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					2006 FINAL ISSUE




           25
The issue is prepared by                                                    We would like to express
the International Finance                                                          our gratitude to:
Corporation in Belarus:
                                                                                   Andrey
                                                                                      Tur
                                                                            Deputy Minister
                   Olga                                                     of the Economy
                   Godunova                                                 of the Republic
                   Senior Advisor                                                 of Belarus
                   on Economic
                   Issues


                                                                                     Nina
                                                                                  Dubovik
                                                                     Head of the Directorate
                                                               for the Single State Register
                                                                             of Legal Entities
                   Valery                                           of the Ministry of Justice
                   Fadeev                                        of the Republic of Belarus
                   Legal
                   Advisor


                                                                             Aleksandr
                                                                         Likhachevskiy
                                                                      Director of the Private
                                                                      Enterprise Directorate
                                                                  of the Belarusian Ministry
                                                                                of Economy
                   Vyacheslav
                   Zhuk
                   Legal
                   Analyst


                                                                               Yaroslav
                                                                             Romanchuk
As well as                                                        President of the Scientific
                                                                    Research Mizes Center


                   Marina
                   Bakanova
                   Country Economist of
                   the World Bank Office
                   in Belarus                                                     Vladimir
                                                                                 Karyagin
                                                                     Chairman of the Minsk
                                                                    Union of Entrepreneurs
We would like to express gratitude to the Kiranna Pipe                      and Employers
Plant in Kokhanovskoye, Opus Unitary Enterprise and
Belintercool Ltd.

   Views expressed herein 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
   Agency (SIDA).
   When reprinting materials contained herein reference to this publication is required by law.
                               Dear Readers!
We would like to present the 25th and final      be seen on the IFC Belarus website
issue of the Analytical Bulletin ‘Small and      (www.ifc.org/europe/belarus) and on the
Medium-sized Business in Belarus’. Over the      BEL.BIZ portal (www.bel.biz).
past six years, we have objectively analysed     We would like to express out heartfelt
the Belarusian entrepreneurial sector            gratitude to our contributors and thank our
alongside private business development. We       readers for their unwavering support and
have highlighted the role played by small and    interest in the publication! We hope that
medium-sized enterprises in the every-day        you have found our bulletin helpful. Without
life of Belarus and its citizens. The bulletin   overstating its significance, we would like
has given experts – including entrepreneurs,     to believe that we have contributed to
business association leaders, civil servants,    certain positive SME development trends
IFC specialists and Belarusian and foreign       in Belarus.
independent pundits – a chance to air their      It saddens us that the time has come to
views.                                           part with our readers. The International
Published in English and Russian, the            Finance Corporation will continue working
bulletin has had a wide audience, including      to improve the business environment in
civil servants, entrepreneurs as well as         Belarus and inform you about the results
university students and lecturers. Readers’      through other IFC publications and
surveys and feedback show that, quite            Belarusian mass media outlets.
rapidly, it has become so popular that the
print run often fails to meet demand.            We would like to wish you all the best in
Accordingly, an electronic version can now       the coming 2007!


                                                                          IFC Belarus Office Staff




                                                                                                1
2
                                          Following a small town model
                                “The state will continue its support of small scale entrepreneurship, although
                                the conditions will be substantially reviewed in the near future,” says Deputy
                                Economy Minister A. N. Tur, in an interview with correspondent Yuriy Bekhterev.
                                He notes that the small business support models currently being developed by
                                the Government as part of its small towns program, will be incorporated in the
                                ‘Law On the Support of Small and Medium Sized Business’ and will be universally
                                applied.




   – Which decisions adopted in 2006 will             medium-sized businesses and boost their
most significantly impact on small and                contribution to the national economy?
medium-sized business development?                        – Before the end of the current year, a
   – With regard to medium-term prospects             number of legal acts will be adopted to
for SME development, the Cabinet of                   introduce the following:
Ministers’ Ordinance No. 1029, dated 11
                                                          a simplified procedure for taxation and tax
August 2006, is worth mentioning; it adopted
                                                          reporting for individual entrepreneurs and
measures aimed at achieving SME
                                                          legal entities depending on the number of
development targets until 2010. It seeks to
                                                          employees, annual revenue and line of
further improve macro business regulation
                                                          business;
and implement new forms of state support
                                                          auctioning of unused state property – with
for SMEs; these will target specific areas for
                                                          starting price set at one base value. This
aid recipients.
                                                          will allow the authorities to pass redundant
   The Government and the National Bank of
                                                          rural and provincial real estate on to
Belarus issued Ordinance No. 42/2, of 13
                                                          effective owners. Transferal will be free of
January 2006, adopting a joint plan of action
                                                          charge to individual entrepreneurs or
to achieve 2006’s social-economic
                                                          private companies involved in specific
projections and follow its budget and
                                                          investment projects;
monetary policy guidelines. This joint plan
                                                          direct sale of company property, when
aimed to improve business-related legislation
                                                          operating at a loss for several years, to
and to put forth specific proposals to promote
                                                          investors.
the activities of SMEs.
   Presidential Decree No. 6, dated 10 April              – Do you think that a Law on SME
2006, On Adopting Amendments and                      Support is needed? If so, what would it
Modifications to Presidential Decree No. 11,          aim to achieve?
dated 16 March was the first step to cutting              – Without a doubt, we need such a law. Its
red tape. The document introduced the ‘one-           adoption signals the state’s determination to
stop shop’ principle for business registration.       increase support for SMEs.
   Presidential Decree No.151, dated 15                   This law needs to set out the basic
March 2006, aims to upgrade procedures for            principles of state support for SMEs as well
conducting inspections and imposing                   as making provisions to safeguard their rights
economic penalties. Specifically, state officials     and legitimate interests. It should also define
are punishable by a fine of up to 50 base             the scope of national and local authorities’
values [US$727] for violating the procedures          responsibilities in supporting private
for holding unscheduled inspections.                  enterprise. In addition, the law should set
   – How does the government plan to                  criteria for categorizing economic entities as
encourage the development of small and                SMEs.

