By Siarhej Karol
The "Belarusian economic model" seems to defy economic theory. An economy entirely consisting of the old, unreformed Soviet industrial base, manages to churn out high single digit growth in gross domestic product (GDP), provides guaranteed monthly income and full, if not always full-time, employment, even as it remains in a state of complete isolation from the modern world. It is this model that causes Belarusians to feel fearful of changes that may unleash a chaos, criminality, and suffering associated with reforms in Russia and Ukraine -- the reference countries for the average Belarusian.
The model is based on three foundations: a favorable valuation of Russian energy, efficient internal controls, and supply-side problems that beset the rest of the former USSR, where most Belarusian output is exported.
Russia charges Belarus $47 per 1,000 cubic meters of gas and $27 per barrel of oil compared to world prices of $230 and $60, respectively. For a country consuming about 20 billion cubic meters of gas per year and 250,000 barrels of oil per day this amounts to direct fiscal support of $6.6 billion annually. Besides consuming oil for its own needs, Belarus is also reselling it in the form of refined products processed at the two refineries whose capacity far exceeds the country's internal needs. Statistics confirm that the country imports about 100,000 barrels a day more than it consumes.
The overall usage of oil began to increase from 2002, the time of the first jump in oil prices, and has continued upward since. According to a study by Belarusian economic expert Leanid Zaika, in 2005 the share of Belarusian exports to Russia and the Commonwealth of Independent States was only 45 percent, compared to the stable 80 percent in the preceding decade. The main user of Belarusian exports (36 percent) is now Europe, by way of buying refined petroleum. Purchased at $27 and sold at $60, this petroleum yields 100 percent profits, or $1.3 billion a year of not even a subsidy, but pure disposable income to the state.
The total effect of the energy price discount amounts to over $7 billion a year, or 30 percent of the nation's GDP. This is a staggering proportion -- even in the United Arab Emirates this share is under 10 percent -- but is it really a subsidy? President Vladimir Putin of Russia thinks so. Marshall Goldman, a Harvard economist, quotes him as affirming the use of energy subsidies for political influence in the near abroad. President Alyaksandr Lukashenka of Belarus disagrees. "The notion that I am supported by the Kremlin is absolutely absurd," he stated earlier this year. According to him, the discount on the Russian fuel is really a barter payment for transit through Belarus, for which Russia nominally pays very little.
Simple arithmetic can check this hypothesis: the $183 per 1,000 cubic meters that Russia loses by selling gas to Belarus equals a transit charge of $18 per 1,000 cubic meters per 100 kilometers. The European average is $2.5. So, by bartering $183 away from the price they could charge, the Russians effectively pay Lukashenka seven times the European average cost of gas transportation. Figures for oil are not readily available, but it is reasonable to expect a comparable valuation.
Whether this is a fair deal is in the eyes of the beholder, but it is the valuation on which the entire Belarusian economy is based. It supports the second main feature of the Belarusian model -- its relatively effective management. Lukashenka, who portrays himself as an anticapitalist crusader, is in fact the country's chief businessman. He presides over a company that has reached the scale of a nation. Almost all Belarusians work for the state enterprise, run by the "vertical," a hierarchy of administrators appointed by the president. This state-owned corporation, Belarus Inc., is a multiline conglomerate with revenues of about $25 billion that would place it in the top segment of the Fortune 500 list. It employs over 4 million workers and controls the services, health-care, and education sectors.
While controls disintegrated in Russia and Ukraine, in Belarus they were preserved and even improved by introduction of the vertical and appointment of the personally loyal corps. As Zaika points out, for some time this created a competitive advantage -- while the dilapidated Russian competitors went through catastrophic reforms, their output fell, creating a gap in supply of low-quality, cheap goods, which Belarusian enterprises were able to fill. Exports to Russia were stable throughout most of the Lukashenka reign, helped in part by an arrangement that some payment for Russian energy comes in the form of Belarusian products.
What Could Happen
Two significant risks threaten this model. First, is the risk of a repricing of the energy valuation if Russia gains a controlling stake in Beltranshaz, Belarus's gas-transport company. Deprived of its transit monopoly, Belarus would lose a key bargaining advantage and could be forced to pay higher rates. In practice, however, the current valuation is likely to continue, as political considerations will likely prevail as long as Belarusian policies remain in the Russian wake. Even so, Lukashenka has made statements implying that he fully understands his dependency on Russian energy and is seeking solutions with nuclear reactors and more frugal energy use.
A greater risk comes from within the system. In the 12 years of Lukashenka rule there has been no investment to modernize the 1950s asset base that is now 80 percent worn out. The oil windfall of recent years has been spent, not invested in the future. In the meantime, Russian competitors are beginning to gather fruits of the painful restructuring, and foreign competitors produce in low-cost locales. This is beginning to show in the numbers -- Zaika's study cites 2005 decreases between 10 percent and 70 percent in key Belarusian exports to Russia, and inventories of unsold products are growing. As the industrial output declines, the Belarusian GDP relies increasingly on refining Russian oil for speculation.
This opens the future for several scenarios. One could be called "Singaporization." Lee Kwan Yu ruled Singapore for 30 years as a dictator but he also opened the country up for trade, welcomed foreign investors, guaranteed their rights, and achieved the level of living that surpassed that of Britain by using a mix of market economy and state planning. The Belarusian regime is well positioned to do the same, more likely seeking partners in the East than in the West, but its insecurity about foreign investors and bad reputation may impede this scenario.
Another scenario is a complete change of power. Besides being unlikely, it also poses the danger of energy repricing, as in Ukraine. The disintegration of internal controls that scenario would provoke could mean a delayed period of chaos and potential return to populism.
Finally, conserving the current arrangement is also possible, as long as Russia does not challenge the status quo in exchange for political subservience. This would not remove the problem of the worn-out assets and obsolete technologies, but it seems to be the bet the Belarusian president is making at the moment.
Siarhej Karol, a chartered financial analyst, is a financial manager at American International Group (AIG), a global financial services company.