Научно-исследовательский центр Мизеса

If it didn’t actually exist, it really would be amusing, even charming. A small chunk of the old USSR ruled over by a popularly elected meglomaniac seemingly determined to prove that Glasonst and Peristrioka could have redeemed the Soviet system. Old ladies out in their Brezhnev-era best, shopping in state stores packed with goods, while the TV offers daily updates on the successes of the current harvest campaign and the social implosion of other former Soviet republics. A place where a bottle of vodka costs a dollar, rent a few dollars more, where the hammer and sickle compete with Madonna and Sony, and the KGB – still called the KGB – plays cat-and-mouse with an opposition free enough to openly complain about the lack of democracy.

For more than a half decade, the former Soviet republic of Belarus has been treated by the international community and media as a political and economic eccentricity, a harmless joke on the periphery of emerging Europe . But with both government and opposition promising stark changes following this month’s elections, the EU’s future next-door-neighbor is taking on new importance. Meanwhile, the country’s once-whimsical image has been shattered by charges the government has been systematically murdering its leading opponents, and the increasingly dire results of a bizarre experiment in economic management.
While the “Soviet themepark” story offered by the newspapers suggests a forthright if wobbly attempt to return to the glory days of command economics and politics, the reality is far more complex. It is now clear that the “miracle years” of 1997-1998 – when near double-digit GDP growth and continued social order led millions of disillusioned and nostalgic former Soviets looked to the country for inspiration – were illusory. But little else is as obvious. So convoluted and opaque is the country’s development model that economists differ widely on its mid-range prospects, agreeing only that it is among the worst places on earth to do business. Adding to the confusion are recent moves by the government in the direction of liberalization, including new cooperation with the IMF and World Bank, and pledges by the country’s autocratic president, Alexander Lukashenka, that he will rapidly speed up economic reforms if returned to office in this month’s presidential election.

Bat'ka knows best
 
If there is one generalization about Belarus that is true, it is the pivotal role played by Lukashenka. In a region where even strong presidents and prime ministers share or delegate power, the man known to many as Batka – or “ Daddy” – rules his country like a tyrannical patriarch.
First elected in 1994, Lukashenka extended his term and dissolved parliament in a 1996 referendum that most independent observers deemed unfair, later issuing a decree on “unemployment” that compelled ousted parliamentarians to clean streets and perform other menial duties. He deepened the rift with the west by driving out a number of diplomats who he accused of plotting against him, making it clear at the time that Belarusian agents had been bugging their embassies. In 2000 he further entrenched his power by engineering the election of a parliament that remains unrecognized by most western governments. (Another referendum during this period (1996) approved the continuing use of Soviet iconography as official state symbols, which helped solidify the country’s reputation as a Communist Disneyland.)
The run-up to this year’s presidential contest has been even more poisonous, with American officials backing up claims by defectors that Lukashenka had been using an elite commando unit to murder political opponents and settle personal scores. Six weeks before the first round of voting, scheduled for Sept. 9, a defiant Lukashenka took to the airways, vowing that he would forcefully resist any Yugoslav-style popular uprising should the opposition claim fraud in the polling. “I will win these presidential elections, whether with you, which I would like, or without you, but I will win them,” he said. “And I am afraid of no one.”
With his lantern jaw and trademark mustache and comb-over combo, the hulking former collective farm boss has become an icon of illiberalism, the last dictator in Europe following the fall of Slobodan Milosevic. He hires, fires and disciplines local and state officials as he sees fit, and bypasses his rubber-stamp parliament with flurries of decrees and edicts. Even within the all-powerful Presidential Administration there are only a handful of individuals – perhaps a half-dozen – who have some influence over Lukashenka, chief among them the heads of the militia and the KGB. (The Administration’s Economic Department, for example, is largely considered impotent.) Lukashenka is, by most accounts, a “loner” who nevertheless expects and demands total loyalty and obedience from all who work for him.
And thanks to his efforts to block the dismantling of the state command system, almost the entire country works for him. Alan Greenspan has more influence over the world economy, and may occasionally step in to orchestrate the bailout of a particular firm or sector. But in Belarus , nothing is done without the active or passive involvement of Lukashenka, from the broad outlines of fiscal and monetary policy to the investment decisions facing small private enterprises.
“Any foreign investment over $10,000 must be approved by the Presidential Administration – that is, by Lukashenka himself,” says Jaroslav Romanchuk, vice-chairman of the United Civil Party, and one of the country’s most vocal free-marketeers.