                                                                                                             3
    Specific mechanisms for supporting SMEs               that permit procedures are becoming
should be defined in special legal acts.                  more costly and time-consuming. What
    – The draft law developed by the                      has the Ministry done and what does it
Economic Ministry has been rejected by                    plan to do to cut red tape?
the Presidential Administration. Which of                     – The Ministry has started work on
its aspects contravened state private                     simplifying business-related administrative
enterprise policies?                                      procedures.
    – The President commissioned the                          Its analysis suggests that an interagency
Government to draw up a program for the                   working group will be most effective. The
development of small towns, allocating a                  Government is currently considering a draft
special role to SMEs. The program would                   ordinance on the establishment of such a
contain new approaches to taxation of                     group.1
SMEs, real estate and stimulation of                          The working group will comprise interested
production of consumer goods and services.                state agencies; they’ll identify those
These provisions are currently being                      administrative procedures in need of
gathered for inclusion in an omnibus legal                simplification, determine the extent of state
act. Consequently, the Presidential                       regulation, cut the duration of the
Administration and the Government have                    aforementioned procedures and implement
agreed that it would be counterproductive                 the ‘one-stop shop’ principle while studying
to adopt such a Law prior to the                          other factors.
programme’s passage scheduled for the                         This should result in the modification of
end of the year. Although the act deals with              legislation       governing      administrative
the development of small towns, new                       procedures.
approaches and mechanisms for stimulating                     – Some say that small businesses in
SMEs are to be included and will apply to                 Belarus concentrate too much on trade;
all SMEs.                                                 few are involved in manufacturing, research
    – The draft law obliges individual                    or development. Any business venture
entrepreneurs to assume the status of                     involves a certain amount of financial risk
micro companies – which are legal                         but, naturally, the establishment of a
entities. In Europe, individual citizens are              manufacturing company requires affordable
not prohibited from being involved in large               and readily available financing. Are there
business – as long as they pay their taxes.               drawbacks in the state’s efforts to tempt
    – Taxes are indeed a sticking point. Each             SMEs away from trade and towards
country has its own business conditions.                  manufacturing?
Belarusian business is still in its infancy – being           – About 24% of small businesses are
only 15 or 20 years of age. Additionally, people          currently involved in manufacturing. Analysis
in the West are law-abiding, whereas                      of change in the sectoral breakdown of the
Belarusians try to avoid paying their taxes.              entrepreneurial sector reveals a gradual, albeit
    Belarusian tax legislation is far from perfect;       fairly small, shift towards manufacturing. In
it’s overly complex and has many loopholes                the past five years, the number of SMEs
allowing tax evasion. This is common with                 involved in manufacturing has risen by 2,000
transitional economies. Consequently, despite             companies.
criticism, the state still prefers to deal with               Industrial companies account for about
legal entities rather then numerous individual            40% of small business employment.
entrepreneurs. I believe this is temporary; in                The state is keen to expand the presence of
future, we will definitely employ internationally-        manufacturing SMEs in those small and medium-
prevalent taxation models.                                sized towns which lack a range of employment
    – State agencies estimate the number                  possibilities. To this end, a Presidential Decree
of permits at more than 1,000. The IFC’s                  offering tax and duty exemption for consumer
business environment survey indicates                     goods manufacturers is planned for 2007.

    1
     After this issue’s going to print, the Belarusian Prime Minister signed an edict, of 30th November 2006, to
    establish a working group to simplify administrative barriers; this is headed by the Deputy Prime Minister,
    Andrey V. Kobyakov.

4
   The state SME support policy seeks to           Belarusian banks extended Br1.461 billion
expand SMEs’ access to bank financing.          in financing to small businesses, including
Banks are to broaden the range of loans         funds allocated under leasing, credit and
available to SMEs and will try to attract       factoring contracts.
investment into the small business sector.         We are constantly trying to attract foreign
   For example, the Belarusian Fund for         investment, including funds from international
Financial Support of Entrepreneurs extends      financial institutions. Specifically, from January-
concessionary loans and micro credits to SMEs   October 2006, 132 contacts valued at more
and individual entrepreneurs. In the space of   than $1.2 million – including 116 contracts
nine months, 42 investment projects – valued    worth more than $700,000 financed by the
at Br819 million – have been funded.            EBRD credit line – were concluded under an
   Under the State SME Support Program for      agreement signed by the Minsk City Executive
2006, 63 economic entities received Br843.3     Committee and Belgazprombank. In the Gomel
million in aid to boost production of goods     Region, loans have been extended by
and services, including export-oriented         Germany’s Bankgesellschaft Berlin AG,
manufacturing.                                  Russian Promsvyazbank and the EBRD.




                                                                                                 5
                                  Business registration in Belarus:
                                       simpler, faster and cheaper
    The first results of the new business registration procedure and plans for further
    simplification and modification of business registration conditions.


                              The new procedure for the registration of economic entities, which introduced a
                              “one stop shop” principle for post registration procedures and cut the application
                              processing period, has been in effect since mid 2006. Nina P. Dubovik, head of
                              the Single State Register of Legal Entities at the Belarusian Ministry of Justice, talks
                              about the new procedure and discusses plans for the introduction of a declaratory
                              procedure for business registration.



   – How would you assess the early                      Ministers’ Ordinance No. 668 dated 27 May
results of the new business registration                 2006. The monitoring conducted in July this
procedure?                                               year revealed only three transgressions. I
   – The Cabinet of Ministers’ Ordinance No. 668         believe that these problems are unlikely to
dated 27 May 2006 empowered the Ministry                 impact the effectiveness of the overall
of Justice to exercise control over the                  process, as they can be easily rectified by
transactions between registration bodies and             registration bodies.
the executive government. The Ministry of
Justice holds the view that registration bodies
and state agencies should be totally capable
of implementing a “one-stop shop” for
business registration. Our regular reports from
the registration authorities show that these
bodies do not encounter problems when
interacting with any other state agencies.



                                                            – Do you think information technologies
                                                         could be more widely used to expedite
                                                         “one-stop shop” registration?
                                                            – Indeed, it should be noted that data is
                                                         currently being processed manually. Software
                                                         that would enable us to perform all the post-
                                                         registration procedures electronically has yet
   Registration by tax and statistical bodies is         to be developed. Such software is being
carried out in accordance with the established           created within the framework of the “Electronic
procedure, which also extends to those paying            Belarus Programmes for 2003–2005 and up
insurance fees to cover workplace accidents              to 2010,” adopted by the Cabinet of Ministers’
and occupational diseases. The appropriate               Ordinance No. 1819 dated 27 December
documents are issued, along with the state               2002. This project is due to be completed in
registration certificates, in accordance with the        the fourth quarter of 2007.
deadlines set forth in Presidential Decree No. 6            – The Cabinet of Ministers’ Ordinance
dated 10 April 2006 and the Cabinet of                   No. 1029 dated 11 August 2006 envisages

6
further modification and simplification of
the procedures for registration and                         Registration in Sweden
liquidation of legal entities, including the               The registration of both companies and
introduction of a declaratory principle of                 individual entrepreneurs is carried out based
state registration and further reduction                   on the “silence-is-consent” principle and can
                                                           be executed by post, or on-line in a single day.
of the application processing period.
                                                           Individual entrepreneurs are not obliged to
Could you outline the steps being                          deliver registration documents to the
considered by the Ministry of Justice to                   registration body in person, and thus need not
simplify         and    improve      business              interact personally with any registration official.
registration?                                              They must pay a registration fee, open a bank
    – Further modification of the registration-            account, and fill out a registration form.
related legislation should be preceded by an               Company founders seeking registration should
analysis of legal application practices. This              submit their company charter with the minutes
work is currently being performed by the                   of the founding meeting and obtain an
Ministry of Justice, in cooperation with other             electronic signature. Registration applications
                                                           and templates for charter documents can be
state agencies, in pursuance of Par. 10.2 of
                                                           downloaded from the website of the
the Complex of Measures to Attain SME                      Registration Bureau or filled out on-line. An
Development Projections for the Period up to               electronic signature can be obtained from any
2010 adopted by the Cabinet of Ministers.                  commercial bank, post office, or major
    In line with these measures, draft legislation         telephone company.
to further amend the procedures and                        It takes between half an hour and one hour to
conditions for the registration and liquidation            confirm state registration and receive an
of legal entities and individual entrepreneurs             identification number via the Internet. The
should be developed by 2008. The draft will                Registration Bureau then sends registration
                                                           confirmation by post, takes out an
introduce a declaratory principle of state
                                                           advertisement announcing the registration of
registration, reduce the duration of registration
                                                           the new entity, and adds the information on
procedures, and shorten the list of grounds                the new company to its database. If an
for amending charter documents. Moreover,                  application for registration is sent in by post,
it will introduce the following provisions:                the whole procedure can take from 7 to 14
    1. Registration will be documented by an               days, depending on postal efficiency.
entry in the Single State Register of Legal
Entities and Individual Entrepreneurs, without                     Source: 2006 Business Environment in
prior approval of local authorities, which will                                    Belarus, IFC surveys
further reduce registration time. I would like to
note that this possibility was first considered
when the Presidential Decree No. 6 was at the            the accuracy of data provided would render
development phase. However, at that stage the            the whole procedure less bureaucratic and
implementation of this provision was hardly              time-consuming. In addition, entrepreneurs
possible, as the state agencies were not                 will no longer be obliged to submit certain
prepared for operating under new conditions.1            documents currently required by the
    2. Applicants will be held directly                  applicable legislation. These include papers
accountable for the correctness of the data              confirming the applicant’s right to be located
in documents provided to the registration                in the premises mentioned in the charter
bodies, which is one of the tenets of the                document.
“declaratory principle” of registration. Thus,              3. Not only company owners but also their
a clear-cut provision stipulating that                   duly authorized representatives would be
registration bodies will not be responsible for          entitled to submit charter documents to

