ANALYSTS PREDICT GENTLE ECONOMIC DECELERATION

C O N F I D E N T I A L MINSK 000072 SIPDIS SIPDIS E.O. 12958: DECL: 02/01/2018 TAGS: ECON EINV PGOV PINR BO SUBJECT: ANALYSTS PREDICT GENTLE ECONOMIC DECELERATION REF: MINSK 042 Classified By: Ambassador Karen Stewart for reason 1.4 (d). Summary -------------- ¶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