BELARUS: ECONOMIC POTENTIAL AND STRATEGIC INTERESTS IN THE EURASIAN ECONOMIC COMMUNITY
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Alexander ZAITSEV
Alexander Zaitsev, deputy director, Institute of Human Problems (Minsk, Republic of Belarus).
The disintegration of the post-Soviet space and the shortage of investments (one could even say investments famine) do not allow Belarus and the countries of Central Asia to overcome all the crisis phenomena in their economy. These states have a number of coinciding interests in trade with Russia, transit of goods to Western countries, and removal of protectionist barriers in foreign trade. The widening presence of major Belarus producers on the markets of the Central Asian countries paves the way for a more effective concerted foreign-trade policy on the Russian market and for more vigorous penetration of other foreign markets.
Over the past five or six years, Belarus has been able to halt most of the crisis phenomena in the economy caused by the breakup of the U.S.S.R. and the disintegration of the post-Soviet space. Despite numerous pessimistic forecasts, the country’s gross domestic product (GDP) and industrial output have been growing steadily since the second half of 1996. The country has been able to sustain its large-scale export-oriented industry and to renew its fixed assets. Moreover, owing to government support and an active policy, the leading producers of export goods have been able to modernize their production facilities, to markedly expand their product mix, and not only to retain their traditional markets, but also to branch out into new ones.
Of course, the difficulties facing the Belarus economy are great indeed and can hardly be overcome in the immediate future. But positive results have obviously been achieved, mostly owing to active cooperation with Russia. In the years of integration with Russia, Belarus producers have managed to expand their presence on the Russian market, as a rule at the expense of Russian competitors. Considerable benefits have been derived in connection with Belarus granting favorable trading status and an opportunity to implement a number of major infrastructure projects of the European Union. It is also evident, however, that the republic’s stabilization potential largely based on the Soviet heritage is running out, something which became particularly obvious during the 1998 Russian crisis. The country’s task now is not so much to preserve its production potential (for this has on the whole been achieved) as to make a breakthrough in mastering new technologies and gaining access to new markets. This opens up fresh prospects in the matter of promoting the mutual interests of Belarus and the countries of Central Asia.
Here are some facts and figures. First of all let us note that within the U.S.S.R. framework Belarus differed markedly from other Union republics in terms of the share, structure and specific features of large-scale industry.
After the Great Patriotic War of 1941-1945, the republic became one of the most powerful industrial centers in Europe. Postwar industrialization was mostly concentrated in the republic’s eastern regions. In a relatively short period, a number of large industrial enterprises were built with the use of funds allocated from the Union budget. As some analysts note, that industrial center came to replace the regional industrial center in East Prussia liquidated during World War II.1
In the 1960s and 1970s, large state-of-the-art enterprises were built in engineering, radioelectronics, and in the chemical and petrochemical industries. Many of them are widely known not only in the post-Soviet space, but throughout the world: the Minsk Tractor Plant (MTZ), Integral, the Minsk Automobile Plant (MAZ), BelAZ, Belaruskalii, Gorizont, and others.
The republic’s industry was highly concentrated and export-oriented. Before the breakup of the U.S.S.R., over 80% of all industrial products made in Belarus were exported, and the necessary amounts of raw materials were brought into the republic. Over one-half of all industrial workers in Belarus were employed at big plants and factories. Another important point is that the republic’s industrial complex was a single whole in technological terms: in most processing chains, Belarus enterprises are compatible with each other. They also have an interesting organizational structure: they are grouped together in industrial associations and concerns (faintly resembling transnational corporations), usually with a backbone of one or several big plants closely linked with several dozen allied enterprises not only in Belarus, but also abroad, mainly in CIS countries. Thus, MAZ has about 120 allied suppliers, and MTZ, about 200.
