The World Bank has been working in Belarus for the last 24 years. What projects have you been engaged in over that time?
Over the years, we have financed the country’s development project portfolio to the tune of over $1.5 billion. Initially, having focused our cooperation mostly on infrastructure services; now, we are working in all the key developmental areas. In particular, we have significantly expanded the size and the scope of the programme, since rolling out our Country Partnership Strategy (CPS) for Belarus, in June 2013. We are now implementing projects in road transport, energy, water and sanitation, solid waste management, forestry, education, and public financial management.
Three years ago, our active project portfolio was worth about $375 million. Now, it is worth $998 million and will soon reach $1.2 billion, when two new projects for the private sector and health sector development are added this year.
This expansion is notable not only in the sense that the amount of financing is increasing but also, and more importantly, because we have been able to build a strong mutual trust with Belarusians. Projects in education and health care represent the first time that Belarus is borrowing from foreign partners for social sector development. In health, the forthcoming project will bring e-health solutions, specialised training labs for general physicians and the refurbishment of a neo-natal care unit.
We are also continuing with our policy dialogue on key structural reform areas, including measures to enhance the competitiveness of the Belarusian producers.
I believe an analysis of the country’s economic challenges and opportunities, which the World Bank completed in 2013, is one of such projects.
Yes, you are referring to the 2012 Country Economic Memorandum for Belarus. Based on this report, which we prepare every five-six years, the government asked us to help the country overcome some of the structural challenges the report had identified. After year-long discussions, we came up with a roadmap for reform last year that identifies six main challenges.
What are the main challenges?
I would say macro stability is the most important challenge. The argument there is: if I am an investor who is interested in bringing my capital to Belarus, I shouldn’t need to worry about how much that money will be worth in say six months. In an unstable economy, the invested capital can be subject to devaluation, depreciation and inflation etc. As we know, a stable economic environment is needed to foster investment. During the past 18 months, there has been a consistent and prudent macroeconomic policy in place, so the first condition for long-term investment has been met.
Another challenge is for state-owned enterprises (SOEs) to become more efficient and competitive. If they make progress in reducing cost and raising productivity, there will be more investors interested in entering into joint-ventures with them. Then, the SOEs will rely less on state subsidies because they generate more profits on their own. This in turn means that financial resources in the economy can flow more towards the private sector. However, making SOEs more efficient and competitive requires streamlining their product range and opening new markets which naturally takes time and money.
In a planned economy, the state gives state-owned companies quantitative production targets and budgetary funds with which to reach those targets, so there is no real incentive to improve the quality of their products. In addition, there are implicit and explicit price ceilings, vis-à-vis consumer goods and component suppliers, which are often very inflexible.
This meant that you can’t adjust your prices based on economic principles. The market is left with unmet demand at the price ceiling rather than clearing at the equilibrium price where supply and demand curves meet. So if you operate under a price ceiling, you have to overproduce because the market would ask for more quantities when prices are lower than the equilibrium. As a producer, you either need to acquire more budgetary funds to produce them or you have to lower the quality, in order to meet those quantities.
That sounds unsustainable, doesn’t it?
Yes, this is what may have happened in Belarus in the past and why price deregulation is so important for firms’ competitiveness. The country has also been very much dependent on exports to Russia which, in retrospect, may have reduced the need for product upgrading in Belarus.
There are many academic papers suggesting that Russia has been suffering from “Dutch disease” associated with oil and gas resource boom. Associated with the Russian boom, Belarusian exports to Russia also grew, although relatively less than those from China. Now that exports to Russia have collapsed, we now need to discover new markets which require the upgrading of a wide range of products through introduction of new designs and technologies.
How can Belarus do that, now?
Well, first of all, you cannot do it all at once, across the board, because it costs a lot to upgrade; you need to be selective. There is little room within the budget to support product upgrading after meeting the country’s social spending. You also have to find a transformation strategy which maximises the viability of the existing production system. Otherwise, you can end up de-industrialising the economy.
It is a delicate and difficult task to preserve Belarus’ significant industrial capacity, without keeping inefficient companies afloat in order to provide employment. It is even more difficult during a recession to achieve product upgrading, discovery of new markets, and transformation to higher value production. We will have to find a strategy to bring external or foreign savings to Belarus preferably in the form of investment rather than loans, and to find ways for foreign investors to put up their money, work with Belarusian producers to upgrade products and open new markets, and make decent profits together.
Some monumental change is already happening in Belarus, first in the business culture – a move from a philosophy based on quantity toward one focusing on quality, from a system relying on subsidies and state loans to one driven by own-generated profits, toward a business mind set which optimises the level of inventories and minimizes how much operating capital you have to carry.
All of these represent a very determined strategy for change, not just a routine modernisation. Now Belarus needs to further develop the logic of change and sell it to potential investors, I would argue, far better than its neighbours. There have recently been many encouraging signs of a systematic effort being made by Government and industries alike in order to overcome the structural constraints. The policy on phasing out directed lending is one of such signs.
