Real Sector: Recovery before the collapse
In 2021, market demand, which was deferred due to the coronavirus pandemic, and the environment favorable for key export items in the global market ensured a recovery of Belarus’ GDP growth, which happened to be above the most optimistic forecasts. The industrial sector and, first and foremost, its main segment – the manufacturing industry – had the decisive influence on the growth rate. The service sector, particularly the high-tech IT component, also made a considerable contribution. Farm output, however, showed a decrease for the first time in many years.
The growth rate of exports of goods and services noticeably surpassed imports, resulting in a record-breaking trade surplus. A relatively small deficit in foreign trade in goods was compensated by the service sector. The decision to freeze the price of Russian natural gas for Belarus played an important role as well.
In contrast to the pre-crisis period, the public sector became a driver of industrial growth amid rising global commodity prices and the government’s lending support to enterprises. The private sector remained largely under the influence of negative factors, and the state did not provide any support to it during the crisis period. The outflow of personnel and money continued due to the adverse sociopolitical situation in the country.
- Economic growth in the absence of internal prerequisites; inflated expectations for maintaining and developing this trend;
- Expansion of sanctions against key enterprises and sectors; restrictions in the crucial sales markets;
- Reduced number of the sources of financing of business; curtailment of lending programs by international and private investors;
- Decline in business activity, output and services in the private sector; deterioration of the financial standing, and increased number of bankruptcies;
- Emigration of specialists and the outflow of capital; a reduction in investments in the high-tech sector;
- Tighter state regulation, higher taxes, the growing threat of nationalization, and increasing influence of the security bloc on the economy.
In 2021, the real sector did not yet feel the full effects of international sanctions imposed in 2020–2021 against a number of business people, companies and entire segments of the national economy. Their impact on GDP was minimal during this period, so the Belarusian economy was able to grow significantly.
Belarus’ gross domestic product grew in 2021 by 2.3% (BYN 173.2 billion), which was above all forecasts. The recovery of economic growth was largely achieved thanks to the industrial sector, which accounted for 1.6% of growth. Industrial output rose by 6.5% year on year to BYN 154.4 billion.
The manufacturing industry, the share of which in the industrial output index was over 85.0%, showed a 5.9% increase (BYN 138.0 billion). The National Statistics Committee of Belarus (Belstat) reported an increase in all ten published groups of businesses. The growth of six groups surpassed the overall average: manufacture of computing, electronic and optical equipment – 20.3%; manufacture of machinery and equipment not included in other groups (agricultural machinery, etc.) – 14.9%; manufacture of wood and paper products, printing and duplication of media – 12.2%; manufacture of electrical equipment – 10.3%; manufacture of vehicles and equipment – 10.1%; manufacture of basic pharmaceuticals – 9.8%.1
Belstat stopped publishing statistics on production, export and import of the goods that fell under sanctions. Therefore, the 2021 report does not show the dynamics of the following industrial groups: production of coke and refined oil products; chemical products; other finished products; repairs and installation of machinery and equipment. However, the data published by the statistics agencies of Belarus’ partners indicate an increase in production and supplies of goods of these groups, which were the most important to the national economy. According to the Ukrainian State Statistical Service, Ukraine’s imports of Belarusian oil products and fertilizers nearly doubled from USD 1.2 billion to 2.3 billion and from USD 290 million to 570 million, respectively.2
Three other industrial components were on the rise as well. Mining industry output increased by 2.8% (BYN 1.88 billion); water supply, waste management and pollution cleanup – by 2.7% (BYN 2.6 billion); electricity, gas, steam, hot water and conditioned air supply – by 12.6% (BYN 11.9 billion).
Farm output decreased by 4.2% (BYN 25.0 billion), including 3.2% (BYN 21.1 billion) in agricultural organizations, the backbone of the agricultural sector. Last year, the country produced less grain and leguminous crops, potatoes, vegetables, sugar beets, livestock and poultry, which led to a slowdown in processing. Output of foods, beverages and tobacco products rose by 1.9% (1.1% in the food production subgroup), to compare with 2.7% (2.9% with respect to foods) in 2020.
The post-pandemic demand ramp-up in the global market resulted in a 30.7% year-on-year increase (USD 94.751 billion) in Belarus’ foreign trade turnover of goods and services, and the record-breaking foreign trade surplus of USD 3.772 billion, which nearly doubled from 2020 (USD 1.898 billion). There was a major deficit in trade with Russia, while trade with Ukraine brought a surplus.
Exports of goods grew by 37.4% (USD 39.023 billion); imports – by 31.0% (USD 39.814 billion). A deficit of USD 791.0 million was reported in foreign trade in goods, but it was considerably smaller than in the previous year (USD 1.993 billion).