From leader to lead

Belarus used to be an economic curiosity, but for a different reason.
A backwater before the Bolshevik revolution – its non-farm economy was dominated by timber and peat processing – by the later decades of Soviet power it was a showcase of socialism, the “assembly line of the USSR .” The republic’s economy grew at a rate nine times that of the union in 1960 and almost five times the average in 1985, vaulting it past all but the Czech Republic among COMECON members in living standards, according to the United Nations. This progress left many Belarusians content with the same system that others in the USSR were so desperate to scrap. And when the first wave of economic reforms came, they did little to endear average Belarusians to the market. Between 1992 and 1994, GDP dropped by 20%, while crime and chaos spread unchecked. As in Russia and Ukraine , the collapse of state power was accompanied by the appearance of a new class of ruthless oligarchs, and the wholesale looting of the public productive assets most citizens still regarded with pride.
It was into this mix that Lukashenka stepped, offering a mixture of authoritarianism and traditionalist leadership.
“His views are very close to communist, but the Communists are his opposition,” says Alexander Sasnow, an economist who was a member of Parliament and Minister of Labor from 1994-96. Lukashenka uses the language of scientific socialism to denounce capitalism and explain his vision, and often seems to go out of his way to bolster his image as the last in Lenin’s line. (In late August, he received Russia ’s Communist leader Gennadi Zyuganov like a visiting head of state, the two bantering on the radio about the contribution of Belarusian tractors to the Russian harvest campaign.) At the same time, Lukashenka-controlled state media employ anti-Communist rhetoric when denouncing his chief rival for office, labor leader Uladzimir Hancharik, one of the highest officials in Soviet Belarus to keep their posts after the breakup of the USSR .
Earlier in his regime, Lukashenka often defined his economic ideology as “market socialism,” and tasked friendly experts with producing a profound work of political economy on which he could build a national ideology. But according to Sasnow, who is now deputy director of the Independent Institute of Socio-Economic and Political Sciences, the effort to create a coherent replacement philosophy fizzled out.
What may seem like simple opportunism can also be explained as an old-fashioned class struggle, pitting Lukashenka and others with humble roots against the urban elites of the old nomenclature and the nascent business classes. Though forced to work with slick former communists and young technocrats, Lukashenka’s is a regime of the common for the common. (The current chairman of the National Bank of Belarus , for example, is one of the world’s few central bankers without a (economic college education.) He revels in using boorish language in public and private, insulting and physically threatening his opponents. He reportedly believes that the separation and diffusion of power in western countries is a deception. Yet despite the incredulity of westerners, Lukashenka remains strongly popular with millions of Belarusian who are poorly educated, poor, and rural, or just old and afraid.
In fact, even as Lukashenka’s model of statism has weighed heavier on living standards in the country, many Belarusians share the president’s economic prejudices. According to a survey conducted late last year by the International Finance Corporation, the World Bank’s private-sector development arm, a slight majority of the population either support a market economy with broad state intervention, or a command economy modeled on that of the USSR . Almost half of those over 65 said they preferred a fully planned economy; in the eastern region of Vitebsk , almost 80% said they preferred a planned economy or one with significant state interference. Even a majority of those who counted themselves in favor of market economics also said they were in favor of strong state control over the economy.
The heterodox nature of Lukashenka’s appeal is also illustrated by his foreign friends; in addition to being popular with Zyuganov and Russia ’s other old-guard Communists, he is strongly supported by Vladimir Zhirinovski, the firebrand neo-Fascist who is vice-chairman of the Russian State Duma. Also great friends are China ’s leaders, who are themselves busy trying to reconcile socialism and the market.
“He has his own political course, and follows it,” say Sasnow. “And he is quite logical in his behavior.”
In making economic policy, Lukashenka follows a similarly crude if powerful logic. Production is supported at the expense of trade, “fair” prices valued over functioning product markets, and absolute control from the center imposed at the cost of everything else.
 

 
How it almost works

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.
 

