Belarus Investment Guide 2009

Transcription

1 Belarus Investment Guide 2009

2 Belarus Investment Guide 2009 Published with the support of the National Investment Agency

3 Ladies and Gentlemen, The Investment Guide Belarus 2009 is a booklet published by UNITER, SORAINEN, and Ernst & Young, to provide information of interest to companies, financial institutions, and individuals considering doing business or investing in Belarus. The information provided is mostly addressed to those who are currently not involved in major business activities in the country, but are considering this as an option for the future. In the year of 2008, a significant shift towards further liberalization of the Belarusian economy was made. Some major steps were taken to opening up the country to foreign investors, and improving the investment climate in general. An ambitious privatization program for became a logical consequence, proving the seriousness of government intentions. Efforts made resulted in the debut of the Republic of Belarus among the TOP-10 reformers according to the World Bank s «Doing Business 2009» report as well as in the significant ranking advance in FDI attraction according to the World Investment Report 2008 issued earlier by UNCTAD. These positive trends are fully in line with the ambitious goal set by the President Lukashenko to become a TOP-30 investment friendly destination for foreign capital contributors by We believe that firm and consistent position of the Belarusian Government will provide excellent investment opportunities and help to build strong strategic and mutually beneficial relations with investors as well as contribute greatly to the positive image of the Republic of Belarus as a reliable and long-term business and investment partner.

4 Table of contents 1. Putting Belarus on the map The Belarusian economy at a glance Geographical position Human and labour resources Key Economic Indicators 7 2. The Belarusian economy The secret of success: a historical overview Structure of the Belarusian economy Recent developments Macroeconomic stability factors FDI inflows into the Belarusian economy Forecast: Belarusian economic prospects Investment environment Milestone deals by sector Banking and Finance Telecommunications Infrastructure Food and drink Retail trade Investment sectors with prime appeal and potential Banking and Finance Logistics and transport Construction materials Agriculture Food and drink Information Technology Retail real estate development Machine building Petrochemical complex Privatization Belarusian capital market development prospects Recent developments Infrastructure Legal Environment for Foreign Investment Investment Laws Basic legal acts Investment activity in small towns Free Economic Zones High Technology Park International treaties enabling and protecting foreign investments in Belarus 32

5 5.3. Corporate Laws: Setting up a Business in Belarus. Main organizational and legal forms Representative Office Commercial Legal Entity Management Establishing a commercial legal entity Privatization: Legal Framework Founding an open joint-stock company Acquiring state-owned stocks in existing open joint-stock companies Legal status of land and other real property Legal sources Registration of real property Land plots Buildings and constructions Taxation system in Belarus Comparison of main taxes payable in Belarus and in certain CIS countries Main trends in taxation system development in Belarus 54

6 All the information included in this document is for informational purposes only, and may not reflect the most current developments, judgments, or settlements. This information is not offered as legal or any other advice on any particular matter. The Firm and the contributing authors expressly disclaim all liability to any person in respect of anything, and in respect of the consequences of anything, done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of UNITER s Investment environment. No client or other reader should act or refrain from acting on the basis of any matter contained in this document without first seeking the appropriate legal or other professional advice on the particular facts and circumstances. Information materials of the National Statistical Committee, National bank of the Republic of Belarus, Prime-Tass news agency and IPM Research Centre were used. 1. Putting Belarus on the map 1.1. The Belarusian economy at a glance The Republic of Belarus: lies in Eastern Europe and offers a favourable geographical position as a transit country possesses well-developed traditional industries that remain a key driver of economic growth occupies leading positions in machine building, oil processing, agriculture and food production, and metalworking on Russian and global markets operates an open, export-oriented economy: external trade turnover to GDP ratio exceeds 1 over the last 10 years depends heavily on supplies of Russian natural resources and raw materials, and on exports to Russia of value-added products has 70% of national GDP generated by statecontrolled enterprises with share in total exports exceeding 80% Tukums Riga Ogre Saldus Jelgava Telsiai Siauliai Panevezys aurage sia Kaunas Vilnius Alytus Krasava Jekabpils Rezekne Kraslava Daugavpils Polotsk Postavy Velikiye Luki Nevel' Vitebsk Smolensk Orsha Molodechno Borisov Suwalki Roslavl' oland Bug Nemunas Bialystok ala Podlaska Chelm Zamosc Lithuania Ukmergй Lida Minsk Mogilлv Grodno Neman Volkovysk Osipovichi Brest Baranovichi Slonim Slutsk Bobruysk Zhlobin Soligorsk Kobrin Luninets Brest Pinsk Sarny Kovel' Ukraine Viliya Zhitkovichi Pripyat' Novograd- Volynskiy Lutsk Berezina Russia Krichev Klintsy Gomel' Rechitsa Mozyr' Chernigov Ovruch Chernobyl' Nezhin Korosten' Kiyevskoye Vodokhranilishche Dnyapro Sozh Desna Zemtsy Dnepr Safono Konoto Key highlights (2007): Territory sq. km (ranked 86 in the world) Population 9.69 million (ranked 79 in the world) Population density 49 people per sq. km. Workforce 4.5 million Literacy 99.6% Capital Minsk (1.81million) Regional centers: Gomel ( ), Mogilev ( ), Vitebsk ( ), Grodno ( ), Brest ( ) Total GDP US$44.67 billion. Real GDP growth rate 8.1%; nominal GDP growth rate 20.7% GDP per capita ($) 4608 Inflation rate 12.1% 5 Exports US$24.8 billion (48% of total external trade turnover), imports US$27 billion (52%) Exports to CIS 46.4% of total exports, to other countries 53.6% Imports from CIS 66.3% of total imports, from other countries % Imports/GDP ratio = 0.6; Exports/GDP ratio = 0.56 Unemployment Rate 1% (officially); % (independent estimates) Current Account Deficit (% GDP) 6.4 FDI inflow (% GDP) 3.96 Gross Foreign Debt (% GDP) 28.4 Year-average government bond yield Not issued Moody s Rating B1 Average exchange rate: (EUR/BYR) Average exchange rate: (USD/BYR)

