Foreign Investors Should Take Ongoing State Reform into Account
On February 11th, Minsk regional court sentenced former Deputy Chairman of the Minsk City Executive Committee Igor Vasilyev, charged with bribery, to 14 years imprisonment in a reinforced regime colony, to confiscation of property and deprivation of the right to hold public office for five years.
Harsh sentence to former senior Minsk official should be regarded in line with the country’s tough personnel management policy and teach a lesson to other officials. Foreign investors should take into account informal rules for coordinating their interests in current Belarus.
The case of ex-Vice Mayor Vasiliev, due to his high position in the government, should teach Belarusian nomenclature a lesson. Perhaps this was the reason why the trial of Vasiliev started as an open trial and was later closed to the public.
Vasiliev was found guilty of extortion and bribery with USD 500 thousand from Czech investors who were planning to build a waste recycling plant in Minsk. The project’s cost was around USD 30 million. According to the KGB, which arrested Mr. Vasiliev, he was arrested in his office at the moment of transferring half of the bribe. However, Mr. Vasiliev pleaded not guilty. His lawyers plan to appeal the verdict – 14 years’ imprisonment – to Belarus’ Supreme Court.
It is noteworthy that previously similar high-profile corruption and bribery cases against other senior officials resulted in more lenient sentences. For example, former prosecutor of Minsk region Mr. Snegir in 2010 and former Air Force and Air Defense Commander Mr. Azarenok in 2011 were sentenced to maximum 10 years in prison. The bribe, which Vasiliev allegedly extorted, is also very costly compared with other Belarusian corruption cases.
First, Vasiliev’s case confirms assessments that President Lukashenko is serious about cutting down Belarusian managerial elite and is prepared to use harsh measures. Consequently, the exponential rigidity will definitely reduce the resistance by Belarusian officials to the forthcoming lay-offs, will increase their loyalty to the President without additional costs, and will reduce initiative in contacts with foreign businesses, either European or Russian.
Now it is time to recall the ambitious plan, made public in January 2013, to attract USD 7-7.5 billion foreign investment in Belarus by 2015, along with recent media speculations that the authorities consider Western business the most desirable investor. Corruption cases against high-level government officials suggest that President Lukashenko seeks to maintain his monopoly on decision-making in property privatization and foreign investment in Belarus.
Moreover, the bribe amount in Vasiliev’s case is exorbitantly overpriced against the background of business opportunities in Belarus and the Belarusian economy as a whole. Theoretically Vasiliev’s case could be interpreted as a signal about the desired informal “entrance” fees for foreign investors, which could be done deliberately, bearing in mind the obscurity of Vasiliev’s detention (official reports say he did not even have enough time to touch the money left in his office), absence of investors during the trial, as well as the fact that the money for the bribe was taken from the KGB’s special fund.
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.