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					This issue has been prepared by                                        We would like to express our gratitude to:
the International Finance
Corporation’s Business
Associations Capacity
Building Project:                                                                         Leonid Zlotnikov
                                                                                          Economic expert
                Olga Godunova                                          Holds a PhD in economics and focuses on
                                                                         economic forecasting methodology and
                is the Analytical Center Manager                             problems of transitional economies.
                She is an economist with seven years of
                practical experience in private enterprise
                promotion and specializes in finance
                management



                                                                                   Yaroslav Romanchuk
                                                                              President, Mizes Research
                Valeri Fadeev                                                  Center of the “Strategiya”
                is the Project’s leading legal expert                                  Analytical Center.
                and an honored lawyer of the
                Republic of Belarus
                For 20 years he worked in the apparatus of the
                Council of Ministers. He specializes in economic
                law. He has authored and co authored a number of
                books and numerous articles on legal regulation of                  Natallya Zhernosek
                private business.
                                                                         Director of the Department for
                                                                              the Management of State
                Vyacheslav Zhuk                                              Property of the Ministry of
                is a lawyer with three years of                                    Economy of Belarus.
                practical experience in the
                banking sector
                Over the last four years he has specialized
                in economic law.
                                                                                 Konstantin Ermolenko
                                                                           Chairman of the Board of the
                                                                            Belarusian Farmers’ Union.

                Nadezhda Sinelnik
                is a Project’s consultant
                She holds an MBA from the International
                Graduate School of Business and
                Management of Technology of the
                Belarusian State University and has been                                Sergey Balykin
                involved in small business development                      Chairman of the Executive
                since 2000.
                                                                     Committee of Alternativa XXI NGO.

Michail Sokolov is the Chief
Translator/Intepreter for IFC Belarus.
Lise Thierfelder is the Editor
of the English language edition.


     Views expressed in this publication are the personal opinions of the authors and do not always express the opinion
     of the World Bank, the International Finance Corporation (IFC) and the Swedish International Development
     Cooperation Agency (SIDA).
     When reprinting materials contained herein reference to this publication is required by law.
     Dear Readers,

      The IFC’s analytical bulletin was originally unveiled in September 2000. Since its inception, it
has taken up issues which were of acute interest to private entrepreneurs, particularly small businesses.
The bulletin has brought together representatives of business associations, state officials and independent
experts. Each issue also runs analytical materials penned by IFC Belarus experts.

     Opinions and assessments of events as well as developments and legal acts voiced by the authors
vary widely at times. This diversity of viewpoints presented and their juxtaposition are the features of
the analytical bullet most prized by our readers. We believe that this approach will ultimately lead to
the adoption of the most optimal decisions and thus we have always sought to stick to an unbiased and
objective line. It is up to you to judge whether or not we have succeeded.

      This issue will be retrospective to a certain extent. On the one hand, we will remind you of the
most topical problems raised by this publication, and on the other hand, we would like to show you
what changes have occurred over the last few years. The articles have been authored by the people
who have previously written on the subject in the bulletin. We hope that you will find this time trip
into the not-so-distant past interesting. Also, it will give you some idea about what has been done and
which problems have remained unresolved. We will be very happy if the materials contained herein
will come in handy for you.


                                                  The Staff of the International Finance Corporations’
                                              Belarus Business Associations Capacity Building Project
         CONTENTS

Economy

1. Liberalization: A False Dawn .................................................................................. 3
“Over the last three years, liberalization in Belarus has acquired an uncanny resemblance to the
mythical Loch Ness monster. Everyone has been talking about it, but no one has actually seen it.”

2. Prices: Slow Liberalization ...................................................................................... 7
“Consequently the state price control system, which took its shape in 1999, has remained largely
unchanged. Monopolists, construction companies and retailers are the most subject to price controls.
The state sets fixed purchase prices in the agricultural industry and fixed tariffs in the housing, passenger
transportation and communication sectors. It also stipulates prices of socially significant goods,
alcoholic beverages, fuel and theater tickets. Consequently, it is extremely difficult to find a good in a
Belarusian store whose price is not controlled by the state.”

3. Economic Transformation and Property Reforms ................................................ 9
“Belarus has opted for a step-wise and evolutionary approach to privatization. The state is actively
engaged in the formation of a market infrastructure and renders support to the key sectors of the
national economy by means of direct subsidies and tax preferences.”

Business

4. Development of Farming in Belarus ..................................................................... 13
Our correspondent Veronika Cherkasova talks with the Chairman of the Board of the Belarusian
Farmers’ Union, Konstantin Yermolenko.

5. Business Associations .............................................................................................. 16
“The polled entrepreneurs would also like the business associations to boost their ability to effect
change in the entrepreneurial environment at both national and local levels. The business associations
have been investing significant efforts to achieve this.”

Law

6. Registration of Legal Entities and Individual Entrepreneurs ........................... 18
“In a word, it is time-consuming and expensive to set up a business in Belarus. Hopefully the Belarusian
authorities will take steps to remove the barriers hindering the emergence of new economic entities.”

7. Licensing of Business Activities ............................................................................. 22
1. Key provisions of the new licensing rules: the pith of changes
2. Assessment and Impact of Licensing Changes

8. Ownership Rights .................................................................................................... 25
“... The one-step-forward-one-step-back approach to ownership rights is still very much in evidence in
Belarus. All positive developments are undone by the state’s attempts to regulate and control issues
which are best left to the market and free competition.”

2
       ECONOMY

                                                                                          Y. Romanchuk
Liberalization: A False Dawn
Over the last three years, liberalization in Belarus has acquired an uncanny resemblance to the
mythical Loch Ness monster. Everyone has been talking about it, but no one has actually seen it.
Having passed thousands of legal acts out of inertia, Belarusian policymakers have been discussing
a constantly increasing degree of economic freedom. They are like the hotel and bar owners in the
vicinity of Loch Ness, who are trying to lure in tourists from all over the world. Experience suggests
that romanticism and the shroud of mystery surrounding the lake in Scotland are far more of an
attraction for an adventure-loving public than an allegedly liberalized investment climate in Belarus
for foreign and domestic investors.

Without Freedom and Foreign Investments

     By liberalization we mean not only the scrapping of administrative price controls, but rather
primarily a greater degree of freedom allocated to the private investor, entrepreneur and consumer in
monetary, fiscal, trade and investment activities. We mean the state’s disengagement from the economy
and the promotion of competition in different market segments, including the so-called "natural
monopolies." Finally, by liberalization we imply the lowering of market entry and exit barriers.

      Belarusian economic legislation over the last three years, the application of laws, the assessment
of the Belarusian economy by different international organizations, and the results of opinion polls
conducted among directors of Belarusian companies all convincingly demonstrate that liberalization
has never taken off in Belarus and instead the reverse trend, namely a tougher administrative control
over the economy, is very much in evidence. Table N1 below features the parameters of the Belarusian
business environment, outlined by World Bank experts. The notion of a liberal economy cannot be
stretched far enough to make sure that Belarus fits in.

      Over the last three years, the institution of private property has been significantly weakened. The
state has remained the lead investor, lawmaker and judge, all rolled into one. Not surprisingly, Belarus
has been unable to leave the group of totalitarian economies in terms of economic freedom (coming in
at number 151 in 2003 and 145 in 2004, out of 158 countries surveyed by the Heritage Foundation).
When it comes to direct and portfolio foreign investments, Belarus has not broken away from its self-




                                                                                                       3
       ECONOMY

imposed isolation. In terms of reformation of companies, infrastructure and the banking sector, Belarus
is sulking among the three least-developed countries of the 27 European and Asian nations in transition,
according to the European Bank for the Reconstruction and Development (see Table N2). Over the
last 12 years, Belarus has attracted only 40.00 US dollars per capita in foreign direct investment,
excluding funds invested by Russia in the pipeline construction. It is one of the worst showings in
Central and Eastern Europe. The share of foreign fixed investments has not exceeded 1%. Headline-
grabbing official promises to significantly improve the investment climate have not materialized into
concrete laws and ordinances. Belarus still doesn’t have a single pilot green field investment project,
about which the authorities could say: "This factory would not have gone up in Belarus, if we hadn’t
pushed forward with liberalization and improved business conditions."

