Regime Nationalizing and Milking Economy

UNCLAS MINSK 000494 SIPDIS SIPDIS DEPT PASS TO USTR E.O. 12958: N/A TAGS: ECON ETRD PREL USTR BO SUBJECT: Regime Nationalizing and Milking Economy Ref: 05 Minsk 1383 ¶1. Summary: By most estimates the GOB controls about 80% of economic activity, but the state has refused to divulge the exact amount. Over the past few years the state's share of the economy has been growing as the GOB renationalizes previously privatized companies and increases its ownership stake in a number of firms. In past years the regime used the Golden Share as the means to take over companies, but recently has abandoned the Golden Share for other methods of seizing enterprises. Such ownership is highly lucrative for the regime; only a handful of companies, almost all of which are state-owned, are responsible for most government revenues and even for most of Belarus' GDP. In December the GOB issued a decree demanding more revenue from these most profitable companies. In March Lukashenko additionally transferred Belarus' largest exporter, the state-owned Belneftekhim conglomerate, under his personal control and supervision. End summary. GOB's Share of the Economy -------------- ¶2. Ivan Ivanov, local representative for the International Finance Corporation, told Econoff that he has asked various GOB interlocutors many times for data on how much of the Belarusian economy is state-owned, but the GOB refuses to divulge this information. Valery Dashkevich, a former analyst with Belgazprombank, estimated that Belarus has roughly 10,000 registered corporations. Of those, 5,900 are fully state-owned and the rest are either fully private or joint-stock companies (whose ownership is divided between the GOB and private entities). ¶3. GOB statements on state ownership of companies have been contradictory. The Ministry of Economy announced that as of the beginning of the year Belarus had 4,636 stock corporations. Of these, 1,818 were open stock corporations (which generally means the state and private entities share ownership) and 2,818 were closed stock corporations (all but eleven of which are believed to be fully private). The ministry claimed the GOB owned 68.5% of the shares of all these companies. [Note: the ministry did not explain this statement, but perhaps meant it owns 68.5% of the value of these companies. Further complicating this picture is that the ministry was only referring to companies owned at the national level, not those with shares owned by local governments.] The ministry's statement went on to say that 904 stock companies still exist which were once privatized by the government. The GOB owned shares in 634 of these, and no shares in 270. Of that 634, the GOB owned more than 75% of 355 (up from 303 a year earlier),between 50% and 75% of 80 (up from 66),between 25% and 50% of 122 companies (down from 166),and less than 25% of 77 companies (down from 129). This trend demonstrates that not only does the GOB own shares in a large number of companies, but that over the past year it has been increasing its ownership stake in these companies. ¶4. In a somewhat contradictory statement, in April the Ministry of Economics announced that as of the beginning of the year there were 895 registered open stock companies in Belarus, only 99 of which were fully private. In 2005 the GOB only sold its shares in only four companies, earning USD 27,400. Highly Centralized Economy -------------- ¶5. Several economists have told Econoff that just 20 companies account for half of Belarus' exports and that 133 companies, employing around one million workers (one-quarter of the workforce),are responsible for nearly all government revenue and the vast majority share of GDP. Independent economists told Econoff that the GOB considers the list of these most profitable companies to be classified information. Another 60% of companies are estimated to be operating with very low profitability or else are loss-making. The GOB recently announced that there were 2,600 unprofitable Belarusian companies during the first three months of ¶2006. Unprofitable companies were concentrated in metalworking and machine building, light industry, food processing, and timber, woodworking and paper production. ¶6. The GOB owns all the largest companies. In 2004 the GOB published a list of the country's 14 top grossing companies, all of which were state-owned. [The list is in descending order: Belaruskaly (potash),Belarus Metallurgical Factory BMZ, Minsk Tractor Factory MTZ, Minsk Automobile Factory MAZ, Belarus Automobile Factory BelAZ, Khimvolokno (chemical fibers),AZOT (chemicals),Mozyr Oil Refinery, NAFTAN oil refinery, Atlant (refrigerators),Horizont (televisions),Integral (microchips), Belomo (optics),and Vityaz (televisions and domestic appliances). Post believes the two oil refineries now top this list.] The GOB also considers 221 of the country's largest companies to be "natural monopolies." By law the state owns all these companies and prevents them from facing competition. Examples of natural monopolies include oil refineries and pipelines, telecommunications, postal services, railroad and air transport, and all utilities (heat, power, water). Largest Exporter and All its Income to be Put Under President -------------- -------------- ¶7. In 2005 Belarus' largest export commodity was oil and refined oil products, even though the country imported 93% of its crude from Russia. The state-owned concern Belneftekhim controls Belarus' oil refining, much of its oil trade and a host of other companies. [Note: A Belarusian state concern operates roughly at the level of a ministry.] Belneftekhim controls 40 companies with 116,000 employees, which account for 30% of Belarus' industrial output and 35% of its exports. In late March Lukashenko's press service announced Belneftekhim would be placed under the personal control and supervision of Lukashenko. This move will give Lukashenko personal control over all of Belneftekhim's significant revenues. GOB Takes Over Yet More Companies, Uses Golden Share Less -------------- -------------- ¶8. The GOB is invoking its internationally unpopular Golden Share to take over companies less frequently than in the past (reftel). During 2006 Post knows of only one usage of the Golden Share. On April 6, the GOB extended its Golden Share control over the