A heavy roof

Private businesses and entrepreneurs also face demands from officials and others for bribes and out-and-out protection money.
A senior manager at a successful privately-owned service firm on the outskirts of Minsk says that members of the militia – one of the bodies which enforces economic regulations – have for years demanded cash for their protection, locally called a “roof.” He declines to have his firm identified, saying that public criticism in the past has led to reprisals against the company and its suppliers and customers.
Unlike many such rackets, the primary weapon of intimidation isn’t violence, but the application of some particularly damaging financial or administrative penalty. Businesses are vulnerable to the threats because it is essentially impossible to comply with the existing body of regulations.
These include not just crippling taxes – such as a turnover tax of 4.8%, regardless of profitability – but rigid controls on everything from R&D to the amount a firm can legally deduct for advertising expenses. (One half of one percent of turnover.)
In fact, says the executive, even with a stable of accountants and advisors, his company doesn’t know if it is in compliance at any given point. And this, he says, is no doubt the point.
“If you look at it from the perspective of someone wanting absolute power, it makes complete sense,” the executive says, adding that the low-level rent seeking is simply an attendant consequence of a broad and deliberate program of criminalizing the private sector. “The goal is to control, not develop.”
Unfortunately, for many businesses, the goal is less to control than destroy.
Because the unbearable tax and regulatory regime leave essentially all public and private enterprises in violation of a number of laws – most companies keep two sets of books – the authorities are easily able to benefit favored enterprises and sectors at the expense of helpless competitors.
According to Romanchuk, a survey last year by the state found that 95% of all audited bodies were not in compliance. “And the other 5% were really in violation,” he laughs.
One very unfunny result is that the authorities can quickly dispose of any enterprise deemed to be a political challenge. For example, late last month, operatives of the State Committee for Financial Investigation seized 400,000 copies of a special election issue of a leading newspaper from a private printing plant. The supposed reason was the printing plant’s failure to file appropriate documents.
While public and private enterprises putatively operate on a level playing field, all it takes is the willingness of control officials to look the other way when the state firm is found in violation.
If there is a violation of tax law by state firm, for example, the penalties can be postponed or abated. “Wherever there is a gray area, state-owned enterprises would get the benefit of the doubt, especially if they are considered important for a region,” Romanchuk says. “And there is always a clause that the council of ministers can make an exemption to any rule.”
Often, state or local authorities simply prevent any competition with publicly owned enterprises.
“If a businessman wants to buy a store and use it as a bakery, the local official may say ‘we have enough bakeries, do something else,’” explains one leading analyst of the country’s small business sector.
Meanwhile, any enterprises which chooses to challenge an administrative action in the courts will face a judiciary appointed directly by Lukashenka, and dependent on the state for every aspect of his or her well being. Even the country’s notaries are under direct control of the state.
Dagenhart says the combined weight of the regulatory leviathan and other negative factors makes Belarus one of the hardest places in the world for a private business to succeed. And the country’s entrepreneurs are voting with their feet: over the last several years the number of registered businesses has decreased, while the number of individuals working as licensed peddlers and engaged in other such activities has increased.
“It’s not the way that the majority of small and medium business in a country should be run, under a tent,” he says.
 

