Tag: Belarus
The Customs Union Between Russia, Belarus and Kazakhstan: Some Evidence from the New Tariff Rates and Trade Flows
Author: Arevik Mkrtchyan, European University Institute.
This brief addresses the Customs Union between Russia, Belarus and Kazakhstan that was established in 2010. It argues that the external tariff schedule reflects a compromise between the interests of its members rather than simple expansion of Russian influence on the CU partners, and that the reduction in trade costs due to elimination of internal borders, benefits both the members of the CU and their external trade partners. Moreover, the impact of alleviated non-tariff trade costs on trade flows is strong and significant, while the tariff impact is insignificant for all members.
Can Anti-Smoking Campaigns Increase Obesity? Evidence from Belarus
Authors: Aliaksandr Amialchuk, University of Toledo, and Kateryna Bornukova, BEROC.
In this brief, we discuss the possible effects of an anti-tobacco campaign on obesity levels in Belarus based on results of Amialchuk et al (2012). Both smoking and obesity are among the main health concerns in Belarus. Negative correlation between smoking and body weight is well documented, but can anti-tobacco campaign cause an increase in obesity rates? Results of studies from developed countries provide mixed evidence. In Amialchuk et al (2012), we use household survey data from Belarus to establish the link between smoking and body mass index (BMI). We use cigarette prices and regional smoking prevalence as instruments for smoking, and find a negative effect of smoking on BMI. Moreover, using the quantile regression approach, we find that smoking has different effects on body weight for different BMI quantiles, with the largest negative effect in the upper part of the conditional BMI distribution. These findings suggest that anti-tobacco campaigns may slightly increase obesity rates, and campaigns should therefore ideally also include measures to promote a healthy lifestyle. On the other hand, the potentially modest weight gain from an anti-tobacco campaign is likely to be more than offset by the general improvements in health.
Smoking and Obesity in Belarus
Smoking prevalence in Belarus, like in many other transitional countries, is quite high. According to the Belarusian Household Survey of Income and Expenditure from 2010, the smoking rate was 26%, with a much higher prevalence of among men (49.3%) compared to women (9.5%).[1]
Despite the troubling levels of smoking prevalence, little has been done to combat smoking in Belarus. While most of the post-Soviet economies liberalized the tobacco industry, it remains under government control in Belarus. The profits of the state-owned cigarette producers, along with tobacco taxes, constitute an important part of Belarusian budget revenues. This might explain why the Belarusian government has not engaged in anti-tobacco campaigns in the past. However, Belarus is currently implementing Anti-Tobacco Plan for 2011-2015 in cooperation with the World Health Organization.
The Anti-Tobacco Plan includes a variety of anti-tobacco actions and measures. In particular, the government has plans to gradually increase tobacco taxes, introduce smoking-free zones and restrict smoking in public places, along with a massive informational campaign about the dangers of smoking and ways to quit. These measures have the potential to lead to a significant decrease in smoking prevalence. However, an unintended consequence of these policies might be an increase in overweight and obesity rates.
In fact, obesity is another important health problem of Belarus. In 1996-2008, (the period of analysis in Amialchuk et al (2012)), the mean BMI among adults was 26, which suggests that an average Belarusian adult is just on the borderline between healthy weight and overweight. In particular, 34% of adults are overweight, while approximately 15% of adults are obese. Moreover, the distribution of weight status has undergone substantial changes over time: the percentage of individuals in the right tail of the BMI distribution has increased over time, with the percentage of obese increasing faster than the percentage of overweight individuals.
The Link between Smoking and Obesity
The negative relationship between smoking and body weight is well-documented in the medical literature. This inverse relationship is mostly attributed to how smoking affects body weight by boosting metabolism and suppressing appetite. However, causality is usually difficult to establish: for example, a smoking person may also be more likely to eat unhealthy foods and care less about their health in general. Nevertheless, most of the previous studies have found a significant negative effect of smoking on body weight.
Since in many developed countries, the decrease in smoking prevalence coincided in time with the surge in both overweight and obesity rates, the question arises whether anti-smoking campaigns are in part responsible for the increase in obesity rates. However, the evidence on the effects of anti-tobacco campaigns on overweight/obesity rates in developed countries is mixed. Some studies do not find any significant effect on obesity (Nonnemaker et al, 2009).
Evidence from Belarus
As mentioned above, smoking behavior and BMI may be jointly determined, and to deal with the challenge of establishing causality, we utilize the method of instrumental variables analysis. We employ two instrumental variables in our estimation: (i) the mean number of cigarettes smoked per day in the same year-region-gender- and education group as the respondent, and (ii) the average yearly price per pack of cigarettes in the region where the respondent lives. Gilmore et al. (2001) identify important demographic and socio-economic differences in smoking rates, which dictates our use of gender and education categories (below secondary, secondary, university degree) to construct groups of observations that will be followed over time. The use of region as a grouping variable allows us to capture the social norm associated with smoking at the regional level. We exclude the individual’s own cigarette smoking when we create group-level means. Group-specific smoking prevalence is likely to be predictive of the individual’s own smoking preferences, but is unlikely to have a direct effect on individual’s weight status other than through the effect on individual’s smoking. After accounting for the fixed differences in average smoking among regions, gender, and education groups within each year, the source of variation that is available to identify the effect of the instrument on individual’s smoking is the differences in smoking prevalence among various interactions of year, region, gender and education categories.
We use lagged prices as instrument for current year cigarette consumption of the individuals in order to account for the addictive and inelastic nature of demand for smoking and the inability to quickly change smoking behavior after a price change. Furthermore, we use natural log of cigarette prices in order to account for the potentially non-linear effect on the number of cigarettes smoked. Cigarette prices are likely to influence an individual’s BMI only through its effect on smoking.
Other controls in our regressions include total personal income; household size; age; gender; single vs. married indicator; indicators of self-reported health status (good health, fair health, and poor health indicators); number of medical visits in the last 3 months; indicator for having been hospitalized in the last 12 months; indicator for whether health affects ability to work; sports practicing indicator; indicators for the educational attainment (university diploma, secondary education); and indicators for being currently employed, having ever worked, and being a student.
Our endogeneity-corrected estimates suggest that one additional cigarette per day would decrease BMI by roughly 0.23 units, and would reduce the probability of being overweight by approximately 2.5%. Furthermore, there is a small but significant effect on the likelihood of being obese: an additional cigarette smoked per day decreases the probability of being obese by 1.3%. Our results suggest an important implication that smoking is inversely related to body weight, and has some effect on obesity rates.
We also explore the difference in the effect of smoking on body weight across different quantiles of conditional BMI distribution. The largest effect is obtained for the 75th and 90th percentiles, and the smallest effects for the 10th and 25th percentiles. Smoking has a large effect on the body weight of individuals who are at the upper tail of the BMI distribution. These findings suggest that a reduction in smoking rate may lead to an increase in obesity rates by inducing weight gain among the population near the top end of the conditional BMI distribution.
While we found evidence of a possible increase in obesity rates resulting from the anti-tobacco campaign, it is important to remember that adverse health effects of smoking are numerous and the health benefits of smoking cessation are far in excess of the risk of weight gain. The current high prevalence of smoking and number of overweight individuals in Belarus constitute a major public health concern. Our results suggest that the prevalence of overweight and obesity might be exacerbated by the anti-tobacco campaign. From a policy perspective, an increase in obesity rates among the general population may be a reasonable concern for policy instruments targeted at reducing the overall smoking rates. It would therefore be wise to promote healthy eating habits and sports together with the anti-smoking campaign. However, the potentially modest weight gain from anti-tobacco campaign only is likely to be more than offset by the general health improvements associated with a decline in smoking rates.
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References
- Amialchuk, A., K. Bornukova, M. Ali, 2012. Smoking and Obesity Revisited: Evidence from Belarus. BEROC Working Paper Series, WP no. 19
- Gilmore, A.B., McKee, M., Rose, R., 2001. Prevalence and determinants of smoking in Belarus: A national household survey, 2000. European Journal of Epidemiology 17: 245-253
- Nonnemaker, J., Finkelstein, E., Engelen, M., Hoerger, T., Farrelly, M., 2009. Have efforts to reduce smoking really contributed to the obesity epidemic? Economic Inquiry 47, 366–376
[1] The social norms explain difference in smoking rates of men and women. In younger population, however, gender differences in smoking rates are less pronounced.
Directed Lending: Is It An Efficient Tool to Modernize the Economy?
Over the last couple of years, the growth rate of potential Belarus’ GDP declined. The government intends to revive economic growth by the policy of ‘modernization’, in practice pinned down to a drastic increase in the volume of capital investment, including by the means of directed lending. As the pre-crisis macroeconomic imbalances are at least partially cured, the government seems to be eager to apply a familiar policy tool. However, the empirical analysis of the effects of directed lending on total factor productivity and economic growth casts serious doubts on the efficiency of this policy tool.
Over the last couple of years, the growth rate of potential Belarus’ GDP declined. This conclusion is robust as suggested by the application of competing methodologies to assess potential GDP. For instance, the statistical filters, including the HP-filter, the Kalman filter, and the production function approach, produce different levels of potential growth, but generate similar growth rate dynamics, particularly the downward trend. From this perspective, the tendency for high and sustainable GDP growth in Belarus is increasingly compromised.
Economic authorities seem to be aware of that fact. For instance, the Ministry of Economy stresses the need to create a new, ‘highly productive’ sector in the national economy as the new engine of growth. An ambitious plan involves expanding the size of this sector to contribute to about half of the GDP growth rate, aimed at 12 per cent per annum by 2015. The creation of this ‘highly productive sector’ falls into recent policy initiative, called ‘modernization’. Under this banner, the government plans to renovate the capital stocks (primarily machinery, equipment, and transport vehicles) of a large number of state-owned enterprises. In a nutshell, this strategy may be seen as a way to facilitate technical progress embodied in capital.
