GOB Forum Warns Against Investing in Belarus

UNCLAS SECTION 01 OF 02 MINSK 001425

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TAGS: ETRD ECON EINV BO
SUBJECT: GOB Forum Warns Against Investing in Belarus

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1. Summary: On November 17 Econoff and Econasst attended an
investment conference in Mogilev, eastern Belarus, hosted by local
authorities. In traditional fashion, about half the speakers
called for foreign and domestic investment to Mogilev. However,
the rest of the speakers presented reasons not to invest in
Belarus. One speaker listed GOB-created barriers to investment,
another gave problems faced by small and medium enterprises, and a
third stated Belarus misuses the pittance it does attract. Most
interestingly, a Russian diplomat spoke about Belarus' lack of rule
of law and how that is blocking the Belarusian-Russian union state.
Surprisingly, local officials seemed to agree with this criticism.
But maybe this is not so surprising, given the sentiments President
Lukashenko expressed to the media on November 23, "Foreign
investors are like cockroaches, crawling into every hole and
crack." End summary.


2. On November 17, Mogilev city authorities held an investment
conference to attract foreign and domestic investment to their city
and region. Around 300 attended, including delegations from
Klaipeda, Lithuania and Pacheon, South Korea.


What is Investment?
--------------


3. The conference began with an event where Emboffs spoke with
several Mogilev region businesses that are seeking "investment."
The vast majority of those firms are fully or partially state-
owned. With few exceptions (mainly 100% private companies),when
these companies ask for "investment," they actually mean loans.
Most claimed they do not have authority to sell shares in their
company to attract foreign capital. Instead, they expect
foreigners to give them money for modernization, or even just to
cover salaries. In exchange they offered to pay the "investment"
back, either in cash or in goods.


"Political Stability + Strong Government = Investment"
-------------- --------------


4. The first several speakers, from the city council, Mogilev Free
Economic Zone (FEZ),and Mogilev Technology Park, all spoke about
the advantages in investing in Belarus. The representative of the
city council stated that political stability and Lukashenko's
strong form of governing create an ideal investment climate. He
stressed Mogilev's geographic position, "in the very center of
Europe," including its location along the main highway and rail
link from the EU to Moscow. Mogilev Oblast has an unemployment
rate of 1.8%, and an average salary of USD 235 per month. Mogilev
most desires foreign investment for its chemical industries, which
represent 34% of production. Other major enterprises produce
fibers, textiles and elevators. State owned textile firm Mogoteks
is the regions largest exporter. In 2005 the oblast expects to
export USD 200 million in goods to Russia, with much smaller
amounts to other countries. Also in 2005 the regional government
for the first time sold a plot of land, and it privatized 25 firms,
earning USD two million. The Free Zone representative added that
Lukashenko is unhappy with Belarus' free economic zones, and has
ordered them to attract "high-tech" companies. Unfortunately, so
far this year the Mogilev FEZ has not attracted any foreign
investment.


5. Also speaking in favor of investing in Belarus was Gennadiy
Melnikov, general director of cell phone company Velcom. Melnikov
claimed Belarus is a fantastic place to invest, and that the GOB
has provided his company with many benefits. He also expounded on
the value of agricultural development, and announced Velcom would
provide low cost cell phone service to rural villagers. [Comment:
Assisting rural villages is a main plank in Lukashenko's platform.
Melmikov unsurprisingly did not mention that in October 2003 the
GOB expropriated without compensation a 20% share of Velcom from
Cypriot/Syrian founder SB Telecomm, giving the GOB a 51% share in
the company. Nor did he mention that a week later the BKGB
arrested his predecessor and six other senior Velcom officials and
deported them. Melnikov also failed to state that this year the
GOB created a 100% state-owned cell phone provider to undercut
Velcom. End comment.]


Mogilev Looks Shabby in Comparison
--------------


6. The mayors of Klaipeda, Lithuania and Pacheon, South Korea both
gave highly professional presentations that made Mogilev look all
the shabbier in comparison. The Klaipeda mayor spoke about the
hundreds of millions of Euros his city has attracted in recent
years, much of it related to the city's thriving port. Belarusian

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companies invested Litas 2.35 million [USD 800,000] in Klaipeda in
2005, making Belarus one of the smaller investors in the city.
Pacheon's mayor showed a very slick film on his city and discussed
the value of decentralizing economies.


Why Not to Invest in Belarus
--------------


7. The next series of speakers all gave valid reasons not to invest
in Belarus. Ivan Ivanov, local representative for the
International Finance Corporation, praised Belarus for its open
economy (exports make up a high share of GDP),political stability,
good infrastructure and skilled workers. However, he explained
that foreign investors look at more than just these factors.
Belarus scares away investment by changing its laws far too often,
by having a very complicated tax code, and because the GOB
frequently differentiates between "our" and "other" companies,
discriminating against those that are not state-owned or are
foreign. While acknowledging that some in the GOB are starting to
think about such issues, Ivanov argued the GOB must open a dialogue
with businesspeople.


8. A representative of the state-run Belarusian Chamber of Commerce
and Industry provided comparative statistics of foreign investment
around the world to show that Belarus fares very poorly, even
compared to other CIS states. Even though the GOB claims Belarus
attracted USD 647 million in foreign investment in 2003, he said
this is wrong, that Belarus really only attracted USD 171 million
that year. He further argued that Belarus squanders the investment
it does attract, and that all investment must be controlled by the
GOB so it can be used effectively.


9. Evgeniy Novozhilov, Trade Counselor at the Russian Embassy in
Minsk, was supposed to talk about benefits of the Belarusian-
Russian union state for investment. Instead, he said Belarus has
created three sets of problems that hurt the union state and
investment: 1) Russia facilitates the free market while Belarus
does the opposite; 2) Russia is ruled by laws while Belarus is
ruled by presidential decrees; and 3) Minsk has largely refused to
work with Russia to align the two countries' laws. Even when the
laws are the same, Belarus issues a great many rules and
regulations that ensure these laws are applied differently in
Belarus. [See septel for a more detailed report of his speech.]


10. Last, Anatoly Zhigalov of the firm Promleasing outlined the
problems for small and medium enterprises (SME) in Belarus. He
explained: SMEs have a hard time attracting investments and
credits; are crippled by the lack of free press, which makes it
hard for them to find accurate market information and business
partners; that the "conservatism" of Belarus' large state-owned
companies makes them unwilling to work with private SMEs; and that
Belarus in general has a poor support infrastructure for SMEs.


Comment
--------------


11. This conference was organized by local GOB officials in
Mogilev. While they win points for honesty and transparency, it
was very odd to attend an investment conference that provided more
reasons not to invest than to do so. More strangely, the city and
oblast officials all smiled and nodded their heads in agreement as
speaker after speaker gave reasons not to invest in Belarus. The
only sign of discontent came from the Pacheon mayor's GOB-provided
translator (likely BKGB),who stopped translating as the criticism
continued. Econoff left with the strong feeling that local
officials were "checking a box" by hosting this conference, but in
reality know most of the problems they face are caused by their own
authorities in Minsk. Lukashenko's public comments, such as
calling foreign investors "cockroaches," demonstrate the regime's
true feelings toward investment. However, the local officials were
delighted that Embassy representatives attended, and even displayed
an American flag on stage.

KROL