Do you think the Belarusian government is close to understanding that logic?
Indeed, I have had discussions with people in government and the political leadership to know that there is not only an understanding but also increasing interest and commitment. The debate during the two and half years I have been working in Belarus was more on how to do this, not on whether to do it.
Although Belarus does not have many natural resources, it does have a deep tradition and capability in sciences, engineering, and innovation. On top of this, Belarusians are very hospitable and decent people who have exceptionally strong work ethics. So I am an optimist on Belarus!
I don’t think Belarus is in the top ten investment destinations for foreign companies, is it? What can be done to attract foreign investors?
Well, part of this is comes from the stigma of its being labelled as a centrally planned economy, heavily controlled by the State. The market tends to see things wholesale based on news headlines — that nothing operates on market principles and that there is excessive regulation. That may have been true in the past, to some extent, but there are also quite a few misperceptions. The part of the investor perception that is not true or exaggerated is the stigma.
So when we look at the current image of Belarus as an investment destination, how much do you think is reality and how much are misconceptions or so-called stigma, if you will?
I think the stigma has had a significant impact on foreign investment. It is not easy to get potential investors who have never set foot in the country to change their minds about the news that they assumed were true. Belarus has to make an extra effort to change perceptions and actively reach out to the investor community in order to overcome the stigma.
They say “seeing is believing” — foreigners who come to Belarus invariably leave with a positive feeling and affinity to Belarusian people.
In this respect, I hope more foreigners will come to Belarus to take a look. For instance I would love to see changes that make it easy and cheap to get visas for businessmen or tourists. E-visas issued on the web could represent a radical but powerful solution to tell foreign investors unequivocally that they are welcome to look around for opportunities.
There are other things that can be done which don’t cost a lot of money. For instance, it costs nothing to uphold principles such as sanctity of contracts and protection of private property, etc. Such principles are now explicitly mentioned in several draft decrees and amendments under discussion, and will go a long way in undoing misperceptions.
One other thing I would do is to put all the relevant legal protection of investors into a special decree and showcase it as part of an outreach campaign to the investors’ community, together with investor facilitation measures. With time and a consistent track record, we will be able to remove the stigma and draw investor’s attention to all the strength and benefits this country offers.
And as you said, these steps do not cost much. I believe there are other steps that are more expensive, aren’t there?
Sure. We’ve already talked about state-owned enterprises, which are the largest employers in the country. As we said earlier, they are neither as efficient nor competitive as they can be; plus there is over-employment now that the market is down. But it’s not only excess labour that keeps operational costs high.
During the last decade, companies imported a lot of new machinery and equipment but they haven’t fully paid back the debt incurred during the factory modernisation phase. So servicing that debt makes up a significant share of today’s costs. One can consider some restructuring options such as debt-equity swaps to reduce debt overhang, provided that SOEs have strong rationalisation plans.
The other effort that is being made in the SOEs is to streamline product offerings, open new markets, and focus on raising profitability and sustainability. This trend represents the soft re-engineering of business lines whose benefits will likely surpass the impact of plant and equipment modernisation.
Companies are very interested in doing serious market research to see which five models in their business line are the best-selling ones and have prospects for market growth. Then they concentrate money and effort on those five, which is a different business model than the quantitative target model of the past. It is now thought to be better to enter into joint ventures with foreign partners who not only can bring new financing but also their market-tested product designs, production techniques, and their established marketing and supply chain networks.
I think there is now a greater awareness of this approach and some company directors have already started contacting potential investors. One positive side-effect of the Russian market collapse in 2015 is that it set in motion the adaptation and coping mechanisms in Belarus which were badly needed. I believe the transformation has started already.
As you said, this would be very expensive for the entire economy.
Yes, if all mid-course corrections were to be done at once, it would require a lot of financing which the country doesn’t have at the moment. So, Belarus has to be selective, and do its best to attract foreign investment.
If we look at the rest of the CEE region, the countries which embarked on structural reforms ahead of others have already managed to overcome these challenges, and are moving into higher value industrial segments. They were lucky in the sense that when they joined the European Union and started their privatisation process, there had already been some European investors interested in finding alternative production sites in order to reduce their own costs. They were also mentally ready to re-establish the historical links. There were also a lot of public funds available to be spent on capacity building and entrepreneurship development.
Belarus doesn’t have that kind of support, neither from the Eurasian community nor from global financial markets. In effect, it has never had support comparable to that of EU accession countries. Even the Russian energy subsidies of earlier days are becoming less generous and less predictable.
Belarus needs to stand on its own and build on its own merits. Comparing the country to other former Soviet countries, we find that it has many strengths, it is resilient, and is better equipped in many sectors to compete in the global market. Besides, Belarus is quite clean, as far as corruption is concerned. Just look at our Minsk-Gomel highway project — European highway standard at one of the lowest construction costs per kilometre in the region.
