The Social Contract In Belarus Has Been Destroyed. What Will Happen To The Country’s Economy?

In the new issue of the podcast “What about the economy?” Public Radio and Kateryna Bornukova, academic director of the BEROC Center for Economic Research in Minsk, spoke about the Belarusian economy, how it was affected by the coronavirus, and the mass protests against Olexander Lukashenko that have been going on in the country since early August. Hosts: Yulia Mincheva, VoxUkraine project manager, and Andriy Fedotov, communications director of the Center for Economic Strategy.

Economy of Belarus. Review

Belarus’ economy is really characterized by a very large public sector. We know that this sector employs at least 30% of the working population, and it generates about half of GDP – and this is only a state-owned commercial enterprise, without taking into account the standard budget types of health and education. This is the first big feature. The second is a strong dependence on the Russian economy. This is the main market for the products of our state-owned enterprises, first. And secondly, even our exports, which go to Europe and Ukraine, are created from Russian oil, that is, it is, first of all, petroleum products. We buy Russian oil, we used to buy it at a discount, and then sell oil products at market prices to Europe and Ukraine. Periodically, this energy subsidy reached more than 10% of GDP in good years, and in recent years it has been significantly reduced. And these two characteristics led to the fact that, in fact, the last 10 years have been a lost decade for the Belarus economy. That is, state-owned enterprises are a huge, inefficient sector of the economy that has already begun to actively hinder the private sector from growing, taking away resources in the form of labor and capital. In addition, the entire system of economic governance in Belarus is primarily aimed at promoting the development of the public sector.

Of course, once the private sector became large enough, it became a serious obstacle to development. Another moment is the connection to Russia, and the Russian economy is also in stagnation, and, accordingly, the Belarus economy has not grown in the last 10 years. We had the last year of high growth at 2011, so this year, even before the political crisis, before the crown crisis, we approached this year with the prospect of growth of 1-2%. Of course, when the pandemic occurred, Belarus used in part this huge share of state-owned enterprises in the economy as a way to mitigate the impact of the pandemic in many ways. And it worked. This explains why the decline of the Belarus economy is not so great. Another part of the explanation is the fact that Belarus did not impose quarantine, possibly guided by many economic motives, because it would be a big blow to the economy. But at the same time, we have managed to accumulate huge macroeconomic imbalances even in these six months, or rather even a few months of the pandemic. In what were they expressed? The fact that state-owned enterprises worked for a warehouse, exports are falling, there is nowhere to sell products, they are working at a loss, and the budget is forced to finance all this

In mechanical engineering, some companies could not work for several months, and stocks would be enough to meet all the demand without the company operating. But as for other companies, such companies as “Belaruskali”, a producer of potash fertilizers, are critical. Extraction of potassium salts and production of potash fertilizers is one of our main export points. And refining is an industry that brings currency to the country This is what is critical now. Their stop is overly critical in the short term for the inflow of currency into the country. Tensions are already rising in the foreign exchange market. If there is a currency shortage, we may face a currency and financial crisis.

With such introductory remarks, we have approached election day. Well, another important thing that I would like to note is that in recent years we have seen a huge increase in inequality in Belarus. If earlier, in the 2000s, economic growth made it possible to significantly reduce inequality and poverty, and Belarus was one of the leaders in the region in terms of success in combating poverty and inequality, the last 5 years have seen reversals, which largely explains those the political phenomena we see now.

About city-forming (town-forming) enterprises and deepening inequality

In the 2000s, when there was growth, state-owned enterprises played the role of a social support system. If you lose your job, you can always find it in the factory. Today we have other methods of social support, but they are in their infancy. For example, we do not have a decent unemployment benefit. What is available is very difficult to obtain, and the amount of this benefit is 10-20 dollars a month, that is, it is much less than the minimum wage or subsistence level. State-owned enterprises are in a difficult financial situation, they have a lot of debt due to unsuccessful attempts to modernize and upgrade their equipment, and they can no longer perform these social functions. And the biggest problem is created in the regions, in monotowns, where these state-owned enterprises provide 20-30% of employment, and in fact the entire economic eco-structure is tied to them. We see that, for example, the increase in average wages that has been observed in recent years is largely due to the growth of wages in the private sector, in particular in the IT sector.

It turns out that there is a split in society: part of the population does not see any increase in income, the other part is growing rapidly. Naturally, there are social problems. In addition, we have seen both in the situation with the coronacrisis and in the situation with the crisis that we had in 2015-2016, that the regions and strata of the population with the lowest income levels suffered the most from the crisis. And the state support system through state-owned enterprises was not able to cope with this, although during the coronacrisis there were big attempts, but still our polls show that a large number of people went on unpaid leave, people had their salaries cut and so on. That is, these people still turned out to be unprotected.

As for people’s savings, according to our surveys, about 30% of the population do not have enough savings to live a month without earnings. Therefore, there is now an understanding in Belarus society that workers must be supported. Several fundraisers have already been launched, and we see that they are very successful so far. People are ready to support those who strike for the common cause

About the economic program of the opposition leaders of Belarus

Opposition, opposition candidates, first of all I am talking about candidates who were not even registered, and at the moment one of them is outside of the country, and 2 others are in prison, they talked a lot about the economy. This was one of the central points of their message to the people. It was said that reforms were needed. Yes, the candidates may have had different approaches, but everyone agreed that what is happening to the economy now does not suit the people. One of the candidates – a popular blogger – was more focused on covering the problems of the regions and gave his word to, including workers of state-owned enterprises, because these are the people who understood that their company is managed inefficiently. These are people who have seen with their own eyes the suboptimal things that happen in their enterprise simply because of the administrative management that is there: the focus on gross performance instead of efficiency, and so on.

