Cancellation of the No 1 investment deal: an investment trend in Belarus
Belarus is advertised as a country with a favorable investment climate and transparent business environment. However, a series of contract terminations with investors from different countries casts doubts about the declared positive attitude to foreign capital and becomes a warning signal to other potential investors in Belarus.
Minsk authorities sent a notice to the Lithuanian Ukio Banko Investicij Grupe (UBIG) investment group about termination of the investment agreement. Investor is preparing to file a lawsuit in the International Court of Arbitration in Stockholm, demanding compensation.
Last week, Belarus decided to terminate two iconic investment projects. Minsk City Council was requested to terminate the investment agreement between Belarus and JV “Minsk-City”, also a termination notice has been sent to a Lithuanian investment group Ukio Banko Investicij Grupe (UBIG) regarding previously investment agreement signed.
The two events make several important points.
Firstly, smooth implementation of a project can be guaranteed neither by a company’s international reputation, nor by personal relationships with the head of state. Irrelevant of the fact that behind the JV “Minsk-City” was a well-known Russian company “Itera” and its management had often met with President Lukashenko personally, the investment agreement was terminated. Absolutely the same applies to the second case.
Secondly, investments in industry are extremely rare. There are examples of successful projects, but they are rare. There were seven major projects of the kind implemented in Belarus. For a country with 9.5 million population and favorable geographical location it is nothing. As a rule, investments are in commercial and residential real estate construction, which experience problems due to the global crisis and local financial problems. This nature of investment is responsible for a high speculative component when projecting the incoming capital.
Thirdly, the local authorities strongly inhibit the relations with potential investors. Most of all, officials look at investors as ‘milking’ cows and a way to solve local problems. They do not want a long-term co-operation. Small and medium investors face with striking examples of inconsistencies between the economic expediency and the requirements of the local authorities. Add to this the extreme intransigence on global projects due to various problems. Neither global nor local crisis exists for the local officials in Belarus, changes are not allowed, even if the economic benefits from the project are not feasible any more.
Therefore it is a vicious circle. Large capital investment, which could contribute to the modernization of the economy, is not coming to Belarus due to a very special attitude towards investors, and the coming investments are designed to make profit as fast as possible because of the high risk projects. And there is no way this circle could be broken.
The Labour and the Tax Ministries are considering the possibility to include persons engaged in some economic activity without forming a legal entity in the social security system. When the decree No 337 comes into effect, the number of private entrepreneurs is likely to reduce due to the possibility of reducing the tax burden when switching to a tax payment as an individual. 95% of self-employed, including PE, pay insurance premiums on the basis of the minimum wage. The number of self-employed citizens is expected to increase, the number of insurance contributions to the pension system from PE will decrease, the number of citizens who will pay a fee to finance government spending will decrease by several tens. Self-employed citizens have the alternative not to pay social security fees and save resources for future pensions, which, given the gradual restriction by the state of pension requirements could be a more long-sighted option.