What is necessary, according to the government, is to make a spurt in capital investments, often on a case-by-case basis. The government has a pool of enterprises to be modernized. The majority of them are unable to modernize themselves – i.e. radically increase capital investments – due to the lack of internal funds and poor access to external finance. Accordingly, directed lending is considered to be a useful policy instrument of modernization. In 2013, the Development Bank plans to considerably increase its credit portfolio (by about USD 0.5 billion) by financing projects at subsidized interest rates under the ‘modernization’ program. Recently, the government compiled a list of 67 agricultural enterprises liable to have an access to cheap loans for modernization purposes from the Development Bank. In addition, state-owned banks will continue the provision of policy loans that can be considered as directed ones.
With directed loans, we mean those loans that are typically granted to selected borrowers at interest rates lower than the market interest rates. In Belarus, directed lending has been an important policy tool over the last decade. Selective credit programs have been applied to prevent underinvestment and to stimulate output growth.
According to the estimations of Fitch Ratings (2010), almost a half of the outstanding loans in the Belarusian economy by the end of 2009, were directed ones. The IMF provided a slightly smaller, but still substantial figure of 46.2 percent (IMF, 2010). According to our own calculations, by 2011, the volume of directed loans amounted to about 40 percent of the total volume of outstanding loans. These loans have been made abundant in agriculture and housing construction sectors and, to a lesser extent, in manufacturing. This massive presence of selective credit in the national economy can be seen as a large factor contributing to the currency crisis of March 2011.
Accordingly, after the crisis, and following the necessity to ‘clear up’ the assets of the national banking system, the share of directed lending was reduced. We estimate that in 2012, the ratio of directed loans in total loans dropped to roughly 30 percent. However, the recent rhetoric of the development of ‘highly productive’ sectors and modernization is indicative of the intention to find new life for this old cloth. Directed lending is expected to revitalize enfeebling growth. In 2012, real GDP growth amounted to 1.5 percent against the background of the initial government plan of 8.5 percent.
Under selective credit programs, banks have been partially deprived of their autonomy to make decisions over the provision of credit. Thus, banks’ intermediation role has been circumscribed by the authorities. In theory, directed loans may spur capital accumulation as beneficiaries of these loans have access to cheap loans and thus invest and – arguably – produce more. In Belarus, there has also been an additional incentive, i.e. the necessity to substitute depreciating and outdated capital stock, inherited from the Soviet past. At the same time, political interference into the process of credit provision suggests that loans may be allocated to lower-yielding projects, and thus dampen growth rates of factor productivity and GDP (Fry, 1995). In addition, non-favored companies – typically from the private sector – face higher interest rates as their state-owned counterparts receive substantial discounts for their use of capital.
So far, these soft budget constraints in the financial system have allowed favored companies to receive loans up to three times cheaper, if judged by the level of real effective interest rates. Although private companies tend to be more efficient than state-owned enterprises in terms of factor returns and profitability, higher interest rates may reduce the volume of outstanding market loans. Furthermore, increases in the volume of cheap residential loans, which do not contribute directly to enhancement of productive capacity of the economy, may dampen the returns on investment further.
Governments have traditionally relied on selective credit programs by stressing positive externalities and spillovers for the economy as a whole (DeLong and Summers, 1991). Commercial banks care about private returns, while governments seek to maximize social returns by financing firms, which are capable of generating positive externalities. Unfettered operations of credit allocation mechanisms minimize allocation inefficiency and induce banks to minimize the costs of financial intermediation, thereby making credit more accessible.
How do these competing forces meet in Belarus and what are the effects of their joint working? In answering those questions, we have conducted an empirical analysis of the effects of directed lending on total factor productivity dynamics. The latter is considered to be a good proxy to observe the impact of selective credit programs on the efficiency of actor use.
The results of our econometric analysis show that over the period concerned, 2000–2012, the expansion of directed lending in Belarus has negatively affected total factor productivity dynamics and, subsequently, negatively contributed to the rates of GDP growth. A positive impact on growth, stemming from additional capital accumulation might nevertheless occur, but with a substantial lag. This likely positive impact is associated with the ability of banks to increase the volume of market loans alongside with the rising volume of directed loans. The option has been made possible only due to massive liquidity injections by the government and mainly the National Bank of Belarus. However, such injections are problematic to maintain over the medium to the long run as they have severe inflationary repercussions for the economy.
The effects of individual components of directed lending are mainly the same. In particular, loans for residential construction, provided to households in need, negatively affect total factor productivity. Moreover, it is through housing loans the adverse effects of directed lending upon factor productivity are mainly realized. The interest rate spread – between preferential interest rate and market interest rate – amplifies these negative relationships. Lower preferential rates result in larger losses in total factor productivity. Loans to agricultural firms have similar impact, although it has to be emphasized that the overall impact on total factor productivity approaches zero (not negative, as in the case of housing loans).
We also find that for Belarus, an increase in the total volume of directed loans leads to an increase in the volume of market loans. Both the National Bank and, to a lesser extent, the government, strive to minimize risks in the national banking system, which provide loans with smaller returns and/or non-performing policy loans. Similar challenges have been observed in China, where the Central Bank has been forced to recapitalize domestic banks to support economic growth after the global financial crisis of 2008. In 2007–2008, Chinese growth of 8–10 percent was driven by new lending averaging 30–40 percent of GDP, of which up to a quarter of the loans might have been non-performing, amounting to losses of 6–10 percent of GDP (Das, 2012).
In Belarus, the recapitalization policy, apart from its inflationary consequences, has other important effects. In particular, it prevents a dangerous trade-off between directed loans and market loans to resurface, whereby the former crowds out the latter as banks are unable to expand their portfolios due to the liquidity constraints.
Therefore, unless the expansion of directed loans would be checked, adverse effects of selective credit programs on productivity and growth would not evaporate, with negative consequences for the whole economy. Regarding policy recommendations, we claim that there is a need to fundamentally revise directed lending policies or to even minimize it to the extremes by allowing standard market mechanism for credit allocation to prevail in the national economy. Furthermore, we argue that directed lending, even after some cosmetic changes in the system design made in 2012, is not an efficient tool for economic growth promotion.
Tentative results of growth accounting made at the level of selected important industries suggest that the downward growth dynamics is associated with weak total factor productivity growth, i.e. disembodied technical progress. Improvement of total factor productivity seems to have the biggest potential for revival of economic growth. Therefore, the use of directed lending, as a policy instrument that hampers total factor productivity dynamics, may undermine prospects for long-term economic growth in Belarus.
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References
- Das, S. (2012). “All Feasts Must Come to an End– China’s Economic Outlook”, Euro Intelligence, 11 March, viewed 12 April 2012.
- DeLong, J.B. and L.H. Summers, (1991). “Equipment Investment and Economic Growth”, Quarterly Journal of Economics 106, 2, pp. 445–502.
- Fitch Ratings, (2010). “Directed Lending: On the Up or on the Way Out?”, Belarusian Banking Sector, May.
- Fry, M.J. (1995). Money, Interest, and Banking in Economic Development (John Hopkins University Press, Baltimore and London).
- IMF (2010), “Republic of Belarus: Fourth Review under the Stand-By Arrangement”, IMF Country Report 10/89, viewed 15 July 2012.
Becoming Entrepreneur in Belarus: Factors of Choice
This policy brief summarizes two papers by Maryia Akulava on entrepreneurship development in Belarus and outlines which factors affect the choice of becoming self-employed in Belarus. While one of the papers, “Choice of Becoming Self-Employed in Belarus: Impact of Monetary Gains”, focuses on the role of pecuniary benefits, the other paper, “Portrait of Belarusian Entrepreneur”, adopts a broader perspective by accounting for individual, sociological, and institutional factors.
Although the Belarusian government has repeatedly declared the importance of private entrepreneurship for the national economy, its role remains rather modest. In terms of private sector development, Belarus lags severely behind other post-socialist countries. Yet, over the last decade, some positive dynamics have been recorded. In particular, the number of small and medium enterprises (SMEs) per 1,000 people increased from 2.5 in 2003 to 7.2 in 2010. Still, this ratio is rather small in comparison with other post-socialist economies (Table 1) [3; 4; 5; 6].
Table 1. Number of Small Enterprises (SEs) per 1,000 People
| Number of SEs per 1000 people | |
| Belarus | 7.2 |
| Russia | 11.3 |
| Ukraine | 17 |
| Kazakhstan | 41 |
| United Kingdom | 46 |
| Germany | 37 |
| Italy | 68 |
| France | 35 |
| EU countries | 45 |
| United States | 74.2 |
| Japan | 49.6 |
Regarding the growth rates of SEs and individual entrepreneurs (IEs), the numbers leave much to be desired. Specifically, in 2009, the number of SMEs and IEs amounted to 62,700 and 216,000 respectively, while in 2011 – to 72.200 and 232,000. Therefore, despite the efforts of the authorities to encourage the development of private initiative, the number of SEs and IEs only increased by 15.2 and 7.4%, respectively.
Next, private sector employment remains rather low. It amounts to approximately 13%, while in the developed economies this figure varies between 60 and 70%. For instance, in the U.S., it amounts to 60%, in Germany and in France – around 65-70%, and in Japan – 85%. On the other hand, transition economies have smaller shares, including Russia – 17%, Kazakhstan – 20.6%, and Ukraine – up to 28.8%, [7].
Some important indicators are provided in Table 2 [8].
Table 2. Share of Small and Medium Business in Economic Indicators of Belarus
| Share of small sector | 2003 | 2008 | 2009 | 2010 |
| GDP | 8.2 | 11.2 | 11.4 | 12.4 |
| Volume of industrial production | 8.4 | 8.3 | 9.2 | 9.4 |
| Exports | 18.2 | 31.4 | 34.3 | 38.9 |
| Retail trade turnover | 9.2 | 27.8 | 29.5 | 28.2 |
| Economically active labor force | 13 | 13 | 13 | 13.1 |
Table 2 reveals an increased contribution of private entrepreneurs to the national economy. At the same time, the share of labor employed in the private sector remains unchanged at the level of 13%. This fact suggests that self-employment remains relatively unattractive for salaried workers.
So, what are the drivers of people’s choice? On the one hand, people might be reluctant to become entrepreneurs because of the prevailing social and cultural attitudes, or the lack of necessary experience. Post-socialist economies all share the legacy of planning and suppression of private initiative. On the other hand, government’s policies and regulations might ‘cool down’ enthusiasm or people simply have had or heard of some bad experiences. Thus, it is important to think of the reasons behind people’s choice and formulate policies to encourage entrepreneurship development in Belarus.
