NO IMMINENT ECONOMIC CRASH IN BELARUS - IFI

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000172

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/11/2018
TAGS: PGOV PINR ECON EFIN IBRD EBRD BO
SUBJECT: NO IMMINENT ECONOMIC CRASH IN BELARUS - IFI
OFFICIALS

REF: A. 07 MINSK 1020

B. MINSK 133

C. 07 MINSK 1061

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

Summary
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1. (C) World Bank Regional Director for Belarus, Ukraine and
Moldova Paul Birmingham told representatives of Minsk's
diplomatic corps March 10 that he sees little likelihood of
an economic crisis in Belarus in the short term. Birmingham
noted that the Belarusian authorities had managed to weather
the storm of Russian gas price increases in 2007, even if the
credits and privatizations they had used to survive were less
than transparent. He described the Bank's loans to Belarus
as well as marginal improvements in transparency and business
climate here. Birmingham predicted strong growth in 2008,
and inflation in the low double digits, but pointed to the
possibility of additional inflationary pressure, if the
government addresses higher food prices through wage
increases. In a separate meeting, EBRD Country Director for
Belarus Michael Davey reported on progress of the EBRD's
micro-lending programs in Belarus. End summary.

Fundamentals of Belarus' Economy Stable - WB Official
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2. (C) In a briefing for members of the diplomatic corps in
Minsk, visiting World Bank Regional Director for Belarus,
Ukraine and Moldova Paul Birmingham said that, unlike in
years past, his institution saw no reason to expect an
imminent crisis in either Belarus' economy or its public
finances. Birmingham said he expected strong GDP growth,
about seven per cent in 2008, and said that Belarus' foreign
trade growth in the recent past had been "phenomenal," with
trade with Russia and with EU countries each making up
roughly 40 per cent. He added that Belarus' hard currency
reserves were strengthening and that he saw no reason to
expect a devaluation of the Belarusian ruble in the near term.


3. (C) Addressing the effect of rising prices for Russian
natural gas, Birmingham said that Belarus had survived a
shock that few economies could withstand, noting that the
January 2007 price increases were the equivalent of a loss of
five per cent of the country's GDP. That said, he criticized
some of the methods that Belarus had used to survive the
shock. Birmingham said that the privatization of telecom
operator Velcom lacked transparency and that the USD 1.5
billion credit secured from the Russian Federation included
terms, including non-economic terms, which were worrisome.


Inflation, Particularly Food Costs, a Concern
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4. (C) Birmingham told the assembled diplomats that he
expected inflation for Belarus to remain "in the low double
digits" for 2008. He noted, however, that government
statistics likely underestimated the impact of inflation on
ordinary citizens. If the increase in food prices -- a
global phenomenon -- led to reciprocal increases in wages, an
inflationary spiral would result, one that could threaten
Belarus' economic growth and stability.

World Bank Lending in Belarus Continues
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5. (C) Describing World Bank lending in Belarus, Birmingham
said that Bank actions were in line with the Belarus Country
Strategy approved in December 2007. A USD 15 million credit
package to assist in the reconstruction of objects of social
infrastructure was currently awaiting parliament's approval
while a USD 60 million water project was being debated by the
Presidential Administration. Birmingham said that the World
Bank also planned a significant set of loans to support
energy efficiency.

Structural Reform Does Not Materialize
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6. (C) Though the World Bank continued to advocate
structural reforms for Belarus' economy, Birmingham noted
that GOB efforts had been marginal here. Some steps had been
made to improve the investment climate, such as the abolition
of the "golden share" law (septel) and improvements in
licensing, registration and taxation policy, but these

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improvements had been small and/or symbolic at best. The
state sector continued to constitute 75 to 80 per cent of GDP
and this figure would remain above 50 per cent for the
foreseeable future. Though Lukashenko was eager to lure FDI,
it remained at roughly one per cent of GDP, and a weak force
in the Belarusian economy.

EBRD - Foreign Interest in Real Estate, "Just Not Yet"
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7. (C) In a separate briefing, EBRD Country Director Michael
Davey and staff told emboffs that EBRD's micro-lending
activity (ref A) had slipped somewhat after January 1, 2008,
perhaps as a result of apprehension on the part of individual
entrepreneurs faced with new hiring restrictions (ref B).
The level of loans issued by the program recovered, however,
in February 2008. Davey noted that the start up of the
EBRD-co-owned Small Business Bank was proceeding according to
plan and the bank should be licensed in April 2008, and
operational in May. While the EBRD's lending activities are
limited to the private sector, emboffs encouraged EBRD staff
to consider U.S. Department of the Treasury prohibition of
transactions with certain regime entities in logistical
matters as well.


8. (C) Davey described a steady amount of interest from
Western real estate funds in the Belarusian market. He noted
that with the maturation of other markets in Central and
Eastern Europe, such as Romania and Bulgaria, fund managers
were increasingly looking at the Belarusian market as an
option. Davey was quick to add, however, that these managers
were not prepared to invest under current conditions and
would wait "for something to happen" in Belarus first.

Comment
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9. (C) We agree with Birmingham's assessment that an
imminent collapse in the Belarusian economy is unlikely.
That said, the regime's insistent search for new and enhanced
revenue streams is evidence that economic pressure on public
finances is growing (ref B). With Russian natural gas prices
up 19 per cent this year (ref C) and rates rumored to
increase next quarter, it remains to be seen if Russian
bilateral credits and opaque privatizations will be enough to
keep the "social state" afloat.
STEWART