Have a carrot

In addition to keeping the private-sector competition at bay, the state offers public enterprises a variety of direct and indirect benefits, and encourages them to do the same for each other. If, for example, a company hopes to distribute consumer goods in the country, it will likely have to deal with state-owned wholesalers or retailers, or vice-versa. State firms may make their private customers pay in advance, but extend generous payment terms to other state-owned firms. The preferences continue down to the street level. Favored retailers and others can count on lower rents for municipally owned property. The GUM department on Minsk ’s main shopping thoroughfare, for example, reportedly pays a tenth of that other retailers are charged.
For some favored firms and sectors, the benefits are even more direct.
Close observes of Lukashenka and his rule say the state continues to directly subsidize enterprises ideologically or personally close to the president and his most powerful lieutenants.
“Lukashenka views the economy as 40-50 enterprises, and 300 koholzes,” says one western official who has dealt closely with the government.
Among the favored industrial enterprises are the country’s most famous Soviet-era names, including the Minsk Tractor Factory, the Minsk Auto Plant (MAZ) and the Horizont TV works.
These and other state industrial concerns also have a strong ally in Mikhail Myasnikovich, the current head of the Presidential Administration, and a former first secretary of the Central Committee of the Belarusian Communist Party. Meanwhile, a lobby boosting the construction industry is lead by National Bank chairman (and former construction worker) Piotr Prokopovich. Lukashenka himself is said to be most concerned with the fate of the country’s state and collective farms.
Help comes in the form of direct budget support, as well as a number of off-budget vehicles; according to some estimates, the official budget captures only 40% of the money spent by the state.
One key avenue for subsidies is energy. While natural gas is reportedly provided to monopoly operator BelTransGaz from Russia at approximately $30 per 1,000 cubic meters – roughly a third of the price charged other customers in the region – it is passed on to most Belarusian enterprises at a price closer to $70. Favored firms, however, receive it at a discount or are allowed to accumulate arrears.
Until recently, the forced surrendering of foreign exchange also allowed the authorities to channel precious forex to favored firms, while exemptions on such rules limited the amount of hard currency certain exporters were obliged to hand over to the National Bank.
Meanwhile, the Presidential Administration itself reportedly helps finance enterprises favored by Lukashenka and his close associates.
As with all things connected to Lukashenka, the so-called Presidential Fund is the subject of much fevered speculation in Belarus . While it has an official annual budget of just $20 million, most analysts believe it controls, and disburses, a large multiple of that figure. Millions are said to come from arbitrage on energy trading, kickbacks for customs clearance, as well as a portfolio of property and operating companies, some with profitable monopolies. And then there are the arms deals.
“It’s a known fact that we were selling MiG 29s to Peru ,” says Sasnow. “But where is the money? Nobody knows.”
Alexander Mikhenevich, the deputy minister of foreign affairs, calls the issues of arms sales and the Presidential Fund “delicate questions,” but says such transactions are not nearly as lucrative as assumed. “It has never been a big component of our foreign trade. Maybe this is a pity, because it’s a profitable business.”
(Naturally, there is also a rich debate over to what extent Lukashenka has helped himself to the financial perks of absolute power. While few believe he has the kleptocratic instincts of a Mobutu or Suharto, most assume his personal income and wealth go far beyond the salary of $2,640 he revealed in a declaration made last month in advance of the elections. And his inner circle, including son Viktar, are believed to have interests in numerous local enterprises and rackets.)
While local analysts put the Presidential Fund’s resources at $500 million to $1 billion, one senior official at a multilateral financial institution with high-level access to the government says he believes the figure is no more than $200 million.
In any case, it is assumed that funds equaling several percentage points of GDP are being diverted to targeted enterprises.


 
Bankers’ trust?