Who Is a Belarusian Entrepreneur?
In Belarus, entrepreneurs are active mainly in the non-manufacturing sector, including trade (30% of all entrepreneurs), provision of different services (16.5%), construction (13%), logistics (7%), and real estate (7%). The most common reasons to start your own business include a sudden, but attractive, business opportunity (66%), and the availability of funding for project implementation (33%).
As for the gender and age profiles of Belarusian entrepreneurs, 64% are men and 36% are women, with an average age of around 40-42 years. The majority of entrepreneurs is religious (54%), married (69%), and has children (75%). Around 65% have higher education, and about one third of them were among the top 10% students of their classes. Entrepreneurs report a good health status: 64% of them consider themselves as ‘healthy’. This is not surprising, given that entrepreneurship in Belarus is ‘survival for the fittest’. An entrepreneur has to be ready to take risks, be energetic, active and to continuously search for new business opportunities. Moreover, entrepreneurs are optimists, who evaluate themselves as successful (77%) and happy (81%) people.
Sociological characteristics reveal strong reliance on social networks. In general, the number of relatives or friends involved in the business activities is about two times larger than for salaried workers. Besides that, a much larger share of entrepreneurs consider their parents wealthy and successful (45% and 82%), compared with employees (34% and 37%, respectively).
Belarusian entrepreneurs stay in business because they like what they do (53%), and think that their work is important for society (29%). Profits and income remain a strong, but are not a decisive reason (25%).
Although entrepreneurs and employees do not differ substantially in terms of their attitudes towards family, friends, health, financial stability, religion, and so on, there is still a notable distinction. Specifically, entrepreneurs tend to praise work, power and influence over other people, and also like political freedom. In addition, they value their function of a service provider to other people.
Moreover, entrepreneurs have more trust to colleagues, other business people and subordinates than salaried workers. This is not surprising, given the importance of horizontal networks mentioned above. It is important to note that more than 30% of respondents expressed their trust to political authorities despite the government-induced difficulties for entrepreneurship development in Belarus.
Analysis of institutional infrastructure for doing business detects a negative relationship between a publicly-stated favorable attitude of authorities towards entrepreneurs and their decision to work in the private sector. This can be explained in following way: a priori, the government’s stance on entrepreneurship is evaluated positively, or at least considered as not harmful. Moreover, a person considers himself as being too small to attract the ‘extractive attention’ of the authorities. However, a posteriori, entrepreneurs revise their initial views. Their experience tells us that the government’s attitude is far from welcoming.
As for corruption, the attitude is ambiguous. On the one hand, entrepreneurs generally disfavor corruption. On the other hand, those who seek to expand their businesses consider corruption a way to avoid ‘unnecessary troubles’ and to overcome barriers created by the excessive ‘red tape’ in the economy.
What Are The Obstacles For Doing Private Business In Belarus?
Belarusian entrepreneurs consider the following factors as barriers to business development: (i) inflation and macroeconomic instability (55%), (ii) lack of financing (31%), (iii) high taxes (27%) and complexity of tax system (18%), (iv) legal vulnerability (23%), and (v) toughness of state administrative regulation inspections, licensing and certification requirements (19%). These barriers are largely of macroeconomic and regulatory nature. Moreover, authorities conduct a policy of close-to-full formal employment. This policy is aimed at securing jobs for people even at loss-making and poorly performing companies, which are kept afloat by subsidizes and directed loans. As a result, employees prefer to trade risks of working in the private sector, for a stable employment in the sector of state-owned enterprises.
As for the main barriers, which impede business start ups financial constraints are the most common factor (33%), followed by high risks (25%), the lack of necessary business skills, a clear understanding what to do in the market (15% and 13% respectively), and unwillingness to work a lot (16%). In other words, financial constrains along with the lack of business education are the two most important domestic barriers.
These findings correspond to the results of the research on the impact of pecuniary benefits on entrepreneurs. In that study, education does not appear to have a significant influence on the level of earnings by entrepreneurs. The latter are ‘self-trained’ by the experience of starting a business in the uncertain environment of the 1990s and matured in the course of doing their business in unfriendly conditions. However, as the economy evolves, activities and contracts become more sophisticated. To survive in the changing environment, entrepreneurs have to acquire new skills and learn new methods and concepts of doing business.
So far, it appears that the quality of education obtained by the entrepreneurs does not match the skills required in the Belarusian economy. Thus, it is important to organize seminars, to hold training and to run business education programs for the future and current entrepreneurs in order to upgrade their skills and thus to contribute to their improved performance on the market.
Conclusion
An efficient development of the private sector in Belarus requires a drastic improvement of the domestic business environment. In order to encourage domestic entrepreneurship, the authorities should improve macroeconomic management and cut much of the ‘red tape’. Entrepreneurship possesses a great potential to contribute to growth and development. Surveys reveal that government policies constrain the development of the domestic private sector. Moreover, the high tax burden should be reduced, and some fiscal ‘sweeteners’ could be offered for business startups. In addition, a somewhat higher priority should be given to the improvement of the quality of business education, and make it more accessible for the current and future business people. If implemented, all these measures would supposedly have a fostering impact on the development of a dynamic private sector in Belarus.
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References
Akulava M. 2012. “Choice of Becoming Self-Employed in Belarus: Impact of Monetary Gains”.
Akulava M. 2012. “Portrait of Belarusian Entrepreneur”. Work in progress.
Djankov S., Miguel E., Qian Y., Roland G. and Zhuravskaya E. 2005. “Who are Russia’s Entrepreneurs?” Journal of the European Economic Association, MIT Press. Volume 3 (2-3), 04/05.
Djankov S., Miguel E., Qian Y., Roland G. and Zhuravskaya E. 2006. “Entrepreneurship in China and Russia Compared” Journal of the European Economic Association, MIT Press. Volume 4 (2-3), 04/05.
http://netherlands.mfa.gov.by/_modules/_cfiles/files/sme_belarus_2011_1670.pdf
http://www.tambov-rosnou.ru/monograf/files/ind4.htm
http://www.erce.ru/internet-magazine/magazine/27/389/
http://www.mspbank.ru/files/documents/Ukraine.pdf
Sulakshin S. “State Economic Policy and Economic Doctrine of Russia. To Smart and Ethic Economy”. Т. II.
http://netherlands.mfa.gov.by/_modules/_cfiles/files/sme_belarus_2011_1670.pdf
The Eurasian Customs Union among Russia, Belarus and Kazakhstan: Can It Succeed Where Its Predecessor Failed?
In 2010, Russia, Belarus and Kazakhstan formed the Eurasian Customs Union and imposed the Russian tariff as the common external tariff of the Customs Union. This resulted in almost doubling the external average tariff of the more liberal Kazakhstan. Russia has benefited from additional exports to Kazakhstan under the protection of the higher tariffs in Kazakhstan. However, estimates reveal that the tariff changes have resulted in substantial transfers from Kazakhstan to Russia since importers in Kazakhstan now purchase lower quality or higher priced Russian imports which are protected under the tariff umbrella of the common external tariff. Transfers from the Central Asian countries to Russia were the reason the Eurasian Economic Community (known as EurAsEC) failed, so this bodes badly for the ultimate success of the Eurasian Customs Union. What is different, however, is that the Eurasian Customs Union and its associated Common Economic Space aim to reduce non-tariff barriers and improve trade facilitation, and also to allow the free movement of capital and labor, liberalize services, and harmonize some regulations. Estimates by my colleagues and I show that if substantial progress could be made in trade facilitation and reducing non-tariff barriers, this could make the Customs Union positive for Kazakhstan and other potential Central Asian members. Unfortunately, so far the Customs Union has made these matters worse. On the other hand, Russia’s accession to the World Trade Organization will eventually substantially reduce the transfers from Kazakhstan to Russia, but this will need a strong political commitment from Russia which we have not yet seen. If that Russian political leadership is forthcoming, the Eurasian Customs Union could nonetheless succeed where its predecessor has failed.
In January 2010, Russia, Belarus and Kazakhstan formed the Eurasian Customs Union. Two years later, the three countries agreed to even closer economic ties, by signing the agreement to form a “common economic space.” Regarding tariffs, the key change was that the three countries agreed to apply the tariff schedule of the Customs Union as their common external tariff for third countries. With few exceptions, the initial common external tariff schedule was the Russian tariff schedule. Kazakhstan negotiated exceptions from the common external tariffs for slightly more than 400 tariff lines, but was scheduled to phase out the exceptions over a period of five years (World Bank, 2012). In addition, the members agreed to have the Customs Union determine the rules regarding sanitary and phyto-sanitary standards (SPS) and standards on good. Fearing transshipment of goods from China through Kazakhstan and from the European Union through Belarus, Russia negotiated and achieved agreement on stricter controls on the origin of imports from countries outside of the Customs Union. The common economic space (CES) stipulates that, in principle, there will be free movement of labor and capital among the countries, there will be liberalization of services on the CES and coordination of some regulatory policies such as competition policy.
In February 2012, the Eurasian Economic Commission began functioning. It is intended to act as the regulatory authority for the Customs Union in a manner similar to the European Commission for the European Union.
The Economics of Tariff Changes — Gains for Russia and Losses for Kazakhstan
Some proponents of the Eurasian Customs Union have argued that as a result of the Customs Union firms in the three countries will have improved market access through having tariff free access to the markets in all three countries. Prior to 2010, however, along with other countries in the Commonwealth of Independent States (CIS), the three countries had agreements in place that stipulated free trade in goods among them. Thus, the Customs Union could not provide improved market access due to reducing tariffs on goods circulating among the three countries.
Since the common external tariff was essentially the Russian tariff, there was little change in incentives regarding tariffs in Russia. The big change occurred in Kazakhstan, who had a much lower tariff structure than Russia prior to implementing the Customs Union tariff. Despite the exemptions, Kazakhstan almost doubled its tariffs in the first year of the Customs Union (see World Bank, 2012). The increase in tariffs on many items which were not produced in Kazakhstan but produced in Russia, led to a substantial increase in imports from Russia and displacement of imports from Europe. Many of Russia’s manufacturing firms, which were not competitive in Kazakhstan prior to the Customs Union, were now able to expand sales to the Kazakhstani market. This represents gains for Russian industry. Given the deeper manufacturing base in Russia compared with most of the CIS countries and the resulting uneven benefits of the common external tariff in favor of Russia, acceptance of the common external tariff has been a fundamental negotiating position of Russia regarding acceptance of members in the Customs Union.