7 1.2. Geographical position Belarus enjoys a highly favourable and advantageous economic, geographical, and geopolitical position. It lies at the crossroads of major railways and highways, oil, gas, and product pipelines, and communication systems between Western Europe, regions of Russia, and Asian countries, as well as between the Baltic Sea and the Black Sea. Several important transport corridors cross its territory: Pan-European transport corridor II (Berlin Warsaw Minsk Moscow Nizhniy Novgorod) Pan-European transport corridor IX (Helsinki St. Petersburg Moscow/Pskov Kiev Kishinev Bucharest Dimitrovgrad Alexandropoulos) Pan-European transport corridor IXB (Kiev Minsk Vilnius Kaunas Klaipeda/Kaliningrad) Belarus borders on Poland, Lithuania, Latvia, Russia, and the Ukraine. The total length of the state border comes to 2,969 km. Distances between Minsk and the capitals of neighbouring states are as follows: Vilnius 215 km, Riga 470 km, Warsaw 550 km, Kiev 580 km, Moscow 700 km Human and labour resources The population of Belarus is 9,689 million people, as of January Its urban population constitutes 73.4% of the total. According to national statistics, 99.6% of the total population in Belarus is literate. The country possesses 57 higher educational establishments, including 28 Universities and 8 Academies. The student resident ratio of 340 per 10,000 stands among the highest in Europe. The proportion of workforce, or economically active individuals, among the total population is estimated at 46.3%. Retirement age in the country depends on gender: 55 for women, and 60 years for men. Health care Construction Agriculture Education Other Industry Workeforce allocation by branch of economy,% Communications Trade and Catering ,3 7,4 7,2 7,6 7 8,4 14,1 9,9 10,4 10, ,3 14,4 15, ,6 26,4 6

8 1.4. Key Economic Indicators F Nominal GDP, US$ billion 10,9 14,5 17,6 23,1 30,2 36,9 44,7 49,4 Real GDP growth rate, % 4,7% 5,0% 7,0% 11,4% 9,4% 10,0% 8,2% 10,4% GDP per capita, US$ Real Industrial Production growth rate,% 5,9% 4,5% 7,1% 15,9% 10,5% 11,4% 8,5% 13,0% Weighted average exchange rate BYR/US$ ,0 2075,0 2163,7 2155,1 2146,3 2148, Money income, US$ per capita 734,6 954,5 1112,8 1390,7 1833,3 2330,5 2829,4 3154,7 Real money income growth rate,% 28,1% 4,1% 3,9% 9,8% 18,4% 17,8% 14,7% 11,50% Capital investments (US $ billion) 1,9 2,5 3,4 5,0 7,0 9,5 11,8 14,3 Capital investments to GDP ratio, % 17,8% 17,2% 19,5% 21,6% 23,2% 25,7% 26,3% 21,80% FDI to the Belarusian Economy, US $ million 95,5 453,3 170,3 162,5 302, ,9 2299,6 Retail turnover, US $ billion 5,8 6,6 7,3 9,0 11,7 14,5 17,8 21,5 Turnover real growth rate,% 11,5% 10,3% 11,5% 20,0% 17,4% 14,8% 19,3% 21,30% Foreign trade turnover, US $ billion 15,7 17,1 21,5 30,3 32,7 42,1 53,0 84,2 Exports, US $ billion 7,5 8,0 9,9 13,8 16,0 19,7 24,3 38,9 Imports, US $ billion 8,3 9,1 11,6 16,5 16,7 22,4 28,7 45,3 Amount of Balance, US $ billion -0,8-1,1-1,6-2,7-0,7-2,6-4,3-5,9 Total foreign debt, US $ billion 3,0 3,9 4,2 4,9 5,1 6,8 12,7 16,1 CPI annual growth rate,% 46,1% 34,8% 25,4% 14,4% 8,0% 6,6% 12,1% 15,5% Source: National Statistical Committee; NBRB;Uniter;IPM 7

9 2. The Belarusian economy 2.1. The secret of success: a historical overview Belarus played the role of an «assembly plant» in the Soviet Economy. Due to limited natural resources and raw materials, the country was one of the largest recipients of funds channelled to industrial development. During the USSR s last 20 years, the value of capital assets in real terms in Belarus grew 4,1 times, compared witha 3,4 times average growth in other Soviet Republics. Between 1970 and 1989, Belarusian national income growth rates stood 1,7 percentage points higher than the Soviet average. Thus, a very substantial and to some extent unique industrial base was created in Belarus, dominated mainly by the traditional industries (49% of GDP in 1990). Even during the Soviet era, the Belarusian economy was export-oriented. In 1990, the Total Exports / GDP ratio amounted to 50%, far higher than in other Soviet Republics. Exports outside the CMEA came to 5,5% of GDP in second place behind Russia, which exported mainly natural resources. Thus, even during Soviet times Belarus held certain niches on the global market. Position of the Belarusian economy in the USSR Country % of GDP, 1990 Exports Exports outside CMEA Industry Azerbaijan Armenia Belarus Georgia Kazakhstan Kyrgyz Republic Latvia Lithuania Moldova Russia Tajikistan Turkmenistan Uzbekistan Ukraine Estonia USSR Source: Uniter 8

