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Country Analysis Paper: Belarus and the Ukraine

1. Introduction. (general information about the two countries, GDP, PPP..etc)

Belarus (Byelorussia, or White Russia) and the Republic of Ukraine are two neighbouring former members of the USSR. As such, both share many points of similarity, but also differ in many aspects, many of which are due to the two countries’ different approaches towards the primary member of the former USSR, namely the Russian Federation, who continues to play a dominant role in the region.

Belarus declared its independence from the USSR in August 1990, but has kept strong economic relations with Russia, whose support in terms of e.g. favourable oil prices to its small ally is the main reason for Belarus’ relatively strong economic performance. However, as described in greater detail in later sections of this paper, the overdependence on Russia poses threats on Belarus.

In addition to being the member of the former USSR (best known today as the Commonwealth of Independent States, or CIS) with the closest relations with Russia, Belarus has also retained a rather communist regime. That is, most of the market is tightly controlled by the government and there are rigid restrictions on the press and freedom of speech.

As of 2008, Belarus’ estimated Per Capita GDP (in terms of purchasing power parity) was $11,800; ranked 94th in the world, Belarus’ Per Capita GDP is barely 20% from that of Kuwait, which is ranked 5th (Central Intelligence Agency, 2009). Its currency, the Belarusian ruble (Br), is pegged with a basket of currencies ($US at Br 2858, EUR at Br 3832.38, Russian ruble at 88.11, Average Basket at Br 975.49).

Bordering Belarus from the south, Ukraine has abandoned the communist principles since its post-soviet inception in 1991. Its pro-western and anti-Russian attitude is still in debate between the Russian-speaking East Ukrainians and their fellows in the west of the country, who support the current regime’s efforts to build a distinct culture and economy.

The current economic crisis has drastically struck the Ukrainian economy. With nearly four times lower growth rate than before the crisis (from 7.6% in 2007 to 2.1% in 2008) (Central Intelligence Agency, 2009), many economists assume that the Ukraine will continue to struggle its way out of the crisis long after the developed country. Given initial recovery in the global economy throughout 2009, the International Monetary Fund (IMF) estimated that Ukraine can regain its potential growth by 2009 (Euromonitor, 2009).

Either way, as described below, Ukraine’s ambivalent relations with both Russia and the West, fuelled with high corruption and immense external debt are major obstacles in the 45-million-people republic’s struggle for prosperity. Hryvnia (UAH), the local currency (pronounced: grivna), has devalued significantly over the last year, falling from 4.85 UAH for 1 USD in May 2008 to 7.905 UAH/1 USD in May 2009 (Yahoo! Finance, 2009). Comparing to Belarus, the Ukrainian Per Capita GDP is rather weak, estimated to $6,900 in 2008 (in terms of PPP), making it 127th in the world, six places above China (Central Intelligence Agency, 2009).

2. Background about the country, cultural environments facing someone conducting a business in the country.

The two most important aspects in the Belarusian current economic state are the dependence on Russia and the centralized, government-controlled economy. However, recent trends caused by the global economic slowdown and the change in Moscow’s approach towards its small ally from the west may suggest future investment opportunities in the country.

The Belarusian banking system is dominated by four government-owned banks, which control together more than 80% of the domestic assets (Euromonitor, 2009). Loans are given to designated purposes according to state policies in subsidized interest rates. More than 75% are government-owned and work according to the classic principles of planned economy.

The main languages spoken are Russia and Belarusian (a Russian dialect). The education system resembles the soviet tradition; the Belarusian workforce is well-trained and the literacy rate approaches 100% (Central Intelligence Agency, 2009).

Russia is Belarus’ major trading partner, and the primary source of energy and raw materials. On December 1999, the two countries signed a two-state union, although many of the agreed steps have yet to be carried on to this day. Under this framework, Moscow intends to change the favourable conditions it gives to Belarus, in particular to raise gas prices.

Ukraine’s strategy to economic prosperity and independence has been quite different from Belarus. The main differences are in regard to democracy, developing a national Ukrainian awareness (far as possible from the soviet past) and market economy. However, this strategy has failed to meet the expectations for development in Ukraine, which was considered as the second senior member of the USSR (after Russia) and is the world’s sixth biggest producer of grain (Central Intelligence Agency, 2009).

Ukraine’s early years as an independent state are characterized by rapid privatization, political instability and state-wide corruption, which resulted in the emergence of the ‘oligarchs’ – powerful businessmen, many of them former USSR officials, who took possession of national assets, often in extremely low prices. These events have left significant remarks on contemporary Ukraine, whose economy, heavily based on foreign investments and credit, is highly sensitive to changes in the global and regional economic environment.

Ukraine’s international reputation is also rather unstable. In the past, Ukrainian officials were accused with extermination of opposition journalists, the collapsing social system and alleged weapon deals with Iraq prior to the 2003 Gulf War.

