Long-term strategy for democracy building and its sustainability

Jaroslav Romanchuk,  President of Scientific Research Mises Center

Political situation

In 2007, Belarus continues to face severe deficit of political freedom and civil rights. The Belarusian regime keeps ignoring demands both of the national democratic opposition forces and the international community. Political prisoners (A. Kazulin, P. Serevinets, N. Statkevich etc), harsh measures against youth organizations and discrimination of independent media are typical of its political environment.

Democratic political parties and NGOs face persecution and are deprived of the access to media and the opportunities to meet ordinary people. The local elections campaign in the beginning of 2007, the intense repression campaign against the demonstrators on the eve and during Freedom March (March 25, 2007) and Chernobyl March (April 26, 2007) showed that the authorities do not have the slightest intention to liberalize the political situation in the country. Moreover, the actions against the political opposition got more intense and sophisticated. Many political activists were detained and sent to prison for 10 – 15 days even prior to March 25 Freedom March. This kind of “preemptive democracy” is a part of the new tactics of force structures to maintain the stability of the political regime.

            The crisis in relations between the Kremlin and A. Lukashenko that was fuelled by gas and oil prices and terms of delivery made the head of the Belarusian state change his rhetoric towards the West. A. Lukashenko expressed his willingness to restore good relations both with EU and the USA, to reshape the foreign policy and to create favorable conditions for foreign investors in Belarus. These statements primarily targeted Russia and were aimed at putting pressure on the Kremlin. A. Lukashenko ignored the recommendations of the European Union that can be the basis of the dialogue. At the same time, he finally agreed to have EU mission office opened in Belarus as well as the Information Office of the Council of Europe. In his annual address to the parliament A. Lukashenko stated, “Of course we are interested in normal mutually beneficial relations with European Union and the United States. There are absolutely all prerequisites for the valuable dialogue.” He appealed to common sense and the respect of the position of his government.

Such statements are in sharp contrast with the earlier vivid anti-American and anti-Western policies. They are the evidence that A. Lukashenko is at the crossroads. he realizes that it is no longer possible to get huge energy rent from Russia in exchange for empty declarations of friendship. He has not delivered on any promised he made to Russia. So called Union State between Belarus and Russia is just a piece of paper with no substance. The Kremlin and A. Lukashenko have opposing views on what should be done with it. Monetary union and the introduction of the Russian ruble in Belarus is even bigger a myth. It is only in 2011 that “Gazprom” will have 50% of the shares of “Beltransgaz”. It is still not quite clear what role it will have in managing this Belarusian gas monopoly until this time as the “golden share” (much more powerful tool that the “eminent domain”) remains a valid policy tool in the hands of the Belarusian government.

Though Belarus and Russia signed a Trade Agreement (March 23, 2007) to remove all trade barriers by the end of 2007 it is clear that the Belarusian governments is not going to stick to it as it would mean the initiation of wide scale liberalization. So Belarusian-Russian crisis may change its format and intensity in the year to come but it is not likely to be resolved. It will have a major impact on the political and economic situation on Belarus. The resource of the mutual trust between the countries has gone. However, we should not expect any meaningful change of the Russian policy toward Belarus earlier than autumn 2008. Russia’s preoccupation with its own elections and the transition of power will prevent Belarus from becoming its priority. In fact, Belarus has never been Russia’s priority. That is why A. Lukashenko managed to pursue his policies of rent seeking at the expense of the Belarusian budget and bug Russian companies for more than 10 years.

            A. Lukashenko is not likely to change his foreign policy and domestic policies. He will try to find a complementary source of his financial and political stability. Hence, he tries to find allies in Venezuela, Iran, India and China. The Belarusian government is trying to ensure oil supply to Belarusian refineries from Azerbaijan and Kazakhstan. No matter what the official propaganda says these projects and contacts will not compensate for the losses of the Russian energy grant. Some of these activities are driven by personal interests of a few representatives of Belarusian nomenclature. They have nothing to do with the revision of the official economic policy.

            The Belarusian regime faces the challenges of delivering the growth of the economy and social standards. It has to restructure its economy and modernize it while keeping employment high and public finance in order. Another conflicting goals are

Ø      making friends with Russia, keeping its pledges in the framework of the union state and trade agreements and pursuing protectionist policies against Russian goods in side Belarus;

Ø      making friends with the West (USA and EU) and preserving political monopoly and the modern version of the totalitarian state inside the country;

Ø      keeping nomenclature, state business, force structures and regional bosses under control while trying to make gradual liberalization and carry out initial privatization;

Ø      attracting foreign investment and keeping the repressive bureaucratic overregulated business climate that favors the few at the expense of others;

Ø      keeping inflation down, exchange rate of the Belarusian ruble stable while ensuring easy access to domestic credit and export stimulation;

Ø      keeping the trust of the population in the national banking system (to prevent the outflow of deposits) and subsidizing agriculture and providing investment resources to industry.

