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REAL ECONOMY:
A PERIOD OF LOSSES AND EXPECTATIONS Vadim Sekhovich
Summary
In 2015, Belarus's real economy operated in conditions of a regional crisis. The drop in global oil prices produced an additional impact on the local economy, which heavily depends on the processing of Russian crude oil and sales of oil products. The decrease in sales in volume terms and resulting plunge in profits markedly affected the financial performance of Belarusian enterprises and brought about hikes in non-payments to the state budget, contractors, as well as defaults on loan commitments.
Mechanical engineering, construction, real property, the light industry, and retail were the most affected sectors last year. At the same time, sales were growing in the defense sector, food processing, and production of specialty devices and equipment. The pharmaceutical industry showed the most impressive growth in the Belarusian manufacturing sector. In agriculture, the dairy industry reported a new record high output. The IT industry was growing at a fast pace as well. The recession made it obvious that the national economy is in need of structural transformation. Attempts were made - albeit inconsistent and sporadic - to limit state support for the real economy.
Trends:
• Drop in export profits of the oil product and potash sectors;
• Spreading of crisis-induced trends all over the private sector, sharp business decline, stagnation in most of the internal markets;
• International expansion of Belarusian IT businesses;
• Wait and see attitude of the government, threats to replace the 'liberal cabinet' with conservatives.
Industry: no drivers of growth
In 2015, the national manufacturing sector reported a 6.6% reduction in output in year-on-year terms, responding to the protracted deepening crisis in the key markets. Industrial output amounted to BYR 729 trillion in comparable prices.
Out of seventeen economic activities included in the industrial production index (IPI), only two reported increases in output compared with the year 2014. One of them is the
'production of coke, oil products, and nuclear materials,' with an increase by 0.3% year- on-year, and the other one is ' chemical production,' which reported a 6.3% growth in output.1
Because of the drop in global oil prices, oil products did not have sufficient capacity to become the chief growth driver of not only industrial output, but also export. Overall export supplies shrank by 26% to USD 26.685 billion, and oil products saw a record decline by USD 3 billion. The UK became the only export destination that showed a considerable growth in supplies from Belarus. In value terms, supplies to Ukraine dropped the most. Due to the unfavorable market situation, Russia received only half of the volume delivered back in 2014 (in value terms, deliveries fell by 65% year-on-year). The reduction caused Moscow to threaten to slash crude oil supplies to Belarus.
Export of potash fertilizers decreased as well in the wake of the fall in global prices, which was first observed in late 2015. Belaruskali remained the main export driver throughout 2015; however, export increased only by 0.3% year-on-year, or by USD 6.7 million, in January—December 2015.
The pharmaceutical sector — which is part of the chemical industry — reported a 38% increase in output year-on-year in 2015, which makes it the leader of the Belarusian industrial sector. The increase can be attributed to the implementation of a state program that aims to provide the Belarusian market with domestically-made pharmaceuticals.
In 2015, the government and the Ministry of Healthcare managed to increase the share of Belarusian medications in the local market to 50% from 39% in value terms. Although two state-controlled manufacturers — Belmedpreparaty and Borisovski ZMP — account for 70% of all of the medications produced in Belarus, the share of privately-owned companies (Lekpharm, Pharmland, Pharmtekhnologia, Triplepharm) has been growing by 2—3 percentage points annually. Bulgarian and Indian investors have come to the sector, along with one
«Индексы промышленного производства по видам экономической деятельности.» Национальный статистический комитет Республики Беларусь. Web. 28 Feb. 2016. <http://www.belstat.gov.by/ofitsialnaya-statistika/realny-sector-ekonomiki/promyshlennost/godovye_dan-nwe_prom/osnovnye-pokazateli-raboty-promyshlennosti/>.
of the leading companies in the Russian pharmaceutical sector Biocad. Biocad's portfolio investor is Millhouse, owned by Roman Abramovich.
Mechanical engineering became the underperformer of the year again, with a decline in output by 25.2% year-on-year. Supplies of tractors and trucks became the second and third most affected exports, following oil products. MTZ's export deliveries dropped by USD 365 million from the level of 2014, and combined export sales by MAZ and BelAZ went down by USD 356 million. Supplies of farm machines to foreign buyers decreased by USD 141 million, and of car parts declined by USD 117 million.2
In the first three quarters of 2015, five out of ten most loss-making enterprises of Belarus were mechanical engineering companies — Gomselmash, MTZ, MAZ, Amkodor, and BATE.3 Defense companies were the only exception in the Belarusian industrial sector. The war in Syria and the overall tense situation in that region led to a growth in demand for special Belarusian developments.