Prices are Controlled and Private Business is in a Tight Spot

      Over the last three years the share of state-regulated prices has remained stable and, as of early
2004, ranged from 22% to 23%. In late 2003, the government resorted to an unprecedented measure
and decreed a 10% reduction of retail prices, which brought down the inflation rate and entailed massive
losses for retailers. Apart from direct price controls, every price increase should be approved by state
agencies, which also strictly control costs and cap profitability in different segments of the economy.
In addition to formal tools to regulate trade the authorities, particularly at the local level, make use of
a variety of informal instruments to curb competition and put non-local manufacturers at a disadvantage.

      Regional and city executive committees force retailers to give preference to locally-made goods.
Not only imported goods, but also products from other regions of Belarus are discriminated against.
One of the more popular instruments in this regard is reservation of the best retail space for locally-
manufactured goods and limitation of shelf space given to goods of non-local manufacture. Over the
last few years, the state has expanded the application of certain legal acts to all enterprises regardless
of their forms of ownership, which further circumscribes property rights. Even privately-owned retail
outlets are not free to carry the goods they choose, since this will expose them to hefty penalties. In
2004, the authorities have unleashed a number of measures aimed at forcing private companies to fund
the resuscitation of floundering agricultural companies. No clear-cut property rights safeguards have
been offered.




4
       ECONOMY

      The issue of the golden share’s efficiency has also sparked off discussions for the last three years.
The golden share proponents have not only failed to empirically prove the feasibility of this instrument,
but rather have succeeded in expanding its application. This puts all privatization deals concluded
prior to 2004 under the threat of possible revision. At least, revisions have now been made legally
possible. It is hardly surprising, therefore, that foreign investments still bypass Belarus.

      Amendments introduced to the bankruptcy law are yet another example of "de-liberization."
These changes have in effect blocked the bankruptcy procedures. A more-or-less progressive law had
not been implemented as it would have disadvantaged state-owned enterprises, more than 60% of
which are in fact broke. The economy, which lacks the legal mechanism to weed out mistaken investment
decisions, namely bankruptcy procedures, not only fails to accord protection to creditors but also
gives rise to a whole range of negative developments. First, it wards off investment and thus hinders
modernization of the economy. Second, it demoralizes economic entities, which are being punished
for efficiency (high taxes and mandatory payments) and awarded for losses (debt write-offs, loans to
pay back taxes, and exemptions from mandatory budgetary payments).

Far from the WTO and even further from Russia

      The degree of liberalization of the Belarusian economy is clearly evident in the snail pace of
Belarus’ World Trade Organization (WTO) membership negotiations. The WTO accession for a Central
or Western European country takes on average from five to seven years. Belarus has been involved in
these talks since September 2003 and has not even come close to fulfilling the requirements to liberalize
the consumer goods and services market. Belarus is even in violation of a WTO rule, prohibiting
direct financial assistance to economic entities. This provision is also entrenched in Belarusian-Russian
agreements. In 2003 the Belarusian authorities extended 500 million US dollars in direct financial
help to 3,500 enterprises. For the sake of comparison, Belarusian industry earned about 1.2 billion US
dollars in 2003. Consequently, 41.7% of all profits generated by all Belarusian industrial enterprises
are in fact money earned by other sectors and transferred to industrial enterprises through a system of
state transfers.

      The situation is much worse in the agricultural sector. Last year this sector received 1 billion US
dollars in financial and resource assistance from the state. In 2003, agriculture produced 10.2 million
US dollars in losses. This state of affairs is hardly possible in a liberalized economy. Such a policy in
the industrial and agricultural sectors testifies to the fact that private investments are being crowded
out by state financial infusions. This is complemented by protectionist practices, which are particularly
evident in relation to a range of Russian-made goods (bread, flour, baked goods, oil derivatives, etc).

     A temporary halt to imports of meat and dairy products as well as wool from Russia, introduced
in April 2004 in connection with the outbreak of foot-and-mouth disease in the Amur Region, is just
another measure to protect the domestic market. In early 2004 Russia’s Ministry of Economic
Development said that Belarus used 13 different instruments to shield its domestic market from Russian
goods. Consequently, over the last three years Belarus has not only drifted away from the internationally-
accepted norms of liberal economy but also stepped up its mercantilist policies in breach of previous
agreements with Russia. De facto, the agreements between Belarus and Russia about a free trade zone
and customs union are now extinct.

    Liberalization as set forth by the WTO also envisions the creation of a competitive financial
market. Over the last three years, the degree to which the state monopolizes the financial sector has

                                                                                                         5
       ECONOMY

not decreased. The share of foreign capital in the banking
sector does not exceed 10%. Belarus does not have a single
private pension or mutual fund. The state has in effect
restored its monopoly in the insurance industry. Credit
policies of commercial banks are still subject to stiff
administrative controls. The state also hinders the
development of certain financial instruments. Both the
extension of credits to loss-making companies to cover their
payroll, obligations and the siphoning of funds from banks
and enterprises to the state short-term bonds have become
hallmarks of the Belarusian market. Entry into the financial
services market is still made difficult by excessive
administrative barriers and the inhospitable legal
environment. Overly tight regulation of both the financial and real sectors has resulted in a situation
where banks have excess funds and a shortage of promising projects. In addition, the low-quality
justice system and restrictions imposed on notaries, lawyers and accountants have also distanced Belarus
from the standards of a liberal and competitive economy.

Belarus has Remained Uncompetitive

      In 2001-2003 Belarus did not make it in the list of the 102 most competitive economies in the
world in terms of macro and microeconomic indicators. The World Economic Forum has recently
introduced the following two economic indicators: a growth competitiveness index and a business
competitiveness index. To calculate the first index, auditors, managers, financiers, and consultants
acting on behalf of transnational corporations, investment banks, international organizations and research
institutions assess 1) the quality of macroeconomic policy; 2) the quality of state institutions; 3) the
level of technological development; 4) the efficiency of state expenditures; and 5) credit reliability.
The business competitiveness index measures the quality of the microeconomic environment. Its key
components are as follows: 1) production and planning strategy (staff training, brand development,
comparative advantages, R&D expenditures, integration in a regional trade system, use of western
licensed technology, etc); and 2) quality of the microeconomic business environment (physical,
technological and administrative infrastructure, human resources, securities market development,
internal demand, copyright protection, availability of local suppliers, efficiency of bankruptcy
procedures, presence of market-distorting subsidies and restrictions). The fact that the World Economic
Forum still does not rate Belarus testifies to a highly critical attitude of the international community to
the Belarusian economic policy as a whole and to liberalization Belarus-style in particular.

     Inefficiency of the Belarusian economy translates to a great extent into higher state consumption
and a heavier tax burden. All promises to liberalize the tax and budget legislation have not gone
beyond words. The revenues of the 2003 consolidated budget grew by one percentage point to 36.2 %
of the GDP (excluding social protection and innovation funds), which surpassed the government’s
projections of 33.9% of the GDP. In the first quarter of 2004, the revenues of the consolidated budget
(excluding the social protection fund) increased to 36.9% of the GDP. If the social protection fund is
taken into account, this total increases to 46.3% of the GDP. If innovation funds are thrown in, the
share of funds redistributed through state agencies will be in excess of 50% of the GDP. These figures
prove that neither the tax nor the budget policy of Belarus have seen any liberalization.