   1
    Local authorities are presently empowered to register new economic entities as well as amendments and
   modifications to the charter documents of legal entities and registration certificates of individual
   entrepreneurs. The current procedure for adopting registration decisions involves numerous structural
   subdivisions of local authorities (departments of ideology, agriculture, etc.), which take account of aspects
   besides compliance with applicable legislation. This is redundant, as many of the approvals sought are not
   pertinent to state registration. In addition, state registration should be exclusively based on legislative
   compliance.

                                                                                                                 7
registration bodies in order to establish (re-      registration agencies, the Ministry developed
organize) commercial entities and to                clarifications covering over 300 legal issues.
introduce amendments to charter documents              The Ministry also identified approaches to
necessitated by a change in company                 the execution of registration procedures that
ownership.                                          involve complex legal issues.

                                                                   Registration in Belarus remains more
                                           time consuming and costly in comparison with other countries




   –The Ministry of Justice has been                   These clarifications, developed at the
overseeing the business registration                Ministry’s initiative, followed up on discussions
procedure. How has this affected the                which took place during four sessions of the
unification of the overall business                 Methodological Council set up by the Ministry
registration process, and what are the              of Justice. Not a single request lodged by
prospects for creating a single                     registration bodies has been left without a
registration body?                                  detailed reply.
   – I believe that the establishment of a single      However, the need to construct an
registration body lost its urgency after the        integrated vertical system of registration
adoption of the Presidential Decree No. 175         bodies, answerable to a single national-level
dated 8 April 2004, which empowered the             agency, is still very much on the agenda. The
Ministry of Justice to exercise methodological      set of measures which I have mentioned above
supervision over business registration.             includes the preparation of a draft law on
   The Ministry of Justice has lived up to the      registration. One of the key issues in this
expectations set forth in the Decree.               regard will be the creation of a single
Specifically, following the requests lodged by      registration authority.




8
                                                                                        V. Karyagin


                          Minsk City Union of Entrepreneurs
                      and Employers: main results and plans
                   to improve business environment in 2006

    – The Minsk City Union of                           trying to communicate the platform’s key plans
Entrepreneurs and Employers put forward                 to state officials, entrepreneurs and
a draft National Business Development                   representatives of civil society. Mechanisms and
Platform in the spring of 2006. How was                 tools for the implementation of these ideas are
it received by state agencies? Has it been              set forth in the platform and can be used by
adopted? What will happen next?                         any business association. I would like to stress
    – In working on the National Business               that we are talking about legal methods of
Development Platform, we sought to create a             shaping public opinion and explaining the
comprehensive document laying down key                  rationale behind legal acts. We should be able
guidelines for improving the business                   to prod the authorities into changing the current
environment. This is what sets the national             situation.
platform apart from proposals previously                    By the end of this year, the coalition – which
drafted by other business associations. The             currently comprises about 20 regional,
business community is now aware that the                sectoral and national business associations –
adoption of one or two legal acts will not bring        plans to register as the National Confederation
about improvement in the overall business               of Entrepreneurship. It is possible that, by the
environment. We support systemic change,                time the coalition is registered, it will have even
which includes taxation reform, state                   more members. We welcome cooperation
regulation and safeguard of property rights.            from anyone desiring to contribute to the
All these proposals are set forth in the national       implementation of the national platform.
platform.                                                   State agencies have greeted with
    The national platform draws on the results on       understanding our call ‘to start an extensive
numerous surveys of entrepreneurs. The steering         dialogue between the business community,
committee, comprising representatives from              the authorities and society’1. At every stage
national and regional business associations, has        of the platform’s preparation, we have sent
incorporated several amendments to take                 drafts to international organisations,
account of the viewpoints expressed by more             parliamentary commissions, ministries and the
than 20,000 business people polled. The final           National Legislative Centre under the
version of the platform was unveiled at a               Belarusian President. Some state agencies
conference on conditions and prospects for              have provided us with critical comment and
private enterprise development until 2010, held         suggestions – many of which have been
on 28 September in Minsk.                               subsequently incorporated in the document.
    Supported by most Belarusian entrepreneurs,         A number of our proposals regarding taxation,
the platform seeks to consolidate the efforts of        registration, licensing and property rights have
business associations aiming to implement its           been included in the Council of Ministers’
initiatives. A coalition of national and local          Ordinance No. 1029, dated 11 August 2006,
associations is currently being created; this is        Organisational Measures to Facilitate the

   1
       2006 – 2007 National Business Development Platform, p. 6.