The year 2015 was also characterized by staff reductions at major state-owned and private enterprises, as well as a considerable increase in the number of entities that underwent insolvency procedures. In the state sector, such procedures were initiated against Viciebsk-based KIM and Mahilo Strommashina, and in the private sector, against Glass Factory Jielizava.
Agriculture: export proceeds eaten up by depreciation
Last year's slump in Belarusian agribusiness proved to be less serious compared with the recession in the manufacturing sector. Farm output totaled BYR 136.7 trillion, which represents a decrease by 2.8% from the level reported in 2014. The figure
Foreign trade in goods in 2015. National Statistical Committee of the Republic
of Belarus. Web. 28 Feb. 2016. <http://www.belstat.gov.by/en/ofitsialnaya-
statistika/macroeconomy-and-environment/vneshnyaya-torgovlya_2/
operativnye-dannye_5/foreign-trade-in-goods-in-2015/>.
«Итоги деятельности ОАО за III квартал 2015 г.» Министерство
финансов Республики Беларусь. Web. 28 Feb. 2016. <http://www.minfin.
gov.by/ru/securities_department/results/results_oao/>.
represents the joint performance by the two components of Belarus's agriculture — cattle breeding and crop production. While the former showed an impressive growth, by 5% on the level recorded in 2014, the latter encountered major challenges and saw a decrease in output by 10.5% from the previous year.4
In 2014, the Belarusian cattle-breeding sector reported a new record high in milk production, with 6.635 million tons, an increase by 6.3% from the year 2013. Cattle and poultry production expanded even more, by 6.5%, to 1.649 million tons. Yields improved as well: the average milk yield increased by 226 kilograms, and the average gain in weight in pigs and cattle rose by 29 grams and 1 gram, respectively. Importantly, positive changes were reported amid significant cuts in state support for the sector. The largest Belarusian dairy and meat producers became regional leaders.
The Presidential Administrative Department, which has consolidated about twenty dairy farms (Agroholding Maculiscy, Malocny Hastiniec, etc.), became the leading dairy producer in the former Soviet Union. With a 30% share of Belarus's market for poultry meat, the holding controlled by М^Нюй businessman Jaйhien Baskin (Servolux and Smaliavicy Broiler) is among the top-eight producers in the EEU.
In crop production, output dropped in almost all sectors — Belarus's grain and legume harvest went down by 9.5% year-on-year, potato production fell by 13%, vegetable output decreased by 16.9%, flax fiber output was down by 16.2%, and sugar beet harvest fell by 31.3%.
The food embargo that Russia extended in June 2015 (while adding new items to the list of banned foods) gave an impetus to the development of some agricultural businesses, such as vegetable cultivation under cover, seafood processing, and cheese-making. Belarus became a major importer of Norwegian fish, which is subject to Russian food counter-sanctions.
«Продукция сельского хозяйства по категориям хозяйств.» Национальный статистический комитет Республики Беларусь. Web. 28 Feb. 2016. <http://www.belstat.gov.by/ofitsialnaya-statistika/realny-sector-ekonomiki/selskoe-hozyaistvo/osnovnye-pokazateli-za-period-
s-_-po-_gody_6/produktsiya-selskogo-hozyaistva-po-kategoriyam-
hozyaistv/>.
Additional investments were made in fish processing to boost supplies to the Russian market. Brest-based Santa Bremor was actively involved in the business, and the little-known company Belrosmoreprodukt, founded by Russia's Morskoy briz and Belarusian Federation of Modern Pentathlon, became a major exporter of seafood to Russia's Magnit and Auchan retail chains.
However, food exporters saw their profits slashed by ruble depreciation trends. Despite the 18.5% increase in supplies of powdered and condensed milk in volume terms in 2015, export proceeds dropped by 27.4%, or by USD 187 million. Export of cheese and curd cheese went down by USD 169 million, and of sausage by USD 113 million. Rosselkhoznadzor's tighter controls on the state border between Belarus and Russia became a serious challenge for many Belarusian producers.
Services: American-Asian IT dimension and first Belarusian billionaire
The surplus of Belarus's trade in services in 2015, at USD 2.323 billion, brought about the third overall surplus of the country's foreign trade in the history of Belarus, at USD 205.7 million (after the years 2005 and 2012). One of the fastest-growing sectors was the Belarusian IT industry, which last year was showing a rapid growth due to its focus on the growing markets of North America and Southeast Asia.