Some cite the expanded Russian exports in Kazakhstan as evidence of success of the Customs Union. But the displacement of European imports, to higher priced or lower quality imports from Russia, represents a substantial transfer of income from Kazakhstan to Russia and is an example of what economists call “trade diversion”. Moreover, it is the reason the World Bank (2012) has evaluated the tariff changes of the Customs Union as a loss of real income for Kazakhstan.
Furthermore, the three countries together (and even a broader collection of CIS countries) constitute too small a market to erect tariff walls against external competition. They would lose the benefits of importing technology from advanced countries and would rely on high priced production from within the Customs Union. Some would argue that there are political benefits of trade to be taken into account, but experience has shown that when a customs union is inefficient and the benefits and the costs of the customs union are very unequal, the customs union can inflame conflicts (see Schiff and Winters, 2003, 194-195).
Non-Tariff Barriers — Extremely Costly Methods of Regulating Standards Worsened by the Customs Union
Non-tariff barriers, in the form of sanitary and phyto-sanitary (SPS) conditions on food and agricultural products and technical barriers to trade (TBTs) on goods, are a very significant problem of the Customs Union. There are standards based trade disputes between Belarus and Russia on several products, including milk, meat, buses, pipes and beer (see Petrovskaya, 2012). Anecdotal evidence indicates that Kazakhstani exporters complain bitterly regarding the use by the Russian authorities of SPS and TBTs measures, either to extract payments or for protection.
If the Customs Union could make substantial progress on reducing these barriers, it would be a significant accomplishment. My colleagues and I have estimated that progress on the non-tariff barriers and trade facilitation could outweigh the negative impact of the tariff changes for Kazakhstan (see World Bank, 2012). Unfortunately, so far the Customs Union has taken a step backward on both non-tariff barriers and trade facilitation.
A big problem in reducing standards as a non-tariff barrier is that standards regulation, in all three countries, is still primarily based on the Soviet system. As a holdover from the Soviet era, mandatory technical regulations are employed where market economies allow voluntary standards to apply. This regulatory system makes innovation and adaption to the needs of the market very costly as firms must negotiate with regulators when they want to change a product or how it is produced. Legislation in both Russia and Kazakhstan calls for conversion to a system of voluntary standards, but this is happening too slowly in all three countries. The problem is that the Customs Union has worsened the situation. Technical regulations are now decided at the level of the Customs Union, so firms that previously negotiated with their national standards authority, have had to now get agreement from the Customs Union. This has reportedly caused further delays, impeding innovation and the ability of firms to meet the demands of the market.
A second problem with efforts to reduce the non-tariff barriers is that the Customs Union is trying to harmonize standards of the three countries by producing mandatory technical regulations. The alternative is to use Mutual Recognition Agreements (MRAs). Experience has shown that no customs union has been able to broadly harmonize standards based on mandatory technical regulations, with the exception of the European Union. In fact, even in the European Union, they have had to use MRAs and only harmonized technical regulations after decades of work. While each member of the Customs Union is expected to create a system of mutual recognition of certificates of conformity, these certificates are not presently recognized in the other countries of the Customs Union. There is little hope for a significant reduction in standards of non-tariff barriers unless the system of mutual recognition is more widely recognized and adopted.
Trade Facilitation —Participation in International Production Chains Made More Difficult by the Customs Union
Customs posts between the member countries have been removed and this has reduced trade costs for both exporters and importers in the three countries. Russia’s concerns regarding transshipment have, however, led to an opposite impact on trade with third countries, i.e., the costs of trading with countries outside the Customs Union have increased. Participation in international production chains has become a key feature of modern international production and trade. If goods cannot move easily in and out of the country, multinational firms will look to other countries to make their foreign direct investment and for international production sharing. Addressing this significant problem will take a change of emphasis on the part of Russia.
Russian WTO Accession —Liberalization That Will Significantly Reduce Transfers to Russia
It has apparently been agreed by the Customs Union members that the common external tariff of the Customs Union will change to accommodate Russia’s WTO commitments. As a result, the applied un-weighted average tariff will fall in stages from 10.9 percent in 2012 to 7.9 percent by the year 2020 (see Shepotylo and Tarr, forthcoming).[1] This will have the effect of lowering the trade diversion costs of Kazakhstan. In addition, the Customs Union will be expected to adapt its rules on standards to conform to commitments Russia made as part of its WTO accession commitments. In the case of Belarus, it remains to be seen if it will implement the changes, as this will increase competition for its industries.
Conclusion — the Need to Russia to Exercise Political Leadership for Standards and Trade Facilitation Reform for Success of the Customs Union
In 1996, the same three countries formed a customs union. Later the same year, they were joined by Kyrgyzstan, then by Tajikistan and in 2005 by Uzbekistan. As Michalopoulos and I (1997) anticipated, the earlier Customs Union failed because it imposed large costs on the Central Asian countries, which had to buy either lower quality (including lower tech goods) or higher priced Russian manufactured goods under the tariff umbrella. The present Customs Union also started with the Russian tariff, which protects Russian industry and suffers from the same problem that led to the failure of the earlier Customs Union. Nonetheless, the present Customs Union could succeed. Crucially, due to Russia’s accession to the WTO, the tariff of the Customs Union will fall by about 40 to 50 percent.[2] This will make the Customs Union a more open Customs Union, very significantly reduce the transfers from Kazakhstan to Russia, and thereby reduce the pressures from producers and consumers in Kazakhstan on their government to depart from enforcement of the tariffs of the Customs Union. Further, the present Customs Union aims to reduce non-tariff barriers and improve trade facilitation, as well as it has “deep integration” on its agenda, i.e., services liberalization, the free movement of labor and capital and some regulatory harmonization. Although, to date, the Customs Union has moved backwards on non-tariff barriers and trade facilitation, one could optimistically hope for substantial progress. In the important area of non-tariff barriers, given the common history of Soviet mandatory standards, Russia will have to take the lead in moving the Customs Union toward a system of voluntary standards where no health and safety issue are involved, and toward a system of mutual recognition agreements and away from commonly negotiated technical regulations. On trade facilitation, Russia will have to reverse its pressure and find a way to allow the freer movement of goods with third countries while addressing its transshipment concerns.
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References
- Michalopoulos, Constantine and David G. Tarr (1997), “The Economics of Customs Unions in the Commonwealth of Independent States,” Post-Soviet Geography and Economics, Vol. 38, No. 3, 125-143.
- Petrovskaya, Galina (2012), “Belarus, Rossia, Ukraina. Obrechennye na torgovye konflikty” (Belarus, Russia, Ukraine. Doomed for trade conflicts), Deutsche Welle, June 14. www.dw.de/dw/article/0,,16023176,00.html.
- Schiff, Maurice and L. Alan Winters (2003), Regional Integration and Development, Washington DC: World Bank and Oxford University Press.
- Shepotylo, Oleksandr, and David G. Tarr (2008), “Specific tariffs, tariff simplification and the structure of import tariffs in Russia: 2001–2005,” Eastern European Economics, 46(5):49–58.
- Shepotylo, Oleksandr, and David G. Tarr (forthcoming), “Impact of WTO Accession on the Bound and Applied Tariff Rates of Russia,” Eastern European Economics.
- Shymulo-Tapiola, Olga (2012), “The Eurasian Customs Union: Friend or Foe of the EU?” The Carnegie Papers, Carnegie Endowment for International Peace, October. Available at: www.CarnegieEurope.eu,
- World Bank (2012), Assessment of Costs and Benefits of the Customs Union for Kazakhstan, Report Number 65977-KZ, Washington DC, January 3, 2012. Available at: http://documents.worldbank.org/curated/en/2012/01/15647043/assessment-costs-benefits-customs-union-kazakhstan
[1] The final “bound rate” of Russia is higher at 8.6 percent on an un-weighted average basis; but there are about 1,500 tariff lines where the applied rate of Russia is below the bound rate. The applied weighted average tariff will fall from 9.3 percent in 2012 to 5.8 percent in 2020.
[2] Russian tariffs fall more on an un-weighted average basis than they do on a weighted average basis. See Shepotylo and Tarr (forthcoming).
Monetary Policy in Belarus since the Currency Crisis 2011
In the second half of 2010, the National Bank of Belarus carried out a soft monetary policy to stimulate domestic demand. Until March 2011, the country experienced strong economic growth. There was an increase in real incomes with a parallel increase in the negative trade balance and the reduction of international reserves. Stimulating policy became one of the reasons for the formation of a multiplicity of exchange rates on the foreign exchange market. Beginning of March and until the end of October 2011, there was an official and gray currency market in the country. High domestic demand and rapid devaluation processes led to the deployment of an inflationary spiral, which in turn meant a decrease in the growth of real incomes.
Do Economic Sanctions Work?
Analysts have interpreted the recent openings in Myanmar and North Korea as the finally successful result of years of international pressure and economic sanctions. At the same time, debate is hot on the scope for similar measures in Iran, Syria and, closer to us, Belarus and Hungary. Does economics have anything to say on this? What can we learn from the analysis of past experiences?
Inflation Expectations and Probable Trap for Macro Stabilization
As of today, a majority of the negative consequences of the deep Belarusian currency crisis of 2011 seem to have been realized. Hence, the Belarusian economy is now ‘purified’ from main macroeconomic distortions and has a chance for sustainable long-term growth. Nevertheless, there are signals that some nominal and real inertia may generate new shocks for the national economy. From this view, the money market is of great concern, while interest rates signal maintained high inflation expectations. High and unstable expectations may entrap monetary policy and generate new shocks for the Belarusian economy. In this policy brief, we deal with a visualization of inflation expectations and argue for the necessity of a new nominal anchor in order to stabilize expectations for future periods.