3. The political, legal and economic environment, business ethics, corruption, geography.

Belarus is a 207,600 sq km land and borders Russia in the east, Ukraine in the south, Poland in the west and Lithuania and Latvia in the north. The country is rather plain, and wide areas in the south region are contaminated from radioactive waste, caused by the 1986 nuclear accident in Chernobyl (then still under the USSR), which is located in northern Ukraine close to the Belarusian border. 73% of the 9.6 million inhabitants are urban; 1.8 million of them live in the capital of Minsk (Central Intelligence Agency, 2009).

President Aleksandr Lukashenko has based his regime on totalitarian measures, a fact that has raised international criticism, in particular with regard to human rights, freedom of speech and the disappearance of opposition figures. In 2006, Lukashenko was re-elected with 80% of the votes.

The government, led by Sjarhej Sidorski, is loyal to the president. The National Assembly is comprised from two bodies: The House of Representatives has 110 seats, who are elected for four-year term. In the 2008 elections, all 110 seats were given to supporters of the president. The Council of the Republic has 64 members who are indirectly elected, out of which eight members are appointed by the president. It is clear, though, that the international community condemns Belarus for unfair elections.

The Belarusian’s agricultural sector accounts for 7.4% and is an important source of income and employment, although approximately 60% of agricultural enterprises are loss-making, partially due to the dependence on imports for raw materials and intermediate supplies (Euromonitor, 2009).

Industries, notably machinery, engineering and chemicals, contribute to about a third of GDP. Some consumer goods are also manufactured in Belarus, but are considered as inferior to Western goods and therefore are practically inappropriate for import to Europe. There is, however, a strong Russian market for Belarusian goods: Russia is Belarus’ major export partner, totalling 36.5% of exports in 2007 and followed by Netherlands (17.8%), UK (6.3%), Ukraine (6.1%) and Poland (5%) (Central Intelligence Agency, 2009).

Both the industrial and the agricultural sectors are not competitive; high inventories and predetermined retail prices are the major symptoms of the uncompetitive environment in Belarus.

The Belarusian oil industry produces 37,000 barrels per day (bbl/d), which makes it a relatively small producer in global terms (67th in the world), similar to neighbouring Poland. As the country’s oil consumption is estimated by 179,700 bbl/d, Belarus imports today 75% of its needed oil from Russia (Central Intelligence Agency, 2009). As of January 1, 2008, Belarus has proven crude oil reserves of 198 million bbl (58th in the world), which are estimated by the national oil production monopoly to last for 17 more years (Euromonitor, 2009). Its official energy trading figures are much higher because Belarus, similarly to other countries such as Ukraine and Georgia, serves as west-heading transit station for Russian oil and gas. Since Russia has many conflicts with other intermediary states, it is clear why Moscow is interested on good relations with Belarus, whose policies are much more stable than any other strategic partner in the region. Foreign investments in the energy market are currently not possible due to government restrictions.

The second largest country in Europe and an important connection between Asia and Europe, Ukraine spreads over 603,700 sq km and has almost 46 million inhabitants. It borders Russia from the east; the black sea from south; Moldova, Romania, Hungary, Slovakia and Poland from the west; and Belarus from the north. Ukraine’s fragile democracy received international attention in 2004, when a peaceful crowd protested for changing the result of the presidential elections, in what is known as the ‘Orange Revolution’. During that time, the ‘orange’ block, led by Yuliya Tymoshenko (leader of the Yuliya Tymoshenko Bloc) and Viktor Yushchenko (leader Our Ukraine-People’s Self Defence), both are nationalistic pro-western parties, maintained that the results of the presidential elections, in which the pro-Russian Viktor Yanukovych (leader The Party of Regions) was elected as Head of State.

Yushchenko was ultimately elected as Head of State in 2005, and Tymoshenko, now leading a narrow coalition, was appointed by the Parliament to replace Yanukovych as prime minister in 2007.

However, the system has yet to stabilize, as the pro-Russian Party of Regions holds today 178 of the 450 seats in the Parliament, whereas the Tymoshenko-led coalition has only 156 seats. Major disputes between Tymoshenko and president Yushchenko are still a bourdon on Ukraine’s effort to stabilize the country and its fragile economy. Both the Parliament and the Head of State (i.e. president) are elected for five-year terms, but as can be seen from the current state of affairs in the Ukrainian politics, the turnover is much faster than that.

The landscape and climate is diverse, ranging from the Mediterranean-like regions along the shoreline to the Carpathian Mountains. Nevertheless, most of the terrain is plain and fertile, and thus Ukraine has and still is an important agricultural country and a target for about $1 billion of foreign investments in grain production during the last several years (Euromonitor, 2009).