6
       ECONOMY

                                                                                              L. Zlotnikov
Prices: Slow Liberalization
      In 1996, the Belarusian government adopted an economic program featuring a soft monetary
policy. This program not only spurred the GDP in 1997-1998, but also gave rise to the highest rate of
inflation in all of the former socialist countries. In 1999 consumer prices increased 3.94 times.
Vanquishing inflation became the primary objective of economic development. The authorities, however,
did not resort to the internationally-recognized practice of enforcing a stricter monetary policy.
     The year 1999 became a watershed year for this pricing policy, as it saw the adoption of legal acts
which introduced blanket state controls. The parliament passed the Law "On Pricing" (April 1999),
which outlined the application of controlled pricing for: 1) goods (services) of economic entities
dominating the Belarusian market; and 2) certain socially-significant goods. The law also contained
an exhaustive list of price regulation methods.
      The Law "On Pricing" set forth an overly broad scope of pricing controls, as the registered
monopolists at both national and local levels run to more than a thousand companies, which account
for the bulk of goods made in this country. Once the Customs Union came into being, however, almost
all companies shed their status of "monopolist" in the common market of Russia and Belarus. (It
should be noted that Belarus’ anti-monopoly measure is still intact and is used as an indirect price
control tool.) The list of "socially-significant" goods was also very extensive, including such items as
dairy and meat products, fish, bread, cereals, potatoes, vegetables, utility and customer services, washing
powders, matches, etc.
      The Law "On Pricing" passed by parliament proved to be too "liberal." The private sector, in the
form of small business, remained virtually outside the purview of this document, as small companies
did not fall into the category of monopolists and were hardly involved in the manufacture of socially-
significant goods. The law did not extend to prices of goods and services important to both bureaucrats
and ideologists of the command economy (trade, for example). Consequently, other normative acts
introducing blanket state price controls followed within a month of the law’s adoption.
     First, the Ministry of Economy adopted a new Regulation entitled "On the Procedure for Formation
and Application of Prices and Tariffs," which sought not to explain the already adopted law, but to
implement presidential instructions. The Regulation kept the blanket state price controls in the
construction industry in place. Prices of construction materials and equipment used in state-funded
construction projects were to be fixed as well. This provision did not apply to privately-financed
construction, however. Mark-up caps for retail and wholesale trade were also introduced. This ran
counter to the law, which only allowed for the establishment of such limitations for monopolists and
socially-significant goods.
      Secondly, Presidential Decree N285 "On Certain Measures to Stabilize Prices (Tariffs) in Belarus,"
was introduced, dated 19 May 1999. This decree resorted to a very simple means of resolving the
problem of growing prices—price increases on goods made in Belarus were to be within the maximum
price indices, which were to be set by the Cabinet of Ministers every quarter. In addition, the decree
set forth the range of goods whose prices were to be regulated by specific state agencies. This
arrangement has remained largely unchanged, the only exception being the separation of powers between
the Cabinet of Ministers and the Ministry of Economy. The principal price control tools are mark-up
caps and limitations imposed on the profitability of certain goods.
     Although these all-encompassing price controls did bring down the inflation rate because the
price indices were set below inflation, they naturally produced a number of negative economic
                                                                                                         7
        ECONOMY

consequences as well (see L. Zlotniokov, "Hard Sought Solution," Issue N3 of the analytical bulletin).
Their hand forced by economic pressures, the Cabinet of Ministers had to gradually expand the list of
goods exempt from price controls.
      In contrast to its first ordinance N933 dated 18 May 1999, where the government did not make a
single exemption, the second ordinance N176 (9 February 2000), which stipulated price indices for the
first quarter of 2000, removed diamonds from the list of goods subject to price control. Designer
furniture, fashionable clothes, food catering services and some other goods were also freed from price
controls in the second half of 2000. The second half of 2001 witnessed a massive expansion of the list
of goods whose prices were no longer fixed by the state. This list no longer contained the names of
individual goods, but rather those of industries (goods produced by the metallurgy sector, goods
manufactured by the machine building industry, etc.).
      Since the fourth quarter of 2001, the government has moved away from setting quarterly price
indices. To reflect this development, Decree N285 was amended and instead instructed the Cabinet of
Ministers to establish these indices "as need be." The practice of curbing price growth by means of price
indices was resurrected in 2004 when the Economy Ministry came out with Ordinance N9, dated 19
January 2004. This document introduced "The Instruction on the Procedure for Changing Prices (Tariffs)
of Goods (Services) Subject to State Price Controls in the Applicable Legislation." This instruction limits
price increases to 1.4% per month for all goods whose prices are controlled by the state. Company
directors should pay particular attention to this document in the context of "The Plan of Action of the
Belarusian Government and the National Bank to Facilitate the Fulfillment of the Social and Economic
Projections in 2004," which envisages the verification of "economic justification of prices."
      Consequently the state price control system, which took its shape in 1999, has remained largely
unchanged. Monopolists, construction companies and retailers are the most subject to price controls.
The state sets fixed purchase prices in the agricultural industry and fixed tariffs in the housing, passenger
transportation and communication sectors. It also stipulates prices of socially significant goods, alcoholic
beverages, fuel and theater tickets. Consequently, it is extremely difficult to find a good in a Belarusian
store whose price is not controlled by the state.
      Some positive developments in this realm were in evidence in early 2004. The list of socially
significant goods subject to price controls was substantially reduced. It presently has only a few specific
goods (such as cheap kinds of bread and dairy products, and certain types of baby food and sugar).
     The instructions for treating expenditures as production costs have seen significant changes.
Since January 2004, companies can account for travel expenses, fees for utilization of natural resources,
and environmental charges as production costs. Previously, only a portion of these expenditures could
be included in production costs. All caps imposed on the inclusion of marketing, advertising outlays
and consulting fees in production costs have been removed. When it comes to taxation, however, the
previously imposed restrictions remain in force.
      The fight against corruption is moving away from administrative regulation to monetary
instruments, which were previously flatly rejected. In 2004 the government will no longer use emission
loans to finance its expenditures, a practice much in evidence in previous years.
     The introduction of monetary instruments for combating inflation will lessen the role and obviate
the need of administrative price controls. However, the Belarusian economic model still has other
ingredients, including social justice and a negative attitude towards profits, which stand in the way of
free market pricing.
8
       ECONOMY

                                                                                           N. Zhernosek
Economic Transformation and Property Reforms
     The switch from a planned to a market economy set in motion serious economic reforms in
Belarus. The linchpin of this process has always been the reform of state property.

      State property reform in Belarus has been ongoing since late 1990, when the laws on ownership,
lease, companies and a number of government ordinances regulating property issues, state property
management, anti-monopoly, destatization and privatization procedures were adopted. This facilitated
the privatization of 19 federal state companies and 42 municipal enterprises in 1991 alone.

      In 1992 a total of 189 companies, employing 47,000 people, were sold off. Of these, 17% were
federally-owned entities. This is how the process of reforming state property got off the ground. It
should be noted that in 1991-1992, destatization and privatization were primarily initiated by workers’
collectives of fairly small companies (in terms of the number of employees). These entities were, as a
rule, transformed into either so-called "people’s enterprises" or joint stock companies at a later stage.

     The formation of a legal framework allowing further privatization of state property was an important
phase in the Belarusian privatization. This actually began to occur in 1993 with the adoption of the
"Law on Destatization and Privatization of State Property" as well as privatization vouchers and
government ordinances regulating the process of reforms.

     The year 1994 was the most successful in terms of reforms, as 641 federally-owned and municipal
objects were privatized by different methods. This amounted to more than 15% of all entities sold off
over the reviewed period.

       As of January 2004, almost 3,900 entities were privatized. Of these, 1,800 were corporatized and
a little fewer than 1,400 were sold at either auction or tender. Privatization made the most significant




                                                                                                       9
       ECONOMY

headway in wood processing, where all companies were reformed. More than 70% of entities were
privatized in light industry, trade, public catering and the agricultural processing sectors.

      The privatized companies presently employ more than 900,000 people. A particular feature of
the reformation of federally-owned property in 2002-2003 was the corporatization of large industrial
enterprises. Restructuring was applied in some cases.

     To increase efficiency and create a more enabling environment for restructuring and the attraction
of investments, the following petrochemical enterprises were transformed into open joint stock
companies in 2002: the Novopolotsk-based Naftan and Polimir; Azot in Grodno; the Belarusian Tire
Factory in Bobruysk; and Khimvolokno in Grodno and Mogilev. These companies provide employment
for 60,000 people.

     The year 2002 also saw the corporatization of the following major industrial companies: the
Brest-based Electric Bulbs Plant; a print shop in Minsk; Steklovolokno in Polotsk; and the Gorizont
TV factory, to name a few.