10 2.2. Structure of the Belarusian economy BELARUS / INVESTMENT GUIDE 2009 Thus, based on the Soviet heritage, traditional industries continue to play the most important role in the economy. The contribution of these industries to GDP in 2007 amounted to 26.7%. However, a certain shift towards expansion of share of services and trade appears logical and is in line with the global trend. Belarusian industry is dominated by machinery and metalworking. In 2007, the share of this sector in total industrial output aggregated 24.5%. Sectors dealing with fuels, fertilizers, and petrochemicals hold very good positions due to a solid industrial base in Belarus and favourable external conditions. Belarus possesses one of the largest deposits of potash salts for production of potash fertilizers. Belarus is a country with an open economy: external trade turnover/ GDP ratio in 2007 reached Since the beginning of 2008, external trade turnover has been growing 5 times faster than GDP, so that the ratio could reach 1,7 by the end of the year. The major import and export items are Mineral products and Machinery and Equipment. These sectors contribute 57.9% to total exports and 60.5% to imports. The largest trading partner of Belarus is Russia. This position has even strengthened since In 2007 the share of the Russian Federation in Belarus total external trade turnover reached 49.2%. Exports to Russia 36.6%. Imports from Russia 59.3%. Russia is the largest supplier of raw materials to Belarus and the largest consumer of Belarusian investment, chemical, and food products. The main export items from Belarus to the EU are: Mineral products Petrochemicals and fertilizers Ferrous metals Textiles and textile goods Wood and wood products 0,155 Sectoral structure of Belarusian GDP in 2007,% 0,231 0,102 0,086 0,287 0,085 Fuel 0,074 Industry Agriculture Construction Transport and communications Trade and catering Net taxes Others Contribution by sector in total industrial output, 2007(%) 0,041 Light Industry 0,041 Building Materials 0,041 Logging and 0,041 wood-working, pulp and paper Electric Power 0,041 Others 0,041 Chemical and petrochemical 0,041 Food Industry 0,041 0,041 Machinery and metaworking Exports and imports split by sector, 2007 (%) 7,50% 14,70% 19,90% 22,30% 35,60% Food and agricultural raw materials Chemical products, rubber, fibers and filaments Other Machinery, equipment and vehicles Mineral products 7,90% 11,80% 19,80% 24,70% 35,80% Exports Imports 9

11 Trade balance with Russia, bln.$ External trade with EU, bln.$ , , ,475-2,772-1, ,734-4,402-6,254-8,326 Exports Imports Balance ,4 Exports Imports Balance 2.3. Recent developments During 2007, the Belarusian economy demonstrated high rates of economic growth. Nominal GDP in 2007 reached US$ 44.7 billion and grew by 8.2% in real terms compared to The major reason for a slight growth slowdown in 2007 compared to 2006 was a worsening of external trade conditions: the price hike on energy resources from Russia. The first half of 2008 showed that the GDP growth rate slowdown had been overcome and the economy had returned to a development track common for In 1H2008, real GDP growth rate amounted to 10.4%. The key drivers of GDP became growth in capital expenditure and household consumption stimulated by income growth. In 2007, gross capital expenditure reached US$11.8 billion and amounted to 26.3% of total GDP. For 1H2008 capital investment growth amounted to 23.9% - growing by 28.4% in June. High growth rates in individual disposable incomes stimulated consumer demand and final expenditure. Thus, in January-May 2008 real income growth rate amounted to 11.4%. The income structure of Belarusian households in 2007 appears as follows: 57.5% of all household income received from salaries and wages; entrepreneur income amounted to 20.7%. Just 1.9% of gross income was received from property. This share is much lower than in neighbouring countries. In Russia, for example, incomes received from property averaged 6.7% of total income. A high income growth rate is based on growth of wages and salaries. In 2007, real salary growth amounted to 10%. In 1H2008 this indicator reached 8.3%. Economic indicators (1H) Real GDP growth,% GDP per capita, US$ Income per capita, US$ Average nominal wages, US$ External trade balance, US$ billion Gross foreign debt, US$ billion (1H) CPI,% Interest rate,% Belarusian GDP in , 114 0,12 0,106 0, ,1 0,094 0, ,08 0, ,06 0,05 0, , , ( п) Nominal Belarusian GDP in , bln. $ Growth rates of real Belarusian GDP in , % 10

