Economic Problems Growing, but Reform Only by Force

UNCLAS MINSK 000420

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PREL USTR BO
SUBJECT: Economic Problems Growing, but Reform Only by Force


1. (U) Summary: On April 7, DCM hosted a discussion among a number
of leading Belarusian economists. All agreed that the GOB is
facing Russian pressures to sell Beltransgaz, but disagreed whether
Lukashenko would allow this sale. While admitting that the
Belarusian economy has had a number of successes, all explained
that much of the economy is increasingly uncompetitive, lacks
sufficient investment, and is overly centralized -- not just too
much government control but also too many monopolies and too few
export goods and partners. These experts stated that the
Belarusian economy needs to reform, but they stressed Lukashenko
would not willingly liberalize. The economists were split on
whether Lukashenko would be forced into reform. End summary.


2. (U) On April 7, the DCM hosted a discussion with leading
Belarusian economists. Participating were former director of the
National Bank of Belarus Stanislav Bogdankevich, Ministry of
Economy analyst Aleksandr Matjas, dean of the business school at
the Belarusian State Economic University Sergey Krychevsky, head of
the Strategy think tank Leonid Zaiko, head of the Mises Center
Jaroslav Romanchuk, World Bank local representative Vadim Voronin,
International Finance Corporation local head Ivan Ivanov, and
International Monetary Fund local advisor Julia Lyskova. Visiting
representatives from the European Bank of Reconstruction and
Development's London office also took part.


Effects of a Gas Price Increase; the Battle for Beltransgaz
-------------- --------------


3. (SBU) Strategy think tank head Leonid Zaiko opened the debate by
stating that Russia recently threatened to raise the price Belarus
pays for natural gas because Moscow wants Minsk to adopt the
Russian ruble as its currency and to privatize the GOB-owned
pipeline network Beltransgaz. He predicted that the final gas
price for 2007 would be anywhere from USD 70 to USD 135 per
thousand cubic meters (tcm),depending on the GOB's willingness to
make concessions. Zaiko argued that Lukashenko would attempt to
stall on any price increases, since higher gas prices would end
Belarus' economic growth. He guessed that Lukashenko's government
might start liberalizing the economy as a result of higher prices,
but stressed this is not a certainty. Former central banker
Stanislav Bogdankevich believed that higher gas prices would force
some liberalization, but that the GOB would have to give up
Beltransgaz if it wants acceptable gas pricing. On the other hand,
Romanchuk opined that Minsk would not privatize Beltransgaz, and
would face greater pressure in 2006 to start market liberalization.


4. (SBU) BSEU dean Sergey Krychevsky claimed the GOB could absorb
some price increases, as the GOB already charges most Belarusian
consumers nearly twice as much for gas as the GOB pays for it from
Gazprom. Moderately higher prices would not necessarily have to be
passed to most consumers, but would make it impossible for the GOB
to continue to subsidize a number of firms, would make it harder
for the GOB to stabilize prices, and would force the GOB to end
many of the social programs that buttress Lukashenko's popularity.


5. (SBU) Vadim Voronin of the World Bank argued that Putin
supported Lukashenko by not raising gas prices before Belarus'
March 19 presidential election. Now Russia is starting to apply
pressure to gain control of the pipelines. However, Voronin
believed that since Belarus surrendered its nuclear weapons,
Lukashenko wants to keep control of Beltransgaz so that he can turn
off gas to Europe if he feels the need. He stressed that
Lukashenko does not want to lose this means of control, but Russia
will likely increase pressure on Lukashenko to surrender the
company. An April 6 debate about Belarus on NTV between Vladimir
Zhirinovsky and Boris Nemtsov was one of the first steps by the
Kremlin to tarnish Lukashenko's image in Russia. Voronin also
explained that, according to World Bank estimates, USD 90/tcm is
the break-even point for the Belarusian economy; any price above
that would cause massive losses.


