Real Economy: No progress

Vadim Sekhovich

Summary

The negative trends that affected the Belarusian economy throughout 2014 and 2015 grew even stronger last year. The recession and deteriorating financial health of Belarusian companies were further aggravated by the reduction in supplies of Russian crude oil by more than 20% in the wake of political and economic differences between Minsk and Moscow, which caused the country’s GDP to shrink.

In the public sector, debts continued to accumulate, along with non-liquid assets and deferred bankruptcies. Crisis developments rapidly overcame the private sector as well, in which bankruptcies became a mass phenomenon.

In the real sector, mechanical engineering, construction, and real estate, the light industry, woodworking, and retail were the most affected sectors. Food producers had to face prohibitive measures imposed by Russian regulators led by Rosselkhoznadzor. Drops in food prices in the global market produced a negative impact on the financials of Belarusian food-making companies.

In agriculture, overall growth was reported; however, the debts accumulated over previous years resulting from supplies of cheap raw materials – which were in fact subsidies – to processing companies caused the authorities to initiate official bankruptcy and turnaround procedures.

The service sector and its main driver, the IT industry, traditionally reported growth; however, the contribution of IT to GDP remained insignificant.

Trends:
Growing gross output and cheaper export

The decline in industrial output slowed in 2016 compared with the 2015 rate: back in 2015, the drop was reported at 6.6%, whereas in 2016, industrial output edged down by 0.4%, according to the National Statistic Committee of the Republic of Belarus (Belstat). In 2015, only two out of seventeen economic activities that make up the industrial production index (IPI) showed an increase compared with the previous year (production of coke, oil products, nuclear materials, and chemical production), whereas in 2016, there were nine such activities. 1

Because of the decrease in deliveries of raw materials from Russia, oil processing became the sector that accounted for the most significant drop in IPI. The “production of coke and oil products” activity reported a fall of 16.8% year-on-year. Amid growing global prices for fuel, export of oil products in value terms decreased by 40.4% to approximately USD 4 billion. Shipments to the UK, which used to be the largest buyer of Belarusian light oil products in previous years, went down by 66.5% to USD 950 million. In 2016, the UK became the second-largest importer of Belarusian-made oil products after Ukraine, which bought USD 1.7 billion worth of Belarusian oil products, up by 2.7% year-on-year. 2

The chemical production segment also made a negative contribution to IPI, with a 3.8% decrease in output compared with the year 2015. Despite local achievements of Belarusian Potash Company, export of potash fertilizers dropped by 24.3% to USD 2 billion.

Manufacturers of vehicles and equipment, as well as woodworking companies were last year’s outperformers with growth rates reported at 12.6% and 11.3%, respectively. In vehicle engineering, production and sales of Geely, BelAZ, and MAZ buses were growing. In woodworking, progress was achieved through success of private companies with foreign capital (VMG Industry, Kronospan, etc.), which outperformed Belarusian manufacturers by export in volume terms.

Agriculture managed to get over the recession, with a 3.4% growth reported in 2016. Output went up for the main activities – meat and poultry production, and dairy. In crop production, the output of vegetables and sugar beet increased amid drops the volume of harvested cereals, legumes, potatoes, and colza. Farmers provided sufficient volumes of raw materials for processing companies to meet the domestic requirement and increase export to Russia, which accounts for more than 90% of foreign supplies of Belarusian-made foods.

In 2016, Belarus supplied USD 3.7 billion worth of foods to the neighboring market (through the Ministry of Agriculture, Belgospishcheprom concern, and Belkoopsoyuz association). In value terms, cheese and curd cheese, condensed and powdered milk, as well as cooled beef and butter were the leading commodities. Butter became the third fastest growing export of the country, after vehicles and chipboard). Butter was among the few food products that saw an increase in prices in the period under review. However, overall, despite the marked increase in export in volume terms, drops in food prices globally resulted in a 1.1% decrease in Belarusian export deliveries in value terms. Restrictions imposed on Belarusian supplies by Rosselkhoznadzor as part of its campaign to combat illegal transit of products subject to sanctions also impacted the results of Belarusian trade in foods.

In 2015, export of services went up by 2.2% year-on-year to USD 6.8 billion, whereas in 2016, surplus in that segment expanded by 12.5% to USD 2.5 billion. However, unlike in 2015, last year’s deficit of trade in commodities was too big for the surplus of trade in services to make up for it. As a result, Belarus posted a deficit of its foreign trade in 2016, just as in previous years, except 2005, 2012, and 2015.

Growing debts and losses

In 2016, the real sector kept accumulating debts and generating losses. During the year, overdue corporate loan debt increased by almost 80% to reach USD 1.4 billion, and consumers’ debt for energy was close to USD 500 million at the end of the year. According to reports by the unofficial creditors’ club, which tackles issues of the country’s 106 largest borrowers, in mid-2016, their combined debts amounted to USD 6 billion, which is in excess of Belarus’s gold and foreign exchange reserves. The largest employer in Belarus – Eurotorg (which operates the Euroopt retail network and has over 35,000 employees) – reported one of the country’s largest debts at the end of 2016.