12 Nominal income growth in Belarus in ,$ % % Household's income structure in selected countries, % UK ,8% 20% +18,4% % +14,7% ,8% 10% ,1% 500 5% +3,9% 0 0% Incomes, $, per annum Real income growth, % Lithuania Ukraine Russia Belarus 0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1 Wages Social transfers Enterpreneur incomes Incomes received from property Real wage growth dynamics in Belarus, ($ per month) % ,6% % +17,4% +20,9% % % ,9% +3,2% ,3% ( п) Wages and salaries Real growths of wages, % 15% +10% +8,3% 10% 5% 0% Nominal wages dynamics in selected countries, , $ Russia Belarus Ukraine Retail turnover dynamics in Belarus, , bln. $ 20,0 25% ,0 14,0 12,0 +17,50% 10,0 8,0 6,0 4,0 2,0 0 7,6 +10,30% 8,4 +11,50% 9,4 11,7 +20% +17,40% 14,4 17, Retail turnover Retail turnover real growths, % 20% 15% +14,80% 10% 5% 0% As of 1 July 2008, nominal monthly wages amounted to US$ 376. However, this figure lags considerably behind comparables for CEE countries and Russia. In 1H2008, nominal monthly wages in Belarus were not much higher than in Ukraine, but only half as much as in Russia, where nominal monthly wages reached US$ 723. High income growth rates stimulate retail sales and retail trade turnover. In 2007, retail turnover growth rate reached 14.8%, while in 1H 2008 it grew by 19.3%. Per capita retail turnover in Belarus in 2007 amounted to US$ 1 883, far lower than in neighbouring countries. 11

13 2.4. Macroeconomic stability factors During the past seven years, the Belarusian national currency exchange rate has remained stable. No significant or unpredictable exchange rate changes have occurred. Since 2002, the Belarusian rouble has strengthened its position against the US dollar by 0.55% annually, at the same time weakening against the Russian Rouble and the Euro by 5.9% and 6.8% respectively. As of 1 January 2008, monetization of Belarusian GDP (in terms of M2) reached 16.4%. Since 2001, the monetization ratio has grown 2.3 times. However, this figure is much lower than in some neighbouring countries. Country Russia 36.9% Belarus 16.4% Ukraine 54.9% Lithuania 44.9% GDP monetization ratio A budget deficit of 0.22% of GDP in 2005 was followed by a budget surplus in Thus, the 2006 budget surplus amounted to 1.49% of GDP compared with 0.31% in Growth of budget surplus has occurred mainly due to significant increase in receipts from export duties on oil products, which were unified with those in Russia. In 1H2008, the budget surplus reached 4.2% of GDP. In 2007, Belarusian gross foreign debt grew 1.9 times and amounted to US$ 12.7 billion. The share of external debt in GDP reached 28.4% in 2007 compared to 18.4% in The amount of debt is within acceptable frames and does not threaten financial stability. Country Belarus 28.4% Russia 34.3% Ukraine 59.9% External debt/gdp 210% 190% 170% 150% 130% 110% 90% Average weighted BYR exchange rated dynamics, % ( ) 3346,9 BYR/EUR 90,6 BYR/RUB 2121,4 BYR/USD (July) BYR/USD BYR/EUR BYR/RUB Belarusian budget balance in , min.$ 600 1,49% 1,6% ,09 1,4 % ,31% 1,2 % 1,0 % 0,80 % 0,60 % 0,40 % ,37 0,20 % -0,22% 0,0 % 0-67,37-0,20 % ,40 % Balance, min.$ Balance, GDP ratio, % GDP Monetization In Belarus (M2) in Foreign dept dynamics in Belarus, bin.$ 8,0 16,4% 18% 7,0 15,5% 7,3 16% 6,0 13,0% 5,7 14% 10,6% 12% 5,0 8,7% 3,9 10% 4,0 3,0 7,3% 7,1% 8% 2,4 1,5 6% 2,0 1,1 0,8 1,0 4% 2% 14,0 12,0 10,0 8,0 6,0 4,0 2,0 27,2% 3,0 26,9% 3,9 23,7% 4,2 21,4% 4,9 28,4% 12,7 17,0% 18,4% 6,8 5,1 30% 25% 20% 15% 10% 5% 0, % 0,0 0% Money supply M2, bln.$ GDP Monetization coefficient Total foreigh debt, bln.$ Foreign debt/gdp ratio,% 12

14 2.5. FDI inflows into the Belarusian economy BELARUS / INVESTMENT GUIDE 2009 In 2007, the Belarusian economy received US$1.77 billion of foreign direct investment (FDI), five times higher than in This positive trend continued in In 1H 2008, FDI inflow into the country grew by 32.7% compared to the same period in 2007, totalling US$ 1.23 billion. Thus, in H2008 aggregated FDI stocks in Belarus amounted to US$ 4.5 billion FDI inflow growth resulted in FDI per capita growth. Thus in 2007 this figure reached US$ 181 and exceeded FDI inflow growth in the Ukraine. Attempts to carry out a liberal and open economic policy became the key driver of FDI growth. In 1H 2008, the largest volume of foreign inflows in the sum of US$ 625 million came into the Belarusian economy from a payment from the Russian company Gazprom for 12.5% of Beltransgaz s shares. Total inflows - excluding this transaction - into the Belarusian industrial sector in 1H 2008 reached US$ 245 million. Major investing countries included the Russian Federation, Switzerland, Austria, the UK, and Cyprus. 13