In 2011, Belarus experienced its highest inflation and devaluation in modern history. These were consequences of the automatic macroeconomic adjustment determined by a number of both long- and short-term distortions in the national economy. Changes in prices and exchange rate adjusted real parameters towards their long-run equilibrium level. Hence, from a long-run perspective, one may interpret these adjustments as favorable since they ‘purified’ the economy from the macroeconomic imbalances that may have hampered growth. Furthermore, shifting from exchange-rate (XR) targeting to a managed float is another essential aftermath of the currency crisis. Economic authorities had to recognize that accommodative monetary policy (MP) was not compassable with XR targeting since it resulted in a considerable overvaluation of the real XR, and correspondingly, an incredibly large current account deficit. Thus, the new exchange rate regime may be argued to be a new automatic stabilizer for Belarus, providing the level of current account balance consistent with other macroeconomic fundamentals. Overall, the current stance of the national economy might be treated as a chance to “begin again from the ground up”. In this sense, the Belarusian economy as of today is sometimes compared to the Russian economy after its crisis in 1998, which then performed particularly high growth rates.
In our opinion, realizing the opportunity for a strengthening of long-term growth through structural changes undoubtedly should become a policy priority of Belarus in the near future. However, it should be emphasized that despite “purification” from major macroeconomic imbalances, there are still a long list of short-term challenges. In particular, one may stress the risks of expansionary policy revival; increasing external debt burden; growth in non-performing loans, which may undermine the solvency of the banking system; reduction of foreign demand due to shocks in global economy. These risks are more or less observable and may be monitored. Hence, the realization of one or the other shocks from this list might not come as a surprise, and economic authorities seem to at least realize this, and when possible, take prevention measures.
At the same time, another challenge seems to be more adverse and urgent; namely, the question of inflation and devaluation expectations. In economic theory, expectations play a crucial role in affecting behavior of economic agents. Recognition of the role of expectations at the money market determined intention to “subject” and stabilize these within modern monetary policy frameworks.
In Belarus, given the recent history of high inflation and devaluation, corresponding expectations of Belarusian economic agents are likely to be rather high. Moreover, shifting from XR targeting to a managed float has not yet resulted in provision of a new nominal anchor for the public.
For instance, disinflation was declared to be a priority goal, but there are no strict commitments on its numerical value, as well as in respect to procedures and mechanisms to provide disinflation trends. As of today, the Belarusian MP regime can hardly be classified as a standard regime. The MP Guidelines for 2012 assume indicative targets on international reserves, refinancing rate and the growth rate of banks’ claims on the economy. The latter witnesses the propensity to monetary targeting. However, the instable relationship between the monetary aggregate to be targeted and the ultimate goal (inflation), as well as the indicative nature of this commitment give rise to doubts in respect to treating it as monetary targeting. Furthermore, commitment on bank claims on the economy can hardly be treated as a nominal anchor for the public. According to the taxonomy of MP regimes by Stone (2004), Belarus is currently closer to the weak anchor regime, which assumes “no operative nominal anchor…and central bank reports a low degree of commitment… and high degree of discretion”.
Thus, our hypothesis assumes that there has been an adverse shock in inflation expectations due to weak nominal anchor and recent experience of huge inflation. If that is the case, this may be an additional source of shock for the money market, which may cause a new wave of macroeconomic instability. In order to make policy recommendations, this hypothesis needs empirical support. However, it is difficult to identify expectations in empirical analyses since this variable is typically unobservable and cannot be univocally measured. Instead, expectations are most often treated indirectly through other variables. Many central banks deal with the results of sociological polls on this issue, but these approaches may suffer from different economic meanings and measurements of inflation expectations by economic agents.
An alternative approach was proposed by St-Amant (1996) and extended by Gotschalk (2001), who base on famous Fischer equation representing current nominal interest rate as the sum of ex-ante real interest rate and expected inflation. Further, based on the approach by Blanchard and Quah (1989), structural vector autoregression (SVAR) between nominal and real interest rate is identified with a number of restrictions, which allows decomposing changes in the nominal rate to those associated with ex ante real rate and inflation expectations. The latter may be used as a measure of inflation expectations. Such a measure of inflation expectations assumes explicit economic meaning referring to the money market, i.e. the rate of future inflation, which will provide the, by economic agents, expected level of interest rate. Taking the data from statistics (not polls) and international comparability of such estimates are important advantages of this approach.
We applied this methodology to Belarusian data (nominal and real interest rate on ruble households’ deposits with a term more than a year). The obtained time series measure changes in inflation expectations in the current period for a period of the next 12 months. However, our goal is to visualize the level of inflation expectation and not changes in expectation. Therefore, we use the series in levels, choosing January 2003 as the base period (when National Bank of Belarus actually shifted to XR targeting regime), and assigned a zero level (as starting one) to it. The obtained series of inflation expectations is provided in Figure 1.
Figure 1. Inflation Expectations in Belarus
The estimated series of inflation expectations show a decrease in 2003 – mid 2005, which may be explained by the effectiveness of the new nominal anchor (XR), and correspondingly the expected disinflation. The expectation of reflation in late 2005 till late 2007 may be explained by the more expansionary policy and changes in Russian preferences that took place during this period. After that, there was a period of stable expectation, which is likely to be explained by the credibility of the nominal anchor (nevertheless, there was a shock in late 2008 that is associated with the impact of the global crisis).
The most considerable shock took place in the beginning of 2010, which has a lack of intuitive explanation and might be associated with a phase of radically expansionary policy.
Finally, a new significant shock took place in late 2010 – beginning 2011 which might be associated with the visualized problems at the currency market at that time.
Currently, there is a very high level of inflation expectations and its increased volatility in the second half of 2011 seem to be of a great importance. It signals that economic agents do not treat price shocks as a single-shot, but mostly tend to consider it as a long-lasting process. Hence, the absence of a nominal anchor and the fresh memory of huge inflation seem to be responsible for the current high and instable inflation expectations.
Maintenance of high inflation expectations is a dangerous threat for the money market. Propagating inflation through expectations may be considered as a separate channel within the monetary transmission mechanism (along with interest rate, exchange rate and bank-lending channels). In other words, even without additional fundamental preconditions for inflation, inflation expectations may become a self-fulfilling prophecy.
However, during the last two months (December 2011 and January 2012) this adverse effect seems to have been suppressed by monetary authorities, as the monthly inflation rate reduced radically in comparison to average rate in May-November 2011. This is likely to be the outcome of the significant monetary policy tightening that has resulted in a sharp increase in nominal interest rates by banks. On the one hand, such nominal interest rate complies with the shocks in inflation expectations and real ex ante interest rate (the latter grew as well at the background of the crisis). In other words, current level of nominal interest rates will equalize ex post real rate with ex ante real rate if the actual inflation rate has been as high as current inflation expectations. But on the other hand, if actual inflation had been much lower than expected one (and it tends to be so, in case of keeping on conservative MP), ex post real rate would be much higher than the ex-ante one. For instance, such a situation has already been peculiar during December and January: according to our estimations, ex ante real interest rate in December was about 3.6% in annual terms (preliminary data on January shows that it in this month it is rather similar), but annualized ex post real rate for these months is about 30%.
This suggests that there is a trap for the monetary authorities. If they keep high interest rates, based on the expected inflation, the impact of expectations on actual inflation will be mitigated, but the losses, say in terms of output, will be high because of the extremely high ex post real interest rates. If the monetary authorities facilitated the rapid reduction of nominal interest rates, current nominal rates would not guarantee ex ante real interest taking into consideration the high inflation expectations, which would then constitute a severe shock for the money market. Hence, the mechanism of self-fulfilling prophecy would work.
Furthermore, the increased ex ante real rate (and high probability of even higher ex post real rate in national currency) could give speculative incentives for a number of economic agents. For example, many agents could increase the share of national currency in their savings portfolio, either avoiding buying hard currency (which took place during the peak of the currency crisis) for new deposits, or changing the nomination of their deposits to the national currency (i.e. selling the hard one). In a sense, this trend may be interpreted as the compensation of losses on ruble deposits in the last year, which is needed to revive the demand for such deposits. But in any case, these internal processes (along with restricting money supply by the National bank) influence the domestic currency market. Through this, the supply and demand are formed not only due to current and financial international flows. Hence, due to these incentives for hard currency supply and demand, the current value of the nominal rate may substantially deviate from the equilibrium rate. The latter may be defined as in Kruk (2011): the one that may clear the market immediately (given short-term trends in current account flows at the background of medium-term values of other fundamentals).
Figure 2. Actual and Equilibrium Exchange Rate
Note: For 2010Q1-2011Q1 official rate of the National bank is taken as actual nominal rate, for 2011Q2 the exchange rate at the ‘black market’ (used by internet shops), and for 2011Q3 ‘black market’ and later the exchange rate of the additional BCSE session are taken.
The assessments of the equilibrium exchange rate based on this methodology (Kruk (2011)) show that in the third quarter, the actual rate almost equals the equilibrium rate. For 2011Q4, all necessary data is not available yet, but an approximate assessment correction of the equilibrium rate of the Q3 for average inflation between Q3 and Q4 may be used (i.e. in real terms the rate should not have changed in order to sustain equilibrium). Such an assessment indicates that the actual rate in the Q4 is again overestimated by roughly 5-10% in comparison to the equilibrium rate.
At a first look, such an ‘overhang’ at the domestic currency market seems to not be a great problem. But along with the trap stemmed from the high and unstable inflation, this may contribute and propagate possible shock at the money market. Furthermore, this ‘overhang’ is due to speculative incentives, which in turn, are due to high inflation expectations. Hence, high and unstable inflation expectations are a prime cause of this ‘overhang’.
Finally, we may argue that unfavorable inflation expectations is a multidimensional problem, which generates grounds for shocks at the money market and entraps monetary policy at the current stage. Therefore, restraining inflation expectations must currently be an absolute and unconditional priority of economic policy.
This gives rise to the issue of which policy tools that are needed for solving this problem. Tight monetary policy alone may not be enough and/or its losses in terms of output may be unacceptably high, especially taking into account that keeping the Belarusian economy depressed is likely to cause huge migration and thus reducing the prospects for long-term growth.
