Identifier
Created
Classification
Origin
05MINSK1528
2005-12-22 12:25:00
CONFIDENTIAL
Embassy Minsk
Cable title:  

World Bank Rep Skeptical of Belarus' Continued

Tags:  ECON PGOV BO 
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RR RUEHCD RUEHDBU RUEHFL RUEHLA RUEHMRE RUEHSR
DE RUEHSK #1528/01 3561225
ZNY CCCCC ZZH
R 221225Z DEC 05
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 3505
INFO RUCNOSC/ORGANIZATION FOR SECURITY COOPERATION IN EUROPE
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
C O N F I D E N T I A L SECTION 01 OF 03 MINSK 001528 

SIPDIS

SIPDIS

E.O. 12958: 12/21/15
TAGS: ECON PGOV BO
SUBJECT: World Bank Rep Skeptical of Belarus' Continued
Economic Growth


Classified by Ambassador George Krol for Reasons 1.4
(B,D)

Refs: A) Minsk 1145, B) Minsk 1159, C) Minsk 1507

C O N F I D E N T I A L SECTION 01 OF 03 MINSK 001528

SIPDIS

SIPDIS

E.O. 12958: 12/21/15
TAGS: ECON PGOV BO
SUBJECT: World Bank Rep Skeptical of Belarus' Continued
Economic Growth


Classified by Ambassador George Krol for Reasons 1.4
(B,D)

Refs: A) Minsk 1145, B) Minsk 1159, C) Minsk 1507


1. (C) Summary: World Bank Permanent Representative
Vladimir Voronin discussed with DCM and Pol/Econ Chief the
general state of the Belarusian economy, stressing the
opportunity for Belarus to make badly needed economic
reforms is now. Referring to the World Bank's recently
published economic assessment of Belarus, Voronin described
an economy that currently enjoys strong growth, but is
highly susceptible to looming external shocks, which
include Russia's likely decision to raise significantly the
price of gas for Belarus in 2007. The World Bank
representative noted that key GOB officials are aware of
the economy's unsustainability, but emphasized that reforms
would only be implemented after the 2006 presidential
elections. End Summary.


Window for Reform Currently Exists in BelarusQ
-------------- -


2. (SBU) On December 14, World Bank Country Representative
Vladimir Voronin told DCM and Pol/Econ Chief that he
personally and purposefully chose the title of the Bank's
recently published annual report, "Belarus: Window of
Opportunity to Enhance Competitiveness and Sustain Economic
Growth." The report, which was released on November 8,
assessed the growth trends in the country's economy since
1996, reviewed the evidence of the accumulated challenges
and risks within the existing growth patterns, and provided
recommendations aimed at strengthening growth
sustainability. The World Bank concluded that economic
growth for the past nine years has been impressive, but
maintaining the current growth strategy would lead to
economic decline, and thus recommended a reorientation of
GOB policies toward ensuring a better business environment
and a smaller government. Voronin stressed that the
Lukashenko regime has the resources to make the needed
structural reforms. He cited as proof steady and sizable
growth rates in the economy (on average 6.6 percent since
1996),a significant increase in foreign currency reserves,
and a considerable increase in personal incomes.


But the Window is Closing Fast
--------------


3. (SBU) Voronin, however, pointed out the cornerstone of

Belarus' growth remains subsidized energy from Russia and
the profit Belarus receives from re-exporting oil and oil
products at world market rates. Voronin listed a
significant increase in the price of gas for Belarus and
other developments that will likely weaken Belarus' economy
in the next few years.


Gas Prices For Belarus Certain To Rise, And Soon
-------------- ---


4. (SBU) The World Bank permanent representative stated
that although Belarus most likely managed to secure the
same natural gas price for 2006 that it received this year
Q approximately USD 47 per thousand cubic meter Q Belarus'
gas price for 2007 "will be completely different." Voronin
speculated Russia's Gazprom will supply gas to Belarus in
2007 for no less than USD 120 per tcm. He explained that
it has become economically and politically unfeasible for
Belarus to continue receiving gas for significantly below
world market rates. Voronin cited as an example Gazprom's
supply of gas to Smolensk, a Russian city located near the
border between Russia and Belarus, in 2006 at USD 52 per
tcm, while Belarus, a foreign country, will continue to
enjoy receiving gas at USD 47 per tcm.


5. (U) Comment: The price of gas for Belarus was one of
the topics of discussion between Presidents Lukashenko and
Putin in Sochi on December 15. Based on statements by
Lukashenko and Gazprom leaders following the Sochi meeting,
Belarus will most likely continue to receive gas for the
same price as this year. Echoing earlier press statements
made by Gazprom Chairman Aleksei Miller, Gazprom Deputy
Chairman Aleksandr Medvedev said on December 20 that
Belarus in 2006 will receive gas for USD 47 because: 1)
Belarus and Russia are building a Union State, 2) Belarus
is the only country in which Gazprom owns a gas transit
line, and 3) negotiations have resumed on Gazprom acquiring
control of Belarusian gas transit company Beltranzgas.