                                                                                                         9
Fulfillment of SME Development Projections         concerned with costly registration procedures;
for 2006–2010. Conferences and seminars            unjustifiably hefty fines and notary duties make
conducted to discuss the platform have             registration and post-registration overly
attracted representatives from the Economic        expensive. A significant reduction of notary
Ministry, other Ministries, parliamentary          fees in August 2006 helped resolve this
commissions and local authorities. In 2006,        problem.
with support from local authorities, we               The IFC has promoted constructive
conducted meetings with entrepreneurs in 24        dialogue between the business community
cities. Gatherings in Mogilev, Krichev,            and the authorities while holding seminars to
Bobruysk, Osipovichi, Gomel, Zhlobin, Brest,       study the experience of Sweden and Ukraine;
Pinsk, Baranovichi, Grodno, Vitebsk, Minsk,        this has had a positive impact on registration.
Molodechno, Borisov and Lida sparked                  As for inspections and fines, the
interest from local business communities. We       Presidential Decree No. 419, dated 30 June
realised that national and local state agencies    2003, rendered these issues less acute. We
have many interesting proposals for local          believe, however, that these problems are far
entrepreneurs. For example, Lida’s City            from resolved and need to be considered in
Executive Committee has invited us to an           the context of property rights protection – the
international economic forum scheduled for         most serious problem faced by SMEs.
July 2007.                                            Belarusian entrepreneurs do not regard the
    We have also tapped the potential of           present judicial system as a legal protector of
Belarusian research institutions, including the    their interests. If a businessman takes the
Institute     of    Entrepreneurship       and     state to court, he loses in more than 95% of
Management and the “Strategy” Analytical           cases. Many laws are poorly-devised and
Centre. We intend to extend our ties with          minor economic transgressions attract steep
research centres in future.                        penalties; fines undermine the economic
    – How would you assess the changes             foundation of companies. The smaller the
seen in 2006 regarding procedures for              company, the larger the burden of fines it
                                                   bears as no differentiation is made between
state registration, inspection, and
                                                   small and large firms.
penalties for tax-related offences? Which
                                                      – Would you say that business
key impediments to private enterprise
                                                   associations and state agencies have
remain?
                                                   worked together effectively in 2006 to tap
    – These changes were certainly beneficial
                                                   business potential?
and were partly instigated by discussions
                                                      – Unfortunately, the dialogue between the
which took place within the national platform
                                                   business community and the state is
framework. The Ministry of Justice and local
                                                   unsatisfactory. We would like to establish
authorities were actively involved in this
                                                   closer cooperation and engage in more
process.
                                                   targeted, systemic work. Instead, we only see
    We support the ‘one-stop shop’ principle for
                                                   one-off meetings; in most cases, these
business registration, simplification of           produce no specific results.
procedures and development of the declaratory         Private enterprise development councils,
principle of state registration. Having brought    which presently operate under the auspices
together the initiatives of the business           of state agencies, are slow moving. The state
community in a single document, the authorities    has tried to seek their advice in the preparation
are prepared to implement these proposals.         of legal acts to no avail. At the same time, the
    However, the ‘one-stop shop’ principle has     state often ignores business associations –
yet to be perfected; some companies consider       capable of providing competent expert
it to be just as costly and complex as the         assessments.
regular procedure. This defeats the very              Most forums, including the National Council
rationale of this concept. Accordingly,            for Labour and Social Issues, the Trade
discussions are continuing. The attention of       Ministry’s Labour Commission and the
the state is a welcome development.                Interagency Council for Private Enterprise – led
    Businesses do not regard this as the most      by the Deputy Prime Minister Andrey Kobyakov –
serious problem though; most are more              are purely formal in nature. These bodies only
10
include a few business association                  However, we do welcome the adoption of this
representatives. In addition, they do not provide   document as it confirms the Government’s
the business community with feedback;               intention to meet entrepreneurs halfway. We
information about issues on the agenda or           also realize that, without the Government
decisions adopted is not readily available.         dramatically changing the way it operates, little
   We established the National Platform to unite    improvement will be seen.
entrepreneurs, hoping to facilitate an effective       – The draft law ‘On Small Business
dialogue with authorities. State agencies do not    Support’ – drawn up by the Economic
rule out dialogue with entrepreneurs and in         Ministry – has been vetoed by the
many cases are ready to take their interests        Presidential Administration. Do you think that
into account. However, civil servants would like    such a law is really needed at the current
to see justified, clear proposals backed by the     stage? If so, what should it focus on?
majority of business people. We are prepared           – Such a law should definitely be adopted –
to put forward such proposals to ensure the         a view shared by most business associations.
implementation of the platform’s six sections.      In working on this document, we were able to
   – Do you think that the Council of               agree on the following classification of
Ministers’ Ordinance No. 1029 can                   companies: medium-sized (up to 250 people),
significantly influence SME development             small (up to 100 people) and micro (up to 15
in Belarus? What might obstruct the                 people). Despite its overly general nature, the
successful implementation of measures               draft law envisages specific forms of state
set forth in this document?                         support available to companies of different
   – This leads us back to a systemic approach      sizes. It’s like a skeleton that needs flesh.
to changing the business environment.                  Many believe that, if adopted, the Law will
Ordinance № 1029 covers the most topical            represent a comprehensive small business
issues raised by entrepreneurs but the              support concept, including simplified taxation
measures envisaged are not systemic. So far,        for micro companies and change to the tax
the state has only promised to tackle the           reporting period for small, medium-sized and
problem areas highlighted by entrepreneurs.         micro firms. We regard this document as a
In the absence of close interaction between         manifestation of a more systemic approach
the state and the business community,               to SMEs. In the absence of this law, the state
decisions adopted may not have a lasting effect     may take measures to improve business
on the situation. Legal acts which may be to        conditions but they will hardly be systematic.
the detriment of the business environment              The Law should improve business
could also slip through.                            infrastructure, allowing local authorities and
   Entrepreneurs do not pin great hopes on          ministries to interact more freely with business
the measures set forth in the Ordinance.            organizations.




                                                                                                  11
                           Regulatory simplification for business
                                 is one of the primary objectives
                           of state policy in the realm of private
                                                       enterprise
                                  Correspondent Vyacheslav Beluga talks with Aleksandr Ya. Likhachevsky, director
                                  of the Ministry of Economy’s Private Enterprise Department.



   – Obtaining various business permits
is a very complex and costly administrative                   IFC’s Belarusian business environment
procedure. This is apparently due to                         survey for 2006 identified administrative
imperfections in the regulatory regime for                   barriers as the key hindrance to private
this field. What key shortcomings would                      business development. Those polled identify
you identify?                                                permits as one of the most serious problems.
   – Numerous studies have repeatedly
identified and publicized a range of common                  The increasing amount of time and money
                                                             spent by private companies on securing
problems. Concurring with the conclusions
                                                             permits could be used more productively.
drawn by the International Finance Corporation,
                                                             Specifically, in 2005, the average company was
the Ministry of Economy recognizes the following
                                                             obliged to acquire six permits, taking an
two key problem areas: the absence of uniform
                                                             average of 79 days per permit. The average
approaches to regulating permit issuance, and                cost of gaining these permits was $2,070.
the lack of available comprehensive information
about business permits.                                      It is virtually impossible to estimate the total
   – This year the executive government                      number of permits in Belarus. Experts believe
established specific objectives with regard                  that they number at least 1,000.
to simplifying permit procedures and
cutting red tape (Ordinances Nos. 42 and                     Procedures for granting permits are barely
1029). Could you tell us about what is                       regulated, so SMEs spend an increasing
being done to meet these objectives?                         amount of funds and time securing them.
     – These objectives are regarded as                      Stated as the main reason for abandoning plans
primary in the realm of private enterprise                   to set up a business, this is a loss to the SME
policy. A draft ordinance of the Belarusian                  sector and the state. Many existing permits are
Prime Minister has been prepared on the                      either unjustifiable or overlap with other
establishment of a working group for the                     regulatory procedures. As a result, they unduly
simplification of administrative procedures.                 complicate the operating environment for
The working group will draw up proposals to                  SMEs while doing nothing to avert risks to
modify legislation governing the administrative              public health or the environment.
procedures relevant for legal entities and
individual entrepreneurs. It will comprise                              Source: IFC Business Environment
representatives of the state agencies involved                                    in Belarus Survey, 2006
and of other interested parties1. Analysis of

     1
      After this issue’s going to print, the Belarusian Prime Minister signed an edict, of 30th November 2006, to
     establish a working group to simplify administrative barriers; this is headed by the Deputy Prime Minister,
     Andrey V. Kobyakov.