Our view on the problem of inflation expectations supposes that they stem both from recent experience of very high inflation and the absence of nominal anchor. Inflation memory cannot easily be removed, but introducing a new nominal anchor seems to be worthwhile. Among possible options, given the desire to preserve autonomous monetary policy in Belarus, the introduction of inflation targeting (IT) is seen as inevitable. A shift to this regime is associated with plenty of obstacles and might not be realized immediately (Kruk (2008)). A gradual shift to IT through its intermediary phases (so called IT Lite) is more expedient and complies more with the requirement of obtaining new powers and capacities at the National Bank of Belarus.
Taking on more and more strict commitments in terms of inflation and implementing mechanisms and procedures peculiar for IT (the latter is even more important than commitments themselves) will increase credibility and public trust for the National bank. The other side of the coin involves decreasing and less volatile inflation expectations, which do not challenge monetary policy and facilitate low and stable inflation. Another advantage of IT is the possibility to mitigate price shocks.
Our main policy recommendation is therefore that it is necessary to shift to an IT framework as soon as possible, starting from exploiting the forms of IT Lite. The advantages of this step overweigh all the obstacles, including those associated with the reluctance of economic authorities to change institutional preconditions.
However, one important clause should be emphasized. Shifting to IT (especially gradually through IT Lite) does not guarantee that current high inflation expectations will be reduced automatically and immediately. In other words, it does not guarantee that the cost of reducing inflation in terms of output will decrease (though for the present Belarusian situation there are grounds to suspect that it would facilitate). For instance, Mishkin (2001) shows that “there appears to have been little, if any reduction, in the output loss associated with disinflation, the sacrifice ratio, among countries adopting inflation targeting… The only way to achieve disinflation is the hard way: by inducing short-run losses in output and employment in order to achieve the longer-run economic benefits of price stability”. However, an introduction of IT assumes that new shocks in inflation expectations may be prevented, and due to it, low and stable inflation will be more likely.
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References
- Blanchard, O., Quah, D. (1989). The Dynamic Effects of Aggregate Demand and Supply Disturbances, American Economic Review, Vol. 79, No.4, pp.655-673.
- St-Amant, P. (1996). Decomposing US Nominal Interest Rate into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology, Bank of Canada, Working Paper No. 96-2.
- Gottschalk, J. (2001). Measuring Expected Inflation and the Ex Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions, Kiek Institute of World Economics, Working Paper No.1067.
- Mishkin, F. (2001). From Monetary Targeting to Inflation Targeting: Lessons from Industrialized Countries, World Bank, Policy Research Working Paper No. 2684.
- Kruk, D. (2008). Optimal Instruments of Monetary Policy under the Regime of Inflation Targeting in Belarus, National Bank of Belarus, Materials of International Conference “Efficient Monetary Policy Options in Transition Economy”, pp. 305-322.
- Kruk, D. (2011). The Mechanism of Adjustment to Changes in Exchange Rate in Belarus and its Implications for Monetary Policy, Belarusian Economic Research and Outreach Center, Policy Paper No. 004.
Privatization in Belarus – Obstacles and Perspectives
For a long time Belarus considered privatization as a minor factor in influencing the economy’s development, competitiveness and effectiveness. The former economic model relied on concessional loans and donations from Russia and various international organizations. The 2011 financial crisis led to the breakdown of this model and forced the authorities to reconsider privatization. A draft of a new law on investment has been prepared, which is aimed at increasing foreign capital inflow to the country. However, it does not contain sufficient measures to significantly raise the investment attractiveness. In turn the lack of such attractiveness can have a very negative effect on the economy in the near future.
Belarus is right now facing a currency crisis primarily due to three factors:
- A growing deficit of trade and payment balances;
- The National Bank’s continuing Belarusian ruble emission partly because of pre-elective directive wages’ raise;
- A lack of foreign currency reserves required to keep the USD exchange rate at BYR 3100 level.
However, the key problem is a growing negative balance of payments, which in January-June 2011 amounted to USD (-1032.6) million against USD (-82.2) million in January-June 2010.
The Belarusian ruble devaluation, which occurred in May 2011, managed to improve the trade balance situation and gradually lead to export earnings growth. That in turn reduces the current account deficit, which amounted to USD (-1630.4) million in the second quarter of 2011 against USD (-3657.2) million in the first quarter 2011.
Negative foreign trade balance mostly forms negative balance of payments of the country, and problems with external payment capacity are likely to occur under conditions of trade deficit preservation. Moreover, taking into account that the main repayment share of external debt should be paid in 2012-2014 it is necessary to attract additional funding sources.
Table 1. External debt repayment scheme
For this to be feasible privatization as a major long-term capital raising instrument will be required for the following reasons:
- Belarus will not be able to borrow in the external markets in the near future. This is due to impossibility of attracting loans from international organizations as well as extreme expensiveness and inexpedience of sovereign debt securities placement in global stock markets.
- Before the 2011 crisis, public and private companies were able to attract bank and state financing programs’ sources for the financing of their activities. However, the unstable economic situation in the country has forced the authorities to cut the state programs’ funding (BYR 12 trillion instead of requested BYR 36 trillion, while BYR 22 trillion were spent in 2011) in order to prevent further inflation and to provide a budget surplus. Moreover, the economic crises resulted in a decline in domestic demand of the population and the corporate sector simultaneously, with reduced domestic savings levels as a consequence. During the first eleven months of 2011 savings dropped by 25% in USD terms in comparison to the corresponding period of the previous year. These occurrences in the economy make a search of a strategic partner through additional issue of shares or mergers with other agents the only source of financing attraction for state and private companies.
Speaking about the current situation, it should be noted that Belarus planned to get around USD 3 billion from privatization in 2011. 178 assets were to be sold according to the privatization plan. However, just around 38 assets were sold in 2011 and the country managed to gain around BYR 150 billion (USD 17.6 million) from that. Thus, the result cannot get positive evaluation right now.
The main reasons for the slow privatization process and weak foreign capital inflows are the following:
- The multiplicity of agencies responsible for privatization. There are too many responsible decision-makers, which potential buyers have to contact. In addition, it is not very clear which agency is responsible for this or that asset. The State Property Committee and the National Agency for Investments and Privatization (NAIP) supervise the state asset sales today. However, ministries and local authorities are also responsible for privatization plan accomplishment.
- Difference in asset valuation methods. Investors, while analyzing any investment project, tend to focus on the cash flows that the project will be able to generate and how soon the costs will be covered. The Belarusian side values the asset according to its’ book value, below which the price cannot fall. This often results in large price differences.
- Additional requirements. The presence of additional requirements is a common phenomenon, but only when the price negotiations are more flexible. But it distracts investors in case the requirements are followed by a fixed overestimated price.
- Lack of transparency. Periodically the deals are announced, which were closed not during the auctions or tenders but after the closed backroom negotiations. That also affects negatively investors’ opinion about the country
- High share of public sector. Private sector is mostly represented by small and medium businesses. Thus, the strategic investors’ interest in them is initially lower. Moreover, they are unable to invest by themselves due to a lack of resources.
In addition, the authorities and enterprise management demotivation in the privatization process, an undeveloped culture of IR and consulting services usage, and the fact that it is often non-controlling stakes that are put up for sale, are also obstacles in the process.
These are the main problems influencing the foreign capital inflow rates. Their solution and elimination should increase the economy’s investment rates as there is an interest in the country’s assets and it is high enough.
As was mentioned earlier, the sale price of an asset is estimated according to its’ book value in Belarusian rubles. The national currency devaluation, which occurred in May and October 2011, has significantly reduced assets’ real value in USD terms and therefore a sharp drop in prices occurred. Starting from March 2011, the national currency depreciated by 181%, and the fall in real value of assets on sale was comparable. The analysis of transactions, which were closed during the auctions held in 2011, showed that the companies acquired by the investor were generally highly undervalued even in the beginning of 2011.As a result of devaluation, the ratio of asset price to revenue (P/S) dropped by 1.67-1.8 times. OJSC “Zhlobinmebel” (P/S=0.3 January 2011, P/S=0.18 in June 2011), OJSC “Vitebskles” (P/S=0.37 – January 2011, P/S=0.2 – June 2011) .
On the other hand, in accordance with Presidential Decree #476, the revaluation of fixed assets should be done by January 1, 2012 and adjusted to PPI, which equaled to 82% in October, 2011. Such adjustment will still not be able to cover the depreciation resulting from the devaluation. Therefore, there will be a gap between the announced corrected asset price and its real value at least for another year.
Nowadays, the demand is formed by Belarusian export-oriented companies. Their products have become more competative in the markets as a result of devaluation and have caused some growth in earnings. Consequently, they are ready for vertical and horizontal integration with attractive companies operating in the local market in order to expand the production and increase their niche in the global markets.
As for foreign investors, macroeconomic stabilization is necessary in order to make them wanting to enter the Belarusian market. Moreover, foreign buyers are attracted by the strategic Belarusian companies rather than by the small and medium business. This is because they are then able to generate sufficient profit volumes even in the short-term period.
Conclusion
The privatization process will be much more active and intensive in the forthcoming 2012, in comparison to what we have seen during 2011. This is determined on the one hand by a great need in external capital and on the other hand by sufficiently favorable acquisition conditions. However, obviously the privatization process and plan should be reviewed and optimized.
It might be more efficient to put on sale, not just companies’ shares, but also controlling interest as it should increase buyer interest.
It is also possible to sell assets at a minimum fixed price (in case it has losses and no perspectives with current owner), or the authorities could reduce the amount of requirements which accompany the transaction.
Finally, it should be noted that the privatization of small companies will not generate sufficient amounts of foreign capital to the country. In order to achieve that goal, Belarus will have to sell some large strategic assets. It already sold the state’s controlling interest of OJSC “Beltransgaz” to OJSC “Gazprom” for USD 2.5 bln. As for other assets, it is most likely that these will be 51% of shares sale of OJSC “MTS”, 51% shares sale of OJSC “Naftan” in exchange of USD 1 billion syndicated loan issued by “Sberbank Russia” and EABR, as well as a merger of OJSC “MAZ” with Russia’s corporation “Russkie Mashiny” or OJSC “KAMAZ”.