The science and education system adds stability to the industrial complex. After the war, the development of major lines of production in the Union republic was paralleled by the development of an education system geared to meet the needs of industry by training local personnel. That system was basically polytechnical, starting from primary school to the occupational training network; the leading institutions of higher learning were also polytechnical. Training was mostly provided in specialities that were in great demand in Belarus industry, that is, under the state-guaranteed job placement system that existed in the U.S.S.R. young people acquiring industrial specialities were assigned on a massive scale to jobs at Belarus enterprises. Science was also oriented toward large-scale industrial production. True, its humanitarian sphere was relatively less developed, but the republic managed to foster a number of scientific schools and trends connected with large-scale industrial production, primarily in mathematics, chemistry, cybernetics and physics (including nuclear physics).
The specific character of the U.S.S.R.’s transport infrastructure was also highly important. The main export and transit arteries, and also the main pipelines between the U.S.S.R. and Western Europe were laid across Belarus. Moreover, their specific pattern turned the republic into a kind of traffic assignment center for the Baltic countries and northern Ukraine.
By the time of the U.S.S.R.’s breakup, Belarus was one of its industrially most powerful republics (ranking third behind Russia and Ukraine) with a modern, flexible and consolidated production base. In other words, it had a modern complex of export-oriented industries and lines of production. Today the country’s foreign economic policy is still aimed at ensuring, on the one hand, guaranteed import of raw materials and, on the other, more vigorous activity on external markets. Thus, in terms of production capabilities Belarus plants stand out not only in the CIS, but throughout the world. The design capacity of the Minsk Tractor Plant, for example, is 114 thousand units of equipment a year, whereas that of the well-known U.S. Caterpillar plant is 30-35 thousand. In other words, Belarus was one of the leading industrial centers of the U.S.S.R. similar in economic structure to the developed countries of the West, and nowadays its prosperity depends on successful activity in foreign markets, on the ability of its large corporations to ensure a steady supply of raw materials to their plants and factories, and a renewal of process equipment.
On the whole, large-scale industry is crucial to the economy of Belarus for various other reasons as well. Should it grind to a halt, this would lead to mass unemployment (over 1.1 million plus members of their families), which cannot be alleviated in a short period by programs of small and medium-scale privatization and occupational retraining. This could produce a seething hotbed of social tension, and that on traffic arteries of essential importance to Europe. A collapse of industry would be followed by a disastrous slump in agriculture, since virtually all its requirements in basic fertilizers and material and technical facilities are met by the republic’s industry. Besides, following land improvement works performed on a massive scale in the southern part of the republic in the 1950s and 1960s (on an area far in excess of the area reclaimed in the Netherlands), there was a population explosion in the region, a transport and production infrastructure was built up, and a substantial amount of farm produce is being grown on the reclaimed lands. With a collapse of industry, the state would simply be unable to maintain the land improvement systems in due order, which would lead to rapid flooding and swamping of sizeable territories, and so to a destruction of the infrastructure, disuse of vast areas of agricultural land (up to 60% in the Brest Region alone), and an exodus of the population from the waterlogged territories.
So, the Belarus economy is a powerful integrated complex oriented toward external markets. The crisis that broke out with the disintegration of the U.S.S.R. was engendered not by internal causes, but by a contraction of the traditional external markets in the CIS and the Third World, which struck a serious blow at the republic’s economy. In the mid-1990s, industrial output was around 60% of the level of 1991 (the year of maximum output). The various aspects of the crisis are widely known: rising fuel and raw material prices, inflation, shrinking markets, a general decline in paying capacity, barterization of the economy, and rising prices of goods on the consumer market. Another important point is that in view of the specific features of its economy Belarus was unable to carry out reforms on the standard European model: liquidation of large-scale industry and high-technology lines of production and orientation toward small and medium-scale business. The problems with large-scale industry in the republic are essentially similar to the cotton problems that arose in the Central Asian countries in the same period: Belarus cannot afford to give up large-scale industry altogether for the reasons listed above, but is unable to stabilize it with the use of internal resources. So, it is obliged to step up its foreign policy activities along new lines while holding on for as long as possible to the weakening but traditional Russian market.2
That is precisely what Belarus policy has sought to do over the past few years. First of all, steps were taken in the mid-1990s to reanimate the effective mechanism of centralized state administration and, with government support, to prevent the republic’s industry from falling apart. Privatization was partially curtailed, guidelines were set for the country’s socioeconomic development, and substantial support was given to producers. In the process of a struggle for deliveries of tractors to Pakistan (1995-1996), the Belarus government came to the assistance of the MTZ, in particular, by allocating funds to meet certain costs. That made it possible to secure the order in the face of competition from Russian and Polish producers. Pakistan was to acquire around 80 thousand tractors, to be delivered over a period of several years. In the first few years, the MTZ supplied the customer with over 40 thousand tractors, which enabled the plant to roughly double its capacity utilization rate. An interesting point to note here is that Belarus attacked its rivals in a technological niche which at the time was not traditional for the MTZ.
