The widening trade gap may be a sign of crisis in the real sector and on the internal market. The government's import substitution programs are ineffective. The Belarusians still prefer to buy imported goods. All short-term benefits have been derived from the new Value-Added Tax (VAT) payment mechanism in trade with Russia. There are shortages of competitive Belarusian goods on regional markets. Programs to support large industrial and agricultural exporters have not produced the desired effect as the ratio of processed goods on exports has been shrinking.
Foreign trade rose by 34 percent year-on-year to $19.4 billion in the first six months. Exports grew by 25.6 percent to $9.25 billion, while imports soared by 42.8 percent to $10.18 billion. Belarus' imports from Russia surged by 43.7 percent and the deficit widened to $3.2 billion. The new VAT collection mechanism, whereby tax is paid in the country where goods are destined to be sold, failed to balance import-export flows in trade with Russia as the government had expected.
The structure of trade has changed considerably. Belarus has been selling more mineral products than buying in the last two years, but this largely depends on the world prices of oil and Russia' pricing policies. Trade in minerals may swing into deficit in 2007 if Russia raises its oil price for Belarus. The widening trade gap creates inflationary pressures on the Belarusian rubel. The deficit in equipment trade doubled from $300 million in the first six months of 2005 to $668 million in the first six months of 2006. Trade in chemical products moved from a surplus of $187 million to a deficit of $175 million. The food trade deficit widened to a five-year record of $282 million despite subsidies to food processing enterprises. If the government lifted all restrictions on food exports or brought its regulations into line with WTO requirements, internal food prices could fall by 25 to 35 percent.
The Export Price Index rose by 16.1 percent in the first six months of 2006. The volume index went up by 8.2 percent. The import indices rose by 12.2 and 27.3 percent, respectively. The Import Price Index rose by 20.9 percent in trade with Russia and was 6.4 percent higher than the Export Price Index. This means that there is little room for pricing maneuver on Belarus' main market.
Belarusian manufactures face a tough task to squeeze costs of goods for export. Since Belarusian equipment is non-competitive, the country should seek to export more consumer goods. Even if manufactures managed to reduce costs to the EU-level, taxes and bureaucracy-related expenses would make their goods more expensive.
Belarusian manufacturers have benefited from a rise in prices of potash fertilizers, tractors, tires, motorcycles and some wood products. However, a decline was recorded in prices of artificial fibers, ferrous metals, cutting tools, flax, refrigerators and TV sets. The import price of petroleum products doubled and the price of crude increased by 50 percent.
The EU has remained Belarus' major export destination with a 50.1-percent share of the total exports. The proportion grew from 44.2 percent in June 2005. Imports from the EU accounted for 20.6 percent of the total imports. Russia's share of exports shrank from 35.8 percent in January -June 2005 to 32.9 percent in January-June 2006, while that of imports widened from 60.8 to 61.2 percent. Russia's presence on Belarus' market would be bigger but for restrictive measures. According to the Russian economic development ministry, Belarus applies 78 restrictions in trade with Russia, compared to 18 in trade with the EU and nine in trade with Ukraine and the United States.
Belarusian companies often resort to transfer pricing to pay lower taxes. Some enterprises use transfer pricing to boost export data and extort VAT reimbursements from the government. Many state enterprises export goods at prices that are lower than real costs, while exaggerated export figures help them cover the losses. Not all companies, but only exporters of minerals and licensed goods, can take advantage of such arrangements.
A sharp rise in imports in the first half of 2006 is largely attributable to overstated import prices. The mechanism is used for moving capital from Belarus to countries with lower taxes. As a result, official statisticians record a rise in imports, Belarusian companies pay taxes from a much narrower taxation base, while the importers receive considerable profits, but do not pay taxes in Belarus.

Table 1Belarus' trade balance, in millions of US dollars

Source: calculated on the basis of the statistics ministry's data for 2003 - 2006.