12
almost 1,100 business-related administrative
procedures conducted by the Ministry of              IFC’s Belarusian business environment survey
                                                    for 2006 showed that permits issued by local
Economy has demonstrated the need for such
                                                    agencies account for the bulk of all business-
a working group. The information obtained
                                                    related permits. About 60% of small businesses
should be analyzed in detail, as some               are involved in retail trade, public catering,
administrative procedures are poorly justified.     consumer services and manufacturing.
In addition, the list of documents to be
supplied by entrepreneurs, the fees charged,        To study the existing problems in the field of
and the processing periods are not sufficiently     permits and draw up recommendations for their
grounded in law. The analysis also assessed         resolution, the IFC and the Mogilev Regional
the potential impact of cancelling or revising      Executive Committee implemented a pilot
certain administrative procedures.                  project. This sought to survey and modify
   – If the total number of business                procedures for issuing permits to economic
                                                    entities operating in leased premises.
permits is to be determined, an inventory
of all legalization should be carried out
                                                    Under the pilot project, IFC and the Mogilev
by all state agencies involved. What is             Region Executive Committee have:
being done in this regard, and what
problems have you encountered?                          studied the procedure for issuing permits
   – I believe that efforts to streamline the           to start a business and taken stock of
legislation     governing     administrative            applicable legislation;
procedures are of primary importance. The               drawn up algorithms for negotiating permit
working group will devise specific objectives           issuance procedures and created a permit
for each state agency involved in permit                database;
issuance.                                               developed a guide for entrepreneurs on
                                                        how to navigate permit issue procedures;
   – Decree No. 17 has streamlined
                                                        devised recommendations on how to
business licensing to a large extent. Are
                                                        improve permit issue procedures;
there plans to adopt a framework                        adopted a decision to start work on the
document which will lay down general                    simplification of permit issue procedures
conditions and principles of the regulation             in early 2007.
and functioning of business-related permit
system?                                             If implemented, new businesses will have to deal
   – The adoption of such a legal act should        with fewer state agencies and the time needed
incorporate the results attained by the             to complete permit issuance procedures should
aforementioned working group. For the time          be reduced by more than three months. The
being, we will focus our efforts on specific        IFC estimates that, over this period of time, small
administrative procedures which should be           businesses involved in retail trade and public
                                                    catering could generate about $9 million in tax
simplified and streamlined.
                                                    and duties for the state budget.
   – The Mogilev Regional Executive
Committee and the International Finance
Corporation are about to complete a pilot             This experience will definitely be very useful
project on the study and improvement of           for further simplification of regulatory
regional regulatory procedures, which was         procedures. I believe that the project results
launched in December 2005. How would              will have a significant impact on the efforts by
you assess the results of this project?           state agencies and regional executive
Do you believe that the experience                committees, including the Minsk City
accumulated could be extended to other            Executive Committee, to reduce administrative
regions?                                          barriers.




                                                                                                      13
                                              M. Bakanova, S. Pukovich, I. Pelipas

                                 Why have new private enterprises
                                      not become the driving force
                                   of economic growth in Belarus?
                                                            Results of Industrial Enterprise Restructuring Survey


   In 2005, the World Bank has published its            complete information, including detailed
Country Economic Memorandum for the                     description of the survey methodology and
Republic of Belarus (CEM).1 The main theme              sampling, tables with descriptive statistics and
of the report was an analysis of sources of             results of the regression analysis is contained
economic growth and its sustainability both             in chapter 3 of the CEM, and more strictly
on macro- and micro-levels. Analysis of                 scientific description could be found in
microeconomic foundations of economic                   Bakanova et al. (2006).2
growth and, in particular, assessment of the               The transition process also involves a
changes in efficiency of Belarusian industrial          number of changes on the firm-level.
enterprises, was based on the results of the            Following Earle and Estrin (1996), we singled
enterprise restructuring survey of 402                  out the following major directions of these
industrial enterprises, undertaken by the               changes:
Institute of Privatization and Management                   depoliticization and reorientation of firms
under the World Bank contract in June 2004.                 away from rent-seeking, which implies
   In this analysis, we had three                           breaking the links between the firm and
                                                            the state and refocusing the objectives on
interconnected objectives:
                                                            profits;
    to evaluate the extent of improved
                                                            property (short-term) restructuring, which
    performance and restructuring, particularly
                                                            implies financial reorganization of liabilities
    with reference to other transition
                                                            and own capital, changes in the enterprise’
    economies at comparable stages of
                                                            assets, legal changes, alienation and
    development;
                                                            getting rid of strategically less important
    to compare enterprise performance in                    enterprise’s units;
    different ownership groups, in particular,              strategic (long-term) restructuring, which
    privatized enterprises and newly created                implies replacement of outdated
    firms;                                                  equipment, opening of new production
    to explain the findings in terms of the                 lines, opening up new markets and
    economic and business environment that                  implementation of new managerial
    could provide some impetus to policy                    strategies, closing down or, conversely,
    reform.                                                 expanding of enterprises.
   This article offers a brief popular summary             We obtained the information from the
of the main findings based on the results of            survey on property and strategic restructuring
the enterprise restructuring survey. More               by their different measures (see Box 1).


     1
      World Bank (2005), Belarus: Window of Opportunity to Enhance Competitiveness and to Sustain Economic
     Growth , Country Economic Memorandum for the Republic of Belarus, Report No. 32346 BY.
     2
      Bakanova, Estrin, Pelipas, Pukovich (2006), Enterprise restructuring in Belarus, IZA DP No. 2148, May
     2006.

14
                                                 Box 1. Measures for Property and Strategic Restructuring




        The questionnaire aimed to assess the degree of strategic restructuring by the following measures:




   The average levels of property restructuring      only been completed in 2 or 3 percent of firms.
are exceptionally low in Belarus. Of the 16             Only 2 of the 18 measures for strategic
indicators of restructuring, more than 80            restructuring have been commenced by fewer
percent of firms report that they have taken         than 50 percent of firms, and 6 measures have
no measures for half of them, and only for           been started by more than 90 percent of firms.
two measures (change in organizational
                                                     However, even here completion rates remain
structure and sale of unnecessary assets)
                                                     frustratingly low: in only 3 measures more than
more than half of the firms report having taken
some actions. Some 14 years after the start          10 percent of firms claim to have completed their
of transition, measures have only been               restructuring. For the remainder, most claim to
completed in more than 10 percent of firms           have started a variety of strategic restructuring
in the same 2 of the 16 actions. For most of         activities, although for a sizable minority the
the remaining actions, measures have typically       actions remain on the intentions list.
                                                                                                       15
    It is hard to make cross-country                        levels and less property restructuring. This
comparisons when the indicators are for                     result may perhaps be explained by the policy
different restructuring activities, but these               dating from the late 1990s to privatize more
measures seem very low by the standards of                  problematic enterprises.
Hungary, Poland and the Czech Republic by                       Our findings that the new firms in Belarus
19933, and of Russia in 1994.4                              rarely show any significant difference in
    An analysis of data leads to the conclusion             performance from current and former state-
that Belarusian firms have made only limited                owned firms are contrary to almost all of the
progress in many of the key elements of                     transition literature, which identifies new firms
enterprise restructuring, such as asset                     as the engine of restructuring and growth. We
restructuring, integration into the world                   found that for the most part, the de novo firms
economy through trade and investment, and                   do not perfom differently from SOEs, except
the reorganization of companies to make them                for exports, which are greater in DNs (when
vibrant components of the market economy.                   we control for other factors). Property and
    An experience of other transition economies             strategic restructuring is also slower in de novo
suggests that under the conditions of sufficiently          firms (because such firms have less need for
developed institutional environment and                     restructuring), as well as productivity growth.
appropriately conducted privatization, privatized           The latter might be explained by the particular
firms perform better than state-owned firms, and            legal, institutional and business environment,
the performance of new private enterprises will             in which de novo firms operate in Belarus, and
be even better and these enterprises became                 which is not conducive to freeing the potential
major driving force of restructuring and                    of entrepreneurship.
economic growth.                                                To better understand and interpret the results
    Using multiple regression methods and the               obtained from empirical analysis on Belarus as
same models that have been employed with                    compared to those on other transition
success in other transition economies; we tested            economies, we’d like to briefly touch upon the
two primary hypotheses about the impact of                  following three aspects: the degree of integration
different ownership on performance and                      into the world economy, the impact of soft
restructuring of Belarusian industrial enterprises:         budget constraints, and institutional
      Hypothesis 1: Private firms perform                   environment for privatized and de novo firms.
  “better” than state-owned firms (SOEs).                       In Belarus we find the levels of FDI and joint
                                                            ventures to be very low, and our empirical
      Hypothesis 2: New private enterprises
                                                            analysis did not reveal that membership in a
  (de novo) perform better than either
                                                            joint venture yields any benefit in terms of
  privatized or state-owned firms.
                                                            improved performance. This suggests that the
    Both hypotheses are rejected by data:                   policy environment is particularly unattractive to
privatized firms do not perform better that                 potential foreign investors, and that the Belarus
SOEs; and de novo firms for the most part                   authorities have much to learn about how to
are not found to perform differently from other             exploit joint ventures to the benefit of the host
firms, both SOEs and privatized firms.                      firms. Studies of other transition economies
    An interesting but somewhat inconsistent                suggest that foreign firms could have a very
result was obtained after the separation the                important role to play in enterprise restructuring.
group of privatized firms that have non-state               Foreign firms can provide new technologies,
majority owners: former state owned firms                   quick mechanisms for benefiting from the global
demonstrate greater profitability and                       division of labor, including export growth, capital
productivity growth but lower productivity                  investments and managerial skills.5
     3
      Estrin, S., Gelb, A., Singh, I., 1995. Shocks and Adjustment by Firms in Transition, A Comparative Study.
     Journal of Comparative Economics, 21 (2), 131 153.
     4
      Earle, J., Estrin, S., Leschenko, L., 1996. Ownership Structures, Patters of Control and Enterprise Behaviour
     in Russia, in Commander, S., Fan, Q., Schaffer, M. (Eds), Enterprise Restructuring and Economic Policy in
     Russia, Washington DC: EDI and World Bank.
     5
      Djankov, S. and Murrell, P., 2002. Enterprise Restructuring in Transition: a Quantitative Survey, Journal of
     Economic Literature, 40, 3, 739 792.