Successes, but Problems Worsening
--------------


6. (SBU) All conceded that there have been some successes in the
Belarusian economy, namely a stable exchange rate, GDP growth, low
unemployment, decreasing levels of poverty, dropping inflation,
growing monetary reserves, and growing exports. However, a number
of problems remain. Bogdankevich stated that two-thirds of
Belarusian firms are either unprofitable or have low levels of
profitability. Voronin mentioned that 33% to 37% of the economy is
"ineffective." Krychevsky explained that the Belarusian economy is
far too centralized, in several meanings of the term. There is
little diversification of exports, with just 20 firms responsible
for more than 50% of exports. An exorbitantly high share of
exports to the West consist of refined crude oil, originating in
Russia. Belarus has far too many monopolies, most of which do not
efficiently operate. Belarus' economy also relies far too much on
Russia. He likened Belarus' level of economic dependence on Russia
to Canada's with the United States. As Russia reforms its economy,
Belarusian firms find it harder to compete. For instance,
Krychevsky stated that Belarusian exports of light industrial goods
and processed foods to Russia fell 20% to 40% in 2005 alone.


7. (SBU) Voronin stated that the Belarusian economy is experiencing
declining competitiveness, which he said even Lukashenko has
publicly acknowledged. As a result, the GOB is phasing out some
assistance to loss-making enterprises. The GOB also realizes it
has a negative image for investment, so some officials are starting
to talk about the need to do away with the Golden Share mechanism.


8. (SBU) Aleksandr Matjas, of the Ministry of Economy, announced
that 70% to 75% of Belarusian firms use outdated technology, but
they cannot upgrade because of the lack of investment.
Bogdankevich added that the GOB uses ruble-denominated bank
deposits as a source of cash to support unprofitable enterprises.
This misdirected "investment" is likely to impact interest rates
and thus deposits, creating what he termed, "a very shaky
situation."


9. (SBU) These experts predict Belarus' economic woes will worsen,
regardless of Russian actions. Romanchuk claimed that GDP growth
is actually lower than the official 9%. He stated the GOB only
measures the amount of goods produced, without taking into account
the massive amount of goods sitting unsold in warehouses. He added
that as the Belarusian population ages, pension reform will become
a necessity. Bogdankevich explained that although inflation is
officially around 8%, there is much hidden inflation that makes the
true rate closer to 16%. One culprit is that the GOB is raising
salaries at a much higher rate than productivity is growing. Such
a trend, he concluded, is unsustainable.


Will Lukashenko Liberalize? Not Willingly
--------------


10. (SBU) All agreed that Lukashenko would not institute any
liberal reforms by choice, but most thought economic problems would
force him to initiate some limited liberalization. Bogdankevich
was the most optimistic, stating that Russia could force some
reform. Voronin argued that Belarus would soon need to massively
restructure its economy. The GOB must increase the number of small
and medium enterprises (SME) to create real jobs, and should
gradually phase out subsidies such as on home utilities, phone
service, and bread. Krychevsky disagreed, claiming that for
reasons of political support Lukashenko would not be able to
greatly decrease such subsidies, but he admitted that reform is
ultimately needed. The Ministry of Economy's Matjas echoed this
call for increasing the number of SMEs, and stated the GOB must
change a number of laws to allow people to create their own
businesses.


11. (SBU) Ivan Ivanov of the IFC admitted that economic life is
getting more difficult daily as a result of the constant barrage of
presidential decrees, but unequivocally stated that the regime will
hold off on economic liberalization until the economy experiences a
major crisis. Ivanov added that none of his GOB contacts have even
been able to tell him what percentage of the economy is private.
Without such basic information, he thought it extremely unlikely
that the GOB could reform. Bogdankevich disagreed with this
statement and stressed that Lukashenko would need to make some
reforms. However, he cautioned that the reforms would not be
major, and that for political reasons Lukashenko could not be seen
as the one initiating any reform.


12. (SBU) Voronin asserted that the only way Belarus would
democratize is, although slow, after a period of economic
liberalization. Zaiko commented that many in the GOB know they
need reform, but do not know how to reform and still keep
Lukashenko in power. Voronin retorted that the GOB has no economic
strategy and so is making numerous mistakes now that are weakening
the economy. Romanchuk thought that perhaps the GOB would attempt
to create a loyal economic elite, perhaps through privatizing firms
to certain loyal members of the nomenklatura. He thought the
people whom Lukashenko appoints to key government positions in his
third term would be a strong indicator of Lukashenko's economic
intentions.


KROL