      In 2003 the Cabinet of Ministers decreed the creation of 50 open joint stock companies (53.2% of
the total number of entities slated for privatization). Another joint stock company, Beltransgas, was
set up in accordance with the Cabinet of Ministers’ Ordinance N127 dated 3 February 2003, and the
establishment of six more joint stock companies was initiated by the workers’ collectives of these
enterprises. Consequently, a total of 57 open joint stock companies were created on the basis of
federal property in 2003.

      The companies corporatized in 2003 employ 34,000 people. The value of the state assets
contributed to the authorized capital of these entities exceeds 1.6 trillion rubles. The employees of the
reformed companies and the population were able to exchange 40 million rubles worth of privatization
vouchers for shares in these companies. The privatization of state property generated 3.3 billion rubles
in receipts for the state budget.

      In the course of the preparation of corporatization projects, state commissions identified and
registered about 1,800 objects (buildings, structures and unfinished construction objects). The re-
appraisals of buildings and structures carried out by these commissions revealed discrepancies of 19.4
billion rubles.

     Privatization of municipal property proceeded at a faster clip. In 2003 a total of 177 communal
companies were sold off. Of these, 169 (92%) were corporatized, 14 were privatized at auction or
tender, and one company was bought out. Larger municipal enterprises are also being privatized.

     The following industrial enterprises were among those transformed into joint stock companies:
the Beryoza Tinned Meat Factory (1,350 employees); Baranovichi Food Processing Plant (802
employees); Baranovichi Tinned Meat Factory (710 employees); Brest-based Metallurgist Company
(416 employees); Glubokoye Tinned Food Plant (341 employees); and the Vitebsk Brewery (226
employees).

      Fourteen objects were sold off at auction and/or tender in 2003. Most of these were food catering
(seven) and retail trade (three) companies, each employing about 20 people. These figures suggest
that this privatization method was rarely used. The sale price of these objects was on average 2.1 times
higher than the starting price. The aggregate value of the objects sold stood at 725.4 million rubles.
10
       ECONOMY

     The Brest Region led the way in terms of privatization with 53 objects sold, followed by the
Gomel Region with 35, the Vitebsk Region with 28, the Mogilev Region with 27, and the Minsk
Region with 16. The Grodno Region and the City of Minsk each privatized nine objects.

      Unused or underutilized municipal property was alienated in 2003. A total of 557 objects were
sold off. Of these, 267 objects (47.5%) went to a pre-determined buyer, 219 were auctioned off and 33
were sold at tender. It should be noted that in order to boost revenues from the sale of state assets, it
would be advisable to move away from sales to a pre-determined buyer and make more use of auctions
and tenders.

     According to the territorial state property management funds, a total of 309 auctions and 38 tenders
were held in 2003. This attracted the participation of 600 buyers. As many as 1,451 objects went on the
block and 289 (20%) were sold off. More than 71% (or 1,032) came up for sale again and 158 were




                                                                                                      11
        ECONOMY

auctioned off. Only one object was sold for one minimal monthly salary. It would be worthwhile to use
this method more widely, as only 15% of the objects offered for sale for the second time found a buyer.
The aggregate value of the objects sold at auction and tender in 2003 equaled 21.6 billion rubles.
     The revenues generated by the sale of state assets and municipal property for local budgets, as
well as the dividends on state shares in joint stock companies, stood at 34.2 billion rubles—well in
excess of the projected amount set at 30.5 billion rubles.
     It should be noted that private companies have traditionally outperformed state enterprises, as
private businesses score better in terms of output growth, profitability and employee compensation.
Therefore, the rationale behind privatization and expansion of the private sector is not in question. The
pace of the transformations, however, is a debatable issue.
     Belarus has opted for a step-wise and evolutionary approach to privatization. The state is actively
engaged in the formation of a market infrastructure and renders support to the key sectors of the
national economy by means of direct subsidies and tax preferences.
      The process of reforms run parallel to research, studies of international experience and staff
training. The legal framework is also being modified by amending the current laws and legal acts, as
well as introducing new documents in a bid to make privatization more liberal and to create conditions
for the attraction of domestic and foreign investors.
      The near-term principles of the state policy, as well as the priorities and objectives in the realm of
state property privatization, are set forth in the Concept for the Management of State Property in
Belarus for 2001 through 2005. The concept stipulates that corporatization of companies with up to
500 people on their books should be completed by 2005.
      Transformation of open joint stock companies with the subsequent sale of shares held by the
state to domestic and foreign investors will remain the key privatization method. The restructuring
of large industrial enterprises calls for a case-specific approach and a thorough selection process
for a potential strategic investor.
                                                               The range of privatization methods will be
                                                          expanded to include market flotation and over-the-
                                                          counter sales of shares as well as Dutch auctions.
                                                          A total of 233 objects are slated for privatization
                                                          in 2004. Of these, 233 will be corporatized and
                                                          10 will be sold at auction or tender.
                                                               In conclusion, it could be said that although
                                                          the Belarusian model of property reform and
                                                          privatization does not lay claim to the status of
                                                          an international model, it does have a fair
                                                          amount of advantages to recommend it since
                                                          many of the Belarusian macroeconomic
                                                          indicators are assessed as positive by renowned
                                                          Belarusian and foreign experts alike.
                                                              For more detailed information about
                                                          economic reforms in Belarus, please go to
                                                          www.main.gov.by.
12
       BUSINESS

Development of Farming in Belarus
Our correspondent Veronika Cherkasova talks with the Chairman of the Board of the Belarusian
Farmers’ Union, Konstantin Yermolenko.

     Q. In an interview published in the December 2001 issue of the analytical bulletin entitled
     "Small and Medium Business in Belarus," you outlined the state of affairs in the Belarusian
     agricultural sector. You also talked about the problems encountered in the course of reforms
     and held out hope that some changes may be in the making (including land ownership). How
     would you describe the present-day situation?

      A great deal has changed since then. The mindset of the people charged with running agricultural
production experienced a sea change. It has become patently obvious that the agricultural sector is in
dire need of drastic reform, as over the intervening years the destructive trends have continued apace.

     A sort of universal approach to the reformation of the agricultural sector has been developed. It
envisions the transfer of loss-making state and collective farms to privately-owned entities, including
private farmers. As of last month, the assets and land of 22 state and collective farms were handed
over to private farmers. This process, however, is highly controversial, as the transferred farms are
diplomatically described as inefficient, loss-making and bankrupt, whereas in reality they simply can
no longer be considered economic entities. Consequently, 2,500 collective and state farms should be
shared out between 2,500 private farmers. Thus each farmer gets a collective farm. This defies logic,
as a farmer who normally cultivates 100 hectares of land is now expected to turn around an entity
which is 20 or 30 times larger than his original estate.

      Over the last few years certain forces pushing for the review of land ownership by farmers have
emerged in Belarus. They seek to deprive farmers of their hereditable land title and substitute it with
a lease. From where I stand, this will not effect any changes since I believe that this issue is beside the
point. It does, however, breed confusion and fosters even more distrust of the authorities. I think that
the powers-that-be are aware of the need to do something, but they have only a foggy idea of what
exactly should be done and where to start. Most of the rural residents are not panting to either lease or
own land. Now is not the time of the revolutionary changes seen in the early 1990s, when the
overwhelming majority of people were confronted with the need to alter their lives. The period of
romanticism is over and tough economic realities have set in. People are sober-minded about the issue
of land ownership. "I could take a plot of land and what next? Is the state capable of helping me?" We
are fully aware of the fact that state support of start-up farmers has come to a close.

     Q. In 2000 you said that "catastrophic processes related to the disintegration of the agricultural
     sector are objective." Has the state adopted any measures over the years to stem this process
     and how effective have these measures been? What do you think should be done to improve
     the situation?

     No doubt, some measures are afoot. Over the last several years prices have reached the level,
making the production of milk and meat profitable. However, as production efficiency is low, even
good prices cannot save the day.