Three unlikely scenarios

These are serious challenges that can hardly be met without policy modification. There are four scenarios for the Belarusian authorities to go on: 1) to seal the country from any outside influence, to tighten the grip over the opposition and to adjust the economy and the population to the gradual deterioration of the life standards; 2) to yield to Russia and to ensure the continuity of its support; 3) to accept USA and EU recommendations and to start political reform and 4) to start liberalization and economic reform, to improve business climate while keeping the political monopoly. Each scenario has its costs and benefits for A. Lukashenko. He does not have enough popular support to lead to the deterioration of social standards without political consequences. Besides sealing the country in the context of internet penetration, open borders with Russia and to a lesser degree with Ukraine when people are used to some degree of economic freedom would require the introduction the a certain type of the state of emergency. Turning Belarus into a police state is theoretically possible but the external conditions and the internal factors (human, financial resources, political will and charisma of the leader) are not likely to make it happen.

            The second scenario would be possible if A. Lukashenko had the intention to turn Belarus into a province of Russia. However, he showed his determination to build an independent country. Had he chosen this scenario he would not have led the situation into the crisis of 2006 – 2007. V. Putin offered him various schemes of transferring the political power in Belarus to the Kremlin but A. Lukashenko vehemently rejected them as he was interested only in one situation when he would be given the right to take part in the presidential elections in the union state and to preserve political power in Belarus at the same time. This scenario is out of the question to the forces that run Russia today. Hence, the probability of this scenario is very low though neither Lukashenko nor the Kremlin will liquidate the existing union state between Russia and Belarus or the customs union. In the short run (up to 2 years) Russia does not have feasible alternative to gas and oil transit through Belarus. It does not have any political person or structures to challenge Lukashenko and to substitute him on the top of the state.

            Anti-Russian or rather anti-Kremlin rhetoric is the theme that adds popular support to Lukashenko. By doing that he protects the interest of national nomenclature and business. In addition, he speaks the minds of many nationally oriented democrats who share his anti-Russian stance.

            The third scenario of turning Belarus into democracy would lead to the quick change of the political regime in the country. A. Lukashenko tries to make EU and the USA ease their position on Belarus. He offers the process of gradual changes and a few minor concessions. He argues that he has been defending the sovereignty of the country and now as Russia is attacking it by raising gas and oil prices Belarus deserves to get the West’s support.

            Taking into account A. Lukashenko’s views on the politics, his record while in power and his status in nomenclature, force structures and democratic opposition he is not likely to accept the West’s offers. The Belarusian regime does not face strong enough resistance from the democratic opposition. It does not face mass disillusionment of its policies yet. In addition the West does not have the tools of real influence or it is reluctant to mobilize more resources and make Belarus its priority.

A. Lukashenko will try to interpret the West’s requirements in the way that will enable him to “sell” his activities as the political reform. For example he may suspend death penalty and gain the recognitions of the Council of Europe. If the deterioration of the economic situation speeds up, he may let a few representatives of the democratic opposition (either from the political parties or NGO community) to the parliament in autumn 2008 elections. The probability of holding a kind of round table talks between the authorities and the democratic opposition with the intermediation of the West is not likely in 12 – 18 months as the social economic situation in the country will remain relatively stable.

The scenario that is likely to happen

It is the fourth scenario that is the safest for A. Lukashenko to take if he wants to keep power as long as possible and to meet the most burning challenges that he faces in the framework of the existing policies. Carrying out economic reforms and improving business climate is likely to be welcomed by the West, Belarusian business and even democratic opposition. The pace and the depth of reforms can be determined by the government. Some measures can even be approved by IMF and World Bank. The authorities have already started meeting the representatives of prominent international business (from Sweden, France, Holland, Germany, Italy, China).

“Privatization” has become a buzz word at the meeting of Belarusian ministers. By handpicking companies that are interested in buying Belarusian state assets A. Lukashenko will try to buy the trust of the West and to build the coalitions both in Russia and in the West that will facilitate his regime’s political recognition. It is also the means to make some new alliances in Russia. For example, recently Russian state “Vneshtorgbank” bought the Belarusian state bank ‘Slavneftbank”. It is this Russia structure that is holding talks on selling Belarusian bonds in the Russian market. AMB Amro audited the gas monopoly “Berltransgaz”. It is one of the banks that the government addressed to help Belarus get its first credit rating. At the same time this Dutch bank  was offered another Belarusian bank to buy “Vnesheconombank”. Any open tender has been announced yet in any of these privatization cases. There are also negotiations with German companies on buying the biggest Belarusian brewery Krynitsa” and a few other enterprises. Earlier A. Lukashenko denied any possibility of privatization. This year he said, “If we have privatization it will be open and honest. We will not have nomenclature, clan or indecent  privatization. I am telling all investors; do not give bribes to anybody no matter who promises you something. It is useless. Nobody will help you as the president has the right of the last signature”. He admits the dangers of nomenclature and its strong consolidation that turned Belarus into a corrupt state.