While even some of the most advanced of Europe’s transitional economies have suffered spectacular banking crises from directed lending to unprofitable enterprises, Belarus ’ small banking system has remained a sideshow during the tumult of recent years.
Because of the country’s long period of high and hyperinflation, deposits and assets are among the lowest in the region. (At $2.4 billion, combined assets equal that of the 10th largest Russian bank.) And while there are currently 24 operating commercial banks, the lion’s share of assets are concentrated in a half-dozen specialized, “system-forming” institutions, all tightly controlled by the state. The banks have been routinely directed by the state to provide credits at unprofitable rates – sometimes at 100 percentage points below the effective refinancing rate – as well as to agricultural firms and other troubled borrowers, often with implicit but unenforceable state guarantees. The periodic recapitalizations of some of the largest banks have been relatively low key, if expensive, affairs. (A 1999 recapitalization of the two largest specialized lenders, Belarusbank and Belagroprombank, came in at 2.4% of that year’s GDP, according to a report by the IMF.)
With the exception of a handful or Russian institutions, foreign banks consider Belarus a no-man’s land. Dresdner Bank, the last western bank with a physical presence in Minsk , recently closed up its rep office.
Executives at some of the country’s largest banks are refreshingly frank about the constraints on their independence.
“The banking system of Belarus has to follow the policy of the government,” says Valentin Treshchev, a member of the board of Priorbank, the largest of the banks outside the “system-forming” core. For several years the bank has been an onlender for a small and medium-size enterprises on behalf of the European Bank for Reconstruction and Development, which also owns a 27% stake in the bank.
“But since 1996-1997 the activities of SMEs have been declining, because of state regulations and the general situation,” Treshchev says.
According to Treshchev, the dearth of viable private sector clients makes it inevitable that the bank will serve state firms. And it does, most often following a pattern in which lending and transactional business for the larger enterprises is divided up among two or more banks. The bank serves both the Minsk Tractor Factory and MAZ, as well as other firms that Treshchev says “have some privileges and the support of the state.”
“On the one had, Prior Bank has the right to serve the state’s largest companies – including the most profitable ones,” he says. “But on the other hand, we have to do what the government wants.”
Until recently, doing what the government wants included providing large volumes of credit to the agricultural sector and other unattractive borrowers, demands that often came formally from the Council of Ministers. He puts the bank’s exposure to such loans from the last two years at roughly $20 million.
Treshchev says that, thanks to pressure from the IMF, the government has largely stopped the practice of openly instructing the banks to lend for particular purposes. “Now I can refuse to credit some ex-clients,” he says, “Our situation is better, but only to some extent.”
Still, as an institution within the state’s orbit, the bank is required to play a part in the harvest campaign, and respond to other, less open demands for credit or assistance.
On one end of the bank’s modern boardroom is a glass case containing samples of cereals and seeds from its adopted kolhozes, which Treshchev admits have not been a great investment in financial terms.
“Of course, for a foreign banker it’s not much,” he says, referring to the several thousands of dollars the bank has been forced to provide its adopted farms, in all likelihood never to be repaid. “But for us, it’s a lot.”
Georgy Egorov, chairman and president of Belvnesheconombank, the “big six” bank specializing in foreign trade, agress that the direction of credit to favored industrial enterprises is an increasingly subtle affair.
“Sometimes it looks like pressure, sometimes it looks like a good opportunity,” Egorov says. “Sometimes it can be both.”
Egorov says his bank does all it can to be profitable given the obvious constraints it faces. The bank is 12.5% owned by the government, through the Ministry for State Property Management and Privatization, while the city of Minsk holds 1.75% and the National Bank 46.6%. (The NBB took its position in 1997, when it was recapitalizing other such banks, though Egorov says that in Belvnesheconombank’s case the move was “not a measure.”) Small stakes are also held by the main legacy foreign trade bank of the USSR in Russia , and by a number of the bank’s leading clients, including the Belarusian Steel Works, and producers of refrigerator, motorcycle, fertilizers, and trading firm. Most of the latter are also debtors.
Meanwhile, among the typical pictures of tidy factories and pages of Deloitte & Touche audited accounts in the bank’s 2000 annual report is a list showing that the chairman of the bank’s Supervisory Council is Lukashenka’s advisor on national security issues.
While Egorov and some other local bankers are popular among international officials for being relatively forthright in such an atmosphere, outsiders marvel at the lack of any sense of urgency given the system’s parlous state.