      In contrast to other former Soviet Republics, the agricultural sector in Belarus is the primary
recipient of state subsidies. The fund for the support of agricultural producers and agrarian research

                                                                                                        13
        BUSINESS

annually receives about 1.3 trillion rubles (500 million US dollars). Of these, 1 trillion comes from
off-budget sources. On average, one hectare of arable land receives about 70 US dollars in state
subsidies. This accounts for about half of the cost of the produce generated by one hectare.




     In addition, the state extends certain privileges to privately-owned entities and farmers who are
prepared to take over loss-making collective and state farms. As the new companies act as successors,
they will have to assume any debts racked up by these collective and state farms.

      The question of what needs to be done to reverse the situation in the agricultural sector is fairly
simple and boils down to the following: either the state continues to bankroll all agricultural producers
or it adopts a political, organizational and economic decision to give the funds to those capable of
efficiently using the money. We have been talking about this at all levels, but to no avail.

     Q. Reforms of collective farms and state-owned agricultural enterprises to make them more
     efficient require significant financial resources and extensive staff training programs. Also,
     private entities will be established on the basis of these companies within the framework of this
     process. This will generate a release of excess labor. How do you think these issues should be
     tackled and has the state changed its approach to these problems?

      Theoretically there is no shortage of labor resources in rural areas, but in practice qualified workers
are is short supply. I was taken aback by a recent TV report about a collective farm in the Khotymski
District of the Mogilev Region. A milking parlor worth almost 705,000 US dollars was built there. It
catered to 600 cows and had all the latest technological equipment. However, local milkmaids were
ill-qualified to use this equipment and before long these fancy computers broke down. The report
showed all this top-of-the-line equipment which is being run by scruffy-looking workers. Although
there is an excess of labor resources in rural areas, there is an acute shortage of qualified people. This
is a cause of serious concern. You could easily find a hundred people capable of performing unskilled
labor, but there is no one sufficiently qualified to operate a tractor or a computer. It is only to be
expected. The young and gifted flee rural areas because they see how poorly paid rural work is.

     Q. Agricultural reforms in Ukraine were underpinned by changes in the legal framework
     governing ownership issues. To be exact, agricultural workers were allowed to use their property
     and land shares in collective farms to create private entities (limited liability companies, private
     farms and private companies). According to Ukrainian agricultural experts, it brought about
14
         BUSINESS

       changes in popular mentality and altered the attitude of the people towards land, property and
       entrepreneurship. It also sparked people’s interest and private initiative, which are the tenets
       of highly-productive labor. These actions allowed Ukraine to achieve a breakthrough after 10
       years of reform and render the agricultural sector profitable in 2000. Do you think that such
       approaches are applicable in Belarus and what are the key obstacles?

      The issue of shares came to the surface in this country in the times of the Supreme Council of the
  th
12 Congregation. I have heard about the Ukrainian experience, which did change popular mentality.
In Belarus the value of land is still underestimated, whereas in Ukraine, people are well aware of how
costly it is. At the same time I do not think we should get back to the issue of shares, because it is a
painful and complicated question. In addition this is the way to create small farms, which are considered
counterproductive the world over.

       Q. What should be the initial steps in the agricultural reform of Belarus?

      First of all, the goals of this reform should be more clearly defined. Also, it should be publicly
acknowledged that the reforms will fail without private ownership and initiative. We are not going to
resort to revolutions in the agricultural sector, but we have one, two or three years to make the switch
from collective to private property. The only question is how to do this. The powers-that-be are
currently urging entrepreneurs to take over state and collective farms! It is not that simple. There was
an incident in the village of Chausy, which I feel is emblematic of the current trend: a businessman
took over a collective farm and lost all his money within three months. Then all the collective farm
members deserted him. So in the end he lost both the money and the collective farm.

     Also, I believe that we should give our people the opportunity to work abroad to earn start-up
capital and accumulate the required experience. They will return home anyway, but they will be armed
with the knowledge of how to proceed. If the agricultural reform is to succeed, a set of factors and
conditions lacking today should be in place.




                                                                                                      15
        BUSINESS

                                                                                                      N. Sinelnik
Business Associations

IFC has been implementing its Belarus Business Associations Capacity Building Project for nearly
two years. Within the framework of this technical assistance effort, it cooperates with seven Belarusian
business associations. Some of these organizations have a long track record, while others, namely
business associations in Gomel and Mogilev, have only recently been set up. The project has conducted
several surveys of business associations in Belarus. Some of the trends that were revealed in the
course of these public opinion polls are outlined in the article below.1

     The problems holding back the development of private enterprise have remained unchanged
     in comparison with the situation three years ago and are as follows: unstable business-
     related legislation, exorbitant tax rates and an overly complex tax calculation procedure.

                                                    Entrepreneurs still believe that the business community
                                              should protect its rights against encroachment by the state
                                              (see Diagram N1). In 2003 almost 100% of the polled business
                                              people shared this viewpoint. This figure demonstrates that a
                                              law-abiding Belarusian entrepreneur does not think that his
                                              rights and interests are sufficiently protected.

                                                   Not all entrepreneurs have a clear-cut idea as to what
                                              should be done. Most survey participants regard business
                                              associations as the ultimate protectors of their rights (see
                                              Diagram N2).

      However, far from all entrepreneurs who believe that
they should close their ranks and stand up for their rights
join business associations. The share of those who became
members of these organizations does not exceed 10%, which
proves that civic passivity is still rife in the business
community.

      The following are the major reasons cited by
entrepreneurs for staying out of business associations:
inability of these organizations to influence the decisions of
local authorities; inefficiency in upholding the rights of the
business community; and lack of time and unwillingness, as well as inefficient information about the
activities pursued by business associations.
1
 The article is based on the following opinion polls:
"Public Attitude towards Private Enterprise," November–December 2000, Novak pollsters;
"Survey of SME Managers," July-August 2001, IFC;
"Assessment of the Business Associations’ Efficiency by Entrepreneurs," December 2002–January 2003, IFC;
"Survey of Business Association Members," October–November 2003, IFC;
"Survey of Mogilev and Mogilev Region Entrepreneurs to Determine their Attitude towards Business Associations,"
December 2003–January 2004, IFC.

16
       BUSINESS

      The share of the business association
members who note increased efficiency of
these organizations is on the rise (see Diagram
N3). The business associations for their part
have stepped up efforts to attract potential
members.

      Among the shortcomings of the business
associations, the polled entrepreneurs single
out the lack of services of interest to the
business community, poor member
notification about the work done, and failure to render assistance in emergencies. These drawbacks
have remained unchanged over the last three years.

       The polled entrepreneurs would also like the business associations to boost their ability to effect
change in the entrepreneurial environment at both national and local levels. The business associations
have been investing significant efforts to achieve this. They are actively involved in numerous
commissions and councils for the promotion of private entrepreneurship under the auspices of the
government, as well as regional and city councils. For example, the Belarusian Union of Entrepreneurs,
which spearheads the efforts to protect the rights of the business community, participates in nine
commissions and councils. In 2004 alone, the union has put forward 16 proposals to improve the legal
environment in which private business has to operate. Only four of these initiatives were acted upon.
But the real question is, only four or as many as four? This depends on how optimistic you are. However,
if it had not been for the Belarusian Union of Entrepreneurs and other business associations, none of
the initiatives might have been adopted.




                                                                                                       17
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                                                                                                  S. Balykin
Registration of Legal Entities and Individual Entrepreneurs
      The very first problem encountered by aspiring entrepreneurs involves the initial registration of
their economic entities. Belarusian bureaucrats have turned this simple procedure, which is a pure
formality in most countries, into a time-consuming and wallet-bursting show.

     Moreover, Belarus must be the only country where businessmen are obliged not only to register,
but also to re-register their companies fairly often. Re-registration entails problems similar to those
entrepreneurs experience in the course of registration.

      Since 1996, Belarusian companies have been subjected to two re-registrations. The first one was
launched on 24 May 1996 and not completed until mid-1997 and the second lasted from September
1998 until 1 April 2003. It is not difficult to arrive at the conclusion that six out of the last eight years
were blighted by re-registration. The re-registration deadlines were constantly extended and the rules
kept changing. In the course of the most recent re-registration, the deadline was reviewed three times
and the "Regulation on Registration and Liquidation of Economic Entities" was also repeatedly amended.