Obuvtorg shoe factory for another three years. The GOB owns 19% of the company, but the Ministry of Trade used the Golden Share to take control in October 2003, preventing two shareholders from buying a majority stake in the company. The shareholders were offering two to three times the listed price for shares, but the GOB announced it feared these shareholders would use the company's warehouses to store goods other than shoes if they took control. ¶9. Instead of using the Golden Share, the GOB has been increasing its ownership share of companies in exchange for providing financial assistance. As in the past, the GOB pays significantly less per share in these companies than their public list price. On April 25, Deputy Prime Minister Vladimir Semashko announced that Lukashenko would soon sign a presidential decree mandating that the GOB only provide a company with financial assistance after it transfers 100% ownership to the government. ¶10. In December the GOB announced it was paying off the debts of motorcycle and bicycle manufacturer Motovelo in exchange for a 90% stake in the previously 100% private company. While shares in the company were previously worth BYR 10,000 [USD 4.65], the GOB acquired its 90% at BYR 600 [USD 0.28] per share. ¶11. Also in December the GOB used the Golden Share to raise its stake in the Kamvol woolen fabric company from 33.8% to 99.9%, in exchange for restructuring the company's debt to the state. In this case the GOB had to use the Golden Share since the owners of 32% of the company opposed the state taking control. ¶12. In February the Council of Ministers issued a decree giving the state an 80.54% stake in Krasnoselskstroimaterialy, one of Belarus' largest construction material companies, in exchange for forgiving USD 5.8 million in debt. ¶13. In February the GOB took control of equipment at ten factories in exchange for the state paying BYR 34.8 billion [USD 16.2 million] which these companies owed to German banks. ¶14. In March under a presidential decree the GOB increased its stake in the Neman Glass Factory from 94.32% to 100% in exchange for forgiveness of tax arrears. After taking full control the GOB immediately granted the company a USD 6.7 million loan from the budget, ordered a state-controlled bank to provide another USD 2.2 million, and reduced by half the factory's utility and tax payments. ¶15. Also in March Lukashenko signed a presidential decree giving the GOB 100% ownership of the Minsk Bearings Plant, up from the state's previous 70% share. In return the GOB will restructure the company's debt. ¶16. On March 30, the CEO of IT company Infopark complained at Minsk's annual IT convention that the Ministry of Communications stifles internet-based business with its monopoly on telecommunications and stated that the ministry frequently nationalizes successful IT start-ups. He called on Belarus' IT companies to unite and confront the ministry. ¶17. In April the Council of Ministers announced the state budget would pay half the interest in a loan for malt producer Belsolod, in exchange for an unspecified increase in government ownership. ¶18. On April 4, the Council of Ministers signed a resolution increasing the GOB's ownership in seven companies (including three of Belarus' four sugar refineries). For each company the state budget covered a portion of interest on their loans in 2005. The GOB already owned a controlling stake in each company, but further raised its ownership by 0.01% to 16.2%. More Nationalization to Come? -------------- ¶19. In December an anonymous source in the GOB told Interfax that the government was drafting a decree on "coercive alienation of former state property." This decree would allow the state to nationalize previously state-owned companies if their current owners "mismanage or do not invest in their development." So far such a decree has not been made public. In March Lukashenko told the Third All-Belarusian People's Assembly that the GOB would not privatize any of Belarus' largest companies, but would allow them to "incorporate smaller and less profitable companies. They will make Belarusian monsters that will swallow weaker companies, and gigantic companies will appear. Then we will hit the world's stock exchanges with their billion-dollar capitalization. That will be the right time to sell shares, but we will not trade a share for a bottle of Belarusian vodka. A share will cost millions of dollars." GOB Asking for More from Its Companies -------------- ¶20. On December 28, Lukashenko signed a presidential decree stipulating that highly profitable state-owned companies must give a greater share of their profits to the government. Companies with a profit of up to 20% must transfer to the state an additional 5% of net profit, between 20% and 22% profit must give 10%, 22% to 25% give 15%, 25% to 27% give 17%, 27% to 30% give 20% and those with profit of more than 30% must give an additional 25% of net profit to the GOB. The GOB estimated this decree would increase state revenues by BYR 105.2 billion [USD 48.9 million]. The Cabinet of Ministers added a proviso that made this decree retroactive for several of the largest state-owned companies. The proviso specified that in December Belaruskaly had to pay an additional USD 29.7 million, Belarus Metallurgical Factory BMZ USD 7.6 million, Belorusneft USD 6.5 million, Gometransneft Druzhba USD 3.5 million, Belarusian Lotteries USD 702,000, and Druzhba USD 690,000. Comment -------------- ¶21. By most estimates the GOB now controls around 80% of economic activity. Over the past few years the GOB has been increasing this share by renationalizing previously privatized companies while selling just a few poorly performing state companies. In past years the GOB used the Golden Share mechanism to take over companies. Now, perhaps as a result of international criticism of the Golden Share -- including in WTO negotiations, the GOB has found other means through which to nationalize the economy. The state now owns more companies and greater shares of each of these companies than it did before, and the GOB is finding new ways to extract profits from these firms. Lukashenko's recent move to take personal control over Belneftekhim, Belarus' largest conglomerate, is particularly indicative of the means to which the regime will go to find revenue. KROL