BELARUSIAN ECONOMIC FUTURE IN DOUBT

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 001212

SIPDIS

SIPDIS

E.O. 12958: DECL: 11/21/2016
TAGS: ECON PGOV BO
SUBJECT: BELARUSIAN ECONOMIC FUTURE IN DOUBT

REF: MINSK 1184

MINSK 00001212 001.2 OF 002


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

Summary
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1. (C) Belarus' current trend of robust GDP growth faces
numerous challenges. The so-called economic miracle rests
largely on Russian subsidies, with the government failing to
harness the windfall to prepare for its seemingly inevitable
end. Russia's preparations to join the WTO threatEn toQ
hasten higher enErgy prices and to complicate Belarus'
privileged access to the Russian market. Direct foreign
investment lags behind that in Belarus' neighbors and often
comes in the form of Russian business seeking monopolies.
While elelents of the GOB may grasp the need for reform, past
complacency suggests the Belarusian economy faces troubLe
ahead. End summary.


2. (SBU) On November 17, Ambassador hosted a breakfast for
prominent Belarusian economists and analysts to discuss the
current economic situation in Belarus. Invitees included
Marina Bakanova, an economist with the World Bank in Minsk;
Valeriy Karbalevich and Yaroslav Romanchuk, senior expert and
chairman, respectively, of the Strategy think tank; Vladimir
Novik, Deputy Chairman of BelarusbanK; Andrey Vardomatskiy,
head of Novak opinion research center; and Sergey Zhbanov,
Deputy Editor-in-Chief of the independent weekly newspaper
"BelGazeta."

Russian Blank Cheques Boost Belarusian Economy
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3. (C) Romanchuk stated the economy was growing, although at
a more modest rate than officially reported. He termed
LukasHenko a wizard at turning promises to Russia into money.
By his calculations, Russia had pumped the equivalent of
13-15% of Belarus' GDP into the economy. He believed this
was historically unprecedented, with the closest comparison
being Spain's receipt of the equivalent of six percent of its
GDP upon joining the EU. Give. the subsidies from Russia, he
said it would take "a lot of brain power for the authorities
to screw up" the economy. Vardomatskiy and Karbalevich
commented on the huge increase in consumption, with
Vardomatskiy adding that his surveys suggested the majority
was satisfied with the economy.

Fat Years Not Used to Prepare for Thin
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4. (C) Zhbanov feared the subsidy-fueled boom had been wasted
in the consumption boom. Growth over the hast three years
could have been used to create a stabilization fund.
Bakanova described the flight of youth from Belarus to find
employment in Russia. Belarus' aging population, combined
with the emigration of the younger generation, could mean a
shortage of labor. She also cautioned that the GOB was
likely to intensify inefficient efforts to produce national
industrial champions. Romanchuk explained investors also saw
economic risks for Belarus, as witnessed by the GOB's
difficulties in selling bonds to foreigners.

Russian WTO Accession Hurts Belarus, But Not Yet Lukashenko
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5. (C) Regardless of whe. Russia enters the WTO, its
agreement with the USG greatly complicates life for
Belarusian manufacturers. According to Zhbanov, the GOR was
already beginning to play by the WTO's rules, using terms
such as dumping and infringing merchandise in its disputes
with Belarus. Bakanova warned thap if Belarus loses its
privileged access to tha Russian market, it would be "the end
of the Belarusian miracle." Romanchuk proposed that the
upcoming inclusion in WTO gives the GOR the perfect cover for
raising energy prices for Belarus while claiming the move is
not about the bilateral relationship.


6. (C) Karbalevich said typically major economic changes in
Russia impacted Belarus two or three years later, at least
giving Belarus time to adjust. Vardomatskiy agreed, adding
that Lukashenko could successfuLly present himself as
defending Belarus from economic events afflicting Russia,
much as he did after Russia's default in 1998, when his
popularity ratings increased in the short term.

Investment from Russia and Elsewhere
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7. (C) Vardomatskiy noted Belarusian business owners
recognized their own weaknesses in comparison to potential
Russian competitors and saw Lukashenko as a guarantee against
Russian business. Bakanova added that there are a
significant number of barriers against Russian imports.
Zhbanov countered that Russian capitalists with good
connections in Moscow had also paid good money to profit from
rent-seeking opportunities in Belarus.


8. (C) Vardomatskiy described how many western companies
interested hn invest)ng in Belarus approached his firm for
market research. Almost all of these contacts were ten years
ago or more, however. Since Lukashenko consolidated power
many western companies had decreased their presence in Minsk,
moving top managers to Moscow. Romanchuk contrasted the low
foreign investment in Belarus with that in Poland and the
Baltics.

Banking Sector Still in Infant Stage
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9. (C) Novik told Ambassador assets in the Belarusian banking
system totaled just USD 10 billion. He predicted the
undercapitalized banking sector in Belarus meant foreign
capital would eventually fill the void, mentioning Chinese
and Iranian banks as possibilities if the West steered clear
of Belarus. Romanchuk said even Russian banks were wary of
Belarus, with only three maintaining a token presence in
order to intervene when the Belarusian economy faced a
crisis. He suggested Belarus was setting itself up for a
loans-for-shares scenario where R5ssian business would
provide an infusion of money during a time of cr)sis in
return for controlling stakes in Belar5sian assets.

Political Consequences of Econo-ic Change
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10. (C) Karbalevich stated Belarus was changing from a Soviet
society to a consumer society. Vardomatskiy seconded this,
adding that the population had formed an expectation that the
economy would continue to grow. Belarusians would most
likely respond tg a downturn by lea6ing state enterprises to
seek out the limited opportunities in the private sector,
which wo5ld radically contradict the official ideology of
equality and redistribution, with potentiall9 huge social
consequences, he continued. According to Romanchuk, the
nomenklatura created by Lukashenko would jump ship if they
detected Lukashenko days were numbered due to a dire economic
situation.

Comment: Is There Time Left for a Change of Course?
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11. (C) Recent broadcasts on the government mouthpiece
Belarusian Television favorably described foreign investm%nt
and explained that wages should be linked 4o productivity,
giving the impression the GOB may, in the words of Romanchuk,
be trying to "alter the freeloading mood and habits resulting
from previous policies." Adjustments might be too little and
too late if Russia goes forward with significant hikes in
energy prices beginning in 2007 (reftel). If Lukashenko
manages once again to fend off substantial Russian price
increases, economic impetus for reforms will suffer, with
much of the Belarusian population and elite remaining
complacent and oblivious to the need to invest in preparation
for the end of Russian generosity.
Stewart