      Although the stated goal of these constant re-registrations is to root out "one-day" front companies,
the very fact that the rules are being constantly altered points to an unprecedented level of imperfection
in the Belarusian legislation.

     It would be incorrect to say that the authorities are unaware of what prompts the emergence of
such "one-day" companies in the first place. One of the analytical reports penned by the Belarusian
Ministry of the Interior nailed down several factors, including high rates of taxation and customs
duties, an unpredictable policy in the realm of foreign exchange regulation, fluid legislation, etc. The
conclusion drawn is truly original. It was decided to weed out front companies by means of registration.
The authorities, however, failed to formulate the criteria which would allow upstanding entrepreneurs
to be clearly separated from potential rule-breakers.

      The most recent amendments to the registration procedures were introduced by Decree N29,
dated 17 December 2002. The most revolutionary change was a provision releasing state officials
from responsibility for the registration of economic entities that damage the interests of the state. This
document has been long in the works but the result is hardly perfect. Although the new version of the
registration regulation is almost a mirror image of the previous document, it does envisage certain
positive shifts for entrepreneurs.

      Economic entities can now pursue any line of business, even if it is not set forth in their foundation
documents, provided that the taxation and registration authorities are duly notified. This, however,
can only be called a partial solution, as it would have been logical to allow entrepreneurs to get involved
in activities which are not barred by applicable legislation without any notification. This is an
internationally-acknowledged practice which has already been introduced in Russia. In addition, it is
easy to sidestep this restriction by printing the classifier and sending it to the executive committee and
tax authorities.

    A private unitary enterprise can be domiciled in residential premises, for example, if they are
owned by a business founder and if his family members do not object. It begs the following question,

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however: why hasn’t a similar privilege been extended to limited liability or additional liability
companies, for example, as these organizational forms are often used by small businesses?

      The procedure for the liquidation of inefficient companies has also been simplified. If an economic
entity has not been operating for six months and has not incurred any debts to the state budget, it can be
closed down by an executive committee’s decision without the creation of a liquidation committee and
with only a minimal paper trail.

      The official commentary issued after the Decree’s adoption said that the simplified procedure for
the liquidation of non-operating legal entities would allow a great deal of budgetary funds savings. (In
other words, these companies do not have any money and in the end the state is forced to foot the bill
for their funeral.)

     Having introduced some improvements, the framers of the Degree rolled out some additional
provisions which only made business registration more difficult. It was probably done to keep things
in balance.

     For example, in order to establish a subsidiary, a company founder is obliged to prove that his
company does not have any debts to the budget or creditors or secure a creditors’ consent. It is patently
obvious that each new document makes the registration process longer.

      The list of reasons which might trigger an extra-judicial liquidation of an economic entity has
been expanded. A private unitary enterprise domiciled at residential premises may be shut down if the
company founder objects to inspections. It should be noted that the author of this article believes that
a democratic state should not have any extra-judicial procedures for closing down legal entities, as
these procedures are in essence the tools to deprive company founders of their property using extra-
judicial means.

      In large measure, business and liquidation procedures have hardly changed. The cumbersome
system of checking whether or not company founders have any debts and the possibility of extra-
judicial liquidation of economic entities in line with executive committees’ decision have remained in
place. The list of reasons to decline state registration is still overly broad and the number of documents
for state registration is excessive. Company founders are still obliged to appear in person at executive
committees and cannot farm out this procedure to their representatives.

     The situation around registration deadlines is also worthy of note. Formally, nothing has changed:
an economic entity must be registered within a month’s time. If there is need for additional information
about a company’s founders, however, bureaucrats have the right to extend registration for another
month. The previous regulation exempted manufacturing companies from this provision, a privilege
which did not make it in the revamped version.

     If truth be told, the Minsk City Executive Committee has a computer database and is able to
obtain the required information fairly swiftly. Consequently, registration in Minsk rarely runs beyond
a month. This, however, testifies only to the efficiency of Minsk authorities.

     The lawmakers have failed to remove the drawbacks of the previous version of the regulation.
For example, the registration fee for each subsequent economic entity established by company founders
(with the exception of manufacturing firms) will still be 20% higher. This provision, however, has
remained largely unused as bureaucrats have no idea how to go about it.
                                                                                                       19
        LAW

     Procedures for the registration of economic entities with foreign participation have seen purely
cosmetic changes. From now on, regional executive committees and the Minsk City Executive
Committee will be charged with registering joint ventures and foreign-owned companies. This function
was previously performed by the Ministry of Foreign Affairs. There is one noteworthy positive
development, however—foreigners will no longer be obliged to come to Belarus. All the required
documents may now be submitted by their duly-authorized representatives. It is not clear why a
similar provision has not been extended to local investors.

     Changes in approval procedures have left things unimproved for the business community.
Previously company founders had to agree upon the company name with the registration authority.
The new regulation obliges them to gain the approval of the Ministry of Justice.

     Another aspect of the registration procedure, namely the associated costs, is also worthy of note.
An executive council will charge 60 euros for the business registration itself. The fee for agreeing
upon the company name with the Ministry of Justice is even less expensive and does not exceed one
base value (approximately 9 US dollars).

     All the documents to be submitted to the registration authority should be notarized and last year
the Belarusian Cabinet of Ministers significantly increased notarization fees. A charge for the
notarization of a signature on a company charter nearly doubled and now stands at four base values.
The foundation agreement should also be notarized. The fee for this service shot up from 30% of the
base value to eight times the base value. Executive committees, however, usually require two copies
of foundation documents, which should also be notarized at a cost of 30% of the base value per page.
Previously the charge stood at 20% of the base value. As a standard set of foundation documents is 15-
16 pages on average, this procedure might set a company back five base values.

      Following state registration, the director of a new legal entity is obliged to take out a certificate at
the registration authority at the cost of one base value. The newly-established firm should register
with the local tax inspectorate and open a bank account. These procedures also entail certain expenses.
Both the tax authorities and the bank require notarized copies of foundation documents, which costs
about 10 base values.

      To open an account, the company is obliged to submit a copy of the notice regarding the allocation
of a taxpayer’s identification number. The local tax authority issues such documents, at three base
values per piece. Finally, the signature cards of the company director and chief accountant should also
be notarized. The fee for this service was nearly doubled last year and presently stands at four base
values per signature.

      The newly-registered outfit is also required to obtain a permit to manufacture the seal and only
once this has been completed, may the company begin working. At the lowest count, the registration
of a limited liability company or an additional liability company will cost in excess of 400 US dollars.

     Registration of an individual entrepreneur is much less costly. The executive committee will
only charge 6 euros. To open a bank account, a businessman is obliged to submit a copy of the notice
regarding the allocation of a taxpayer’s identification number (three base values) and notarize a signature
card (four base values). This adds up to 70 US dollars.

     In a word, it is time-consuming and expensive to set up a business in Belarus. Hopefully the Belarusian
authorities will take steps to remove the barriers hindering the emergence of new economic entities.
20
       LAW

     PS. After this article had been written, the Belarusian President issued Decree N175 "On State
Registration and Liquidation of Legal Entities and Individual Entrepreneurs," dated 8 April 2004,
which at long last introduced a registration one-stop shop, namely the Ministry of Justice.

      The Ministry of Justice is tasked with the development of methodological guidelines, organization
and coordination of state registration and the liquidation of commercial and non-profit entities, as well
as individual entrepreneurs. It is empowered to adopt registration-related legal acts and supervise the
implementation of state registration and liquidation by local authorities.

      The creation of a one-stop shop in the shape of the Ministry of Justice is definitely a long-needed
step in the right direction. Up until now, the overly complex registration procedures and differing
interpretations of legal provisions were major impediments for the business community. It would be
ideal if both problems were tackled simultaneously, but even partial improvements are a welcome
development.