15 2.6. Forecast: Belarusian economic prospects 2012 Belarusian economic development prospects will mostly depend on external factors due to heavy dependence on foreign trade and external financing. The most crucial internal growth drivers: internal consumption opening opportunities for privatization and liberalization. Mid-term key drivers of Belarusian economic growth External Low energy resource prices Internal Growing internal consumption Even in case of a gradual price increase up to global market level within the coming five years, the growing costs of the Belarusian economy will most probably be compensated by Russian credit lines. High demand for Belarusian goods on the Russian market Accelerated process of privatization and liberalization According to 2007 foreign trade statistics, the growth trend of exports to Russia and their share in total Belarusian exports has revived. It is clear that in the next few upcoming years Belarusian enterprises will be able to secure their export potential on the Russian market, thus generating high export earnings. Opportunities and threats for the Belarusian economy Opportunities Good position of Belarusian exporters in Russia, especially in the capital goods and building materials markets Belarusian exports to the Russian Federation in 2007 grew by 30% Entry of large foreign banks in the Belarusian banking sector Development prospects of the Belarusian financial sector: Belarusian banks asset growth exceeds 30% per year Mortgage market development:: a new law will come into force in January 2009 Growing transit opportunities Customs union with Russia offering perfect opportunities for entry to the growing Russian market Possibility of the start of a large-scale privatization process 70% of Belarusian GDP is still produced by state-owned plants and factories, e.g. machinery, petrochemicals, telecommunications, oil refineries. SME development if new law passed The number of SMEs in Belarus is 3 per 1000, while in neighbouring countries it is up to 10 per 1000 Threats Significant price increase of imported energy resources (oil and gas) State interference in the economy and remaining elements of a planned economy with growth rates, prices, unemployment, and salaries compulsory targeting Insufficiency of international reserves due to limited access on global capital markets Excessive state control over the stock market Traditional enterprises dominant, especially in export-oriented industries Sharp growth of foreign debt burden on the national economy due to growing foreign borrowings Possible slowdown of consumer activity because of shrinking social programmes and high rates of inflation Review of Russian-Belarusian relations in terms of Belarusian exporters access to the Russian market and vice-versa 14

16 Box 1. Provided by IPM (The leading Belarusian independent think-tank for economic studies) Energy shock and its consequences The major threat to the stability of the Belarusian economy in the short-term and medium-term perspective is a price hike of energy resources supplied by the Russian Federation. Preferential terms and conditions of supplies and the existence of a formal trade union agreement between two countries were the key drivers of recent favourable Belarusian economic growth. Preferential conditions of energy supply to a considerable extent smoothed the influence of a number of adverse trends on the domestic economy down, namely: 1) Worsening competitive positions of Belarusian goods on the Russian and domestic markets. This has led to a mounting merchandise trade deficit, with limited possibilities for financing; 2) Growing dependence of Belarusian exports on external market conditions. The basis of Belarusian exports has been revenues from exports of oil products and chemical and petrochemical products (about 50% of total export volume). However, prices for these goods are usually subject to market fluctuations. Accordingly, falling external prices (or increasing exporters costs) would lead to an appreciable decline in currency revenues. Since 2007, the terms and conditions of oil and gas supply to Belarus have changed substantially: 1) The gas price has doubled and further price increase were scheduled by the contract, assuming world price levels until the end of ) Export duties were imposed on crude oil piped into Belarus, as well as an obligation to establish the same level of import duties on oil and oil products as in Russia. In the investment goods sector, similar problems have been taking shape. Russian enterprises are increasing their demand for investment goods produced abroad and are upgrading their technological base. This is also hard to realize given the current ownership structure and the economic policies of the government. Expansion of the Russian market would imply heightened competitiveness both due to the emergence of new domestic producers (directly competing with Belarusian producers) as well as the entry of large transnational companies. The need to enhance the competitiveness of Belarusian companies is also related to the unacceptable dependence on the Russian market. This dependence has become more salient in the course of the energy conflict with Russia and the necessity to increase the volume of Belarusian exports to countries other than Russia. All these issues could potentially ignite economic reforms in Belarus. If this course is selected, then some inconsistent economic liberalization policy measures by the government could be expected in the near future. Most likely, these are measures aimed at attracting foreign capital (by allowing some liberalization of economic conditions for the new private sector) along with privatization of large enterprises. These measures would likely help to attract capital and to invest in enterprises, to carry out restructuring and modernization, and to collect additional budget revenues in order to finance social expenditures. Challenges to the Belarusian economy One of the key problems of the Belarusian economy is a high intensity of power consumption. Growing costs of output produced by Belarusian enterprises amplify problems they face on the Russian market. The growth of the Russian economy and the consequent household income growth in Russia both lead to a changing character of competition on this market. Growing incomes inform a demand shift to more expensive and better-quality consumer goods, while Belarusian goods occupy a specific niche for the poor of the Russian market. In order to hold their ground on the Russian market, Belarusian companies should relocate their output by supplying to a more prosperous (in terms of incomes) consumption segment. Usually, it is difficult for state-owned enterprises to implement these activities in practice. 15