Last year, a trend emerged towards a further reduction in profits and an increase in losses at domestic companies. In the first half of 2016, combined profits of the country’s 25 most successful open joint-stock companies decreased by 39.8% year-on-year, whereas losses reported by the 25 least successful companies went up by 75%. During the period under review, the top ten loss-makers included mechanical engineering companies (MAZ, Amkodor, BobruyskAgroMash), cement makers (Krasnoselskstroymaterialy, Belarusian Cement Plant), and meat-processing factories (Barysaŭ and Minsk meat-packing plants). 3

MAZ became Belarus’s largest loss-maker, mostly due to the restructuring of debts of Belarusian Metals Plant based upon a decree by the Belarusian president. Targeted support by the state was also extended to a group of other major state-controlled holding companies, including Avtokomponenty, MTZ, Gomselmash, as well as woodworking companies. The list also includes Second National Channel, Stolichnoe Television, and Belavia. Some private companies enjoyed benefits as well, including Marko, the leather and footwear company owned by the senator Nikolay Martynov. The public sector still bears an important employment-related social burden. Although the number of insolvency cases for public sector companies increased, the number of bankruptcy cases with the liquidation of chronically loss-making companies remained a very rare phenomenon. In most cases, the state introduced rehabilitation procedures at state-run bankrupts seeking to restore their capacity.

In the private sector, bankruptcies became a mass phenomenon. Several major developers announced liquidation plans, and well-known manufacturers, including Serge, Izobudpromstroy, Brest household chemicals plant, First Chocolate Factory, are either undergoing or have already completed bankruptcy procedures. Administrative pressure on private business, such as devastating penalties, pre-trial debiting from accounts, imposition of product range requirements, etc., further deteriorated the financial standing of private businesses.

In late 2016, companies subordinate to the Ministry of Agriculture accounted for more than half (55%) of the total amount of overdue debts on loans. In late 2016, 321 agricultural producers were loss-making, 22% of the total number.

In August 2016, the Asset Management Agency was registered in Belarus. The new institution will restructure “bad debts” that are for the most part accumulated in agribusiness. By the end of 2016, the agency had accepted bad debts from about 200 companies worth a total of USD 250 million.

In autumn 2016, the government approved lists of problem companies. Pre-trial turnaround procedures were launched at 323 companies, 102 will have to go through bankruptcy procedures that envisage either rehabilitation or bankruptcy with asset sales.

Private business operating in agriculture was also affected last year – Fruktest, one of the largest suppliers of fruit and vegetables to the Belarusian market, declared bankruptcy. Stotz Agro-Service, in which German businessmen invested, became a chronic non-payer to the state budget.

Investment hunger

Last year, real sector companies de facto phased down their development programs: their capital investments decreased, and so did the amount of foreign investments in their development. For the first time in many years, no privatization deals were registered in the country.

Last year’s capital investments of Belarusian companies decreased by 17.9% from the level reported in 2015 to USD 9.6 billion. In 2016, the share of investments in GDP went down to a new record low from the year 2003. The negative trend equally applies to the state sector, which receives financing from the state budget, and to privately-owned business. In the public sector, investment shrank by 17.1%, and in the private sector, by 13.2%. The main reasons behind the reduction in business activity are the depletion of the state budget, curtailment of lending by commercial banks and overall business apathy that affected the Belarusian commercial sector.

In 2016, foreign capital inflows in the real sector (except commercial banks) ran dry as well – the reduction was estimated at USD 2.7 billion. In 2015, investments totaled USD 11.3 billion, whereas in 2016, they amounted to USD 8.6 billion. FDI dropped from USD 7.2 billion to USD 6.9 billion.

Conclusion

Hopes that the Russian market, the main consumer of Belarusian-made products that many manufacturers cater for, would recover in 2016 never panned out. There are concerns that even when the Russian economy overcomes the current recession, Belarusian exporters will be unable to restore their positions. Russia heavily invested in its domestic import-substituting facilities during the anti-sanction campaign, and some of them have filled the niche that traditionally belonged to imported products, including those from Belarus. Furthermore, the threat of further expansion of limitations and restrictions imposed on Belarusian-made goods amid the prolonged conflict between the two countries still remains as well.

The marked reduction in capital investments and suspension of modernization further increase the gap between the Belarusian real economy and its competitors. The trend can narrow the range of possible outlets for Belarusian products and affect the competitiveness of Belarusian goods even in the Russian and CIS market already in the medium term. The IT sector stands out, though, as it has been changing from outsourcing to the product model, albeit somewhat later than originally expected.

The administrative pressure on private business, which in terms of its scope looks like we are back in the early 2000s, paralyzes business activity and accounts for the growing shadow market segment. On the other hand, some part of business turned out to be unready to respond to new economic challenges, and clearly adventurous and sometimes illegal schemes are applied, which the authorities tend to punish with criminal prosecution.

The search for mechanisms and instruments to address current problems turned the work to devise a development strategy for the Belarusian economy and put in place public sector reforms into a secondary task. The global reformatting of the world economy can become both an additional problem and solution in the search for Belarus’s economic “identity.”