                                                                                                      21
           LAW

                                                                                                              V. Zhuk
Licensing of Business Activities
     In September 2000 the first issue of the analytical bulletin entitled "Small and Medium Business
in Belarus" dwelt on one of the most topical themes for the business community, namely the legislation
governing business licensing in Belarus. The 15th issue, which came out three years later in December
2003, took up this topic again due to significant changes in licensing legislation.

     Therefore, we feel that it would be of interest to look closely at these legal amendments, analyze
them in detail and run a comparison with the previous legal framework. We will also try and estimate
what impact these changes will have on economic entities.

I. Key Provisions of the New Licensing Rules: The Pith of Changes

     The Belarusian licensing rules were substantially reviewed following the adoption of Presidential
Decree ¹ 17 dated 14 July 2003, which introduced the regulation on licensing of certain lines of
business (hereinafter referred to as "the Decree).

      1) The Decree reworked the wording of criteria used to include a line of business in the group of
licensed activities. Presently, these criteria comprise "interests of national security and public order as
well as protection of rights and freedoms, morality, health of the population and environment."

     Previously obtained licenses to pursue entrepreneurial activities are required only if this business
can hurt the interests of the state, popular health or environment.

      Unfortunately the revamped criteria were not rendered more specific, as the definition of "national
security" set forth in the applicable legislation1 is overly broad. Therefore, it would be incorrect to say
that the new licensing rules bar the state from expanding the list of licensed business activities.

     2) One of the most keenly awaited alterations in the licensing legislation should have been the
reduction in the number of lines of business subject to licensing. The previous list of such activities2
was subject to numerous changes and ran to 162 positions at the time of its revocation. When this list
was first introduced the licensing agencies numbered 26, but when this document was rescinded the
figure nearly doubled.

      The Decree excluded wholesale trade from the list of licensed activities. Initially, licensing was extended
to this line of business to curb intermediary activities. Pursuit of certain entrepreneurial activities will
henceforth be governed by standardization and certification legislation (for example, consumer services).

      However, a purely mechanical comparison of the reworked and old lists will not support the
claim that the number of licensed activities was reduced three-fold. The new list contains 49 types of
licensed lines of business, which consist of several subtypes. According to rough calculations, the list
introduced by the Decree runs to 350 business endeavors, including 164 medical services. This number,
however, does not take into account the approximately 20 lines of business licensed by the National
Bank of Belarus.

1
    Presidential Decree ¹ 390 "On the Adoption of the National Defense Concept of Belarus," dated 17 July 2001.
2
    Adopted by the Government’s Ordinance dated 21 August 1995.

22
         LAW

      3) The business registration legislation3 introduced in Belarus in 2000 obliged entrepreneurs to
include all their lines of business in foundation documents, including those subject to licensing. This
provision was regarded as an administrative barrier to business development since a company that
failed to meet this requirement would be unable to obtain a license.

     Presidential Decree ¹ 29, dated 17 December 2002, introduced yet another amendment to the
regulation setting forth the business registration rules. This time, the legal framework governing
entrepreneurial activities was improved. Economic entities were allowed to get involved in activities
permitted under applicable legislation and were obliged to include in their foundation documents only
those lines of business set forth in current legislation. These comprise business endeavors pursued by
a limited group of organizations, including banks and insurance companies.

      This rule, however, was in existence only until the adoption of the Government’s Ordinance ¹ 1666,
dated 19 December 2003. This document obliged companies involved in licensed activities to amend their
foundation documents by changing the wording of the licensed activities in line with the list of licensed
activities introduced by the Decree.

      4) The key legal act in the realm of licensing in 2000 was a Temporary Regulation, adopted by the
Belarusian Government’s Ordinance ¹ 386 dated 16 October 1991. This document empowers each
license-issuing body to develop its own procedures, which makes it possible for these agencies to
advance their partisan interests.

      Previously, it was up to the license-issuing agencies to define reasons which might trigger a refusal
to give a license. These agencies were also authorized to compile a list of documents to be provided by
license applicants. The key change in this field introduced by the Regulation is that the license-issuers
have been taken out of this process and these tasks have instead been handed over to the government.

      5) Although the Decree introduces a single license fee of 100 euros, thus depriving the government4
of the right to increase it, the overall costs associated with obtaining a license ballooned. Individual
entrepreneurs have seen an eight-fold increase.

      6) Previously licenses were not issued for long periods of time (up to 20 years), despite the fact
that there were no legal provisions prohibiting this. Nevertheless, the cap of ten years imposed on the
duration of a license was hardly a welcome development for the business community. The timeframe
for the processing of a license application (30 days) has not been changed. The overall period of time
for license processing, including an expert assessment, has been cut from 60 to 45 days, which is
definitely a step in the right direction.

      Reorganization, including an assumption of a new legal form, might entail a need for an economic
entity to take out a new license, as was previously the case.

      7) Procedures for issuing and revoking a license have seen significant changes.


3
  Item 29.1 of the Regulation introduced by Presidential Decree ¹ 11 dated 16 March 1999, as amended by Presidential
Decree ¹ 22 dated 16 November 2000.
4
  The previous licensing rules set the license fee at about 87 Euros for a legal entity and about 12 Euros for an individual
entrepreneur. The Belarusian Cabinet of Ministers introduced special rates for certain lines of business, which were from
20 to 60 times higher than the fees set forth in the rules.

                                                                                                                        23
        LAW

     Previously the above-mentioned Temporary Regulation set forth that the reasons for suspending
and nullifying a license was to be stipulated by license-issuers. This unduly expanded the remit of
these agencies and set the stage for all sorts of excesses.
      The Decree introduced a court procedure for nullifying a license for insignificant violations of
licensing legislation. Only in the case of flagrant violations may administrative (extra-judicial)
procedures for license revocation be applied. License-issuing rules have also been substantially
reworked. If a license-issuer reveals certain transgressions on the part of a license holder, it should
give the company at fault up to six months to correct the violation. If the economic entity fails to do so
within this period of time, the license-issuing agency can then suspend the license for up to one month.

II. Assessment and Impact of Licensing Changes
      The realm of licensing has seen significant positive changes. The list of licensed activities has
been reduced but still contains more lines of business than the expected 10 or 12. The rules of the
game are enshrined in a law and the authority to alter them now rests with the government. This is one
of the key factors which will render this sphere more stable. The higher plane of legal regulation of
licensing bodes well for a significant reduction in the capability of state agencies to advance their
narrow partisan interests. It does not mean, however, that licensing agencies will be devoid of their
powers to develop instructions regarding the application of licensing legal acts, but their ability to
issue legal documents has been severely curbed. The provision mandating that licenses shall be cancelled
only by a court decision and the liberalization of license withdrawal procedures are positive developments
put into place by the new licensing rules.
     It should be noted, however, that there are a number of " buts" which largely devalue the positive
features of the new licensing rules.
      The introduction of the new licensing legal acts was concurrent with the imposition of new license
forms, which had already been called "re-licensing." Many companies found the deadline for obtaining
new licenses difficult to meet, which exposed them to penalties. Moreover, the new licensing rules
introduced for market vendors pushed these entrepreneurs to the brink of survival. This prompted a
negative reaction to the changes in the licensing legislation on the part of the business community.
      The revamped licensing procedures have retained the shortcomings evident in the previous version
and sport additional gaps which could have been avoided. The logic behind the resurrection of the
obligation for companies to list their licensed activities in their foundation documents and registration
certificates imposed on economic entities is questionable. A company reorganization is still considered
grounds for the termination of a license despite the fact that at least one of its types, namely the
transformation of a legal entity into a different legal form, should be treated differently because a legal
and organizational form shall not be considered as a precondition for obtaining a license. The feasibility
of a new license cancellation system, mandating that a company should be given advance notice, is
imperiled by the fact that the current legislation has yet to specify a procedure for classifying a
transgression as "a flagrant violation." As a result, it is overly broad in some cases and absent in others,
giving license-issuers an opportunity to freely interpret the grounds for the administrative license
revocation, which is unfortunately still in place.
     These are only but a few of the key drawbacks of the new licensing system. At first glance, these
shortcomings seem to be fairly minor and easily fixable. Experience suggests, however, that even the
most trivial barriers, inaccuracies and ambiguities in the rules could develop into serious problems for
private business.
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                                                                                                V. Fadeev
Ownership Rights
This bulletin has constantly dealt with issues related to ownership rights and their execution in the
Republic of Belarus. The fourth issue, which came out in February 2001, ran an article entitled
"Ownership Rights: Declarations and Reality." I believe that the article’s title alone prompts the
conclusion that Belarus experienced certain problems in this area at that time. Sufficient safeguards
of ownership rights set forth in the constitution were singled out as positive developments. However,
it was noted that the current legislation and its application were not always in line with the declarations
enshrined in the constitution. Having described some constitutional norms as "declarations," we
nevertheless do acknowledge that many of the constitutional provisions, including those regulating
ownership rights, are effective. However, the current legislation and the way it is being applied turn
these provisions into declarations. In this context, property rights holders have experienced a great
deal of problems, the most important of which are analyzed below.