MINSK 00001528 002 OF 003


Although Lukashenko has successfully managed to keep
Beltranzgas just out of arm's reach of Gazprom in the past,
this issue undoubtedly was raised again in Sochi. End
Comment.


6. Voronin pointed out that the Belarusian economy could
only handle a rise in gas prices up to USD 90 per tcm.
Beyond this price, Voronin argued the entire economy would
be significantly affected. Thus, as early as 2007 the
Belarusian economy would look markedly different.


Bankrolling Unprofitable Industries Becoming More Difficult
-------------- --------------


7. (SBU) Voronin explained that the money making
industries in Belarus are limited to oil processing and the
sale of petrochemicals, fertilizers (also heavily dependent
on cheap gas),timber, fibers, and textiles. Together,
these goods and services account for nearly 70 percent of
the fiscal revenue for the government. Voronin stressed
that the Lukashenko regime uses the 20 to 50 state
companies that comprise the above industries to subsidize
the loss making industries. He noted that such an
arrangement is becoming unsustainable for the government.


Loss of Competitiveness in Main Export Market
--------------


8. (SBU) Voronin also noted that in 2005 Belarus' exports
to Russia, its main trading partner, decreased by 10
percent. Despite GOB claims the decrease is attributed to
complications arising from changes made to the VAT (ref A),
Voronin argued that the Russian market has found Belarusian
goods less attractive. He explained that the loss of
competitiveness is mainly due to rising Belarusian wages
and the superior quality of Russian goods and increased
sophistication and buying power of Russian consumers.
Voronin noted that Belarus has significantly increased its
trade with EU countries, but again these goods are
concentrated in a few sectors.


Russia's Accession into WTO
--------------


9. (SBU) Voronin said that despite GOB claims to the
contrary (ref B),Russia's entry into the WTO, which Russia
hopes to achieve in 2006, will have disastrous consequences
for the Belarusian economy. In the WTO regulations, Russia
will likely be forced to suspend providing Belarus
subsidized energy. Moreover, the special trading
arrangements between Belarus and Russian cities will be
cancelled. Voronin agreed that Russia will likely be
granted permission to adopt a phased approach to removing
preferable energy prices for Belarus, but he remains
convinced that the Belarusian economy will be adversely
affected soon after Russia joins WTO.


GOB Takes World Bank Conclusions SeriouslyQ
--------------


10. (C) Voronin was pleased to report that his World Bank
report did not fall on deaf ears. Several GOB officials
have told him that they recognize the need for immediate
economic reform and they stressed the regime is willing to
take some steps to reduce the government's involvement in
the economy. Specifically, the government plans to
increase consumer costs for "communal services" (gas,
electricity, and water supply for homes) from 60 percent to
80 percent of actual costs. Moreover, the GOB is
considering cutting back on subsidies to loss making
industries. Voronin noted the government is working with
the International Finance Corporation (IFC) to obtain
reliable information on the state of affairs of the loss
making industries.


QBut Only After the Presidential Elections
--------------


11. (C) GOB officials have made clear to Voronin that the
regime will only take action on needed reforms once the
2006 presidential elections have been held and Lukashenko
is (presumably) elected for a third term. (Note: At the
time of this conversation, it was still assumed that
elections would take place in the summer. On December 16,
the GOB unexpectedly announced that the elections will he

MINSK 00001528 003 OF 003


held on March 19, 2006, several months prior to the
expected election date. See ref C for details.) Voronin
posited that Lukashenko is not willing to take the risks of
losing popular support in the run up to the elections, and
would be in a better position to weather criticism from the
masses once he is guaranteed a third term.


Reluctant To Improve Investment Climate
--------------


12. (C) When asked about possible GOB plans to attract
foreign investment, Voronin confirmed the regime was not
prepared to make any improvements in this area in the near
future. Senior economic officials in the government have
told Voronin that inviting foreign investment is a
political decision and thus far Lukashenko has not
demonstrated much willingness to budge on this issue.
Voronin noted, however, that recently he was asked by the
administration to resubmit his papers on steps Slovakia,
Hungary, and other Central European countries took to
privatize their state-run oil transit companies. He also
said the GOB was considering allowing foreign companies to
acquire controlling interest in the two largest state-owned
banks.


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


13. (C) Voronin seemed thoroughly convinced that Belarus'
nine-year performance of strong economic growth will soon
be coming to an end. The impact of significantly increased
gas prices for Belarus would indeed seriously impair the
regime's ability to continue such policies as artificially
increasing wages, pensions, and other social benefits,
propping up unprofitable state-run industries, and
investing resources in expensive rural development
programs. However, several analysts have told us the
Belarusian economy will experience the greatest shock when
the world market price for oil drops or when Russia chooses
not to sell to Belarus at discounted prices.


14. (C) Although it was encouraging to hear that the
regime may begin to implement necessary economic reforms
following the presidential elections, Lukashenko's
continued reluctance to move on attracting foreign
investment remains an issue of serious concern. Given
Belarus' relative lack of natural resources, the most
realistic engine for sustained economic growth for this
country continues to be foreign direct investment. Without
it, the economy will likely never reach its full potential.

Krol