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 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.