            The government is trying to create the impression that it has chosen to finally build a private market economy and integrate into the regional system of the division of labor. However, load talking has failed to lead to any meaningful changes in policies and the legislation. Moreover the tax system that was `ranked by the World Bank to be the worst in the world got even worse. Import sales tax, real estate and land taxes were increased. A very high new fee in construction was introduced. The level of general government revenues in the first quarter of 2007 peaked at 54,8% of GDP (it was 48,4% in 2006).

            The privatization law and the subsequent presidential decree still form the legal base for the privatization. Under this legislation, it is the president who makes all decisions on privatization. The procedures are very cumbersome and difficult to go through. With this kind of legislative base mass privatization is not likely. At the same time A. Lukashenko allowed to sell loss making assets and enterprises. This window of opportunity can be used by local nomenclature to transform its administrative resource and political power into economic and financial power. At the same time, this kind of arrangement can be the price A. Lukashenko is willing to pay for maintaining local nomenclature’s loyalty under new economic conditions of limited budget resources and the funds that can be used to subsidize local budgets and companies.

            Belarusian government has not shown any sign of preparation for the system market reforms and building the adequate institutions. Prices are still strictly regulated. The burden of regulation is the equivalent of 10 – 15 percent sales tax. Under the existing conditions, property rights became just a formality. If the government tells you how much you can pay to your employees, limit profitability, sets production targets for you and enforces certain payment and exchange rules you do not own the business in the economic sense of the word.

            The Belarusian government’s behavior reminds of the attempts of late Soviet leader Y. Andropov and early M. Gorbachyov to save Belarusian socialism. There is much talk about saving, limiting energy consumption and its effective utilization. The government declares another campaign to fight corruption, to cut bureaucracy and make the state more accountable. In his annual address to the parliament A. Lukashenko promised once again to cut subsidies to agriculture and loss making enterprise and to fight the culture of dependency and corporate entitlements. This time he will be forced to do it as the Russia energy grant will be over by 2011, the year of another presidential elections.

            Another concession that A. Lukashenko may be willing to make is to Belarusian entrepreneurs and SMEs. The things is that 185000 individual entrepreneurs (IE) will not be able to function after January 1, 2008 due to sever hiring restrictions. They are turning into an influential economic and political force. IEs forced a few organizations that made not just economic but political requirements as their program. The authorities realize` the danger of such consolidation. That is why they try to pacify them and to create better business environment in the situation when thousands of Belarusian state enterprises are likely to begin losing jobs. SME business associations are also gaining influence. The National Business Platform that the Coalition of business associations approved (Minsk Capital Union of Entrepreneurs and Employers is a coordinator of this initiative) became the consolidation platform for the private business.

A. Lukashenko included many of its propositions into his annual address to the parliament on April 24, 2007. He recognizes that “entrepreneurship, private initiative is an integral element of dynamic development of the country… The policy of the Belarusian state in the economic sphere must take into account the full-fledge support of private initiative and entrepreneurship… Firstly, simplification of business registration and opening a business. One of the strategic tasks in this direction is debureaucratization of administrative procedures.. It is important to change both legislation and the mentality of government employees… We must finally recognize that development of small and medium size entrepreneurship means stable government revenues and the increase of the number of jobs. People should not be afraid to do business…”

            Repeating the propositions of the NBP A. Lukashenko suggested abolishing the norm to indicate all kinds of activities of the incorporation documents. He ordered to simplify the procedure of issuing permissions to open a specific business (to open a café you need to get 42 permissions from dozens of different organizations). It is obvious that the authorities will be under the increasing pressure to improve business climate and to create much more favorable investment climate. If A. Lukashenko starts pushing harder in this direction he is likely to generate more enemies among nomenclature and so-called political entrepreneurs. The culture of dependency and freeloading dominates in the Belarusian economy and administrative bodies. Any attempts to liberalize and to debureaucratize will erode the existing solid power of “Vertikal” (or the vertical like of power that goes from the top to the bottom and it is controlled by A. Lukashenko via many force and control structures).

Democratization via economic and business reforms

Belarusian democratic opposition has been consistently fighting with the regime since 1996. The 2006 presidential elections showed that coordinated consolidated efforts can become a powerful factor in Belarusian politics. Bravery and determination of political parties and NGO’s activist deserve recognition and praise. The joint political opposition is the only well-structured opposition force in the country that has a network wide and efficient enough to launch a nation wide political campaign. Keeping and expanding it under the totalitarian regime and with very limited resources shows the strength of the opposition and its determination.

