled by state farms (sovhoz) and cooperatives (kolhoz). Total cumulative foreign direct investment is just over $80 per person (with investment of Gazprom into the pipeline) , compared to more than $500 in neighboring Poland and over $1,000 in Hungary [CHECK], and is focused on low-value-added industries like timber processing. And an obscure accounting rule means many firms are speciously classified as being outside direct state ownership. “A company can have 96% state ownership, and still be called ‘non-state,’” says Romanchuk.
For most of the country’s productive enterprises, the current system of state control is something of a twilight zone, having elements of both the market and the former system of rigid indicative planning. Sectoral officials in the various ministries will occasionally instruct enterprises to supply other firms with certain goods, or to increase their production by a certain amount. Meanwhile, each of the country’s regions, or oblasts, has its own economic planners, and officials who issue broad directives concerning sales growth to all enterprises in their region. Finally, smaller publicly owned enterprises can find themselves taking direction from officials all the way down to the city or rayon (municipal) level.
Despite such cajoling, only a limited number of enterprises – such as those involved in housing construction – operate under Soviet-style production directives. And even these have more freedom to choose suppliers or subcontractors than in the past.
Analysts say there are several reasons the center does not try to fully plan the operations of state enterprises. First, there is an understanding that a higher degree of direct planning is not possible given the nature and state of the economy, and that many state firms are already under too many constraints to effectively comply without further eroding their precarious financial condition. Most understand that any rigid production commands or guidelines offered by officials would be ignored, even if a show of compliance will be put on so the control officials in question can save face, both personally and institutionally.
Another reason for the lack of Soviet-style planning is Lukashenka’s desire to control or bypass the bureaucracy. Ever the take-charge CEO, the president has been known to use the television to publicly chastise officials and managers he feels have not performed up to expectations.
“He meddles, and often in a very rude way,” says Igor Pelipas, who heads the research center at the Institute for Privatization and Management, a privately funded think-tank.
In fact, why outsiders may assume the country’s unreformed apparatchik and state firm managers to be among Lukashenka’s core constituencies, there is evidence that many who staff the state’s economic command apparatus increasingly resent his rule.
“The upper-level officials are totally dependent on him,” says Sasnow. “They hate him but are afraid of him.”
And there is good reason for them to be afraid. Officials can be held personally liable for decisions they make – such as licensing companies that don’t pay their taxes or debts – or penalized in other, less formal ways, while managers at state firms despise the interference of state control bodies and local officials, however ineffectual. (Such managers also hate their pitifully low official salaries, which are generally a fraction of those in other former Soviet Republics .)
If most state firms are not held to detailed Gosplan-style production directives, they must still deal with official demands so obtuse they often mystify even weary locals.
All state firms, for example, are expected to provide some kind of support to the country’s run-down and monstrously inefficient agriculture sector, a favored cause of Lukashenka. Firms are asked to “adopt” one or more farms, providing financial or even in-kind resources. Local officials are also known to request that employees at area state firms donate the income from a “free day” of work to finance municipal projects, or simply to demand cash from the enterprise. And, of course, there still exist the webs of social and community services attached to large firm during the Soviet area, such as housing, cinemas and kindergartens. According to Romanchuk, such costs not related to production are roughly 30% of all corporate expenses. “One company’s budget was recently found to included the maintenance of a local church,” he adds.
While some of the social obligations imposed on firms are done so explicitly, they increasing come in the form of “requests” for voluntary contributions. But most firm managers and officials understand that there is no such thing as a voluntary request. “If a given company doesn’t do it, they get blacklisted,” says one executive with broad contacts at firms throughout the country. “And Lukashenka leans on oblast or local officials to make sure it gets done.”
As disrupting or damaging as such interventions are, they pale in comparison to the carnage caused by the broad price and wage controls imposed in the wake of the government’s disastrous experiment with runaway monetary growth.
While inflation has come down from triple to mid-double digits over the last year, a tangle of more than 250 normative acts continues to regulate price formation on a range of basic and “strategic” goods. Under the system, the state Council of Ministers periodically issues directives on price growth limits to the sectoral departments of the various ministries. Enforcement of the ceilings is via more than 20 state control organs; enterprises desiring an exemption must apply in advance to a local price committee, which passes such requests up to the main price committee at the Economy Ministry.
While the combination of high inflation and low price rise ceilings earlier led to some shortages of basic goods, store shelves were not left bare. But the controls, and the loopholes available to firms subject to them, have devastated firms’ profitability and led to a range of distortions unheard of in most countries.
“One result is the total destruction of brands,” says Romanchuk, the opposition economist. Because the law says that enterprises have the ability to freely price new products, some responded to the controls by changing the names or characteristics of well-known products. “‘Little Cow Cheese’ becomes ‘Pink Cow Cheese,’ or the quality is degraded,” Romanchuk explains. “Brands of sausages that were once 60% meat content are reduced to 20% meat.” Either way, consumers are forced to view many routine purchases essentially as first-time buys, while producers and retailers waste endless time and effort trying to compensate for their inability to freely set prices.
Such controls, and the exceptions granted certain products and companies, have also served to mask the financial situation of many enterprises.
“There has been some progress with price controls,” says Carl Dagenhart, the head of IFC’s local SME Development Project. “Every quarter there is a list of goods and services not subject to price controls, and this is currently growing. But this progress could be illusory, because until the degree which institutes price regulation and quarterly updates is reversed, the next quarter these exclusions may stop.”
And price controls are just the beginning.
If the image abroad of adherence to strict Soviet-style planning is overstated, the regulatory horror show isn’t. Much of the burden falls on the country’s nascent private sector, mostly small and micro-enterprises.
Firms are forced to endure a lengthy and cumbersome registration and re-registration process, without any certainty that even a flawless filing will be approved. Licenses are required for up to 1,000 different kinds of business activity. Capital requirements for limited liability companies are higher than in far richer companies. Meanwhile, Lukashenka has urged officials to deny registration to those companies that refuse to submit to subsidiary liability for individual owners.
Companies involved in foreign trade operate under a range of separate administrative constraints, which until recently included multiple exchange rates and a forced surrendering of as much as a third of export earnings.
Meanwhile, despite an official policy that frees private companies from state production guidelines, managers of privately owned firms are often forced to report to regional officials on their activities.
Likewise, private or joint-stock companies under are dragooned into the harvest campaign and made to submit to other arbitrary demands to support public enterprises. Romanchuk relates the story of an Austrian-run food processing joint venture ordered to procure 100 tons of hay for a nearby collective. “The manager said, ‘We make sausages – we don’t know anything about hay,’ to which the official said ‘I don’t care how you get it, just do it.’”
Currently, private enterprises also operate under the threat of a law that allows the to introduce a single “golden share” and make all corporate decisions, including hiring and firing directors.
And this is not to mention the state’s “doomsday weapon” of economic control, Presidential Decree #40, which allows the authorities to seize any property deemed to have harmed state interests – without a court order. The measure was put in place last year after a Lukashenka rival – a businessman friend of the exiled former head of the Presidential Administration – was found innocent of apparently trumped-up charges. It applies to all forms of property, government, private, domestically or foreign-owned.
This unending deluge of ruinous and niggling regulations led Romanchuk, who is also deputy editor of the weekly Belorusskaya Gazeta to compile an annual list of what he calls the “20 most horrible legal acts of the year.”
This year’s catalogue leads off with a presidential edict demanding that businesses receive payment for all transactions within 90 days, or 60 days if dealing with a foreign counterparty. Those found in violation face penalties of up 100% of the value of the transaction plus 2% per day in overdue fines.