The state has actively lobbied and continues to lobby the breakthrough of its producers into other foreign markets as well. Major industrial enterprises have restored their sales networks in Third World countries dating back to the Soviet period, have expanded their presence in North Africa and in South and Southeast Asia, and are making vigorous efforts to move their assembly and service divisions out of the republic. Leading Belarus producers have renewed their manufacturing equipment and have markedly expanded their product mix, certifying their products both according to European and world standards.
Yet another step of principal importance for Belarus was its decision to carry out in its territory a number of infrastructure projects of the European Union: gas pipelines from Yamal to Germany, the Berlin-Moscow and other transport corridors, a fiber-optic communications line, and so on. Indeed, most of the transit traffic flows between Russia and the West run across Belarus.
But the most tangible successes have been achieved on the Russian market. Virtually throughout the 1990s, the Belarus leadership kept putting forward various integration proposals: for a ruble zone, for the establishment of financial and industrial groups and a Customs Union, and for a union between Belarus and Russia. These and other initiatives were aimed at ensuring preferential access for Belarus producers to the Russian market and regular supplies of Russian raw materials (energy resources above all) to Belarus. In one way or another, all these arrangements have been put into effect. In the years of integration, our producers have managed to regain the positions lost with the disintegration of the U.S.S.R. and to make headway against Russian competitors in their own technological niches. Thus, the Integral plant now manufactures around 95% of all microchips in the post-Soviet space, and MAZ, over 60% of all trucks in the CIS countries. Many Russian enterprises are allied with Belarus enterprises, working together in processing chains. In principle, the two countries have been quite able to settle various matters arising in their relations in connection with debt arrears for Russian raw materials and energy resources, and to resolve problems of mutual offsets and deliveries of Belarus products to Russia.
This does not mean that the Belarus economy is free of crisis phenomena. For industrial growth and preservation of major export-oriented lines of production the republic has had to pay with one of the highest rates of inflation among the CIS countries, lack of stability on the consumer market, and a weak national currency. There is also a most acute shortage of investment resources. But despite all these difficulties, growth rates in the economy are substantial, as even biased critics have had to admit. Thus, GDP dynamics over the past few years have been positive: 1.5% in 1996, 11.0% in 1997, 8.0% in 1998, and 3.0% in 1999. Industrial output has also been growing: 17.8% in 1997, 10.3% in 1998, 9.7% in 1999, and 4.0% in January-August 2000. Import-substitution programs are in operation. In 2000, for example, a special government program provided for the production of $140 million worth of import-substituting manufactures.3
Such a successful foreign economic policy on the Russian direction has largely become possible against the background of highly unequal exchange between Russia and the West. After all, the strategic interests of the West and Belarus in Russia coincide in many respects. Although explicit statements on that score are fairly rare, nonequivalent exchange between Minsk and Moscow is of considerable advantage to Belarus. According to the estimates of the Association for Promoting Economic Reforms, the annual flow of capital from the Russian to the Belarus economy has been around $3-4 billion. This includes write-offs of fuel debts, barter in economic commerce between the two countries, and return on the Customs Union. Nor should one forget the effect of fuller capacity utilization at Belarus enterprises, “stifling” of Russian rivals, and indirect transfer of a part of the Western credits granted to Russia.