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References
http://nbrb.by/statistics/BalPay/Analytical/Current/
http://banki.bel.biz/?p=4167
http://www.interfax.by/news/belarus/101635
http://belstat.gov.by/homep/ru/indicators/doclad/2011_11/6.pdf
http://www.gki.gov.by/about/press/news/e4fc4311733e0af1.html
http://minfin.gov.by/rmenu/departament/itogi-emit/itogi-oao/
http://www.president.gov.by/press127520.html
Multidimensional Approach to the Energy Security Analysis of Belarus – Part 2: Economic and Geopolitical Trends
Author: Mykhaylo Salnykov, BEROC
Energy security is a complex phenomenon incorporating a variety of economic, social and environmental aspects of a country’s life. Building on a previous FREE policy brief, published on September 5, which dealt mainly with the situation up until today, this text deals more with the future. It takes a detailed look at existing trends and discusses potential positive effects and challenges to energy security in Belarus. It also provides potential measures for addressing adverse effects of these trends on the country’s energy security.
When evaluating energy security consequences of external and internal factors, a decision maker is advised to view energy security as a complex phenomenon. The main components of Belarusian energy security identified in the first part of this paper published in the FREE Policy Brief Series September 5, 2011, include (i) primary energy source distribution (diversification of energy sources, especially away from natural gas as well as reducing the economy’s energy intensity), (ii) international trade considerations, (iii) the geopolitical context (with a special focus on diversification of energy suppliers and an optimal use of the country’s gas- and oil- transporting systems), and (iv) environmental considerations of the energy use (related to both actual and the perceived impact of the energy production and consumption on the environment).
Other dimensions of energy security also include the social impact of energy production and consumption, as well as the sustainability of energy use.
Below, I provide a detailed look at these and other existing trends. Potential positive effects and challenges in the context of energy security of Belarus will also be discussed. Finally, potential measures of addressing adverse effects of these trends on the country’s energy security will be suggested.
Main Energy Security Challenges for Belarus in 2011-2020
The following components of the energy security of Belarus are considered to be of primary importance:
- Reducing energy intensity of the economy;
- Diversification of energy sources used in heat and power generation, especially diversification away from natural gas consumption;
- Diversification away from Russian fuel imports;
- Securing stable operation of gas and oil pipeline systems close to full capacity;
- Reducing impact of energy production and consumption on the environment.
The main trends in Belarusian and regional policy and economy, as well as their impacts on the aforementioned components of energy security are the following:
- Natural shale gas and liquefied natural gas revolution in Europe;
- Launch of the Nord Stream gas pipeline system in 2011-2012;
- Construction of nuclear power plant station in Astravets;
- New suppliers of hydrocarbons to Belarus.
I will purposefully not discuss important topics as carbon-free technologies development in Belarus, participation in the international carbon-reduction dialog, etc., since these trends are unlikely to become anything close to significant determinants of the Belarusian energy security puzzle within the next decade.
Natural Shale Gas and LNG Revolution in Europe
Recent developments in the technology of natural shale gas extraction in Europe and elsewhere, bring a lucrative prospect of boosting the world’s natural gas supply. Several of the European countries, including Austria, Germany, Hungary, Poland, Sweden, Ukraine and United Kingdom have announced plans to study fields with shale gas extraction potential. This could secure European gas supplies, drive gas prices in Europe down, and diversify European imports away from Russian natural gas. The natural shale gas extraction development factor will be further reinforced by the increased volumes of the LNG imports to Europe from the Americas and Northern Africa.
Contraction of gas prices in the European market will positively affect Belarusian economy as natural gas imports from Russia will become less expensive even if no active steps by the Belarusian government are undertaken. Nevertheless, the natural shale gas and LNG revolution will also widen the body of potential importers of natural gas via pipelines from Poland and Ukraine and by sea freight from seaports in the Baltic States. Specifically, in the summer of 2010, the Belarusian government announced having plans of negotiating a possible construction of a Belarusian LNG terminal in Lithuanian Klaipeda. This terminal is projected to have an annual capacity of five to eight billion cubic meters of natural gas which would be transported to Belarus via the pipeline system.
The shortcoming of the lower prices for natural gas and diversified body of importers in Europe is a reduced demand for Belarusian natural gas transit capacity as Russian exports to Europe contract. Moreover, potential transportation of shale gas from Poland via the pipeline system (see Figure 1) is likely to conflict with the Russian gas transit going into the opposite direction. From an economic perspective, it is very likely that benefits for Belarus obtained from lower gas prices will overweight potential losses from the reduced transit of Russian natural gas to Europe.
Figure 1. Natural gas and oil pipeline systems in Eastern Europe.
Source: http://www.eia.doe.gov/emeu/cabs/Russia/images/fsu_energymap.pdf
From a political perspective, Belarus losing its role as a transit country would substantially weaken its position in foreign relations with both Russia and Europe.
A possible side effect of the lower prices for natural gas is reduced incentives for the Belarusian government to reform power and heat generating sector and contract the energy intensity of the economy. While the former outcome may be economically justified by lower gas prices and diversified sources of natural gas in the new economic environment, the latter raises serious concerns over the pace of economic modernization in the country.
On the other hand, the environmental impact is mixed. While lower incentive to modernize the economy could result in a slower progress of lowering the pollution intensity in energy use, increased incentives to use natural gas, one of the environmentally friendliest hydrocarbons, would play a positive role in ensuring that the intensity of pollution reduces.
Launch of the Nord Stream Pipeline System
Dubbed by the Belarusian President, Aliaksandr Lukashenka “the silliest Russian project ever”, the Nord Stream pipeline system will allow Russia to redirect 55 billion cubic meters of natural gas (nearly 33% of the current Russian gas exports) via this more direct route to the final consumers. Thus, if European demand for Russian gas stays unchanged, the gas transit through Belarus and Ukraine will drop to nearly 100 billion cubic meters from the current 158 billion cubic meters. The 100 billion cubic meters figure is close to the capacity of the Ukrainian gas pipeline system alone. Therefore, one may hypothesize that in the worst case scenario Belarus may suffer a complete loss of its gas transit revenues.
In fact, even optimistic scenarios of the distribution of the residual transit demand between Ukrainian and Belarusian pipeline systems, imply both a substantial reduction of volumes transferred via Belarusian pipeline system, and a decline in transit tariffs triggered by strong price competition between Belarus and Ukraine. As a result, profits from the gas pipeline system in Belarus are likely to diminish.
This negative outcome is reinforced by the above mentioned trends of increased extraction of natural shale gas in Europe as well as prospective development of the LNG trading routes with Northern Africa and Americas. A conservative estimation of the reduction of European demand for Russian natural gas indicates that it can be reduced by 28 billion cubic meters (17% of the current Russian imports). Coupled with the launch of the Nord Stream, the decline of transit volumes through Belarus and Ukraine can be nearly 75 billion cubic meters annually, which is more than a 50% reduction from current levels.
Notably, these 28 billion cubic meters is an equivalent of the natural gas consumption by Poland and Hungary alone, the European countries currently most dependent on Russian gas imports.
Thus, the launch of the Nord Stream presents a substantial threat to the stable operation of the Belarusian gas pipeline system and requires careful policy steps (which will be discussed further ahead).
The fact that Belarus loses an important lever of its transit capacity may lead to lower negotiation power in fuel prices dialog with Russia, thus, leading to the smaller subsidies for the Russian oil and gas imports. However, a reduction of the world gas prices due to the growing European production of natural gas and LNG trade is likely to at least partly offset this effect.
Reduced profits received from the natural gas transit is likely to lead to a decrease of budget funds available for technological modernization of the Belarusian economy, which, in turn, may lead to an inadequate pace of changes in energy efficiency and pollution intensity of energy use as well as slower modernization of the power and heat generating sector and diversification away from the natural gas use.
On the other hand, the launch of the Nord Stream and reduced negotiation power towards Russia could increase incentives for Belarus to diversify away from Russian fuel imports as subsidies for the Russian oil and gas imports will contract.
Construction of Astravets Nuclear Power Plant
Although the launch of the Astravets nuclear power plant is unlikely to happen before 2017-2018, debates around this controversial project and its rationale requires a discussion of its energy security implications long before the plant is constructed.
The projected two-reactor nuclear power plant has an operating capacity of 2.4 GW. Unadjusted for load fluctuations in demand, this figure is an equivalent of 63.5% of the electricity consumption in Belarus. A rough seasonally unadjusted estimate of the Astravets nuclear power plant electricity production is a 35-40% of the daily peak load electricity consumption in the country – a usual figure for the baseload demand figure. Therefore, it is expected that once in full operation, Astravets plant could provide for the entire baseload demand on electricity in Belarus.
Some opponents of the Astravets plant construction note that the plant’s capacity may be excessive as several other nuclear power plants are being constructed in the region, including a plant in Lithuania and Russia’s Kaliningrad oblast. It is suggested that it may be optimal for Belarus to purchase electricity from these plants rather than constructing its own. This view, however, does not take into consideration two important issues. Firstly, it is highly unlikely that anything but the excess baseload electricity production will be traded (i.e. limited volumes of energy at night for approximately 5 to 6 hours per day); at all other time Belarus would need to rely entirely on its thermal power plants to generate electricity. Secondly, shifting from the dependence on hydrocarbon imports to the dependence on electricity imports will not cause a substantial improvement of the country’s energy security.
Current production of electricity by fossil fuel operated power plants in Belarus is an equivalent of 18 TWh, 55% of the total electricity consumption in the country. A launch of the Astravets nuclear power plant would allow reducing fossil fuel operated power plants’ utilization to virtually zero level. In addition, nearly 15% of the combined heat and power plants may operate as heat plants only.
Yet, it is unlikely to lead to the substantial changes in the usage of the existing heat plants: while nuclear power plants can provide heat, Astravets is located far from densely populated regions of Belarus, which makes heat delivery to the final consumer close to impossible because of the high losses in transfer.
As a result of decreased utilization of power plants and CHP plants, demand for natural gas from the heat and power generating sector will be reduced by 38%. Thus, the share of natural gas in the sector’s consumption balance will shrink to nearly 50% from the current 91% figure. The Astravets plant launch will also lead to nearly 25% reduction of the sector’s demand for petroleum products.
