SATISFYING THE MARKET IN A STATE-DOMINATED ECONOMY

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 001164

SIPDIS

SIPDIS

E.O. 12958: DECL: 10/26/2016
TAGS: ECON PGOV BO
SUBJECT: SATISFYING THE MARKET IN A STATE-DOMINATED ECONOMY

REF: MINSK 1142

Classified By: Ambassador Karen Stewart for reason 1.4 (d).

Summary
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1. (C) Profitable Belarusian businesses, even if they are
completely privately owned, must respond in large part to the
dictates of the state. This is especially true when private
companies try to compete in the same markets with state-owned
enterprises. The complex business environment, which even
includes the risk of nationalization of property, partially
shields local business from foreign entrants into their
markets. Business can delicately lobby for piecemeal
economic reforms, but have to couch their efforts in terms of
the health of their entire industry. In doing so, business
leaders demonstrate their tacit acceptance of Lukashenko's
statist economic model. End summary.


2. (SBU) Emboffs spoke to executives in several of the most
visible firms in Minsk catering to clients at the upper end
of the economic spectrum: Viktor Petrovich, Director and
partner in the holding company Tabak Invest, which opened
Minsk's newest hypermarket; Inna Maslennikova, General
Director of Merlintour, a travel agency specializing in
individualized foreign tours; Sergey Kusonovskiy, Deputy
Director of Milavitsa, a lingerie manufacturer and retailer
focusing on the middle class and "middle class plus" market
segments; Aleksey Dunayevskiy, Director of Sales and
Marketing for Mir Fitnessa, the only gym in Minsk in a
purpose built facility; Igor Razumovskiy, the General
Director of Avtosalon-AV, the exclusive dealer in Belarus for
Audi and Porsche; Aleksandr Parkhimchik, owner of several
restaurants in Minsk; and Vitaliy Arbuzov of Fenox, a holding
company for grocery stores and food imports.

Competition? What Competition? The State Worries Us
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3. (C) All of the business leaders we spoke with believe
their enterprises will continue to grow (reftel). The
absence of worries about competitors accounts for much of the
optimism. Executives forecast their markets will expand
further, creating plenty of room for sales growth. This
helps soften the resentment against regulations that greatly
increase the cost of business. Merlintour, to take one case,
has to employ five accountants to satisfy the reporting
requirements of multiple agencies. Without regulations
peculiar to Belarus, the company could get by with one or two
accountants.


4. (C) All the businesses we surveyed had by definition
successfully navigated the labyrinth of regulation by
maintaining close ties with the government. For example, the
newest hypermarket in town, Korona, is owned by Tabak Invest,
which reaps huge profits by annually winning government
tenders to import cigarettes. The annual import quota is
well below demand. Similarly, Arbuzov's company received
part of the quota to import frozen fish into Belarus. The
majority owner of Mir Fitnessa is the state-owned
Belvneshekonombank.


5. (C) Successful business leaders feel comfortable dealing
with bureaucracy as long as they do so on a level playing
field with competitors. When private Belarusian businesses
share a market with state enterprises, they run the risk of
increased government interference. Merlintour, like all tour
agents, must assist the largely state-owned hotel industry by
generating at least ten percent of its revenues from selling
in-bound tours. The limits of markets with state-owned
competitors drove Tabak Invest to diversify from the
cigarette market, in which it must subsidize loss-making
state companies producing cheap Soviet-era brands, into
markets with no state-owned competitor: hypermarkets and
personal helicopters.


6. (C) The less than welcoming business climate helps
existing businesses by increasing the cost for new entrants.
Petrov said Russian companies flush with money are just now
entering the hypermarket business in Minsk, but West European
competitors are still too fearful to take the risk.
Dunayevskiy remarked even Russian companies do not want to
deal with the complex procedures for opening a fitness center
in Minsk. Restauranteur Parkhimchik and entrepreneur Arbuzov
said the temporary constraints against Russian competition
helped their businesses.

Lobbyists Seek Safety in Numbers or Internal GOB Divisions

MINSK 00001164 002 OF 002


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7. (C) Keeping the government happy does not mean accepting
all its decisions blindly. Industry associations allow
businesses to approach the government with united positions,
and sometimes result in meaningful changes in policy.
Razumovskiy said the auto dealers association help draft
legislation greatly reducing the tariffs on importing new
cars.


8. (C) Milavitsa, as the dominant garment exporter in
Belarus, maintains a close working relationship with a
ministry-level state agency, Bellegprom, which helps it
negotiate with the Ministry of Economics. Working thru
Bellegprom, Milavitsa succeeded in getting itself removed
from the list of monopolistic companies, thereby avoiding
further regulation of its pricing. Milavitsa also worked
with Bellegprom to convince the government that the garment
industry is in worse shape than agriculture. This swayed the
GOB to return "agriculture support taxes" from companies in
the garment industry back to the industry itself, rather than
to support agriculture.

The Worst Case Scenario: Nationalization
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9. (C) A complete failure to keep the government happy risks
a company's very existence. In fact, press had speculated
that placing Milavitsa on the list of monopolistic companies
was a first step toward nationalization, with the next step
being driving prices down to the point where the company was
no longer profitable. The lack of a culture of respect for
private property worries entrepreneurs. Arbuzov said he
keeps no assets in his own name to reduce the risk of
confiscation.

Comment: Would-be Capitalists Still Fulfill the Plan
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10. (C) While the demand for high-end consumer goods
definitely exists (reftel),to one degree or another firms
meeting this demand must also fit within Lukashenko's
economic plan for Belarusian development. While often
thought of as focusing on paying pensions on time and
producing big machines, this unwritten plan includes
showcasing successful Belarusian companies on billboards on
the way in from the airport (Milavitsa was "strongly
encouraged" to advertise) and the presence of some well-known
foreign brands.


11. (C) Although entrepreneurial-minded Belarusians are able
and willing to fulfill Lukashenko's plan in cases where
genuine demand exists, they also must put up with regulation
and taxation designed to support the rest of the plan.
Entrepreneurs have managed the burden over the past decade of
strong economic growth. How they will manage during an
economic downturn if Russia withdraws generous energy
subsidies may be quite another story.

Stewart
Stewart