This deficit was fully compensated by the service sector. Although its growth rate was not as high as in the goods sector, exports increased by 16.5% to USD 10.237 billion; imports – by 15.9% to USD 5.674 billion. The resulting surplus of USD 4.563 billion was above the previous year, when it stood at USD 3.891 billion.3
The main contribution to the surplus in trade in services for the second year was made by computer, telecommunication and information services. Their exports increased by almost half a billion dollars from 2020 to over USD 3.19 billion. Imports reached USD 482.5 million, the surplus standing at USD 2.7 billion. For comparison, the export of transportation services totaled USD 4.388 billion, import – USD 2.5 billion, surplus – USD 1.876 billion.4
Considering the above, the government made optimistic forecasts for 2022 (the Economy Ministry expected GDP to grow by 4–4.5%). However, there were several negative trends behind these figures of 2021, including a decline in capital investments, which were expected to increase by 2.0%, but showed a 5.6% decrease instead (BYN 30.13 billion).
Private sector in stagnation
One of the key problems that manifested itself in 2021 was that the private sector, which accounted for around a half of the economy, being its main growth driver since mid-2010, has lost its leading position. While most neighboring countries supported their real sector entities during the pandemic, Belarus provided little or no support at the peak of it, so the sector had to rely on its own resources to overcome the consequences. Pandemic impacts and the shortage of reserves to withstand them led to a series of bankruptcies of a number of large private businesses and declined financial stability of many companies primarily oriented to the domestic market.
Private business has been and still is affected by the sociopolitical crisis that began in the country after the 2020 presidential election. The state regulation got much tighter; the public sector was subjected to a political purge, and taxes were raised to support the loyal entities financed from the national budget.
The year saw a series of high-profile arrests of private business representatives (Tut.by Media, 21vek.by, etc.) and amendments to the tax legislation, including the abolition of VAT exemptions and changes in taxation of private entrepreneurs. This triggered even more massive emigration, relocation of businesses to more stable jurisdictions, and withdrawal of capital. The number of proposals for the sale of businesses increased, although few deals were closed, as sellers requested substantial discounts, given the high associated risks.
The domestic political situation, migration crisis, deteriorating business environment and expanding international sanctions against counterparties and industries reduced the interest of old and new foreign investors, and affected infrastructure projects.
The temporary increase in the tax on profits from 9% to 13% for the High-Tech Park resident companies (since January 2021), which was supposed to support the economy during the pandemic period, on the one hand, increased the deductions into the budget to an all-time high, while, on the other hand, it hit the fundamental principle of not worsening the business climate. Therefore, fewer new residents of the High-Tech Park were registered in 2021, while the number of exits increased. For example, Belarus’ first ever unicorn startup PandaDoc left the Park. The mass relocation of employees to more comfortable places continued.
EPAM Systems, the High-Tech Park’s largest resident and founder, stopped hiring in autumn 2021. At the end of the year, its Belarusian office numbered fewer employees than its office in Ukraine for the first time.5
The sanctions slowed down investments in two other major infrastructure projects – the China-Belarus Great Stone Industrial Park and Bremino – Orsha Special Economic Zone – putting the reasonability of investments in question. The suspension of some logistics projects in Belarus financed by China shows the latter’s declining interest in the transit potential of Belarus as a whole.
Against the backdrop of the reduced inflow of resources from the West and Asia, Russian investors were active in the sectors with a quick return of capital (retail trade, e-commerce, etc.). The Western sanctions, however, significantly narrowed their interests in the local market, for example, projects of the family of Russian billionaire Mikhail Gutseriev.
Russia’s invasion of Ukraine and its consequences will be a key factor affecting development of global and regional economies in the next few years. For Belarus, it means the loss of its second most important foreign trade partner, while its indirect participation in the Russian aggression will inevitably lead (regardless of the outcome of the war) to the rapid implementation of the already imposed sanctions and application of additional financial, trade, investment and technological restrictions and bans by the international community.
The scale of the sanctions against Russia and its ally not only makes Russia’s support for Belarus problematic, which, among other things, concerns loans and subsidies. This also means that under the new circumstances, Belarus will have to worry not so much about economic growth, but about at least keeping it more or less stable in view of a possible national default.
Some industrial enterprises, primarily in the consumer segment, will be admitted to the Russian market or strengthen their positions there, since Western businesses are leaving Russia, weakening the competition. Protectionist measures taken by Belarus to maintain social stability in the domestic market, and shortages of raw materials and components previously imported from the West will be a serious problem. Due to the migration crisis and new sanctions, Belarus has permanently lost its significance for Europe as a transshipment point for grey re-exports to Russia.
The sanctions, deteriorated economic environment and tightened domestic policy with possible nationalization will lead to the continued outflow of Western capital and shutdowns of joint ventures and foreign enterprises, including in all special economic zones. This will not only lead to reduced tax revenues and job cuts, but will also deepen the technological gap between Belarus and developed economies.
Private businesses will continue leaving the country, as commercial opportunities are getting fewer, the tax burden increases, and the extra-economic interference become more frequent. In the previous years, owners of businesses were thinking about changing the country of permanent residence or acquisition of new citizenships, while now, this is about the active transfer of production or, at least, financial centers, and the relocation of key professionals. In the actual economic blockade and the lack of adequate support from the government, companies’ inactivity means a high probability of closure.