On the whole one could say that Belarus has prevented a dissipation of the Soviet heritage and retained its economic potential primarily through an active policy on the Russian market. However, this “stabilization resource” is in principle being depleted. The republic’s economy has also been affected by the 1998 crisis in Russia. As in many other CIS countries, it brought a decline in production, a fall in the exchange rate of the national currency, and an intensification of other negative factors. Even though a part of the Russian market abandoned by Western competitors in the course of that crisis has been occupied by Belarus producers, the increase in instability is obvious. That is evident, among other things, from the downward trends in the positive dynamics of GDP and industrial output (see above).
Today Belarus is in need of new breakthroughs on foreign markets, a rapid renewal of manufacturing capabilities, new strategic partners, and new strategic initiatives. All these lines are tied in with the development of cooperation with the countries of Central Asia, both on a bilateral basis and within the framework of the Eurasian Economic Community. How do the Central Asian realities appear from Belarus? What do we have in common?
The reforms of the past decade in the Central Asian countries have been just as dynamic. The changes in agriculture connected with its monocultural cotton specialization are particularly far-reaching. The history of cotton is, first and foremost, a history of the Soviet Union’s rise to “cotton independence.” Since cotton is a strategic raw material required by the military-industrial complex, geopolitics had an important role to play in this matter: during the Cold War the country was in need of its own sources of cotton, even though the costs of growing cotton in the U.S.S.R. were higher, on average, than in other parts of the world and it could only be produced on a limited territory, in Azerbaijan and the Central Asian republics.
Virtually all arable lands in these republics were allotted for cotton-growing, while the cultivation methods applied required wide use of manual labor. In effect, nearly all rural inhabitants in the Central Asian republics were engaged in growing and processing cotton. That served to perpetuate the existence of patriarchal rural communities, held back urbanization, and created real prerequisites for intensive population growth.4
In the late 1970s, cotton production reached its highest level, sustained throughout the 1980s. Thus, the average annual gross yield of raw cotton in 1976-1980 was 8,547 (2,612)5 thousand tons, in 1981-1985 it was 8,314 (2,453) thousand tons, and in 1986, 8,233 (2,647) thousand tons.6 With the breakup of the U.S.S.R., there was a sharp drop in the demand for cotton. In view of cutbacks in military spending, a general crisis in the economy, competition on the world market and in the clothing industry of the CIS countries, and an influx of low-priced goods from Turkey and China, the annual demand for cotton in Russia, the leading cotton consumer, is now around 350 thousand tons. Besides, not all of that amount comes from Central Asia. Belarus is one of the few countries where the decline in cotton consumption has not been as steep, since it has managed to maintain its clothing industry on a proper level. Cotton imports into the republic amounted to 13.3 thousand tons in 1996, 10.9 thousand tons in 1997, 19.2 thousand tons in 1998, and 18.3 thousand tons in 1999.7
All these figures make it quite clear that the countries of Central Asia were faced with the need to restructure their agriculture as soon as possible, especially since the region was left without overt or covert subsidies from the Union center for monocultural specialization. In addition, access to the world market is difficult for various reasons: it is saturated with higher-quality and lower-priced cotton (primarily from the U.S.A., India and China), the transport infrastructure of the Central Asian countries is poorly developed, etc.
Reforms in agriculture are particularly manifest in Uzbekistan, the country with the region’s highest gross output of cotton. Area under cotton in the republic has been reduced from around 2 million to 1.5 million hectares, and gross yields have gone down in the same proportion, to 4 million tons. The newly vacant lands were sown to other crops, mostly grain crops. By the mid-1990s, Uzbekistan and Turkmenistan were able to attain self-sufficiency in grain. In far from simple conditions, the countries of Central Asia have not only changed the structure of agriculture, but have also managed to preserve their irrigation systems, so promoting social stability in the countryside (and, consequently, in society as a whole). Moreover, serious changes have been made in the export flows of cotton: with the collapse of the Russian market, which the Central Asian countries should undoubtedly try to keep, the share of the U.S.A., Turkey and the EU countries has been going up.
