The Belarusian economic model will not hold together for much longer.
The Belarusian economic model is no longer sustainable and the command economy cultivated by President Alexander Lukashenko has begun to reach its logical conclusion, says Leonid Zlotnikov, one of the few Belarusian economists deemed independent, renowned abroad and employed as an expert by the IMF and World Bank, in an interview with Diplomaatia.
Q: The vocal protests in Belarus in March and February against the so-called “decree on freeloaders”, which lasted over a month, had a clear economic basis. The essentially socialist Belarus has begun to slip into serious economic problems. Why is that?
A: The fact that the Belarusian economic model is completely ineffective, of course. It has remained a command economy to this day. It has a de facto socialist model, similar to 1930s Germany. The economic model of the Soviet Union could not be repeated, because you could not require the steel factories of Chelyabinsk to provide the steel required by our car industry. It just does not work in a country as small as Belarus [207,000 km2]. A business class did emerge here, but it is similar to an archaic society in which power and ownership are not separated and where the property owner depends heavily on the [state’s] political administration. We may appear to have a market economy, but it is a command economy in essence.
Can you give specific examples of how today’s command economy is functioning in Belarus?
Let’s take agriculture, for example. All the large undertakings in that sector are from the Soviet era. Generally, they are not called kolkhozes or sovkhozes anymore, but are referred to as agricultural production cooperatives. Those cooperatives, however, still receive plans from above on how much to sow, how much of something they have to supply for reprocessing, and what selling price their products must have, because all procurement prices are dictated by the state. Prices for [agricultural] equipment are also prescribed by the state. In theory, cooperatives are free to elect their directors, but in practice they are still appointed by the executive committees of the oblasts. So in reality, the old Soviet kolkhozes still exist, and only the facade has changed. A question of great importance in this is the personal dependence of the people. It is a vertical power structure, headed by the president [Alexander Lukashenko], who thinks he has to be in charge of every branch [of power], that he is the root of the tree. For example, according to our constitution we ostensibly have an independent supreme court, but half of its members are appointed by the president and the other half by the parliament on the basis of lists received from the president’s administration. Again, it looks as if democracy has been served, but it is a deception. For example, decree No. 72 was issued at the beginning of last year. [In Belarus, the president’s decrees are effectively laws.—JP] It includes a clause in which the president orders the reduction of manufacturing costs in all undertakings—I repeat, in all of them!—by 20%.
You live in a perfect world!
Exactly—a fantastical world. Of course, manufacturing costs more or less consist of materials, which in Belarus are often imported, and the wages of employees. Plus profit, but in Belarus the profitability of undertakings is already very low. The authorities cannot influence the price of imports in any way. What they can influence is wages. In Belarus, the reduction of manufacturing costs means the reduction of wages, because you cannot ask Russia to reduce the price of oil and metal exported to us. The power structure naturally began to execute the order, but it was quietly forgotten by the end of the year because everybody understood it was impossible to achieve. And in November 2016 the president issued another order: to increase the average wage so that it would be up to 500 dollars by the end of 2017. This January, the average wage in Belarus was 360 dollars. An order to increase wages means you cannot reduce manufacturing costs. Impossible. So that’s how our country is managed. The economy is too complex for it to be run with orders from one source. Belarus is a textbook example that shows you cannot produce anything effectively by just giving orders.
How much does the Belarusian economy depend on what Russia wants?
When oil prices started to rise on the world market in the early 2000s, life in Belarus improved alongside Russia. In 2001 Belarus imported 11 million tons of oil from Russia, of which we used 7 million tons ourselves, but as from 2005 we imported 22 million tons and last year 23 million tons. What we did not need ourselves, we refined and resold to the West. [Belarus has two large oil refineries dating back to Soviet times, which would be shut down without Russian oil. Belarus itself produces about 1.5 million tons of oil a year.—JP] According to the Treaty on the Union between Belarus and Russia entered into in 1997, we should give 85% of the export duties on oil products to Russia, but we have always ignored it. [Russia sells oil to Belarus without any customs duties, but Belarus collects export duties when selling oil products to the West.—JP] Russia did not pay attention to this until 2007, but then president Putin began to insist that Belarus had that obligation under the treaty. Russia did not demand retroactive payment. As you may recall, this led to the shutdown of gas pipelines in the middle of winter. After an enormous amount of kicking and screaming, Belarus appeared to agree to observing the treaty. But prior to that, Belarus was earning a large income from oil exports. Basically, it was assistance received from Russia. [It is actually beneficial for Russia to send its oil into Belarusian refineries because it gets relatively cheap petrol and other oil products in return.—JP]
How much did Belarus earn from the export of oil products at Russia’s expense?
