The government promised investors a separate law for each nationalization case
On August 6th, the Economy Ministry explained the main provisions of the new law “On Investments”, which will take effect on January 24th, 2014.
The new Investment Law aims at convincing foreign investors that investment climate in Belarus will improve and at compensating for the reputational damage caused by resonant nationalization cases. However, the Law will not have any impact on the current investment practices that upset foreign investors.
The new Law is primarily addressed to foreign investors to revitalize their interest, since the Belarusian authorities count on greater investment activity and claim investment legislation improvement. The main domestic investor is the state, but it is hardly taken into account, since it has no available resources.
During the past ten years, the authorities’ FDI plans were regularly unfulfilled and the actual FDI inflow on a net basis was very modest. In 2012 FDI was USD 1.376 billion and in Q1 and Q2 2013 – USD 1.5 billion. Simultaneously, international experts assessed the investment legislation in Belarus as consistent with the global average standards. In addition, the granted preferences were often unprecedented (as a rule, such preferences are introduced by Presidential Decrees). For example, Sino-Belarusian Industrial Park was granted tax and customs privileges for up to 50 years.
The investments’ inflow into the Belarusian economy is constrained by other factors, inter alia, by the Belarusian authorities’ political reputation. To a much greater degree potential investors are turned off by ‘specific’ investment practices: legal framework volatility, high administrative and bureaucratic barriers, and most importantly - low guarantees for property rights and their judicial protection, including nationalization cases. For instance, the last year’s confectionery industry examples, when decisions about de facto nationalization of two enterprises with foreign investment (Kommunarka and Spartak) were made during the meeting with the President, followed by post-factum adoption of relevant legislation. The new Investment Law was designed to mitigate the significant damage made to the country’s investment profile as a result of such practices.
On August 6th, Economy Ministry Chief Directorate for Investment Head Voytekhovsky said that the new Law was designed “to consolidate the basic legal framework for investment and to safeguard the investors’ rights and interests, and guarantee their legal protection”. As such guarantees, he mentioned the possibility for investors to protect their rights, not only in Belarusian courts, but also in international arbitration bodies, and for non-resident property owners in the International Centre for Investment Disputes Settlement.
The new Law’s most important provision concerns nationalization procedures. Thus, investors are guaranteed that in each nationalization case a separate law will be adopted, envisaging, in addition to general provisions, assessment and compensation terms for seized property. The IFC, which consulted the government about the Law, advised to incorporate the compensation rate into the Investment Law, however this proposal was not adopted.
The Law also does not regulate the nationalization practice when owners are forced to ‘voluntarily’ relinquish their shares in joint-stock companies to the state. In fact, on August 6th, information about yet another such case was made public: the state had gratuitously received a blocking share package (25% + 1 share) from JSC ‘Luch’ footwear maker (the state’s share after privatization was 0.015%).
Thus, the new Law, having no impact on the current economic management practices, is not likely to start an investment boom after January 24th, 2014. A better effect could be achieved if a moratorium on adoption of legislation (including Presidential Decrees) worsening economic conditions for investors was introduced; and if legal restrictions on nationalization practices were adopted with clear exceptions and defined evaluation and redress mechanisms. As is, the new Investment Law brings nothing like that to the Belarus’ investment practices.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.