16
    Analysis of the impact of soft budget                and disincentive effects probably provide much
constrains on enterprise’ performance also               of the explanation for the failure of privatization.
revealed the results different from many other               A comparative analysis of the performance
studies on transition economies. We found that           indicators of SOEs, former SOEs and de novo
firms in receipt of direct or indirect subsidy           firms has indicated improvements in the
never perform significantly worse and                    operations of SOEs in some areas, such as higher
sometimes perform even better. This might be             growth of output, expansion of product range,
explained by the underdevelopment of market              and increases in exports, wages, profits and
economy in Belarus, resources from any                   profitability. This suggests that the restructuring
source may, under certain additional                     of SOEs, albeit limited, took place and brought
conditions, help the firms to improve                    aboit some positive results. The pressure for this
performance. In Belarus, it seems, two such              restructuring came from the two sources:
conditions have been in place. The first is the          strengthened administrative controls and
fairly strict supervision over SOEs and former           increased competition. The “restructuring” was
SOEs performance, which considerably                     supported by government subsidies, investment
reduced the costs of asset stripping and the             grants, soft credits, etc. Moreover, some forms
related non-appropriate use of subsidies. The            of state support were explicitly linked to enterprise
second is a selection bias in both privatization         performance, such as tax restructuring
(best firms remain non-privatized) and                   (conditional on due payments of current taxes)
subsidization (best firms, due to their state            and tax exemptions (contingent to growth in
status, have better access to state support).            output). The government has also supported the
    However, the real major impact of soft budget        domestic demand for local industries in the
constraints has to be seen not just on the subsidy       consumer sector by a combination of income
recipients themselves, but on the economy-wide           policy and import restrictions and the foreign
business dynamics. Massive subsidization                 demand by lobbying industrial interests abroad.
undermines the most basic incentives for                     Perhaps the restructuring was undertaken
competition generated by the market economy.             “top-down”, its overall speed was found to be
    The refutation of Hypotheses 1 and 2 is the          slow and scope to be limited. Some important
                                                         basic restructuring measures are yet to be
strongest indication that the Belarusian
                                                         implemented. As it is argued in the CEM,
institutional environment has not yet taken a form
                                                         accelerating restructuring in the future may be
that can encourage the emergence of a market
                                                         increasingly difficult without serious changes
economy. The environment in which both de novo
                                                         in the institutional and regulatory environments.
and privatized firms operate prevents them from
                                                         For this purpose the right set of incentives
realizing the potential benefits of private
                                                         should be in place, and this is impossible
ownership. This relates to the uneven playing field,
                                                         without depoliticization – a completely missing
the restrictions on the operations of the product
                                                         element in the transformation of the industrial
markets, credit rationing, weakness in the
                                                         sector in Belarus to date.
corporate governance regime, etc. Even in                    Institutional development, particularly in the
privatized firms, owners, as a rule, have difficulties   area of property rights and institutions, should
replacing firm management. Overall, the private          be also conducive to the emergence and
sector remains quite depressed: privatized firms         growth of a dynamic de novo sector. Such
are still affected by considerable government            institutions include a flexible capital market, a
controls, while new private firms are mostly weak.       sound commercial code, the enforcement of
    The fact that privatization is not found to          property rights, a limitation on regulations and
influence company performance, while soft                bureaucracy – especially for SMEs – and
budget constraints sometimes have a positive             relatively low levels of corruption. The
effect, however, cannot be interpreted as                institutional differences with respect to the
evidence against a reform strategy aimed at              business and legal environment for new firms
more privatization and equalization of business          seem to be strongly associated with the rate
conditions. Rather, the institutional environment        of the creation of new enterprises and therefore
in Belarus must be so poor that reforms that             with productivity and economic growth.
have been effective in other transition                  Therefore, the weakness of the de novo sector
economies have failed to work. An important              should be interpreted as a fundamental
element of this poor business environment is             weakness of the entire development path that
soft budget constraints, whose pervasiveness             the Belarusian economy has been following.
                                                                                                           17
                                                                                    Y. Romanchuk

                                          End of the economic cycle
                                    Belarus completes its best ever
                                                    economic period
                              End of year economic reports rarely differ from those seen in the first three
                              quarters; key trends are already apparent and the behavior of key economic
                              subjects is predictable. Companies are completing their business plans and the
                              government and local authorities continue within their existing task framework. As
                              Belarus has almost fully reconstructed a planned economy, its end of year results
                              can be calculated by looking at the first three quarters.