According to Russia, the assistance was 23.5 billion dollars from 2011 to 2015. [By “assistance”, Zlotnikov means the amounts Belarus earned from export duties by selling oil products to Europe.—JP] And that was not all. In 2012, there was a scandal when it was revealed that oil products were exported under the label of solvents, because no export duties were applied to these products. The Russian oligarchs discovered that loophole—naturally, they also paid their share to the Belarusian authorities to keep them quiet—and exported oil products into Belarus, but sent them on to Riga and Ventspils as solvents. There, they were again transformed into oil products in the documentation.
And Belarus suddenly became the world’s largest manufacturer of solvents?
We met the entire global demand for solvents! (Laughs.) Last year, Belarus officially earned about 1.3 to 1.4 billion dollars for oil products. In addition to oil, we received and still receive cheap natural gas from Russia. While Poland received natural gas at a price of 450–460 dollars per thousand cubic metres, our price was 130–180 dollars. This was a tremendous help to our economy, of course. At times, the oil and natural gas subsidies from Russia constituted up to 10% of our GDP. In early 2014, oil products made up one-third of our exports, and now it is about a quarter. The next big source of income is food products, which are mostly exported to Russia. But there is a problem here as well, because, for example, we sell beef (about 100,000 tons) to Russia at a price below production costs, which means that we actually sustain a loss. The third-biggest export item is potash—mining it and manufacturing fertilisers constituted 6–8% of our exports.
For years Belarus earned high profits from the sale of refined oil. Did Lukashenko find a sensible purpose for the money, or did he squander it all on social policy?
When the money started to come in, an attempt was made to modernise the Belarusian economy. After the collapse of the Soviet Union, our strong engineering, chemicals and electronics industries went under. From the latter, the manufacturers of TVs held out the longest, and stopped production only a couple of years ago. Lukashenko wanted to modernise the industry, so not all the money was squandered. At some point after 2005, investments in Belarus accounted for 32–35% of GDP.
Where did Lukashenko make the biggest investments?
The country invested the most in agriculture: machinery was purchased, all kinds of pedigree cattle were brought here from all over the world, and no expense was spared on seeds. Almost 60% of state investment went into agriculture, but our socialist agriculture failed to return on the investment, of course. It was not effective: they were just not ready for better machinery, better animals, better feed, anything. Now, they are trying to sell the kolkhozes with the most hopeless debts to someone or to write off the debt through bankruptcy. In banking, the state pulled a trick: all the bad loans of Belagroprombank [a national bank that credits public agricultural undertakings—JP] were transferred to the balance sheets of executive committees of oblasts. Let them do as they see fit. As of the middle of last year, the total debt of undertakings under the Ministry of Agriculture and Food, which produce 95% of the foodstuffs in Belarus, was equal to 13 months’ turnover of all these companies. Nobody lays a hand on them, though, and they still operate.
How about other sectors of the economy? Have investments there been just as ineffective?
Generally, you see the same picture everywhere. There were big modernisation programmes in industry as well, but there have been no benefits so far. In Minsk there is a factory for construction materials that was modernised in three stages—everything is brand-new there. Modernisation was completed two years ago, but now the factory is bankrupt. Three cement factories were fully modernised. The objective was to introduce their products to the global market. And then it became clear that their manufacturing costs exceeded the world market price. It was like that with everything. At the time when the modernisation was widely implemented—it started in 2006—there was a big increase in consumption. Over a thousand undertakings were modernised, and hundreds more were built—the plans were terribly grand. There were large residential construction programmes. 18% of the state’s investments went into housing construction.