However that may be, cotton is still the basis of agricultural production, the main source of foreign exchange and budget revenues. Its total exports come to around 1.5-2 million tons a year, and one of the main tasks now is to get a foothold on world markets. In this context, the countries of the region should work out a common policy on cotton.
It is just as important to solve the problem connected with the complex of state-owned regional electric power stations in the upper reaches of rivers. Its destruction would lead to the flooding of vast areas, primarily in the Ferghana Valley, which is fraught with great loss of life, destruction of irrigation systems and infrastructure facilities, and could lead to socioeconomic collapse. Control of the power generation complex is necessary for all countries in the region, but especially for Uzbekistan. In addition, such control would make it possible to forecast the course of events in Afghanistan and Tajikistan, in principle enabling the Central Asian states to project and follow a concerted policy in this area.
Finally, great importance attaches to such problems as development of mineral deposits and attraction of foreign investments. Most countries of the region have followed a policy similar in purpose (to attract the largest possible amounts of foreign investments) but differing in approaches, which ranged from sale of deposits and production facilities to investments in new production. The experience of Kazakhstan, which took the former approach, is most indicative: in the 1990s, many of its plants and a considerable part of its deposits were sold off, often to dubious foreign companies and at giveaway prices. Such a policy made the country dependent on changes in world prices of raw materials (both ores and fuels), which became painfully clear during the world crisis of 1997-1998 and especially during the 1998 crisis in Russia. A somewhat different approach was taken by Uzbekistan and Turkmenistan, where the state remains largely in control of deposits, while a considerable part of foreign investments is channelled into the development of new lines of production and into construction. Evidently, the policy aimed at attracting investments has on the whole proved to be successful: the countries of the region (except Tajikistan) have attracted the largest amounts of foreign investments per capita among all the CIS countries. In Uzbekistan, for example, something like 200 investment projects with the participation of foreign capital worth a total of around $10 billion are being put into effect.8
One could say that the region is in need of programs similar to Soviet industrialization programs, which would help to regulate population processes, modernize and develop production facilities, create an infrastructure, and build up resources for socioeconomic stabilization. In other words, despite undeniable successes, what the region needs in the first place is foreign investments in production, construction, agriculture and development of raw material deposits. It is necessary to branch out into new foreign markets of cotton and energy resources. It would also make sense to formulate a concerted policy, something in the nature of a common market. When seen from such an angle, the mutual interests of Belarus and the countries of Central Asia stand out in sharper relief.
The striving of the Central Asian states to enter foreign markets and attract investments for restructuring their economic base coupled with Belarus requirements in raw materials and a desire to boost the export of goods provide a solid basis for the development of mutually advantageous cooperation.
From 1997 to 1999, the republic’s trade turnover with Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan9 rose from $133,883 thousand to $207,488 thousand. But it is still much too small, making up 1.69% and 1.88%, respectively, of the total trade turnover between Belarus and the CIS countries.10 First of all, Belarus could both expand its deliveries of goods and set up service and production facilities in the region along several lines: general and special-purpose farm machines, and also products of other branches of engineering, including heavy engineering, radioelectronics, organic synthesis and household chemicals. Deployment of assembly and service facilities of large Belarus industrial enterprises in the countries of the region is an interesting and worthwhile prospect for both parties: an attractive feature here is the capacity of the Central Asian market, and also of the neighboring Russian and Chinese markets, where Belarus products have won recognition and are in demand.
One of the most promising lines is to establish a corporation on the basis of the Belarus clothing industry and cotton-producing facilities of one or several Central Asian states. Such cooperation could embrace the entire production and marketing cycle: from the production of cotton, textiles and clothes to their sale on the world market, and even to the arrangement of world-wide trade at every stage of commodity production and adoption of own standards.
It could also be possible to set up a corporation (or several corporations) specializing in the transit of raw materials from Central Asia to the West (to the EU countries). On the one hand, this would enable Belarus to maximize transit via its territory and, on the other, would meet the interests of the Central Asian states by giving them access to foreign markets and helping them earn foreign exchange.