Therefore, the economy-wide TPES of natural gas is likely to contract by 28.5% and TPES of crude oil and petroleum products by nearly 2% once the Astravets plant is in full operation. The estimated annual benefit from the reduced imports of hydrocarbons is likely to reach USD 1 billion at current fuel prices.
Overall, Astravets power plant launch is expected to have strongly positive effect on diversification of energy sources in heat and power generating sector as nuclear power will gain the second largest share among the energy sources used in the sector and the natural share will reduce to nearly 50% of the total consumption by the sector. The plant construction is also likely to have a positive effect on the energy intensity by reducing losses from the power generating sectors and by closure of obsolete plants.
Moreover, the effect on diversifying fuel imports away from Russia is two-fold. Although Belarus will be able to reduce its Russian gas imports by almost a third of its current level, nuclear fuel for the Astravets station is likely to be imported from Russia. Nevertheless, given positive shifts in Belarusian regime’s relations with the West, it is highly likely that by the time of the power plant launch, the current suspicion of the Belarusian government by the international community will have vanished and alternative importers of uranium would then become an option.
Overall, the Astravets plant will have very limited impact on Belarus’ role as a transit corridor for Russian hydrocarbons.
Environmental consideration is probably the most controversial issue with respect to the projected plant. The issue becomes even more uncertain when one takes into account not only objective environmental costs and benefits, but also subjective factors, such as suspicion of Belarusians to nuclear power – a legacy of the Chernobyl accident.
A nuclear power plant will undoubtedly lead to a reduction of pollution intensity in the Belarusian economy. Yet, there are a number of factors that may offset the seeming gains. Firstly, a low probability of technological disaster at the power plant, mean that most Belarusians consider the plant as an environmentally but dangerous project for the country. Secondly, Lithuanian environmentalists have expressed their concerns over the proximity of the projected plant to the Lithuanian capital, Vilnius (only 40 km), especially as the Neris (Viliya) river that flows through Vilnius will be the main water source for the Astravets plant. Thirdly, international environmental experts rarely consider nuclear power plants considerably greener than their fossil fuel operated counterparts as uranium extraction and enriching produces substantial amounts of polluting substances at their fuel producing facilities. Finally, spent nuclear fuel treatment still remains one of the issues without a sustainable technological solution. Belarus is likely to export its nuclear waste to either Russia or Ukraine that have spent nuclear fuel storage facilities.
Therefore, from an environmental perspective, while Belarus will enjoy most of the benefits of the cleaner power generation, it is likely to create substantial trans-boundary environmental risks mostly for Lithuania, Russia and Ukraine.
New suppliers of hydrocarbons
Belarus currently attempts to diversify its oil supply by shipping Venezuelan crude to Black Sea and Baltic Sea ports. In addition, there exists a sound potential of diversifying Belarusian natural gas imports by gaining access to Ukrainian and Polish natural shale gas deposits as well as through constructing an LNG terminal at the Baltic Sea.
While the perspectives of these recent international advancements are not certain, in the case of sustainable progress they are likely to have important implications for the energy security of Belarus, which are closely interrelated to the implications of the shale gas and LNG revolution.
Emergence of new suppliers of hydrocarbons will have a positive impact on diversifying away from Russian fuel imports, but will also reduce incentives for the energy intensity and pollution intensity reduction as well as the modernization of the heat and power generating sector as economic stimuli for technological modernization fade away.
Diversification of hydrocarbon suppliers presents risks for the usage of Belarusian gas and oil pipeline systems. If oil would be transported from either Black Sea or Baltic Sea ports, this oil would compete with the Russian oil transport routes headed into the opposite direction to either Ukrainian Odesa seaport or Baltic refineries (see Figure 1). Pipeline transportation of shale gas from Poland would compete with Russian natural gas going in the opposite direction. At the same time, reduced revenues from transit of Russian hydrocarbons may be overweighed by benefits incurred from lower prices for hydrocarbons from the alternative sources.
Table 1 provides a summary of the reviewed trends and their impact on the energy security challenges faced by Belarus.
Table 1. Summary of the existing trends and their impact on energy security of Belarus
Policy recommendations
Table 1 suggests that the most of the vital energy security components will experience both positive and negative shocks in the nearest future. Nevertheless, it is possible to undertake a number of policy measures to enhance positive effects and secure against risks.
Reducing energy intensity of economy
All possible negative effects on the energy intensity reduction will be a result of either lowering incentives to modernize the existing technologies due to lower hydrocarbons prices or a reduced capacity to modernize due to drop in budget revenues. Yet, as discussed above, improving energy efficiency may become an important driver of economic growth in the foreseeable future.
Besides already existing Energy Efficiency Department of the Committee for Standardization and construction of the Astravets power plant having a positive impact on the energy intensity of the economy, the Belarusian government may also consider the following options:
- Establishing a Research and Development (R&D) program on energy efficiency;
- Creating a special energy efficiency fund to be used for the modernization and energy intensity reduction measures;
- Imposing standards of energy use, especially in energy intensive sectors;
- Introducing taxation schemes on energy use with industry-specific energy intensity reference values in order to provide additional incentives for businesses to undertake modernization and reduce energy intensity;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and energy intensive industrial sectors.
Heat and power generating sector diversification away from gas
Similarly, to the energy intensity challenge, the HPG sector diversification away from gas will be negatively affected by the reduced incentives to modernize and the lack of budget funds to impose these modernizations. Hence, the following measures may be considered:
- Ensuring adequate progress of the Astravets power plant construction;
- Imposing standards and taxation schemes of energy use by the sector;
- Study options for electricity imports, especially in off-peak hours;
- Gradually replace and rehabilitate obsolete equipment.
A number of steps to encourage use of specific fuel sources can be undertaken:
- Study possibilities of expanding production and/or imports of coal;
- Transfer some smaller-scale heat plants to coal and/or wood as environmental conditions permit;
- Integrate production of fuel wood into conventional forestry and industrial timber procurement;
- Assure quality standards and efficient use for forest chips.
While not being directly related to the sector’s diversification away from natural gas, the following measures will allow improving financial performance of the sector and, thus, providing additional resources to undertake modernizations in the sector:
- Separate commercial operation of the sector’s state-owned companies from the government’s conflicting position as an owner, policy setter and regulator;
- Imposing reporting standards, such as IFRS standards, in the sector in order to improve financial management of the companies and attract possible financiers;
- Adopt and implement OECD 2005 Guidelines on corporate governance of state-owned enterprises. While a number of the guidelines are not applicable to the Belarusian noncorporatized companies such as Belenergo and Beltopgas, general principle allow for more effective management of the companies.
I purposefully omit an option of the ownership change of the heat and power generating sector’s companies in our policy recommendations, since this option is not consistent with the existing economic and political environment in Belarus.
Diversification away from Russian fuel imports
While all of the trends analyzed will have positive effect on diversification away from Russian fuel imports, this seeming progress is largely due to the fact that up until recently Belarus has been totally dependent on Russia’s fuel imports. Yet, a number of steps can be undertaken to further augment the diversification progress:
- Ensuring adequate progress of the projects enhancing the diversification away from Russian fuel supply, namely LNG terminal in Kaunas, Astravets power plant and search of alternative suppliers of hydrocarbons;
- Exploring possibility to access and explore Polish and Ukrainian shale gas fields with a possibility to operate some of the extraction facilities;
- Studying an option to create a coal-bed methane extracting consortium with Ukraine to develop technology and extract coal-bed methane in coal-rich Eastern Donbas region;
- Researching and developing biomass as a source of energy to replace a share of oil and gas usage.
Usage of pipeline system up to full capacity
It is next to certain that the configuration of the hydrocarbon routes in Eastern Europe is about to go through fundamental changes in the nearest future due to both reduced demand for Russian hydrocarbons from Europe and the launch of the Nord Stream pipeline system. Still, there exist a number of steps to ensure that Belarusian pipeline system is in operation and is enhancing the country’s energy security:
- Creating a gas-transporting consortium with Ukraine to gain an additional market power to ensure adequate transit tariffs and share of volumes of the residual Russian gas exports to Europe after Nord Stream is launched;
- If Russian hydrocarbons transit volumes fall below critical level, transfer to the reverse direction to make the best use of the Polish shale gas and Baltic seaports’ ability to receive oil for Belarus. By doing so, Belarus will ensure both hydrocarbons imports diversification and adequate operation of its pipeline systems;
- Continuing search for alternative suppliers of oil and natural gas (including LNG) in order to assure adequate usage of the pipeline systems in the reverse direction.
Environmental effect
Similarly to energy intensity considerations, most of the negative effects of the current trends on the environment are related to either reduced incentives to modernize or reduced funds available for modernization projects. The following measures are intended to reduce pollution intensity of energy use:
- Establishing a Research and Development (R&D) program on environmental effects of energy use;
- Imposing environmental standards and taxes on energy use, especially in energy intensive sectors and bringing these policies closer to international standards;
- Issuing a mandate requiring gradual replacement and rehabilitation of obsolete equipment, especially in heat and power generating and pollution intensive industrial sectors;
- Establishing emission trade relations with the Kyoto Protocol Annex B countries to collect funds for the environmental modernization of equipment.
The following steps should be undertaken to minimize both actual and perceived environmental risks of the Astravets nuclear power station:
- Working with the general public to educate them about modern technologies that guarantee nuclear power safety as well as inform them of virtually accident-free record of civil nuclear power besides Chernobyl disaster;
- Establishing relations with the stakeholders that might be affected by the environmental impact of the projected power station, especially, local communities along Neris river;
- On early stages, study the possibilities for the spent nuclear fuel treatment and reach the preliminary international agreements over the potential nuclear waste storage if needed;
- Ensure compliance with the international standards of the power plant construction and operation and advertise this compliance strategy to the stakeholders.
Concluding remarks
Currently Belarus enters a completely new stage of its development as the old economic growth factors vanish, the political situation both within and outside the country transforms, and the geopolitical context changes. This new stage of the country’s development presents new challenges and new opportunities for Belarusian energy security, the key for any country’s independence. Careful consideration of the most critical energy security challenges coupled with professional and effective policy measures to tackle them is a vital task for securing Belarus’ economic growth, political sovereignty and quality of life improvement.
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