Farming employs about a quarter of the workforce (Datamonitor, 2009). In an attempt to reduce foodstuff-induced inflation, the Ukrainian government has put quotas on grain export and banned the export of wheat from Ukrainian farmers. Considering the increasing food prices worldwide, this move resulted in huge losses for the agricultural sector.

The major industries are steel (which accounts for 40% of total exports) and food processing. The global economic slowdown influenced both investments and demand and resulted in lower outputs and profits. Steel output, for example, declined by 6% in 2008 and continues to fall (Euromonitor, 2009), other industries report losses up to 30%.

Exports of raw minerals are as important as steel, and metal contributes for about 40% of total exports (Datamonitor, 2009). In terms of natural resources, Ukraine is the world’s biggest supplier of titanium, has the third largest deposit of iron and 30% of the world’s xanax no prescription manganese ore (Euromonitor, 2009).

Due to its strategic location between the oil-producing areas in the east (in particular around the Caspian Sea), much of the Russian oil exports to Europe goes through pipelines in Ukraine. A conflict over energy prices between Russia and Ukraine gave rise to a temporary shortage in Europe during late 2008 and the early months of 2009. Ukraine plans to build a large refinery for Caspian oil near Odessa (on the shore of the Black Sea) to reduce its dependence on imports from Russia.

The banking sector nearly collapsed as a result of the global credit crunch, mainly due to extensive risky lending. The country received $16.5 billion from the IMF in November 2008 and agreed to conduct material reforms in its banking system.

4. Prospects as trading partner, government policies on international trade, directions and terms of trade, attractiveness as a site for foreign direct investment.

As mentioned earlier, the Belarusian private sector is narrow, as the government controls most of the economy through direct ownership of over 75% of the businesses and the banking sector is highly centralized. That is, Belarus is currently a planned economy with little place for interventions from the outside.

However, as the global and the regional conditions are hard, the government plans several structural reforms, notably privatizing more than 600 state-owned companies, introducing a flat income tax of 12% and abolishing the notorious turnover tax in 2010 (Euromonitor, 2009). In addition for more private involvement in the economy, one major implication would be a change in the government spending in Belarus’ GDP (as a result of lower tax revenues), in comparison to the current situation, where the private sector contributes to only 20% of GDP (Datamonitor, 2009).

Nevertheless, today’s prospect investor will find a market with predetermined prices and tight fiscal policy, but with a rather stable growth rate (about 8% per annum), although much of this growth is due to reselling of discounted Russian oil at market prices.

Wealth and income are very equally distributed: the country’s Gini coefficient (a standard index for inequalities) is calculated as 28 – one of the lowest in the world and an impressive figure for a developing country (Central Intelligence Agency, 2009). The official unemployment rate is 1.8%, but many private economists doubt that figure (Euromonitor, 2009).

The authorities are also capable to interfere with any business decisions or management in the country. Sanctions against businesses include re-nationalization, arbitrary changes in regulations and inspections. Businessmen and managers who do not comply are often arrested and declared “disruptive,” just as during the dark days of USSR (Central Intelligence Agency, 2009). Additional risks are unpredictable and changing taxation policies, high inflation rate, huge external debt, non-proportionality between increase in wages and profitability and the country’s slow and cumbersome bureaucracy, which makes it hard to establish and develop new businesses.

Ukraine’s openness toward market economy and foreign investments, coupled with the richness of the country and the big population, could have built one of the healthiest and strongest economies in Eastern Europe. However, nation-wide resistance to change, the ideologically divided nation and being one of the world’s most corrupted systems keeps Ukraine far from its potential growth.

Since 2005, Yushchenko’s regime introduced several reforms in favour of private businesses and foreign investment. These include, among others, changes in taxation, fighting corruption and more efficient and transparent regulation.

However, the economic crisis has been devastating on the the country. From a real GDP growth of about 7% before the crisis, Ukraine is now seeing an annual contraction of 9%. The main reason is the nearly collapse of the state’s banking system and a drop in the price of steel, which accounts for Ukraine’s main export.

A $16.5 bailout loan from the IMF has helped to slow the economic decline, and forced the government to make more reforms such as increased duties on some consumer goods (e.g. alcohol) and a progressive tariffs system for energy. But this is far from enough: according to a recent report on the Economist (2009), a third of Ukraine’s GDP goes to social spending (although the system is so corrupt, that the actual social services hardly reach the citizens), and it takes 47 steps to open a business and three years to close it. The political turmoil in Kiev and the seemingly indifference of the general population do not help, of course, to recover from the harsh economic and social situation.

However, the great majority of the current political leaders speak favourably on integration with Europe and more openness towards the west; steps such as joining NATO and preparing the grounds to future membership in the European Union are largely accepted now, even among the past enthusiasts of stronger integration with Russia.