17 3. Investment environment Key highlights: Until 2004, companies with foreign investments enjoyed significant benefits, being granted 3-year corporate tax vacations and avoiding price regulation, which resulted in many private businesses being established as foreign through off-shore SPVs. In 2004, domestic and foreign businesses were granted equal rights as a part of a state program of SME support. No restrictions exist on foreign investments, or on profit repatriation. A withholding tax of 15% is payable on foreign entities income acquired from sources in Belarus, unless a Double Taxation Avoidance Agreement (DTAA) provides otherwise DTAA signed inherited from USSR with USA, UK, and many other countries, including most EU members. Attractive features of the Belarusian economy for foreign investors: Low competition in many industries. Possibility to become a pioneer. Privatization opportunities: 70% of Belarusian enterprises are directly or indirectly controlled by the state. Highly favourable geographical position of the country. Highly developed scientific and industrial potential. Highly-skilled and relatively cheap workforce. Recent developments Between 2007 and 1H2008, Belarus took a significant step forward in liberalizing the economy and improving the investment climate. Increasing FDI attractiveness was set as a priority by the President. According to President Lukashenka, Belarus is to be one of the top-30 FDI recipients by Several important presidential decrees and government resolutions have been adopted concerning improvement of the investment and business climate. These include abolition of the golden share right; gradual abolition of the ban imposed on trading securities acquired during preferential privatization; announcement of the first list of enterprises to be privatized. Governmental efforts have resulted in outstanding growth of FDI inflow (a fivefold increase). Within the past few years many foreign strategic investors have entered the Belarusian market: Russian: VTB, GazProm, Alfa-Group Western: Mobilkom Austria Group, TurkCell, Heineken NV, Generali & PPF, Baltic Beverages Holding world reformers. In H 2008, Belarus improved in 6 out of 10 factors influencing a country s position in the global ranking. Thus: 1. The public credit registry expanded credit information by eliminating the minimum threshold for loans recorded in its database. 2. A unified registry database was created, a time limit was introduced for registration, and the minimum capital requirement was cut by half. 3. A one-stop shop was created for property registration and a broad administrative simplification program introduced that set strict time limits at the registry and computerized its records. 4. The tax burden was eased by abolishing the Chernobyl tax (3 %) and unemployment tax (1 %) and amending the simplified tax system for small businesses. 5. Statutory time limits for pre-approval clearances and building permits were set. 6. A new customs code and new banking regulations reduced the time for exporting. Firm steps have been taken by the Government and the National Bank towards creating and developing a national stock market. As a result, according to the World Bank Doing Business 2009 report, Belarus is in the TOP-10 16

18 3.1. Milestone deals by sector Banking and Finance 2007 and 1H 2008 were characterized by the active entry of foreign banks and investors acquiring controlling stakes in private and state-controlled Belarusian banks (VTB, Alfa-Group, VneshEconom- Bank, AFK Sistema, Delta-Bank, Home-Credit, GetIn Holding, Dogmat Financial Group, Ximex, Bank of Georgia, Horizon Capital, Fransa-Bank, TBC, EBRD, RosBank, Moscow Bank). As a result, the quota on foreign capital participation in the Belarusian banking system was recently lifted and since 4 September 2008 is equal to 50% instead of the former 25%, while the share of foreign capital in the Belarusian banking sector augmented from 9.8% as at 1 January 2008 to 17% as at 1 July CJSC Belarusian Bank for Small Business was registered on 28 August Bank CJSC TK Bank was registered on 15 September 2008 and became the 30th bank in the Belarusian banking system. Transactions in the banking sector Year Target Bidder Country Stake acquired Deal value, $ mio Completed 2008 Golden Taler Fransa-Bank Libya 98.93% Mezhtorgbank Alfa -Bank Russia 39% SomBelbank Getin Holding Poland 75% N/A 2007 MTB Horizon Capital USA 32% International Reserve Bank Dogmat Ukraine 90% N/A 2007 Atom-Bank Delta Bank Ukraine 100% Belvnesheconombank Vnesheconombank Russia 65% Slavneftebank VTB Russia 50% Lorobank Home Credit Bank Czech Republic Controlling N/A 2005 AstanaExim Bank Turan Alem Bank Kazakhstan 50% N/A 2003 Priorbank Raiffesen Bank Austria 50% 30 Expected transactions 2008 Paritetbank AFK Systema Russia Controlling Bealrusian Industrial Bank N/A N/A N/A BPS-Bank N/A N/A Controlling Belinvestbank N/A N/A Controlling Belarusbank N/A N/A Minority stake Belagroprombank N/A N/A Minority stake Source: Uniter, NBRB In several transactions were completed in the insurance sector: Russia s RESO insurance group acquired 100% in Belarus AlVeNa insurance company. In 2008, the Russian RESO Group invested US$ 2 million in development of insurance company Brolli, taking control over a 83% stake since The Baltic insurance group Ergo bought a 60% stake in Belarusian insurance firm Baso. In 2008 Czech Generali PPF entered the Belarusian insurance market through a new CJSC Generali opening. 17