“Here you have banks with arrears on credit lines to Hermes and Kfw and they are calm about it,” says one multilateral official who has worked closely with the domestic banking sector. “These guys don’t have real responsibility. If they were working for a real bank, they would be fired, or sweating bullets.”
There is a broad difference of opinion as to what extent the banks will be contaminated by new bad loans.
While the National Bank’s move to significantly tighten monetary policy has produced the first positive real interest rates the ruble market has seen in years, the banks’ supposed gain comes at the expense of their already struggling borrowers.
Some believe that the move away from inflationary financing of enterprises leaves the state with no other choice but to raid the banks.
“Until 1999, the economic model was supported by monetary emission,” says Anatoly Tarahovich, who covers banking and finance for Belaruski Rynok (Belarusian Market), an independent weekly. “And when they decided to stop the emission of money, all the problems became the problems of the commercial banks.”
According to Tarahovich and others, the problem is not just officials instructing banks to make loans. The authorities also pressure enterprises to take on debt.
“For example [some enterprises] must take loans to make salary increases,” Tarahovich says. “The chiefs can be arrested if they refuse.”
And despite the official freeing of the National Bank from the government a half-year ago, and a pledge by the government to the IMF not to direct lending, Tarahovich says the old habits have not been broken. One indication is the move by the government to concentrate the deposits of state firms in Belarusbank, an institutions seen as particularly open to manipulation.
But Pavel Kallaur, first deputy board chairman of the National Bank, says the Bank is committed to enhancing the transparency and discipline of the commercial banking sector. He says NBB supervisors are stepping up their efforts vis-à-vis both large and small lenders, with the specific aim of improving the capitalization of the sector.
“Eight banks have insufficient capital adequacy, a situation they must change before next January 1,” he says.
Two smaller banks are currently under liquidation, and many expect the flock of smaller institutions to be winnowed down to a handful within a year or two.
As part of the National Bank’s agreement with the IMF, and its overall drive to modernize its profile, Kallaur says the bank will soon divest itself from its remaining holdings in the commercial banking sector. “Agrabank and Belarusbank have both been exited. Now the National Bank will reduce its capital in the Development Bank and Belvnesheconombank.”
But it is unlikely this will mean putting the banks beyond the reach of credit-hungry state officials, as the government itself is likely to be the owner of the shares surrendered by the NBB. For example, while Egorov of Belvnesheconombank says his management team would welcome equity participation from either the EBRD or a purely private investor, EBRD officials downplay the likelyhood of such a deal in the current environment. And aside from the Russian institutions already active in Belarus , most foreign banks have made their lack of interest in the market well known. “Once some German banks were interested in the banking sector, but that was a while ago,” says Egorov. One exception is Snoras bank, Lithuania ’s fourth largest commercial lender, has recently invested in a small Belarusian bank.
Meanwhile, most believe the stock of problem loans in the system is significantly higher than that reported by the NBB. According to Kallaur, non-performing loans among the commercial banks currently total 15.6% of all credits, down slightly from the 15.9% recorded at the beginning of the year.
“In reality the figure is much larger, perhaps twice as large,” says Pavel Daneyko, chairman of the Advisory Council of the Institute for Privatization and Management, which is supported by a range of pro-market international organizations. Daneyko is also a leader of the group of economists advising the united opposition ticket, and president of the Economists’ Club. According to Daneyko and others, the official figures fail to include a large volume of problem loans that have been rolled over, as well as the overhang of more recently-granted credits that were likely bad the day they were made.
Meanwhile, the banks must deal with a tangle of formal and implicit guarantees, especially to firms in the agricultural sector. “Taking into account that the sector is not solvent, we have to hope that the government will fulfill their promises,” says Treshchev of Priorbank.
According to Egorov, the commercial banks’ lack of liquidity is acute enough to provide an opening for the Russian banks on the market, where yields are two-and-a half times those in Moscow . And while he says he doesn’t see a crisis in the near term, the signs of stress are clear enough. “There is a three-day period every months when tax payments are due,” Egorov says. “That causes problems.”
Despite the likelihood that the banks’ position is eroding, the low level of assets as a percentage of GDP, mean the absolute size of any problem is likely to be small, even in Belarusian terms.
“The good side of the weak banking sector is that the problem isn’t big,” says one multilateral official monitoring the situation. “You could solve the entire problem with $500 million.”
Finally, the very lack of independence which dogs the financial system means a classic banking crisis is unlikely; all the government need do to fix the problem is move money from one pocket to another.
 