Where did the money for such an extensive modernisation come from? Surely not just from the resale of Russian oil?
The money came mostly from loans. In 2006, Belarusian foreign debt was 5–6 billion dollars, and in 2014 it was 40 billion dollars. [In November 2015, the official foreign debt was 38 billion dollars, which then constituted 62% of GDP.—JP] Let’s add to that several billion dollars in income per year from Russian oil. All those loans and oil income were just squandered—a classic case of the state consuming much more than it could produce. The first devaluation of the Belarusian rouble was implemented in 2011, prior to which the current account of the balance of payments [the difference between the monetary value of goods and services being exported and imported] was already in the red by 14%. This indicates huge overconsumption. The devaluation was preceded by another decree issued by Lukashenko in 2010 to increase average wages up to 500 dollars. The country had no money left to do that, but the election was on the way. [This was the notorious presidential election of December 2010, which ended with the leaders of the political opposition of the entire country being imprisoned for years.—JP] After the election and devaluation, the average wage in Belarus fell by a quarter within half a year. Lukashenko issued another decree to increase wages and in 2012 the average wage increased by that same quarter which, of course, led to high inflation, almost 60% per cent a year. At the same time, GDP rose by 1%, but wages—as I said—were raised by a quarter. In 2013, wages were increased even more; Beltransgaz [natural gas transmission company, which was officially sold to Gazprom to cover the gas debts; the company is now known as Gazprom Transgaz Belarus.—JP] was sold to cover the increase and a loan was taken from Sberbank of Russia, lodging the shares of the Salihorsk Potash Fertiliser Factory as security. [Salihorsk’s sister city is Kohtla-Järve—JP] The wages could be raised at the expense of that in 2014 as well, but then they began to decrease. According to official statistics, as of 2014 the average wage in Belarus has decreased by 14%. And there are no reserves left. The doping received from Russia was not that strong anymore, either. Lukashenko blames everything on external factors: the fall in world oil prices and Western economic sanctions against Russia. But I would like to point out that this fall started in Belarus in 2013, when none of the reasons cited by Lukashenko existed.
How high are actual wages in Belarus now?
They were almost 400 dollars in December, but wages are always higher at the end of the year. In January, the official average was already at 355–360 dollars. [In February, the average wage was 378 dollars.—JP]
That is the average, but how much do people actually get?
It’s a pittance in the regions. People get 150–200 dollars. The former chairman of the National Bank of the Republic of Belarus [Pjotr] Prokopovich [in office from 1998 to 2011] recently wrote an open letter to Lukashenko, demanding that the state invest more money in the economy, and claimed that in small towns people felt lucky if they got 150–200 dollars. The standard of living has dropped significantly in the regions. In Minsk, the wages are above 500 dollars, of course—that is where the average comes from.
I want to stress that the main cause [of all economic problems] lies not with lower oil prices or the decline of Russia’s economy, but rather the fact that the Belarusian business model is simply not sustainable. What has happened now is natural and will be with us for some time. The warehouses of Belarusian factories are full of goods that have not been sold. Even the warehouses at MAZ [trucks] and Belaz [huge tipper trucks used in mining] are packed. The engineering industry in particular began to manufacture straight to stock as early as 2014. Those plants will soon begin to fail, and this is very important.
So the Belarusian economic model is heading towards its logical conclusion?
Yes, that’s right. Income is so low and employment only fictitious in many undertakings—people are not fired, but no actual work is provided either; people are just sitting around or cleaning the area and are paid a small amount for this, but they are afraid to lose even that income. By the way, the official unemployment benefit in Belarus is 13 dollars, but for that you have to participate in public-benefit work, clean the streets, etc. Nobody wants to, of course; as of 1 January, there are only 80,000 officially unemployed. Lukashenko gave a speech recently and said that today’s unemployed are tomorrow’s potential criminals. He ordered that nobody should sit around unemployed. It was fairly unique how he scolded all kinds of executives and told them to get their spouses and lovers to work by May. Can you imagine that? This is how our country is run. What is this?