     The quality of economic processes                 imports. Throughout 2006, the Government
                                                       conspicuously failed to make plans for future
     in 2006                                           that might include the absence of a lavish
                                                       energy grant. Few voices of dissent were
    The key economic trends in Belarus in 2006
                                                       heard. State companies, shielded from foreign
were laid down in late 2005, when Russia
                                                       and domestic competition and enjoying cheap
extended its generous energy grant for
                                                       credit and guaranteed domestic sales, were
another year – worth about 13% of GDP. The
                                                       content with the current policy. They continued
Kremlin’s decision (lobbied by official Minsk)
                                                       to secure privileges yet were still unable to
gave Belarus 12 more months of a rapidly
                                                       utilize their resources effectively; ‘minor’
expanding GDP while allowing real monetary
                                                       problems such as high taxes, costly
incomes to be significantly raised. Additionally,
                                                       bureaucracy and unpredictable legislation are
the agricultural sector could be further
                                                       accepted as part and parcel of state
subsidized and construction projects could be
                                                       patronage. Private businesses, particularly
invested in. As a result, exports and investment
                                                       small firms, failed to loudly voice their
projects grew.
                                                       grievances although the first-ever Small
    The Government has failed to focus on the
                                                       Business Development Program did come into
quality of key economic processes. No
                                                       being. It is a welcome development but the
incentives have been given to calculate the
                                                       dialogue with the state never entered an active
profitability of investment projects or assess
                                                       phase in 2006. The number of anti-business
the efficiency of budgetary expenditures, let
                                                       legal acts, violations of property rights, huge
alone create a competitive field or carry out a
                                                       fines imposed by numerous control agencies
structural reform. In 2006, the Government
                                                       as well as administrative barriers were as
continued to delude itself that a planned
                                                       significant as ever. Entrepreneurial hopes for
economy is more efficient than a market one.
                                                       lowered taxation and administrative burdens
It still believes that the Ministry of Economy is
                                                       have not materialized. Their share in the overall
better suited to select investment projects
                                                       employment, in the GDP and the value added
than company directors and that price
                                                       allowed civil servants to ignore the economic
liberalization, small business development and
                                                       and political interests of the business
investment have little affect on social stability
                                                       community.
or sustainable development.
    Belarus suffers from the ‘energy curse’: a            Stimulation of consumption
huge energy grant effortlessly provides the
Government with funds, obviating the need                Over the first three quarters of 2006, the
for reform. Although Belarus has no oil of its         monetary and fiscal policies of the National
own, its economy is skewed by cheap energy             Bank and the Council of Ministers inspired

18
consumption growth in the real sector and            traditional 17%-20% to just 4%-5%. The stimuli
individual households. The Government re-            offered by the Government eroded Belarusian
distributed tax receipts to try and bring higher     natural thrift and caution. The lion’s share of
added value. ‘Unlimited spending’ was their          the population’s income was spent on
catchword.                                           consumption: from January-August, spending
   In 2006, the National Bank steadily reduced       on goods and services amounted to 24.1 trillion
the cost of borrowing. From January-August,          Belarusian rubles or 49.5% of the GDP – a rise
ruble loan interest rates fell to 8.8% from 10.3%    of 24.2% on the year before. This buying spree
(compared to the previous year). The National        would have been impossible without an
Bank’s agenda failed to include a banking            increase of 17.8% in the population’s real
reform or the creation of genuine stock and          incomes in the first eight months of 2006. This
financial markets due to a lack of political will.   is the highest growth rate in the past four years –
The National Bank poured its energy into             perhaps unsurprising in a year of parliamentary
boosting gold and currency reserves and              and presidential elections. Logically,
accelerating the growth of the money supply          consumption should be subject to restraint in
(M2). From 1st September 2005 to 1st                 years to come. Most individual households are
September 2006, the M2 increased by 57% –            unfamiliar with debt. With salaries constantly
higher than the year before. Free prices in          indexed and the labor market being stagnant,
Belarus are only seen at outdoor markets so          debt servicing is much easier than in a situation
money had to be channeled somewhere; the             where the national economy has to adapt to
options offered by the authorities can be            structural shifts.
counted on the fingers of one hand.
   By tradition, people’s savings were                  Budget
deposited at state banks as salary increases
awarded by the Government exceeded the                    In 2006 Belarus’s monetary policy was
pace of labor productivity growth.. As of 1st        constrained by the government’s fiscal
September 2006, 7.1 trillion Belarusian rubles       policy. Promises of lower taxation and more
had been deposited in savings accounts: an           transparent and efficient budgetary
increase of 28.5% over the previous 12               spending came to nothing once more. State
months. The growth of deposits and money             agencies tried to find ways to reduce
supply in the first three quarters of 2006 was       investment and current expenditure while
higher than in 2005. From 2004-2006, inflation       devising new longer term projects for
rates of 5% and annual returns of up to 25%          national and local budgets to be spent on
were seen within transitional economies’ stock       (keeping the budgetary status quo).
markets worldwide. However, the Belarusian                From January-August, consolidated budget
Government claims that savings rates of 12%          revenues stood at 48.7% of GDP while
and similar inflation rates are the only             expenditure reached 46.2%. 2006 consolidated
reasonable way of investing money.                   budget revenues were projected at 46.1% of
   The authorities realize that the financial        GDP with expenditure at 47.6%. The 2007 draft
stability of the state and the unreformed public     budget – based on gas prices of $60-65 per
sector largely depends on the consumer price         1,000 cubic meters – takes little account of new
index. Limitations on price rises, state-            oil delivery terms; it envisages a fall in
imposed restrictions on profitability and costs      consolidated budget revenue to 44% of GDP
and complex procedures for obtaining official        and a spending cut to 45.9% of GDP. In absolute
permission for each price increase distort           terms, expenditure is expected to reach 41.7
market forces and inflation. However, as             trillion Belarusian rubles or about US$19.3
property prices have reached their peak and          billion. These projections will be hard to meet.
the cost of energy is bound to increase in                In 2006, the Government was not only
2007, excessive money supply should result           unable to put the country’s finances in order
in high inflation. In 2006, the Government           but it exceeded the maximum budget deficit.
reinforced this trend by ignoring Russia’s           As a whole, the national budget deficit was
stand on future oil and gas deliveries.              570 billion Belarusian rubles higher than that
   A steep increase in individual households’        allowed for in law. Belarus’ taxation system
consumption reduced the savings rate from a          continues unsatisfactorily; the World Bank
                                                                                                     19
ranks Belarus bottom of a list of 175 nations.       investment in this sector, 19% of total
The number of taxes levied rose from 113 to          investment volume, still lags behind that of
125 over the year. Tax payment times                 the industrial sector - which attracted 28% of
remained unchanged at 1,188 hours; in                all capital investments in the third quarter.
monetary terms, this amounted to an indirect         Some funds were spent on technical retooling
tax of 1-2% of company revenue – a waste             while the rest was frozen in unsold stock. As
for the budget and the companies themselves.         of 1st October 2006, 2.49 billion Belarusian
                                                     rubles of stock remained unsold – a 17%
     Investment boom                                 increase on the previous year. More than $1
                                                     billion in locked capital represents a grave
    With a projected rise in capital investment      investment blunder. Moreover, unfinished
of 13 – 14% a year, actual growth reached            construction projects account for even more.
31.9% in the first three quarters of 2006.           As of 1st October 2006, these included more
Although spending on equipment rose by               than 16,000 construction sites. Of these,
46.8%, technological modernization is far from       55.1% are behind schedule and 4,300 have
underway. In fact, this has merely enabled the       been mothballed.
existing manufacture of outdated goods to be             The analysis of individual investment
expanded, deepening structural deformations.         projects reveals their striking similarity. A total
    Investment in the agricultural sector jumped     of 1,1613 kilometers of electricity transmission
by 57.7% while production fell by 0.8% per           lines were put into operation in the first three
cent; despite subsidies in excess of US$1            quarters of 2006 up from 985.8 kilometers
billion annually, the sector’s finances are as       the year before. 15 oil wells came on line with
precarious as ever. As of 1st September 2006,        only 10 drilled in 2005. 158.5 kilometers of
agricultural enterprises’ outstanding debt           main gas pipelines were completed as
stood at 915.3 billion Belarusian rubles. This       compared to 81.4 kilometers the year before.
would be twice as high if their taxes, electricity   68.3 kilometers of roads were built up from
and fertilizers were charged at market rates.        39.3 kilometers in 2005. The new production
Net profit reached just 683 billion Belarusian       facilities included: sausage production of
rubles from January-August 2006. All state           3.500 tons a shift, cheese production 7,200
efforts to attract investors into the agricultural   tons a shift, and confectionery of 900
sector have proved futile. Accordingly,              kilograms a year. Facilities for 165,900 hens
foodstuffs are more expensive in Belarus than        (263.6 in the previous year), 11,700 of cattle
elsewhere worldwide. Each year, the average          (8.800 in the year before) as well as vegetable
household spends more than $100-150 on               and forage warehouses were constructed.
food than should be necessary.                           The same investment projects – albeit with
    Construction has also been free of               different parameters – feature in the 2003 and
budgetary constraints while seeing a 47.8%           2004 reports; high tech projects are
increase in investment. This provides a litmus       conspicuous by their absence. Few can
test for the Belarusian economic management          believe that raising the number of hens and
system. The authorities appear to discriminate       cattle will help Belarus become competitive
against private companies in favor of state-         internationally. Sadly, misguided agrarians had
run firms yet the private companies, having          the final say in the determination of macro-
long maintained comfortable relations with           economic parameters for 2006.
state organs, clinch the most lucrative                  Private investment was either crowded out
contracts. In fact, the state agencies often         or obstructed in 2006. The business climate
act as customers and investors.                      saw no significant change – especially when
    Housing prices have rocketed due to              compared to its neighbors. No headway was
market mechanisms being blocked: new                 made in improving the quality of state
companies are denied access and                      governance.
complicated administrative procedures                    In terms of political stability and absence
continue. The construction sector continues          of violence, Belarus is indeed ahead of 44.8%
to absorb the new money supply provided by           of countries; it is hard to take heart from this
the National Bank and funds deposited by the         achievement though. The Baltic states are
population. Nevertheless, the level of               much closer to the best international
20
standards; regarding state governance,              only 15% of other countries. Russia and
Belarus ranks 191st. Over the past 10 years,        Kazakhstan have similar ratings. Most CIS
almost nothing has been done to improve             countries are in a similar position so it could
matters. The average state governance               be concluded that the Soviet ideology and
indicator throughout the rest of the CIS is 2.5     culture have done little to encourage people
times better than in Belarus. In terms of quality   to be law-abiding.
of state regulation, Belarus ranks 199th, ahead        Belarus’ 172 nd position in fighting
of only 6.4% of countries; its indicator is 4.4     corruption is equally unimpressive, putting it
times worse than the CIS average. Belarus           ahead of only 19.2% of countries. This is
lags significantly behind Russia and Ukraine;       particularly disappointing considering the
the quality of service rendered by civil servants   funds allocated to law enforcers and control
in the Organization for Economic Cooperation        agencies. In 2000, Belarus was ahead of
and Development (OECD) remains a distant            54.4% of countries in this respect but it’s
dream. The Belarusian state heavily taxes its       becoming increasingly clear that the state’s
citizens without providing them with the kind       economic and political monopoly counteracts
of services seen in Scandinavia. A non-             anti-corruption efforts. Belarus has fallen
competitive environment and the absence of          behind other CIS countries in this field, a trend
public control over civil servants mar the          confirmed by Transparency International’s
Belarusian machinery of state.                      decision to downgrade Belarus from 107th
    In terms of rule of law, Belarus is near the    position in 2005 to 151st in 2006. This is one
bottom of the list, ranking 181st – ahead of        of the steepest falls on record.