1. Article 13 of the Constitution, mandating equal safeguards and conditions for all types of
property, is not always fully applied in practice

      Unfortunately, there have been no positive developments in this field over the last three years.
On the contrary, some recently-adopted legal acts have further worsened the situation. For example,
Presidential Decree ¹ 125 dated 1 March 2004, entitled "On the Special Right of the State to Get
Involved in the Management of Economic Entities (the Golden Share)," has expanded the authority of
state agencies to meddle in the functioning of joint stock and other companies. This document has the
following key provisions:

    • The golden share (hereinafter referred to as "the share") can be introduced not only at a joint
      stock company, but at any economic entity;
    • It may be imposed regardless of whether or not the state holds a stake in the company;
    • The conditions for the introduction of the share are phrased in such a way that, taking into
      account the current state of the Belarusian economy, it can be introduced at any company;
    • Previously the state could veto only some of the decisions adopted by the company. Presently,
      however, all decisions passed by state agencies in relation to the functioning of the company
      are mandatory and should be documented as decisions taken by the company board; and
    • The responsibility to be assumed by state agencies for the damage stemming from such decisions
      is not defined.

     The only positive feature of this document is the fact that the golden share can be introduced only
at companies whose assets were previously owned by the state.

     The conditions and grounds for the liquidation of economic entities as well as extra judicial
reasons for refusing state registration, mentioned in our article published three years ago, have remained
unchanged.

      Presidential Decree ¹ 508 entitled "On Certain Issues Related to Bankruptcy," dated 12 November
2003, not only detracts from the overall efficiency of the bankruptcy legislation, exemplified by a
fairly well-developed bankruptcy law, but also creates unequal conditions for different forms of
ownership and could negatively affect the functioning of crisis managers, etc.

                                                                                                        25
       LAW

     Presidential Decree ¹ 88 entitled "On Restructuring of Overdue Payments to the National and
Local Budgets and Credits Issued by State Banks Accumulated Economic Entities," dated 16 February
2004, does nothing to further equal conditions for different forms of ownership. First of all, banks
where the state has a stake are now bracketed with state banks. Second, these banks received the right
to acquire a shareholding in companies as settlement of their overdue credits, which private banks
cannot do.

     During the second plenary session of the Foreign Investors Advisory Council under the Cabinet
of Ministers of the Republic of Belarus, which took place on 31 March 2004, foreign investors mentioned
several examples of unequal treatment of privately-owned companies by the state. These include
insufficient access to resources available to private businesses and customs limitations imposed on
non-state economic entities.

      Over the last several years actions taken by some regional governments to "streamline" trade
using administrative tools have become the stuff of legends. These steps have instead entailed significant
costs on private companies, which will never be compensated.

The most optimistic development to date is the emergence of a draft Land Code, which envisions the
expansion of land ownership rights and furthers opportunities for using land as a tradable good.

2. Serious problems related to discontinuation of ownership rights, extra judicial confiscation
of property and limitation of ownership rights

      Decree ¹ 40 dated 23 November 1999, allowing for extra judicial confiscation of property, was
scrapped by Presidential Decree ¹ 667 dated 13 November 2001, which was welcomed as a good sign
by international organizations and foreign investors. The premise that confiscation of property can be
carried out only in line with a court decision was reaffirmed in a number of legal acts.

      Presidential Decree ¹ 17 entitled "On Licensing of Certain Lines of Business," dated 14 July
2003, was definitely a step in the right direction, as it streamlined licensing and rescinded several
limitations of ownership rights.

      On the other hand the remits of numerous control agencies, which are empowered to curb ownership
rights, place liens on property, postpone business activities and withdraw funds from bank accounts,
remain fluid.

3. Negative consequences of the Law "On Prevention of Legalization of Illegal Gains"

     Over the last three years, this document has been amended twice, but these changes were
insignificant and did not remove the problems which we previously mentioned.

      Ordinance ¹ 167/2 entitled "On Certain Aspects of Money Transfers into Accounts Held by
Individuals," dated 17 February 2004, adopted by the Cabinet of Ministers and the National Bank of
Belarus, stipulates that starting from 1 January 2005 recipients of transfers exceeding 600 Euros shall
provide the bank with a certificate from tax authorities. Such a worthy objective as fighting money
laundering could, taking into account the overly bureaucratic nature of Belarus, turn into a huge headache
for individual citizens and entail violations of existing legislation. This could be averted, however, if
additional tax officials are hired to facilitate the implementation of this document. The threshold is
also open to question along with the compliance of this ordinance with the above-mentioned law.
26
       LAW

4. Overly slow pace of privatization in Belarus, which is particularly true for federally-owned
property

      This trend can be ascribed to not only a lack of political will, as most tend to believe, but also to
imperfect and incomprehensible privatization legislation, complex and insufficiently transparent
procedures, as well as a limited remit of state agencies empowered to carry out sell-offs. Unfortunately,
draft changes to the Privatization Law are still making rounds in the corridors of power and it is not yet
clear when they will be adopted.

     The one-step-forward-one-step-back approach to ownership rights is still very much in evidence
in Belarus. All positive developments are undone by the state’s attempts to regulate and control issues
which are best left to the market and free competition.




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          Belarus Business Associations Capacity Building Project Policy Work
Business Associations
The Council of Regional Business Associations was launched
in 2002 with assistance from IFC. The council convenes every
three months in regional capitals throughout Belarus.

One of the most important areas of the Council’s activity is
the development of proposals to improve legal environment
for SME growth. Since the Council’s inception, a range of
initiatives to modify the local taxation system and the
procedure for the formation of targeted funds as well as to
improve the functioning of markets, social security for         Participants in the 6th session of the Council of
individual entrepreneurs, small business reporting and          Regional Business Associations conducted on
                                                                30 January 2004 in Minsk
taxation have been submitted to parliament, the government,
and appropriate ministries.

                                                    Press clubs
                                                    Press clubs created within the framework of IFC Belarus SME
                                                    Development Project have been operating in Minsk and regional
                                                    capitals for more than three years. Press club sessions are in
                                                    effect a forum which allows journalists, entrepreneurs and
                                                    government officials to discuss a wide range of issues of interest
                                                    for private businesses, including changes in business related
                                                    legislation, job creation, investment climate, etc.

                                                    Foreign Investors’ Advisory Council under the auspices of
                                                    the Belarusian Cabinet of Ministers (FIAC)
                                                    IFC has been actively involved in the FIAC’s activities since its
  The press club session held on 10 March 2004 establishment. IFC lawyers contributed to the development of
  to discuss foreign investment attracted the several legal proposals to have the current provisions of
  participation of 35 journalists
                                                    legislation governing licensing, foreign exchange, business
registration, and pricing as well as the Investment Code either rescinded or amended.
IFC experts drew up recommendations and proposals to perfect the legislation regulating bankruptcy, subsidiary
liability assumed by company founders, and labor relations.


Business associations, press clubs and FIAC are key instruments to promote the interaction between the business
community and the authorities to improve business related legislation. The existence of such tools is in the
interests of both entrepreneurs and civil servants. A further development of the Belarusian business environment
depends to a large extent on how efficiently these levers will be used.