            However, while recognizing the status of the joint democratic forces and its place in the Belarusian politics and the society their limitations and weaknesses should also be taken into account. First of all the social economic situation in Belarus steadily improved in 2000 – 2006. Common people recognize it as the achievement of the government. Unlike Georgia, Ukraine recently or Poland in the late 19080-ies Belarus does not face the deterioration of the living conditions. Moreover, in 2002 – 2006 the government administratively made real wages grow much faster than productivity. The government does not allow state companies (they still generate up to 90% of officially registered GDP) to fire workers. In addition to that about 60% of the population receives various kinds of social transfers. Such social policies made the majority of the population reluctant to openly oppose the regime unless it can deliver on wages, pensions, freedom of leaving the country and some other basic economic liberties. Therefore the popular support of the Belarusian opposition in 2006 compared even to 2001 presidential elections got smaller to about 20% while A. Lukashenko’s personal rating is about 55%. It is important to preach to the convinced, to keep democratic supporters informed and get them involved into various activities (street protests, trainings, political and information campaigns etc.). At the same democratization measures that are limited just to these activities are likely to fail to expand the popular support for the democracy and private market economy.

            As joint democratic forces in Belarus are in the process of revising its strategy, shaping its institutional structures and deciding on the leadership issue they have limited capacity to reach of their electoral base. After the presidential elections the Political Council headed by A. Milinkevich has failed to deliver any substantial value to the expansion of the democratic forces. Moreover, the initiative of A. Milinkevich to create Freedom Movement as a means to reach out to the people who are involved in the democratic movement generated more splits and conflicts inside the existing political structures without adding new people and adding support for democracy and freedom.

The National Council of the joint democratic forces (the shadow government) chaired by A. Lebedko managed to generate positive messages to various social groups (entrepreneurs, judges, teachers, doctors). It arranged and carried out the work on the transitional constitution, economic platform and the strategy of the joint democratic forces. These three documents were approved by most of the democratic structures and are likely to be adopted by the Congress of the joint democratic forces, which will be held on May 26 – 27, 2007. the activities of this body are important in creating the positive agenda of the existing democratic forces. However, its potential to reach out of the democratic electorate is limited. The national Council works closely with some structures of individual entrepreneurs but they do not have access to SMEs and to local authorities to say nothing about the national bodies of power.

            Under these circumstances promotion of economic reforms and favorable business climate creation via the existing most effective and structured business associations in close cooperation with the best think tanks is the most effective and cost-effective means to expand the popular support of market reforms, liberalization, private initiative and as a consequence – democracy. Numerous opinion polls in Belarus showed that the only consolidated social group that consistently supports democracy and private market is the people who have the experience of working in private business or being entrepreneurs. While young people, pensioners, residents of Minsk and small towns do not represent the consolidated electoral base for democratic forces people who were exposed to private business activities are. It leads us to a very important conclusion. Under present circumstances democratization of Belarus, expanding the support for market reforms and creation of the institutions of the free society can best be achieved by concentration more effort, resources and attention to business climate and economic reforms. It can create valuable synergies inside the country. The thing is that local authorities need some ideas on how to improve their economic, investment and social situation. There is much evidence that they are very susceptible to new ideas and suggestions in this area. As these ideas come from local business associations and Belarusian expert community they are viewed as not oppositional but constructive and productive.

            Secondly, the government itself is looking for solutions and answers to the challenges. Hence, it is paying more attention to the proposals of the business and expert community. They are not allowed to meet the political opposition or to start negotiations with it but they meet business community representatives and listen to what they say. Once there is demand for economic reforms and business climate change, these ideas and proposals (like with a few propositions from the National Business Platform) can become the basis of the new economic policy. It is about being in the right place in the right time with the right ideas. Business and expert communities working together are well equipped to meet these criteria.

The right time is yet to come but they have to be ready for that and they can accelerate its arrival. The rights ideas are generated and put in the form of concrete legislative changes but they should be a part of the public debate before the crisis happens. Besides holding such nation wide debate by itself is a powerful means to bring about changes in the country. From the experience of promotion the National Business Platform we know that talking about economic reforms and business climate change inevitably leads to the discussion on the political and legal reforms. As democratic forces have limited access to the people outside their own electoral base supporting activities of business and expert communities for working out, discussing and promoting economic and business climate reform is extremely important part of the long-term democratization campaign. It will have an impact on the country not just prior to political changes but long after them as they will deliver the necessary institutional framework for free and democratic Belarus to prosper without jeopardizing its sovereignty and sustainability.