Of course, other opposition candidates said that privatization was needed, they said that a normal system of social support was needed, because if we reform this huge public sector, people will lose their jobs in any case. Some of these people will lose it in regions where it is difficult to find something alternative, they will have to be supported. But I think what we see now with workers, yes, there are economic reasons, there’s frustration because they haven’t seen recent wage growth, they haven’t seen prospects, they’ve seen that that the enterprise is not developing as they would like to see it. But, really, our opposition candidates did not represent their economic interests in reality, in the first place. They did not say that our state-owned enterprises should be further developed and supported. Rather, they spoke of the need for rather painful reforms, and the support we see is probably largely political, not economic, with the flow of lawlessness we have seen in a few months, and especially last week.

On economic cooperation between Ukraine and Belarus and possible changes

Our most active sphere of export is oil products, gasoline. I think that this year it is not so relevant, because in Ukraine itself, demand has declined due to the economic crisis. But still it is the basis of our economic relations in terms of exports from Belarus to Ukraine. If our oil refining goes on strike long enough, it is possible that there will be less of Belarus gasoline on the Ukrainian market. But it is still too early to say that the strikes will last long enough for Ukraine to feel it. But as for more long-term things, first of all, I think it will affect Ukraine through what we import from Ukraine: food products, metal and so on. It is possible that the demand for this will fall simply because we in Belarus are facing a major economic crisis, no matter how long the strikes last, it will probably be due to other reasons, not only that.

On economic dependence on Russia

This is the entire public sector, primarily mechanical engineering, production of transport equipment, agricultural equipment, our famous plants MAZ (Minsk Automobile Plant) and MTZ (Minsk Tractor Plant), they are focused primarily on the Russian market, and so far attempts to reorient have not been successful due to low efficiency of these enterprises. It is difficult for them to be competitive in the European market, and everyone understands perfectly well that our economic dependence on Russia is quite significant 

Not just for the market. This is a market other than mechanical engineering, and for our food industry, this is a huge chunk of our exports, particularly milk. All this is also exported to Russia. It is because of this huge dependence, which is also in the energy sector, that is, dependence on Russian gas, for example, is enormous. I think this is a situation familiar to Ukraine, although we are only now commissioning a nuclear power plant, which would help at least to eliminate this instantaneous dependence. Apart from it, basically, almost all energy is produced from energy sources that are supplied from Russia, that is, it is a significant part of it. Another aspect of dependence is financial dependence. If we look at our foreign debt, half of the public debt is either Russia’s sovereign debt or a debt to the Eurasian Stabilization and Development Fund, in which Russia has a decisive say as the largest shareholder. Therefore, the dependence is very high, and that is why not even one of our opposition candidates said that we would break off relations with Russia in any way. On the contrary, it was said that economic relations will continue to develop, we just need to get away from the huge dependence. How far can we get away from it? Well, with the oil needle we are slowly being put down, with the gas one too: this year Belarus is paying for gas above the market price. Agreed on a certain price level, then it fell in the market, and the agreement remained. Therefore, as for the borrowing market, at least since December we have not taken any large loans from Russia, and Russia has not provided them.

Therefore, here the dependence is also slowly declining, I think it is partly largely Russia’s desire to get rid of the need to finance Belarus in a situation where Russia itself has certain financial problems. Of course, this is a big problem for us. There are several aspects to how far we can reorient. If we talk, for example, about our food industry, the reorientation to the European Union is associated with difficulties in the sense that the European Union, as Ukrainians are well aware, protects its agricultural markets. Here, Belarus rests heavily on the political issue of relations and agreements with the European Union. Well, as for the products of mechanical engineering, in general, the products of the technological industry, then it rests on our non-competitiveness, and this is undoubtedly the question that we could solve and somehow fit into global value chains. If we restructure our state-owned enterprises, first of all make them more efficient, effectively managed, and then privatize, then I think this issue could be resolved without any significant shocks. We are not talking about shocks of the scale of the 90s, about the severance of all economic ties. It is rather a kind of progressive but decisive movement in a certain direction. Here all opposition candidates agreed that public sector reform is necessary.

About trust as a particularly important factor of economic growth

I think this will be the biggest problem for our economy in the coming years, because at the moment, confidence is completely undermined by what happened last week. The unprecedented wave of violence and torture that we have seen with horror, I think, will long repel the desire of entrepreneurs to make something, people – to show initiative of any kind, and in general, in fact, it undermined the social contract that existed in Belarus . Yes, it is a bit outdated for economic reasons and has lost its relevance, but it was still there, and it was destroyed last week. So far, to be honest, I do not really understand how we will further develop our economy. Of course, the very first steps should be to abandon at least the “witch hunt”, but so far we see the opposite. People who are on strike are threatened with dismissal. People who express their opinions are fired. So far we see only repression, and, unfortunately, for trust and for economic growth, it all looks very pessimistic.