Economic Liberalisation in Belarus: Yet Again?

By Yauheni Preiherman 7 May Aliaksandr Lukashenka signed Decree No. 6 that can dramatically improve business climate in Belarus. This is one of the most advanced pieces of economic legislation adopted by the current government.

The decree is a reaction to the challenges of the Eurasian economic integration project with Russia and Kazakhstan and aims to boost the attractiveness of Belarus for foreign and domestic investments. However, previous attempts to improve business climate showed that it was not enough to adopt liberal legislation to bring about real change.

The inconsistency of the government, its poor macroeconomic policy and opposition to reforms inside the political elite remain the main major obstacles standing in the way of prospective investors.

Previous Attempts to Liberalise the Belarusian Economy

The Belarusian authorities have declared liberalisation of the country’s business climate as their priority many times before. Several years ago Alexander Lukashenka demanded that the country entered the top-30 list of the World Bank’s Doing Business ranking. Then the government initiated a series of improvements of the business climate - among other measures it liberalised start-up procedures and slightly enhanced the taxation system. But the effort was not enough. Currently, the country is ranked 69th.

In 2008 and 2009 presidential decrees established favourable conditions for doing business in rural areas and small towns. They simplified procedures and waived certain taxes for small enterprises there. The decree became a model for a more fundamental document – Directive No. 4 that was signed on 30 December 2010.

Directive No. 4 laid out a detailed vision for microeconomic liberalisation across the whole country. Its pro-market spirit caused high expectations in the Belarusian business community and among local and international experts. However, the authorities failed to carry out essential reforms that Directive No. 4 envisioned. The government’s contradictory policies during the economic crisis of 2011 “buried” all the expectations. And it even seemed that after the return of Russian subsidies in 2012 liberalisation was off the agenda.

Competition in the New Economic Reality

On 1 January 2012 Belarus became a part of the Single Economic Space with Kazakhstan and Russia. Goods, services, capital and labour forces can now freely move across the SES. Belarus has to compete with its integration partners for businesses that want to work on the SES market and also for foreign investments.

It is clear that without real liberalisation Belarus will lose the competition. Both Russia and Kazakhstan have more stable and less regulated economies. Some of Belarus' own entrepreneurs have transferred their businesses to Russia, primarily to its western regions. And foreign investors do not want to invest in Belarusian administrative economy either: in 2011 Belarus received only $1.5bn of foreign direct investments.

Wonderful Act of Legislation

The newly signed liberalisation decree (Decree No. 6) comes as a response to the economic realities of the Single Economic Space. Like the decrees of 2008 and 2009, it does not affect cities, but aims to stimulate entrepreneurial activity in small and medium-size towns and rural areas (almost half of the population of the country live there). And it is better than the previous acts because it has more explicit provisions of direct effectiveness which do not require additional implementation measures.

Decree No 6 significantly lightens the financial and administrative burden for businessmen in rural areas and small and medium-size towns. It lifts income and property taxes for companies and physical tax for individual entrepreneurs that produce their own goods and services (i.e. that do not just trade). It exempts businesses from the obligation to pay certain duties, make mandatory contributions to the so-called state innovation funds and sell 30% of their foreign currency revenues to the state. It also provides easier access to loans and better terms of their repayment.

Moreover, entrepreneurs and companies became absolutely free to choose their commercial partners and conclude contracts with them. In other words, the state significantly relaxed control over business activities. Essentially, the decree creates a big special economic zone that spreads over half of Belarus' territory.

Businesses will enjoy all these rights for seven years after their registration.

Importantly, Decree No. 6 tackles the problem of regional development in Belarus. According to the official statistics, the population of rural areas and small and medium-size towns has been diminishing for the last decade while the population of cities has been growing. As a result, the economic activity in the regions is extremely weak and the quality of life is much lower than in the cities.

What to Expect?

The decree is a very promising piece of legislation. It shows that the current situation forces the authorities to think in the right direction. However, as the previous experience showed, it is not enough just to sign decrees. There are several factors that can undermine the good spirit of Decree No. 6.

First, the Belarusian government has a serious problem with transforming its own strategies and decrees into consistent policies. The aforementioned Directive No. 4 is the most recent example. In spite of numerous declarations, only 20% of that directive’s provisions have been practically implemented.

With inflation exceeding 100 percent a country cannot expect to receive considerable amounts of foreign investment

Second, the government’s awful macroeconomic policy can overshadow any success in microeconomic liberalisation. With inflation exceeding 100 percent like in 2011, a country cannot expect to receive considerable amounts of foreign investment or to revive the activity of local entrepreneurs. Hopefully, in 2012 inflation will not exceed the level of 25-30%. But these are still shocking numbers for investors.

Moreover, in September Belarus will hold parliamentary elections. And elections traditionally cause macroeconomic destabilisation in the country as Lukashenka’s populist government likes to bribe voters by raising their salaries (which usually means essential money emission). These days we again hear the same old story about the average salary across the country – Lukashenka again demands that it reaches $500 a month by the end of the year. Today the number stands at $370.

Finally, there are different views on liberalisation inside the ruling elite. There are opponents of reforms in Lukashenka’s closest circle. And there are lots of regional officials and directors of state enterprises who do not see their interests being served in liberalisation. Therefore, they will keep undermining any sound pieces of legislation, including Decree No 6.

Belarus Digest