October 23, 2017 / 10:08 AM / a month ago

Once derided as leeches, private firms see new hope in Belarus

MINSK (Reuters) - Belarus’s reputation as a hard place for private entrepreneurs to succeed is starting to fade as the Soviet-style economy frays and the president who once denounced them as “leeches” tries to woo them.

Employees work at the ADANI company in Minsk, Belarus October 11, 2017. Photo taken October 11, 2017. REUTERS/Vasily Fedosenko

The former Soviet republic, squeezed between Russia and the European Union, is still dominated by the state, weighed down by bureaucracy and dependent on Russian money and subsidies. Its record on human rights and democracy has been widely criticized.

But President Alexander Lukashenko, who has faced protests over unemployment and low living standards, plans to sign a series of business-friendly decrees shortly to build on other reforms he has launched to encourage private companies.

The private sector accounts for less than a third of gross domestic product. But some private firms are blossoming and say Belarus is a good place to do business because it has a cheap, educated workforce, competition is not fierce and corruption is less rife than in some neighboring countries.

“Belarus is a blue ocean for investment. Not all Western investors realize this, but this is also one of our advantages,” said Sergey Riabuhin, deputy director of Zubr Capital, which launched the country’s first private equity fund last year.

Zubr Capital’s portfolio includes online retailer 21vek.by. Launched with a small stock room by three law students in 2004, it is now the market leader in Belarus, has more than 500 employees and expects revenues to rise by more than 50 percent this year from $48 million in 2016.

“I believe that, in the European Union and in the USA, they overestimate the barriers and the troubles small businesses and middle-sized businesses may have in Belarus,” said Ivan Pliuhachou, 21vek.by’s 34-year-old business development manager.

The company’s headquarters has modern Belarussian art on the walls and a hoverboard on the floor near the entrance.

But outside, streets are still named after Friedrich Engels and Karl Marx, the founders of modern communism, and a statue of Soviet state founder Vladimir Lenin stands on the capital Minsk’s main Independence Square.

Although Minsk also now has some smart Western shops and McDonald’s fast-food restaurants, the contrast underlines how far Belarus has to go to shake off its image abroad as being stuck in a time warp.

STREET PROTESTS

Lukashenko, 63, has ruled the country of 9.5 million people since 1994, brooks little dissent. With the economy propped up by Russian subsidies, he has avoided carrying out liberal market reforms on the same scale as some other ex-Soviet republics.

But with financial help from Moscow declining as Russia faces its own economic problems, and the Belarussian economy hit by recession in 2015 and 2016, unemployment has grown, salaries have dropped in real terms and public discontent has mounted.

Street protests earlier this year, against a “parasite tax” levied on the unemployed to compensate the state for lost taxes, were the biggest anti-government protests for years.

Lukashenko has increased support for private companies, though without reforming state firms -- a way of boosting the economy and potentially averting more unrest.

One decree he signed has cut red tape for starting a tiny business such as a hair salon or a bakery. He has also tightened regulations for the inspection of companies and made it illegal to halt a company’s operations without a court order.

Employees work on an electric train assembly line at the Stadler Minsk plant in Fanipol, Belarus August 1, 2017. Photo taken August 1, 2017. REUTERS/Vasily Fedosenko

Decrees in the works will cut the number of licenses firms need, reduce state interference in the private sector in favor of self-regulation, and put a moratorium on the introduction of any new taxes or increase of current taxes until 2020.

Private entrepreneurs welcome the changes, hoping the number of foreign and Belarussian companies that flourish will rise.

RED TAPE

Successful foreign investors include Switzerland’s Stadler Rail, which opened a rolling stock factory in 2014.

Philipp Brunner, chief executive of Stadler Minsk, said the company was attracted by tax breaks, an educated workforce, an onsite customs clearance facility and Belarus’s membership of the Eurasian Economic Union, a trading body whose other full members are Russia, Kazakhstan, Armenia and Kyrgyzstan.

Slideshow (17 Images)

“Belarus was and still is a very good location for us to invest,” he said.

Even so, he said, cumbersome bureaucracy pushes up costs and Stadler in Belarus is less competitive than its factories in Poland, Hungary and the Czech Republic.

Brunner studied the Soviet planned economy in books but came up against it in real life during the construction of the plant.

At a high government level, in some instances “there is still a completely different approach and there is not much understanding for the private sector,” he said.

Andrey Serikov, chief executive of Mark Formelle, a clothing label that employs 2,000 people across 11 factories, also says government regulations can be difficult to navigate and that violations of administrative procedures are punished harshly.

“For example, as a result of a mistake in documents, you can lose the goods,” he said.

Another private company, ADANI, now sells medical X-ray equipment, airport screening machines and body scanners for prisons in 70 countries, including the United States, after being created in 1991.

In the World bank’s latest ease of doing business index, Belarus has risen to 37th from 91st in 2010, and ranks higher than Russia, Belgium, Italy and Hungary.

The economy ministry says the share of private sector jobs has risen to 32.8 percent from 28 percent in 2010, though the private sector’s contribution to GDP -- put by the EBRD at up to 30 percent -- is still much smaller than in some neighboring states.

Deputy Economy Minister Dmitry Matusevich said the national authorities were making life easier for entrepreneurs and Western attitudes towards Belarus had changed.

When one speaks of the command economy, “many investors associate it with stability and some kind of guarantee that they won’t lose their money,” he said.

Editing by Timothy Heritage

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