You’re all alone

But moving money from one pocket to another is becoming increasingly more difficult, especially if the government tries to comply with the fiscal and monetary limits outlined in its agreement with the IMF. While modest, the Staff Monitored Program running from April until September 30 compels the National Bank to forego direct financing of the budget, and holds the government to fiscal targets and administrative reforms incompatible with its previous policies.
According to NBB vice-chairman Kallaur, the bank is doing its part to remain in compliance with the agreement, if doing so alone. “As for the government, although there is progress, there are some difficulties concerning the budget sphere,” he says.
Kallaur says he is hopeful the current monitoring program with the IMF could lead to a standby arrangement. But a source close to the negotiations with the IMF says any such progress is unlikely as long as the government refuses to be more forthcoming about its finances, including the proceeds from arms sales. And while the World Bank recently approved a small loan for energy conservation projects, significant multilateral financing is probably unthinkable as long as Lukashenka stays in power, even if the September elections are certified as clean and fair.
“They have no advocates, not even the Russians,” says the source close to the IMF.
As for significant financial help from Russia , the time for this may have passed as well.
Last month Belarus did recently receive the first tranche of a 1.5 billion Russian ruble credit similar to an IMF standby arrangement. (Indeed, one source at the IMF said the Russians may have prodded Minsk into its monitoring program with the Fund because they wanted the Fund to vet the details.) And Moscow earlier wrote off $1.4 billion in energy arrears. But the much heralded relationship between the two countries, manifested in the union treaties signed by Lukashenka and former Russian President Boris Yeltsin, has been in decline since the rise of current Russian President Vladimir Putin. (Many believed that Lukashenka only pushed the concept because he dreamt of succeeding the frail Russian president as the powerhouse leader of a Russia-Belarus union; the current figurehead of the union is Pavel Borodin, the former chieftain of Russia ’s own shadowy presidential administration, who earlier this year was indicted in Switzerland for money laundering.) One sore spot involves arguments over the distribution of costs and benefits associated with the existing customs union. In 1999, the head of the Russian customs authorities was quoted as saying that Belarus had captured $800 million in one year alone just from the customs clearance of automobiles. But according to officials on the other side, the Russian state budget gets as much as $200 million a year from Belarus via VAT refunds. Meanwhile, the flood of Russian goods into Belarus is leading domestic firm to demand protection, non-tariff discrimination that will not lead to more harmonious trade relations between the two countries.
Finally, the prestige the Russians get out of the linking of the Belarusian ruble to the Russian currency is next to nil. (The Belarusian ruble currently devalues at a rate of 2% a month against its Russian counterpart, and 2.7% in relation to the dollar.) Even though it is reportedly the appetite of Russian banks for short-dated Belarusian paper that his keeping the ruble parity stable, the risk of a de-linking is high, according to Zoya Yarmosh, director of Priorbank’s liquidity and risk management department.
The notion that Russian FDI will arrive to save the Belarusian economy – given a boost by an August 27 announcement of a potential $1 billion investment by LukOil – is similarly overplayed.
Despite the widespread hope or fear that Lukashenka will seal Putin’s support by offering up choice industrial enterprises to Russian businesses close to the Kremlin, most analysts believe he would be loath to give up control over any important existing assets. This is especially true given that he has been subsidizing many such assets for so long, to the detriment of all other aspects of the economy. “At any moment he wishes, he could give this country to Russia ,” says Sasnow. “But [he will agree to such sales] only in a critical moment, if he thought he was going to lose power.”
 

The rot spreads

Faced with such a critical moment, some leaders would reverse course and embark on program of widespread reform. But while the government has over the past two years taken some important steps in the direction of macroeconomic reform – most notable the adoption of a single exchange rate and the easing of inflation – few believe that Lukashenka will agree to anything that will jeopardize his control over Belarus and its economy.
For one thing, Lukashenka has continued to make expensive promises to both enterprises and individuals, for example recently pledging that average salaries would be raised by a quarter before the election, to $100 a month. He also shows no apparent interest in any reforms outside of the bare minimum needed to keep potential voters or foreign lenders on the hook until their support is no longer needed.
“The tough monetary policy is not because of long-term strategy but because of short-term problems – the need to keep prices stable before the election,” says Pelipas of Institute for Privatization and Management. “When the ‘problem’ is solved, policy will be loosened.”
It is also questionable whether the authorities can maintain a unified exchange rate and continue to maintain sufficient reserves or meet their foreign exchange liabilities, which include official and commercial debts totaling $2.3 billion.
“The external situation will deteriorate,” says Axel Gerloff, an economist at Dresdner Bank. “The question is how fast that will happen.”
Meanwhile, any positive results in the areas of fiscal and monetary policy are of questionable value without corresponding structural reforms, which remain officially anathema. “You may have a unified exchange rate, but if you don’t create the right incentives for the private sector to grow and function, you will have a rotten situation,” says Dagenhart of IFC.
And by all accounts the situation is rotten.
While officially the economy grew by more than 3% in the first half of 2001, most independent economist believe that figure bears little relation to reality. A marginal increase in industrial output largely went into increased inventories, while the long binge of government-financed housing construction started to decline in the first half. Meanwhile, despite a continuing of the ruinous practice of intermediary-led barter, arrears to Russian firms grew $300 million in the first half, according to Zlotnikov, the IFC economist. A similar growth in inter-enterprise arrears took place within Belarus .
Across the landscape of state-owned firms, profitability has collapsed. Officially, 40% of enterprises are loss making, while unofficial estimates put the figure as high as 75%. And with 80% of plant and equipment fully amortized, many firms are running on fumes.
“All the indicators suggest that all the resources have been exhausted,” Zlotnikov says. “The turnover capital of the enterprises has been consumed. They can’t continue production. It is a crisis.”
Physical evidence of the crisis is growing daily, as unsold inventories grow and unutilized assets accumulate on the perimeter of rundown enterprises.
The human cost is growing as well.
In Smorgon, a town 200 kilometers from Minsk , some local plants have been put on a cash basis by their suppliers, or have been forced to take loans to pay their workers. Others, like the mini-tractor plant, have not paid their salaries in several months. Functionally unemployed workers at some firms are known to put in one day a month, to avoid being forced to report for public-works jobs that pay as little as $7 a month, while aged pensioners are ordered to weed the fields of the local koholzes.
“After the elections, we think the situation will be disastrous,” says a local lawyer who runs a human rights and social service NGO.
 But by almost any measure, the situation is already disastrous. To accompany his annual list of terrible laws, Romanchuk keeps an index of common products and how long an average wage earner in Belarus , Poland and the United States would have to work to earn them. The first entry says it all: In 1990, it took the average Belarusian 31 minutes to earn enough money to buy a liter of Coca-Cola, while it took the average Pole almost two hours. In 2000, the average Belarusian was grinding away for more than an hour and a half for the same liter of Coke, while his neighbor to the west need just 10 minutes.