Such an arrangement implies the need for vigorous concerted action in Russia, both within the framework of the CIS and within the Eurasian Economic Community and other interstate structures. The main parameters of this work may be projected fairly accurately. The first thing to do is to secure preferential status in trade with Russia, since the Russian market remains important both for Belarus and for the Central Asian countries. The second major line is to create favorable conditions for the transit of cargo traffic from the countries of Central Asia to Europe via Russia and Belarus. Of course, the Russian direction does not rule out a measure of competition against Russian and foreign rivals for segments of the market which are of interest to Belarus and Central Asian producers.
In the 1990s, the countries of Central Asia began to develop trade links with Iran and China, but transit to the West via Russia and Belarus is well-established, stable, and could be built up faster than in other directions. The prospect of launching one’s own industrialization programs pivoted on the Belarus industrial base is equally important for the countries of the region. The republic’s production capacities enable it to play an effective part in any large-scale projects of this kind, which are most acceptable in terms of scope, quality and form of payment. Finally, partnership on strategic directions gives much room for maneuver on the Russian and world markets (those of the developed countries above all), especially in combatting all kinds of trade restrictions, and opens up new vistas for cooperation with transnational corporations and for attracting foreign investments. As for Belarus, it is interested in an opportunity to create a stable base that would guarantee a supply of cotton, energy resources and some mineral raw materials to the Belarus industry. Belarus could also gain considerable advantages from fuller utilization of production capacities (and, in some cases, of entire industries) through an expansion of its presence on the Central Asian and Russian markets. Central Asia is a sufficiently promising market. Besides, stable positions in the region would provide ample opportunities for operation on the markets of neighboring states, especially China and the countries of South Asia. What is important for Belarus, as well as for the Central Asian republics, is not only a quest for strategic partners in the developed countries, but also the prospect of surmounting restrictions in foreign trade.
The immediate benefits from the development of cooperation between Belarus and the countries of Central Asia are also obvious for the European Union. Stable transit of raw materials (especially energy resources) from the CIS countries is a key factor in the development of European integration. The fact that Belarus and the countries of the region have a vital stake in the stability of their own and of the Russian markets and, consequently, in reliable transit is a weighty argument for Europe.
Unless Belarus and the countries of Central Asia, and not only Russia, are treated as partners of the European Union in the CIS, it will be difficult in the East to realize the strategic plans for the creation of a single Europe. What is particularly important here is that such partnership would make it easier to combat illegal commodity flows and illegal migration to the EU countries.
1 See: Iu.V. Shevtsov, Strana bazirovania. Geopoliticheskie tendentsii, v sfere deistvia kotorykh nakhoditsa Belarus’, Minsk, 1994-1996.
2 See: Iu.V. Shevtsov, Rossia: put’ na Sever. Triediniy Sever vmesto Zapada i Vostoka, Minsk, 1997, Chapters 4-6.
3 According to the data of the Economic Research Institute of the Ministry of Economy of the Republic of Belarus, Minsk, 2000.
4 See: Iu.V. Shevtsov, Rossia: put’ na Sever. Triediniy Sever vmesto Zapada i Vostoka, Chapters 4-6.
5 In brackets, gross yield of raw cotton in terms of fiber.
6 See: Narodnoie khoziaistvo SSSR za 70 let: iubileiniy statisticheskii iezhegodnik. Goskomstat SSSR, Finansy i Statistika Publishers, Moscow, 1987.
7 See: Vneshniaia torgovlia Respubliki Belarus’ za 1999 g: statisticheskii sbornik, Ministry of Statistics and Analysis of the Republic of Belarus, Minsk, 2000.
8 According to the data of the Economic Research Institute of the Ministry of Economy of the Republic of Belarus, Minsk, 2000.
9 Figures of trade with Afghanistan are statistically insignificant.
10 See: Vneshniaia torgovlia Respubliki Belarus’ za 1997 g: statisticheskii sbornik, Minsk, Ministry of Statistics and Analysis of the Republic of Belarus, 1998.