19 Telecommunications In 2007, the largest transaction was completed in the Belarusian Telecommunications sector. Mobilkom Austria Group, the mobile communications segment of Telekom Austria Group, announced that it had acquired a 70 % stake in Cypriot SB Telecom Limited, sole owner of Belarusian mobile operator MDC operating under the Velcom brand for an enterprise value of approximately EUR 730 million after having received approval of the relevant antitrust authorities. As of the date of purchase, Velcom had more than 2.7 million customers with market share of approximately 42 %. In 2006, Velcom generated revenues of EUR million, EBITDA of EUR million and net income of EUR 82.8 million. In August 2008, Turkcell a leading provider of mobile communications in Turkey, signed a Sale and Purchase Agreement ( SPA ) to acquire a 80% stake in Belarusian Telecommunications Network ( BeST ). Completion of the transaction will be subject to fulfilment of the conditions set forth in the SPA. The stake will be acquired from the Belarusian State Committee on Property for a price of US$ 500 million. The payment is expected to be realized in 3 tranches: US$ 300 million is expected to be paid on the closing date, expected to be 30 days after the signature date. US$ 100 million tranches are expected to be paid on December 31, 2009 and 2010 respectively. An additional payment of US$ 100 million will be made when BeST records a full-year positive net income for the first time. As of the date of purchase, BeST held a market share of about 2.5% by number of subscribers, covered 68% of the territory, and generated US $ 1.6 million revenue in Infrastructure In May 2007 Russian Gas Giant Gazprom signed an agreement with the Belarusian government on acquisition of a 50% stake in the national gas pipeline monopoly Beltransgaz for US $ 2.5 billion The deal has become the largest investment offer in the history of independent Belarus. Payment will be in four annual tranches in Gazprom will thus acquire 12.5% in Beltransgaz every year. The shares of Beltransgaz to be sold to Gazprom may not be disposed of or otherwise encumbered before the transaction has been completed. Within 50 days of acquisition of the first 12.5% stake in Beltransgaz by Gazprom, Beltransgaz will call an extraordinary general meeting to elect new members of the supervisory board, according to the contract. On December , Gazprom and the Belarusian government also signed an annex to the protocol on a joint gas transport venture, supplies, and transit of natural gas through Belarus. The document envisages a gradual increase in the wholesale markup on natural gas that Beltransgaz sells to domestic consumers in and a commitment on the Belarusian side not to introduce the golden share rule in Beltransgaz. On December , Belarus and Russia signed a protocol to establish a joint gas transport venture on the basis of Beltransgaz by June and regulate natural gas supplies and transit Food and drink In 2006 Baltic Beverages Holding acquired 30% of JSC Alivariya (the third largest beer-producer in Belarus in terms of market share) for US $ 18.5 million In 2008 BBH planned to invest more than US $ 6 million in corporate development of Alivaria. In 2007 Heineken NV bought Syabar brewery, Belarus second-largest beer brand, for EUR 70 million. Under the terms of the transaction, Heineken acquired Syabar s Cypriot parent company from a consortium led by Detroit Investments Limited (Cy- 18

20 prus) and from the International Finance Corporation, an affiliate of the World Bank. In 2008 Heineken NV acquired a majority stake in Rechitsa brewery. Under the terms of the transaction, Heineken has agreed to invest US$ 9.9 million (EUR 6.4 million) in an increase in the share capital of Rechitsa, ultimately leading to a 51% share in the company. The transaction is to be financed from existing credit facilities and will be immediately earnings-enhancing and value-enhancing in Retail trade In 2007, the Russian investment vehicle A1 Group announced its plans to open 128 discount stores in the six largest cities of Belarus by the end of The project has started under the name of Belmarket. The total project cost is estimated at US$ 83 million. The company has already opened 10 stores in Mogilev and Minsk region and is to open 10 more by the end of The Kaliningrad-based retail company Vester entered the Belarusian market in 2008 and has opened two supermarkets in Minsk. Total area of both supermarkets amounts to sq.m. Gross investments in the projects reached US$ 5.6 million. In 2007, total retail turnover of Vester in Russia amounted to US$ 420 million and total trading area reached sq. m. Russian retail chain Almi entered the Belarusian market in As of today, the Company has seven stores in different regions of Belarus. In September, 2008 the company opened the first hypermarket in Grodno Investment sectors with prime appeal and potential Key highlights: 70% of GDP is still produced by state-controlled enterprises, including petrochemicals, oil-refining, raw materials, automotive and machinery, agriculture and food industries Government is taking clear steps towards liberalization of the stock market and privatization: abolition of the golden share, issuing lists of hundreds of enterprises to be reorganized into open joint stock companies or sold to investors Deterioration of Belarusian terms of trade (growth in energy prices and tension of competition in traditional industries and markets in Russia) leading to a search for external sources of financing for the Belarusian economy (issue of the first sovereign Eurodollar debt in 2009 expected) Some sectors offer outstanding growth potential Growth in assets of Belarusian banks exceeds 50% annually Growth in exports of machinery and equipment to Russia more than 30% annually Growth in retail turnover more than 20% annually (booming consumption) Customs union with Russia offers perfect opportunities for entry to the growing Russian market More than highly-qualified programmers are involved in offshore software development in Belarus The commercial real estate sector (office, logistic and retail spaces) offer high margins with rental fees exceeding EUR 500 per 1 meter annually 19