Long way down

Despite these and other indications declining living standards, Lukashenka remains popular with a significant minority of the population. And as late as two weeks before the first round of the elections, the anti-Lukashenka forces had only begun to articulate a program of economic reform to the wider population, thanks both to the efforts of the authorities and the disorganized nature of the opposition itself.
In mid-August Hancharik joined forces with another leading presidential candidate, Domash, with the understanding that the latter would serve as Prime Minister should the ticket prevail. The combined campaign also agreed to an economic platform worked out in part by Daneyko and Romanchuk which calls for a liquidation of most of the overbearing administrative controls that characterize the current system, as well as a broad privatization program. The experts also suggest deep tax reform (to leave just 6 taxes out of 39), reduce the number of licensed activities by 10 times (to 10 - 15) and to launch pension reform Chilean style. The most important6 part of it is to ensure sanctity of private property and open the country to free flows of money, goods, services and labor. 
Most analysts say a well-implemented reform program, coupled with official aid and FDI, could quickly produce strong results.
“When change begins, it will happen much faster than in Russia or Ukraine ,” says Dagenhart. “The country is full of hard-working, patient people.”
But the initial stages of liberalization would likely be very painful, especially given the absence of a private sector able to mop up labor forced from restructured or liquidated state enterprises.
“If the opposition wins we have no illusions,” says Gennady Bykov, Chairman of the Belarusian Free Trade Union. “We hope that, if there is privatization, it will be like the in the west, not like in Russia .”
But the businessman stuck under the militia “roof” says he has no illusions that Lukashenka can be defeated, either by ballot or popular uprising. “If the power changes, people will be put in jail… and that’s why the power won’t change.”
And while some believe a change is inevitable, given the rapid deterioration of the enterprise sector, even many opposition figures say the system could continue for quite some time.
“There has been talk about this economic ‘crisis’ for seven years,” says Pelipas. “For one country it may be a crisis. But for another it may be a normal situation. And if the economic situation gets much worse than it is today, the majority of the population has plots of land to go cultivate, or relatives in the villages.”
Most painful of all is the fact that this devastation will be largely ignored by the outside world, like the radiation from the Chernobyl disaster that continues to poison the country’s southeast corner.
“It has attracted no attention whatsoever, and it will be many, many years before investors look at it,” says Augsto Lopez-Claros, senior international economist at Lehman Brothers in London . “To the extent that it gets a little better, it will have a marginal effect on the region. And if it goes into a tailspin, it will have only a marginal effect as well.”