Analysis - Belarus flirts with China, chilly on market reform

MINSK Wed Aug 25, 2010 10:45am BST

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MINSK (Reuters) - Belarus is likely to give few clues at least until after upcoming presidential elections on whether it will seek much-needed foreign investment elsewhere or concentrate on its strongly developing links with China.

The former Soviet state of Belarus, struggling to reduce its dependence on Russia and unwilling to bring in the sweeping reforms demanded by Western investors, saw its economy grow by a mere 0.2 percent in 2009, down from 10.0 percent a year earlier, according to IMF figures.

Analysts say Belarus needs new export markets and foreign investment to support growth.

"There is no escape ... Belarus has only one path -- to create a competitive economy, which is not possible without fundamental changes," said Sergei Levin, an economist with Renaissance Capital in Minsk.

President Alexander Lukashenko, who has ruled Belarus since 1994, is under pressure to loosen economic controls and seek a wider range of foreign investors after Russia this year hiked energy prices and withdrew $2 billion (1 billion pounds) worth of effective subsidies on oil supplied to Belarus refineries.

But few expect Lukashenko, running for a fourth term in presidential elections due within six months, to loosen economic control before the vote -- and the president has told visiting EU officials not to expect major changes even afterwards.

"We will not crawl on our knees before you, before Russia or before America," he said last month.

Criticised by Washington and Brussels for his intolerance of dissent -- a subject Beijing asks fewer questions about as on economic reform -- Lukashenko has yet to significantly improve diplomatic ties with the West.

In the spring, however, Lukashenko signed a series of projects with China potentially worth $10 billion -- more than one-fifth of Belarus's gross domestic product (GDP) last year -- and covering areas including car manufacture, electricity and sugar refining.

Last year, China was Belarus's fourth biggest trading partner after Russia, the European Union and Ukraine, with trade turnover at 1 billion euros, three-quarters of it being imports from China.

It is unclear though whether Lukashenko thinks growing links with Beijing, without the moves away from a centrally planned economy desired by Western investors, are enough for one of Europe's poorest countries. The IMF in April cut its 2010 growth forecast to 2.4 percent from an earlier 3.8 percent.

"Lukashenko understands that if liberalisation begins, it will mean no return," said Alexander Feduta, a political analyst in Minsk.

LACK OF CASH

One thing that may push Lukashenko towards more liberalisation and privatisation is simply Minsk's lack of cash.

The country is facing a budget deficit of 1.5 percent of GDP this and next year at least and the IMF sees its foreign debt reaching a record high of 52 percent of GDP in 2010.

To finance the deficit and the debt, Belarus may after the election start long-promised privatisation of big firms such as potash producer Belaruskali [ID:nLDE60E1JI].

Three years after Lukashenko first promised to liberalise the economy, the International Monetary Fund remains hopeful of change, the Fund's Minsk representative Natalia Kolyazina said.

"Liberalisation has not been abandoned," she told Reuters, citing her talks with government officials. The IMF has praised the greater price and currency flexibility allowed in return for a $3.5 billion loan in 2008.

In a sign Western investors want exposure to Belarus, they snapped up its first dollar bond issue in July, letting it place a five-year $600 million Eurobond. Minsk has since added $400 million to the issue, thus doubling the original expectations.

Foreign direct investment, still led by Russia, was down 15 percent last year at just $1.8 billion, according to data from the central bank and the United Nations trade body UNCTAD.

The country aims to boost annual FDI inflows to $7 billion, Prime Minister Sergei Sidorsky said recently, but this looks tough, partly because of the global crisis but also because foreigners want more clear-cut rules of the game.

Investors see in Lukashenko what is termed a "single person risk," said Michael Kart, managing partner at Marshall Spectrum, a Moscow-based private equity firm.

"All very much depends on his moods, on his good intentions, on his will. It's very hard to predict whether these changes will take place."

(Additional reporting by Sujata Rao in London; Writing in Moscow by Lidia Kelly; Editing by Ruth Pitchford and Stephen Nisbet)

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