The fall in export proceeds in the CIS prompted the last major Belarusian IT company that used to have no office in the U.S.— ScienceSoft — to shift its focus to the North American market and open an office in Texas. In 2015, four companies owned by Belarusians were found in the Top-5,000 fastest-growing private businesses in the U.S. The main criterion for Itransition, Coherent Solutions, Oxagile and Intetics to be included in the Inc. 5000 List was their growth in revenues over the past three years.5
Last year, the Belarusian IT industry was characterized by a turn towards the Southeast and South Asia. Belarusian investors
"Inc. 5000 2015: The Fastest-Growing Private U.S. Companies, At a Glance." Inc. Magazine. Web. 1 Mar. 2016. <http://www.inc.com/ inc5000>.
were attracted by cheap workforce, large markets, and promising startups.
ScienceSoft, one of the ten largest residents of the High-Technology Park, last year opened a new office in Hanoi, the capital of Vietnam, with a view to reaching out to U.S. and Japanese customers and cutting costs. EPAM Systems completed another acquisition transaction and for the first time ever bought two development offices in India employing 1,200 Indian programmers. Wargaming, a developer of multiplayer computer games, invested in a Taiwan-based distribution office.
By the end of 2015, venture capital investments by Fenox Venture Capital controlled by Vital Arbuza had reached an estimated USD 400 million. Half of the 80 startups he financed in the past four years are in Asia — Indonesia, Singapore, Malaysia, Thailand, Bangladesh, and Japan. Bloomberg calculated profits generated by Belarusian IT companies in the past few years and reported that Viktar Kisly, the founder and co-owner of Wargaming.net, became the first ever Belarusian billionaire over the five-year period.6 The company operates offices in Belarus, Ukraine, Russia, France, the U.S., South Korea, Taiwan, Japan, Singapore, and Australia and employs approximately 4,000 specialists. According to Bloomberg, last year, Wargaming.net netted USD 590 million in revenues, and Kisly's personal wealth exceeded USD 1 billion.
Conclusion
The unfavorable forecast for oil and potash prices makes the situation in the economy increasingly dependent on external borrowing — from Russian and western lenders. The new cabinet, formed in late 2014, is supposed to put in place relevant, albeit unpopular measures to enhance the efficiency of the Belarusian economic model and eventually improve the country's relations with the IMF and other international institutions. Should social tensions grow, modernization might slow, and cabinet members
"World of Tanks Video Game Mints a New Billionaire from Belarus." Bloomberg Business. 25. Feb. 2016. Web. 2 Mar. 2016. <http://www. bloomberg.com/news/articles/2016-02-25/world-of-tanks-video-game-mints-a-new-billionaire-from-belarus>.
will be replaced with conservative ministers. Belarus will likely lose all sources of external resources alternative to those Russian, which will further complicate the economic situation.
The government is expected to be making specific effective moves to modernize the national economy; however, it cannot disregard the opinion of the industrial and agricultural lobby and is short of competencies and expertise required in conditions of the global transformation of the world economic landscape. Russian and Ukrainian specialists objectively have better competencies. Private business owners and foreign specialists might be invited to the government as its members or advisors.
The situation will keep deteriorating in the traditional sectors of the Belarusian economy, except for some industries (pharmaceutical sector and instrument engineering). Under the circumstances, the authorities might opt for big privatization moves to gain additional resources. Russian oil majors and some European partners are interested in oil processing, whereas private Belarusian business and investors from China, India, and Latin America will be eager to buy into mechanical engineering companies. Belarus still has some privatization edge in the former Soviet Union: the state still owns the country's key assets and is capable of consolidating them to ultimately sell them the way potential investors want them.
Bankruptcies will persist in the private sector, alongside increasing numbers of M&A deals. In 2014—2015, many companies hit the bottom, and their owners are ready to sell. High costs will slow down the expansion of the outsourcing sector of the Belarusian IT industry. Market players will seek ways to cut costs and open offices in countries with cheaper workforce — India, Pakistan, Bangladesh, Vietnam, or even Poland and Lithuania.
The food sector will continue developing fast in 2016, with at least ten companies already offering competitive products in various segments of the global market. The IT industry will attract new players due to low entry fees, mobility, and relative independence from the state.
