Hit hard by neighbouring Russia’s recession and faced with decline after nearly 20 years of growth, Belarus is beginning its foray into market-oriented economic reforms and industry modernisation.

The country’s deputy prime minister, Vladimir Semashko, points to its privatisation plans, special economic zones, and the lifting of European and US sanctions as harbingers of economic recovery, while stressing the need to diversify its export market. The reforms look promising, outside observers say, but more work is needed to balance the economy of what many call Europe’s last dictatorship.

Russian reliance? 

“In order to survive, we have to sell 65% of our output, and Russia is one of our key customers,” says Mr Semashko. “Forty-six percent of our exports went to Russia last year, so the impact of the crisis in Russia was worse than we forecast.”

Bilateral trade with Russia, Belarus’s top trade partner, fell in 2015 by 26% from the previous year. Meanwhile, Belarus’s economy shrank 3.6% year on year in the first quarter of 2016 and manufacturing production, one of the country’s biggest industries, fell 4.4%, according to the National Statistical Committee of Belarus. The IMF forecasts Belarus's GDP to fall by 2.2% for the year 2016.

However, the country is still better off than it was 15 years ago, according to Semashko, when Russia accounted for 75% of its total sales, a number now lowered with the help of a more diverse economy. 

Sanction relief 

More recently, economic diversification has been aided by the lifting of most US and European sanctions in February, which were imposed in 2010 over human rights violations after president Alexander Lukashenko led a violent crackdown on protesters following a contested election result.  

“We think the relaxation, with the lifting of sanctions, is timely and something that we need to hail,” says Mr Semashko. “We are in a position where we need to operate in every direction, and I think we are getting there. More than half of our product is exported toward non-Soviet countries [in] Europe, North America, Asia and especially south-east Asia, which means that many of our products are competitive in terms of quality and price.” 

But with regards to inbound investment, Mr Semashko says: “we would like to see leading Western companies bring their knowledge and investment to Belarus – in sectors such as agriculture, transport, manufacturing, electronics, as well as more investment in new sectors such as biotechnology, nanotechnology and IT.”

Privatisation plans 

FDI currently comprises 2.4% of Belarus’s GDP, a figure the government hopes to increase through privatisation measures. In January, the State Property Committee of Belarus announced 60 companies that had been selected for privatisation – 56 open joint stock companies and four enterprises as asset complexes.  

Yet the privatisation process is slow, primarily because of the vested interests of state-run industries, such as agriculture, and the desire to protect jobs. Seventy percent of the Belarusian economy is in state hands, according to the EBRD. “We’ve always been conservative with [privatisation],” says Mr Semashko. “This has allowed us to preserve our industries and industrial production.” 

Francis Malige, managing director for eastern Europe and Caucasus at the EBRD, believes it is early days for privatisation in Belarus. “Change creates uncertainty – how are you going to maintain social services? It creates anxiety in the people, so you have to do these things carefully and it takes time,” he says. However, he adds that Belarus’s industries hold significant potential: “Belarus has skilled workers and good production capacity, but you have to take it one step further. The state companies are well-functioning so they should be privatised as a priority, because that is where the potential is.” Mr Malige highlights light and heavy industry, manufacturing, IT and the wood industry as particularly promising areas. 

The IMF, in its June 30 statement on Belarus, praised the country’s recent reform and stabilisation efforts, but also warned of “low competitiveness, weak balance sheets and other domestic structural impediments to growth” in addition to low oil prices. “Tight macroeconomic policies remain critical to growth,” said the IMF, recommending that the government “enhance and strengthen the framework for restructuring state-owned enterprises, including by developing clear insolvency and privatisation procedures”.