ANALYSTS PREDICT GENTLE ECONOMIC DECELERATION

1. (C) Two leading independent economists told visitors from
EUR/ACE that Belarus' economy outperformed dire expectations
in 2007. They predicted a drop in GDP growth rates through
2011 unless the regime unexpectedly embarked upon reforms
necessary to attract foreign investment. The economists
plugged the importance of developing the small- and
medium-sized enterprise (SME) sector. However, both thought
the regime would not bend regulations to prevent many sole
proprietors from going out of business. End summary.

2007 Could Have Been Worse


--------------------------





2. (C) In their meeting with EUR/ACE visitors Heather Grant
and Noah Krystal January 25 Igor Pelipas, Director of the
Institute for Privatization and Management's (IPM) Research
Center, and Aleksandr Chubrik, an Economist with IPM, noted
that the Belarusian economy did not decelerate as quickly in
2007 as many economists predicted. They attributed this to
favorable prices for Belarusian exports and increased
external borrowing. However, both pointed out that the
poverty rate failed to decline for the first time since 2003.

Three Scenarios: Status Quo, Reform or Fall Out with Russia


--------------------------



--------------------------





3. (C) They outlined three economic scenarios through 2011.
Under the current policy of increased borrowing, Belarus
could maintain GDP growth rates of up to 6% and external debt
could reach 30% of GDP. In a second scenario Belarus would
attract increased foreign investment and GDP growth would
average 8.5%. In the worst scenario, Belarus enters a trade
war with Russia, the Belarusian ruble devalues sharply and
real wages stagnate. Both Pelipas and Chubrik predicted that
the first scenario was the most likely, with the GOB
maintaining exports to Russia but failing to engage in
sufficient privatizations to attract significantly more
foreign investment.

SME Growth Essential


--------------------------





4. (C) Both thought that an increased role for SMEs would
help strengthen domestic opposition to a state-controlled
economy. Belarusians working in the state sector tended to
accept government propaganda about the economy. Those with
experience in private business tended to see the value of
allowing free markets to improve the economy as a whole.

Lukashenko Unlikely to Give in to Sole Proprietors


--------------------------



--------------------------





5. (C) Commenting on the recent protests over stricter
regulations on sole proprietors (reftel), both argued that
the government would not give in. Pelipas averred that
influential groups wanted to take control over the flows of
cash spent on imports by further centralizing retail outlets.
Chubrik said the average entrepreneur mistakenly believed
that Lukashenko fit the traditional image of the good tsar,
and they would not cooperate with the opposition sufficiently.

Comment: Old Beliefs Die Hard


--------------------------





6. (C) One reason Lukashenko allegedly gave for opting for a
state-controlled economy upon taking power was the lack of
experts on market economics in his inner circle. The IPM
economists said at least mid-level officials in various
ministries understand the need for reform. Pelipas told
Pol/Econ Chief separately that mid-level National Bank of
Belarus officials also think competently about reform. The
main blockages appear at the top and among the broader
population that still by and large works for the state.

STEWART