                                                             Business environment parameters in Belarus
                        in 2006 in comparison with neighboring countries and competitors (values in US$)




                                                                                                     21
Source: Doing business 2007, World Bank, IFC
                                       Comparing Belarus’ governance system with that of other countries




Source: A decade of measuring governance. Governance matters 2006

     Anti recessionary administration                demonstrate that the Soviet-style planning is
                                                     becoming a thing of the past, a trend
   In 2006, the Belarusian leadership failed         apparently lost on the Council of Ministers.
to effectively coordinate state agencies’               It became increasingly apparent in 2006
efforts to prepare for the new business cycle.       that an old management style would be
This task will be even harder in 2007 as the         insufficient in 2007; the authorities will be
state policy is still inconsistent and               forced to create an anti-recessionary
shortsighted. The developments seen in the           administration system. Liberalization,
first three quarters of 2006 convincingly            structural reform and privatization will probably
22
be pushed onto the agenda by external factors             import bans to cocoon the economy from
and the financial stance of the public sector             negative trends. An increasingly urgent need
and banks. However, another option may                    to pursue reform can be regarded as the main
emerge: tougher administrative measures,                  outcome of 2006. Next year marks the start
further monopolization of the economy and                 of a new economic cycle for Belarus.

                                  Macroeconomic Indicator Dynamics Three quarters of 2004, 2005 and 2006




Source: the Ministry of Statistics of Belarus, 2004 – 2006.


      Qualitative Economic Indicator Dynamics in Belarus Three quarters of 2002, 2003, 2004, 2005 and 2006




*Excluding payments to the Fund for the Social Protection of the Population




                                                                                                       23
24
International Finance                                                                     Swedish International Development
Corporation                                         www.bel.biz                                         Cooperation Agency


                   BEL.BIZ – THE MOST POPULAR BUSINESS PORTAL
                             Established in 2005 within the IFC Belarus Business Enabling Environment
                             Project, the BEL.BIZ portal targets owners and managers of small and medium
                             sized enterprises as well as individual entrepreneurs. BEL.BIZ is currently one
                             of the most popular and authoritative business oriented Internet resources in
                             Belarus: the portal has attracted about 500,000 visitors. It also won the Brand
                             of the Year 2005 competition. The survey conducted by IFC in March 2006
                             showed that 50% of Belarusian entrepreneurs are aware of the BEL.BIZ’s
                             existence.


Currently BEL.BIZ:
   Attracts 2,000 unique visitors daily;
   Features 75 rubrics;
   Contains 1,500 articles covering practical aspects of business, law and economy;
   Published 1,700 expert replies to entrepreneurs’’ queries covering different aspects of Belarusian
   business;
   Cooperates with 80 leading legal and consulting companies, banks, business editions, as well
   as state agencies.

BEL.BIZ would like to express its gratitude to the following
state agencies:
    The Ministry of Justice of the Republic of Belarus, which has placed
    a database of company names on BEL.BIZ and regularly updates it;
    The Ministry of Taxation of the Republic of Belarus, which
    regularly publishes clarifications and instructions on the
    functioning of economic entities on BEL.BIZ and answers
    questions from portal users;
    The Ministry of Trade of the Republic of Belarus, whose
    representative has taken part in the Internet conference entitled Presentation by a representative from the Ministry of
    «E commerce: problems and development prospects»;                    Justice, Irina Petrova (in the center) at a conference
                                                                           dedicated to the portal’s one year anniversary,
    Regional executive committees which take part in the Regions                             31 May 2006.
    on BEL.BIZ campaign by providing information about the
    entrepreneurial climates in their regions and answering questions posed by portal users.

                                            The BEL.BIZ portal makes it possible for state agencies to promptly
                                            inform the public about changes in the regulatory policies, results
                                            of their activities, as well as receive and analyze feedback from
                                            the business community. One of the most important tools driving
                                            an interactive dialog with the business community is the Topical
                                            Discussions section. The discussions of the following issues have
                                            proved most popular with the portal users:
                                            – Draft Law On Small and Medium Sized Enterprises Support,
          Internet conference entitled      – The National Business Platform of the Republic of Belarus,
    «E commerce: problems and development
         prospects», 25 October 2006.       – E commerce: problems and development prospects.