Belarus is open for business and will facilitate investors who can bring technology, financial resources and their market networks.
When we look at the Doing Business report, Belarus ranks 44th. It seems that on the one hand there has been a lot of improvement in the business climate, but on the other hand, we see countries which have climbed up the ladder where businesses don’t see much improvement in their day to day operations. In an interview two years ago, former Minister of Economy, Nikolai Snopkov, told me I would see Belarus leap in the ranking.
Ten years ago, Belarus ranked 106th out of 155 countries in the DB ranking. Now it ranks 44th out of 189 countries. So in ten years, the country moved from the bottom third group to the top quarter group which is remarkable. The rapid climb in the ranking was possible, to some extent, because the government focused on reforms that would have larger effect on the ranking. There have also been changes in the DB methodology which have helped Belarus. However, it is difficult to explain a consistent climb in the ranking without policy changes that are good for business.
I was not here ten years ago, but I will bet my house that the investment climate in Belarus is better now than it was a decade ago and will get better still.
I think it is important for the government now to ask a different question: if we have climbed up in the ranking so much, why haven’t we seen a stronger inflow of investment? In addition to all that has been done over the years to achieve the current position, what should the government do in order to translate the Doing Business indicators into actual investment?
Clearly, I think Belarus should ask which of the 43 countries ranking higher on Doing Business have also been able to attract investors. What have they done in addition to improving their Doing Business performance? Moving beyond the mechanical introspection on how it does on various country rankings, Belarus needs to study countries which have attracted large amounts of investments and recreate the conditions they offered to investors.
When your talk to foreign investors what questions do they usually ask you?
I would say they often ask about the regulatory environment and property rights. We talked about this earlier. I spend a lot of time telling investors why they should be the first movers in developing business ties with Belarus. When they have specific concerns about investing in Belarus, we, as the World Bank, do our best to bring them to the attention of the government so that necessary changes can be made.
I also tell investors to look at the scientific and engineering tradition which is still strong in Belarus. The first fully manufactured truck in Belarus was produced in 1947. To put it into perspective, South Korea, my own country, today produces Hyundai and Kia cars on a global scale. Not many people know that Korea produced its first own-brand vehicle only in 1975. Belarus’ broad industrial base is a big advantage for investors looking at new production sites. Belarus also has the inherent capability to innovate if provided with a reliable platform and a bridge to the global market.
Another advantage is the education system, capable of producing skilled labour. Skills regeneration capacity has been retained here, with a significant portion of public spending going to education. Skilled labour in Belarus is cheap and abundant compared, not only to the EU, but also Saint Petersburg or Kaluga.
Now what you need to do is to translate these advantageous factors to access the global market, right?
If you are a European producer of factory equipment or high precision instruments, for example, China is already at your doorstep. In terms of proximity to the market, as well as factor costs, a joint venture with a Belarusian company can still give you a fair chance of competing with emerging low cost producers and buy you the time needed to innovate yourself into higher added value, high technology, upper-tier market.
What would be the profile of a European company that could benefit from investing in Belarus?
I think companies whose traditional business lines face increasingly stiff competition from Asian producers should look at Belarus which has a good skills base and offers relatively low factor cost. The Carl Zeiss Group entered into a joint venture with BelOMA to produce high precision camera lens and microscopic equipment. Moscow Aeroexpress line is being upgraded with trains made in Belarus. There is interest from global medical equipment companies to produce X-rays, CT scanners, components for MRI scanners in Belarus.
However, I need to also mention that some of these products are already produced in Belarus and exported globally!
To me, I think a win-win solution can be found for many European producers if they would just come to Belarus and look around. One can definitely create higher value at lower cost in Belarus, and that is where the investment opportunities are.
We were talking about the negative image of Belarus; we need to add there are many people who make generalisations and sometimes make comments even though they have never been here.
Well, before I came to Belarus, I also came across a lot of articles which were negative about the country. Over time, I found that some of the same old articles from the past were being recycled by the media. New stories were being re-written on the basis of old pieces. So it is difficult to get outsiders to take a fresh look at the country – we called it the stigma earlier. It is like phantom pain of a severed limb.
Belarus has many scars from the past. If we look at the Chernobyl catastrophe, the country is still suffering. Chernobyl was actually a nuclear power facility in Ukraine not in Belarus but it was Belarus that got bombarded with nuclear fallout. Did anyone compensate Belarus for the damage? Since its independence, Belarus has spent $22.5 billion in direct costs to take care of its Chernobyl victims. If Belarus had a spare $22.5 billion today, it would be able to pay for a good chunk of the cost of transforming itself into a high-income economy.
However, since the reality dictates otherwise, Belarusians will do their part to attract investors who are willing to take the first step. I am sure Belarus will soon establish itself as a hospitable and friendly investment destination. I just bet my house on it, didn’t I?