GOB LIKELY TO SEEK LOANS BEFORE FDI

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000250

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/21/2017
TAGS: ECON EPET PGOV PREL BO
SUBJECT: GOB LIKELY TO SEEK LOANS BEFORE FDI

REF: A. MINSK 216

B. MINSK 188

C. 06 MINSK 1220

Classified By: Charge Jonathan Moore for reason 1.4 (d).

Summary
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1. (C) While higher energy prices have not immediately
impacted all firms significantly, Belarusian manufacturers
have become less competitive. As a result, the GOB will seek
to reduce imports. Bureaucratic and philosophical barriers
will prevent drawing foreign investment into Belarus via
serious privatization. Consumer spending also looks unlikely
to boost the economy. Foreign lending will likely postpone
serious reform, for which Lukashenko's inner circle does not
recognize the need, until at least 2009 and possibly after
Lukashenko's seeks re-election in 2011. End summary.


2. (C) This cable draws upon a number of sources, including
comments from local businesspeople at a March 16 lunch with
the Ambassador in the northern city of Polotsk. Invited
Polotsk entrepreneurs included Vladimir Zakharov, whose
businesses include retail outlets, construction, cable
television and a newspaper; Pyotr Livshits, the owner of a
wholesale food processor; Aleksandr Volkov, whose owns a fish
processing plant; and Ruslan Tabachnikov, who has a small
chain of car repair and carwashes. Also, Pol/Econ Chief on
March 16 hosted a breakfast with Aleksandr Yaroshevich,
Director General of Coca-Cola Bottlers Belarus; Aleskandr
Chubrik of the Institute for Privatization and Management;
Yelena Chizhik from the Belarusian Union of Entrepreneurs;
economics professor Mikhail Zalesskiy, formerly of the
Ministry of Economics' Research Institute; Roman Osipov, Head
of Investment at Uniter Consulting; Leonid Zlotnikov of the
Institute for Social Issues; and Sergey Balykin of the
independent business weekly "Bela
rusy i rynok".

Private SMEs Not Feeling Higher Energy Prices Yet
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3. (C) The Ambassador's visit with entrepreneurs in Polotsk
demonstrates that if given a chance, the private sector --
which currently accounts for just 20 percent of employment in
Belarus -- could succeed. Unlike massive state-owned
enterprises, their businesses do not rely primarily on huge
energy subsidies. Tabachnikov was optimistic the higher
price of gasoline would not impact his car repair business
significantly. Zakharov reported only a two-percent rise in
the cost of product at his distillery. Livshits noted his
warehouses use energy very efficiently. Volkov suggested
there would be a market in Belarus for more U.S. imports.

But Most Belarusian Products Becoming Less Competitive
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4. (C) During the breakfast with Pol/Econ Chief, Zlotnikov
predicted zero GDP or even a decrease this year. He
described Belarusian manufacturers as becoming less and less
competitive against those in Russia. Even in machine
building, one of Belarus' traditional strengths, Russian
producers were beginning to overtake Belarusian ones due to
higher levels of investment. Chizhik said even in some areas
where there was demand in Russia for Belarusian products,
such as processed food, over regulation and complicated
customs procedures prevented small businesses from exporting.
Most worryingly for the economy, Zlotnikov said Belarus
lacked attractive investment opportunities for foreign or
even domestic companies.

Leading to a Crackdown on Imports
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5. (C) Balykin explained how the inefficiency of Belarusian
manufacturers resulted in regulations to restrict
entrepreneurs (ref A). Large state-owned companies
understand they cannot sell their products even domestically
and lobby the government to suffocate small traders earning a
living from selling imports. Balykin agreed with Zlotnikov
that investment opportunities were few and far between,
mentioning bloated social infrastructure costs associated
with large enterprises and the inability to lay off redundant
staff.

Medium-sized Acquisitions Still Require Big Shot Approval
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6. (C) Despite noises the government may begin a round of
privatizations (ref B),Osipov noted the bureaucratic
barriers to investment. Even acquiring a minority stake in a
medium-sized state-owned enterprise requires the go ahead
from Lukashenko or people close to the dictator. What is
more, if approval is given, that does not mean the investor
can be assured the Belarusian government will take the
responsibility to ensure a level-playing field for the
enterprise in the future. Osipov sounded even more certain
than he did in January that Gazprom's investment in a joint
venture with Beltransgaz would fall through for precisely
this reason (ref B).

Less Money Circulating
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7. (C) Yaroshevich said that despite large investments
predicated on expected sales growth of 15 percent, Coca-Cola
sales in Belarus were down one percent for the year through
February. Sales in February were worse than in January.
Yaroshevich believes the first utility bills of 2007, which
increased 30 percent, scared consumers. Osipov suggested the
significant rise in real estate prices so far this year
indicated well-off Belarusians were looking for a safe
investment. He added that banks were tightening up on credit
to small businesses.

GOB's Room for Maneuverability: Loans and Wage Stagnation
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8. (C) Chubrik cautioned against accepting on face value
rumors the economy was headed for an imminent collapse. He
said the government could seek foreign loans over the next
two to three years without much difficulty given that current
foreign debt totaled less than two percent of GDP. Also,
with presidential elections four years away, the government
will keep wage increases low.

Socialist Mentality Prevents Real Reform
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9. (C) Zalesskiy explained that too many of those in
positions of power learned what little economics they know
from Karl Marx. They simply want factories to run. The
recent trips to Venezuela, Cuba and elsewhere were
Lukashenko's attempts to look for a handout. Osipov cited
Deputy Prime Minister Vladimir Semashko, the former General
Director of the television manufacturer Gorizont, as an
example. He was promoted after supposedly turning around the
enterprise, but actually he was just successful in obtaining
budget subsidies and Gorizont remains a mess. Zalesskiy
echoed Chubrik's statement that the government would not
consider significant privatizations until two or three years
down the road, when the regime depletes its foreign reserves.

Comment: Import Substitution Destined to Fail
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10. (C) Taking on increased foreign debt to invest in
competitive sectors of the economy would represent a sound
policy. Unfortunately for Belarusians, under current
conditions any investment would bring negligible returns.
Previously the GOB "invested" high profits from arbitrage on
oil and gas into maintaining the flow of cheap energy from
Russia (ref D). Lukashenko will probably use whatever
revenues come his way to buy friends and lobby Moscow for
cheaper energy and privileged access to the Russian market.
Moore