Is seems, thus, that the Ukrainian legislator is highly supportive toward foreign trade and investment. Several examples are the parliament’s approval of laws allowing foreigners the to purchase Ukrainian property and businesses; enabling to repatriate profits and revenues, and to receive compensation if the business or property is nationalized by the government (Datamonitor, 2007). Many additional improvements in the were forced upon the Ukrainian government prior to the country’s joining to the World Trade Organization (WTO), intended to put the business environment in line with WTO standards and to facilitate prospective support from the IMF. These include changes in numerous fields from intellectual property to banking; clear instructions redarding corporate governance standards; enforcement of contract law; ease on regulation and barriers on new entrance; and protection for minority share holders.

5. Participation in cross-national cooperation and agreements, regional trading blocks, FTAs and other forms of international economic integration.

Belarus’ relations with the international community are very ambivalent from both sides. As discussed earlier in this paper, President Aleksandr Lukashenko’s economic policy seems to be rather successful, but his political agenda and his methods for establishing his regime are criticized by potential partners in the west.

The current Belarusian protectionism prevents any possible membership in the WTO. Belarus is, however, a member of the IMF and received some support in recent years, and made some small changes following its membership. The country also signed several international environmental agreements such as the Kyoto Protocol.

Belarus main trading partner and strategic ally is Russia. This cooperation is beneficial for both sides, as Russia has a convenient and friendly intermediary for its oil and gas exports and Belarus accounts much of its stable growth to reselling of oil. This is even more significant when keeping in mind that Russia’s relations with Ukraine and Georgia are tense and unstable.

Ukraine is much more internationally integrated than its neighbour from the north. It is a member of both the WTO and the IMF and generally complies with the latter’s regulations. Its intention to join NATO is a part of the general propensity to join the European Union in the future, although many doubt the chances for this to happen. The country also signed the most important international environmental and maritime agreements.

At the moment, Ukraine’s high employment rate, particularly in the less-industrialized west parts (which are close to EU members Poland, Slovakia and Hungary), puts pressure on immigration from Ukraine to European countries, which all demand entry visas from Ukrainian citizens. Needless to say that this situation puts even more pressure on the local economy, as brain drafting from the country increases. Ukraine also cooperates with Moldova, its poor neighbour from the west, on issues such as customs and passage of people and goods.

6. Any major trends and events affecting its standing in the global business environment.

The global economic crisis has not been devastating in Belarus, but the local economy is weaker now due to higher energy prices (which terminate the margins on reselling of Russian oil), lower demand for exports and a major increase in wages compared to real growth in productivity.

By 2011 Belarus will have to pay Russia regular European prices for the latter’s oil. It also had to sell half of the gas pipeline going in its territory to Gazprom, the Russian gas monopoly.

As real GSP is expected to decline to a level of 5%, large deficits in current account will most likely to rise to more than 8% of GDP in 2009, and the external debt will continue to grow (Euromonitor, 2009). The labour market policies, in particular planned increases in wages, support the economy by increasing private consumptions but induce inflation and losses in the business sector, which leads in turn to unemployment. The environment continues to be uncertain, but it is assumed that the deterioration in the warm relations with Russia would result in higher openness to Europe and new sets of opportunities and risks.

The Ukrainian financial sector was and still is very vulnerable and holds one of the main keys for growth, both domestically and in regard to the country’s prospective place in international trade once the global economy will return to positive growth rates. The weakness of the system came about mainly from overdependence on foreign credit, which enabled rapid growth of the country in most aspects but failed to protect the private investor from changes in global risk and liquidity settings. Thus, one of Ukraine’s main assignments is to regain confidence in its private sector through legislation, enforcement of trade laws and by continuing the structural reforms in many aspects of the system.

In addition, the current high corruption and developed shadow markets do not only worsen private and public revenues, but also increase the risk of investing in the country. The current presidential term ends in January 2010 and expected to bring changes in the regime, but all leading candidates (including Viktor Yanukovych, whose party, The Party of Regions, received Russian support in the past) maintain a pro-European line. This has many implications, one of them is the expectation that businesses will be able to work more freely than today.

Ukraine’s deficit in current account and standing loans imply that Ukraine will have to liquidise more government-owned assets. However, the price of lower control is not necessarily positive; loss of more government revenues will probably lead to lower social spending and greater inequalities, and thus more political pressure is likely to appear in the near future.

Possible solutions to Ukraine’s domestic problems may be opening opportunities for Ukrainians to work outside of Ukraine and to develop enhanced FDI-packages in such fields where Ukraine has significant advantages, such as steel and minerals (e.g. titanium), combined with work visas quotas for Ukrainians in the investing countries. Allowing international exchanges and multidimensional cooperation, strengthened by fighting smuggling and corruption may result in higher acceptance to Ukrainian exports.

Bibliography

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