For more than two decades, Belarus has been quite predictable politically and economically. A centralized, neo-Soviet state guided by an autocratic leader who ensured rising living standards and stability had seemed to serve the country adequately. However, the last two years of recession – which we expect will continue during 2017 – have shaken things up as the country was rocked by historic protests and a new low in relations with Russia in recent months. Are we seeing a fundamental transformation in Belarus? And if so, what does it mean for doing business in the country?
What has happened?
In February and March, Belarus suffered from the some of the most widespread protests in its history. Incited initially by the passage of the so-called “parasite tax”, which taxed unemployed citizens, the demonstrations snowballed into general anti-government grievances and a protest Lukashenko’s rule. The protests were rare in a few significant ways. Unlike in the past, when protests were isolated to Minsk, thousands also came out to the streets across the country in Gomel, Brest, Grodno, and other major regional cities. In addition, the protests developed spontaneously from the grassroots by citizens disenchanted with the country’s economic direction and worsening living standards.
Meanwhile, Minsk-Moscow relations hit one of their worst points since the fall of the Soviet Union. Starting in mid-2016, Russia cut oil shipments and refused to sell gas to Belarus at a reduced price, accusing Belarus of accumulating US$ 600 million in debt for deliveries. As a result, Belarus lost roughly 1.5% of its GDP in 2016 from the drop in the volume of the Russian oil it refines and re-exports, with continued losses into Q1 2017. Moscow has also delayed the delivery of a promised tranche of funds to help Minsk pay off external debts. Most recently, Putin skipped a meeting with Lukashenko at a summit in Sochi, instituted an agricultural ban on imports from Belarus, and implemented a border security zone in response to Belarus’ decision to waive visa restrictions to most Western countries. For his part, Lukashenko complained bitterly about the unfairness of the Eurasian Economic Union (EaEU) and its lack of benefits for Belarus, implicitly threatening to depart the group.
Belarus’s economy remains under considerable pressure. The continued low energy prices and weak demand from Russia, which dominates Belarus’ export sector, continue to weigh on growth. GDP fell by 2.6% YOY in 2016 and a further 1% YOY in the first two months of 2017, with agriculture the only sector seeing significant growth since 2015.
Internal structural issues are playing an important role in this downturn as well. High external debt payments, matched with weak forex reserves, are diverting government spending from the real economy. With state-owned enterprises (SOEs) constituting over 70% of economic production and employing the vast majority of the country’s workers, the reduction of government subsidies to SOEs has ravaged purchasing power: real disposable incomes fell by over 7% YOY last year and declined further in early 2017 (-4.5% YOY).
Most recently, matters have slightly improved. The protest action has calmed, having failed to destabilize the country. Belarus and Russia also settled the energy dispute, and Minsk will now see precious revenues stream back through its refineries. But it is clear that Belarus will continue to face both political and economic vulnerabilities for the foreseeable future.
What should MNCs do?
A country that once seemed so predictable and reliable is clearly changing. What should companies change about the way they approach the market?
First and foremost, work closely with your regional teams to get on top of policy changes as the market is changing, particularly in regard to demand. In addition, we advise our clients to:
- Segment your customers
- Firms should focus on the Minsk, Grodno, and Brest regions, which have performed more strongly than the rest of the country in 2016 and in Q1 2017: in the Jan-Feb period, these regions stagnated or grew, while national GDP fell by 1% YOY. Real disposable incomes likewise reflect these regional growth differences
- B2B firms should focus on more resilient sectors – agriculture, transportation, and manufacturing – which have sustained strong performance in comparison with the rest of the economy
- Adapt your product offering
- B2C firms should consider altering their product portfolio or changing their packaging in order to retain consumers who will likely be trading down for an extended period of time
- Create a contingency plan
- Belarus remains highly exposed to the risk of return to recession in Russia. This scenario could be caused by a sharp reduction in oil prices and would have a considerable negative impact on Belarus, considerably worsening its recession.
- A much deeper recession in Belarus could prompt much wide-spread domestic unrest. Depending on its severity, this could prompt Russian intervention. Such events would create significant uncertainty in the market, causing severe currency depreciation and much diminished domestic demand
While many negative developments define the changes we are seeing in the country, many positives remain the same.
Despite the prolonged economic downturn, the Lukashenko regime is firmly in control and the potential for political instability is low this year. In addition, the market is easily serviceable geographically, enjoys access to the EaEU, and is considered to be relatively less corrupt than other CIS countries. Most importantly, Belarus has a highly-urbanized population with a relatively high spending capacity. With careful risk management, and some adaptation in business strategies, companies can continue to take advantage of the opportunities in Belarus.
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