Belarus: How black/grey schemes make good GDP growth Reviewed by Momizat on . By Chris Weston, CEE Consulting Group Anyone who remembers “The Godfather” by Mario Puzo will remember the inscription at the start, citing Balzac: “Behind ever By Chris Weston, CEE Consulting Group Anyone who remembers “The Godfather” by Mario Puzo will remember the inscription at the start, citing Balzac: “Behind ever Rating: 0

Belarus: How black/grey schemes make good GDP growth

Belarus on map_Zscout370

By Chris Weston, CEE Consulting Group

Anyone who remembers “The Godfather” by Mario Puzo will remember the inscription at the start, citing Balzac: “Behind every great fortune, lies a great crime.” But what of a nation`s wealth and how that country achieves its GDP growth?

History provides plenty of examples: Belgium`s wealth based on its exploitation of the Congo; the USA`s heavy dependence on slavery and cotton well into the nineteenth century; and the case of England`s most famous swashbuckler (or state sponsored pirate, if you will), Sir Francis Drake and his capture of Spanish treasure ships that generated sufficient funds for Queen Elizabeth I to pay off the national debt.

Such examples appear in even modern times and Belarus constitutes an interesting latter day example of how countries can “go on and on” without ever “facing the music” in macroeconomic terms, despite being abysmally run and not possessing a real economic model.

First, the economic data from the IMF regarding GDP growth since 2011:

2011

2012

2013

2014

2015

(Projection)

5.5%

1.7%

1.0%

1.6%

– 2.3%

 At first glance, the reader would assume that 2012 represented a marked slowdown before recovering somewhat in 2014. Economists would no doubt want to consider wider macroeconomic forces e.g. monetary and fiscal policies adopted, structural issues etc. But a closer look at how the country generated the 5.5 percent growth in 2011 might be more interesting.

In 2012, the EU decided to sanction a number of Belarussian businessmen close to President Lukashenko for providing financial support for the maintenance of his regime. Among them were Yuri Chizh and Nikolay Vorobey.

Both individual have been noted for their participation in a scheme, involving the sale of Russian  crude oil  and petrochemicals to  the  EU  under  the  disguise  of  lubricants,  solvents,  and  thinners,  thus  avoiding  paying customs duties to Russia. This scheme, which had been operating since at least 2010, had generated considerable export revenues for Belarus – a major component of GDP and any growth thereon.

In 2012 alone, approximately USD 2.5 – USD 3 bln in revenue was gained by Belarus through the aforementioned “solvents scheme.”  To put this in context, Belarus` GDP in 2012 came to USD 63.6 bln , so the solvent scheme, which generated hard currency exports for Belarus, came to almost 5 percent of the country`s GDP – a figure that appears to have eclipsed an otherwise decline in GDP experienced.

In  2012, overall  exports  from  Belarus  to  the  countries  of  the  EU  amounted  to USD 17.5 bln (27.5 percent of GDP).  The country’s trade surplus with EU countries totalled USD 8.3 bln– up from a USD 7 bln surplus in 2011. Sales of solvents and thinners contributed to more than 80 percent of Belarusian export growth in 2012, according to the Ministry of Economics of Belarus.

A further source noted “it allow[ed] the regime to earn USD 220-260 on every tonne of exported oil products.” This USD on every tonne was what should have been paid to Russia but was, in fact, appropriated for Belarus and its President`s benefit. Whether the Russian government was complicit in the arrangement, either as providing an unofficial subsidy or for reasons of personal gain remains unclear.

It is also worth noting the IMF`s recent (May) 2015 report on Belarus in respect to the 2014 GDP figure. It attributed this uptick in GDP to the following “real GDP increased by about 1.5 percent in 2014, primarily driven by the recovery of potash exports.”

Belaruskali is one of the largest potash producers in the world. It has approximately 20,000 employees and its four mines produce about 15 percent of world demand for potash fertilizers. Belarus’s most profitable venture, potash accounted for 20 percent of government revenue. In 2012, Belaruskali revenues were USD 2.14 bln, according to Belarusian Ministry of Finance data. Up until July 2013, Belaruskali had a joint venture distribution agreement with the Russian potash company, Uralkali.

In a press release dated August 19, 2013, Belaruskali angrily denounced statements made by Uralkali`s CEO Baumgertner as “provocative, emotional, unprecedented and unwise” and suspected that behind him stood “the private interests of shareholders” of Uralkali and ” the personal ambitions of some of their leaders.”

This escalated in late August when the hapless CEO of Uralkali, Baumgertner, was arrested at Minsk airport following a meeting with the Belarus prime minister to discuss a resolution to the conflict between the two companies. He was later extradited to Moscow on November 22 and then placed under house arrest in December. In September 2014, he was released on RUR 15 mln ruble (USD 241,400 at the current exchange rate) bail.

The Belarussian authorities also issued an international arrest warrant for Uralkali’s shareholder, billionaire and former Russian Senator Suleiman Kerimov, but later withdrew it, as well as that for four other Ukralkali managers.

These hardball tactics paid off since Belaruskali essentially departed the cartel arrangement with the Russian Uralkali and took advantage of increasing output (which the cartel had regulated at lower levels) and higher prices arising from Chinese demand to generate greater earnings for the Belarus state in 2014. This fed into higher GDP for the country in that year.

Photo courtesy of Zscout370 (Wikimedia Commons).

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