21 3.2.1 Banking and Finance Key highlights: 30 banks operate in Belarus today, with three more due to open within the next two years. 14 banks have changed ownership structure since 2006 and five deals are nearing completion. State-owned banks domination (four state banks account for 76% of total banking assets). Plans for IPO of the two largest state-owned banks (2009 declared). The Central Bank is actively looking for opportunities to sell stakes in another two state-controlled banks and has reported on negotiations with the major foreign banks (World Top-25). Huge growth potential, particularly in consumer loans and SME In the Belarusian banking sector demonstrated highly positive development dynamics. Thus, for the period: Banks equity grew five times. Total Assets soared more than six times. Quality of loan portfolio and assets has improved significantly: (non-performing loans to loan portfolio ratio decreased from 2.8% to 0.65%, and non-standard assets to total assets ratio dropped by 2.4% to 1.92%). The share of foreign capital in the Belarusian banking sector rose from 9.8% as at 1 January 2008 to 17% as at 1 July has become another very successful year for the Belarusian banking industry: Total Assets grew by 43% and reached US$ 20 billion Total Equity increased by 25% and amounted to US$ 3 billion Aggregate loans soared by 47% to US$ 13.4 billion Deposits grew by 37% to US$ 9.2 billion Profits of the banking institutions rose by 46.4%. Despite positive trends, development of the sector was constrained by the smallness of the economy and low diversification. By level of penetration of the banking sector in the economy in 2007, Belarus lagged far behind CIS leaders and some CEE countries: Total Assets of Belarusian banks amounted to 36.9 % of total GDP, compared to 86.6% in Kazakhstan; 86.8% in the Ukraine and 61.4% in Russia. CIS countries have become very close in 2007 to CEE countries by level of penetration of the banking sector in the economy. In Lithuania, the Banking Assets/GDP ratio amounted to 83.9% in 2007, while in Poland 71.2%. Foreign investors are also actively looking for opportunities in the Belarus insurance sector. The sector is still highly concentrated due to an excessive state presence. Thus in 1H 2008, the share of state-owned insurers amounted to 80% in gross premiums received. However, recently new governmental plans were announced on privatization of the largest stateowned insurance companies RUE Belgrosstrach and Beleximgarant Logistics and transport Due to a strongly favourable geographical and transit position, Belarus is a highly attractive place for investment in development of warehouse and transport logistics. Recently, a logistics system development program to 2015 accepted by the government stipulates serious privileges for potential investors. Within the past few years, several large-scale projects have been announced in Belarus. However, no modern logistics complexes have been built, so that a huge gap exists between demand and supply in warehousing estate in the country. The most active so far are Russian, Belgian, and Lithuanian investors. Recent announcements in the field: JLLC KMK Logistics and Belgium AOI n.v. have announced a US$ 1 billion investment in construction of a large Transport and Logistic Park on land of the former National Airport. JLLC Prilesie, a joint venture of Kayson In- 20

22 ternational (Iran) and Trust Bank has been authorized by the Belarusian government to invest, design, build, and operate a first-class logistic center in the Minsk Free Economic Zone. The complex will consist of 200,000 sq. m. of warehouses and 50,000 sq.m. of different support buildings. Aggregate investments in the project are planned at US$ 140 million. Recently, the Lithuanian company Vinges logistikos grupe stated its intention to invest about EUR 15 million in warehouses together with Belarusian partners and to organize a joint venture BelVingesLogistik in Minsk. The joint venture is ready to build customs and commercial warehouses in Belarus with a total area of 20 30,000 sq. m and to double this area by Construction materials The Belarusian construction materials sector can benefit from the construction boom, supplying building and construction materials both in the domestic market and in Russia. Thus, the mid-term and long term perspectives in this industry will be highly attractive for investors. Belarusian building material market capacity grew by 13.4% annually in In 2007, the building materials industry comprised 3.4% of total Belarusian industrial production. Belarus has three state-owned cement plants. Three more lines, which will have an annual output capacity of 1.8 million tonnes each, are to be put into operation by April Belarusian cement is mostly consumed domestically: in 2008, the supply of cement to the Belarusian market is to amount to million tonnes, including million tonnes coming from abroad. All the largest enterprises in the sector are still state-owned; hence, a good opportunity for privatization exists. The Russian construction sector grew in 2007 by 18.2%. The Olympic Games of 2014 in Sochi and a deficit of building materials in Russia open a good opportunity for Belarusian suppliers Agriculture In 2007, the global food market experienced a food-price shock. An increasing deficit of food products resulted from growing consumption in the Asia region and growing production of bio-fuel opened a good opportunity for countries with a strong agricultural traditions. Today, Belarus is one of the largest agricultural producers in CIS countries. Belarus is fully self-sufficient in agricultural production, as its production fully meets internal demand and provides opportunities for exports. In 2007, gross agricultural output in Belarus reached US$ 8.4 billion, 4.4% more in real terms compared to The Republic holds a very strong position in cattle breeding and planting. In 2007, total cattle livestock amounted to 4.01 million head, including 1.5 million head of females. The number of head has remained stable for the past six years. Pig livestock stands at 3.6 million head, which is 1.1% less than in Poultry livestock has been constantly growing since The average growth rate reached 5% annually in Belarus is completely self-sufficient in terms of meat production and is a net-exporter. Belarus is a leading producer of potatoes. The Belarusian government substantially subsidizes domestic farm producers and development of the sector is a top priority set by the President. 21

23 3.2.5 Food and drink More than 60 meat processing plants and more than 100 milk processing plants exist in Belarus. With the end of the Soviet era, Belarus inherited huge meat and milk production and processing capacities as well as a good cattle and pig feeding base. This is no surprise, as the Republic was the leading meat and milk products producer in the USSR. Today, Belarusian meat and milk production potential is in strong demand on the Russian meat and milk-deficit market. Despite problems that Belarusian meat and milk-processing plants faced in 2007 when selling their products on the Russian market, the largest producers were certified by Russian veterinary services and are now allowed to selling their products in Russia without limitation. In the second quarter of 2008, Russia and Belarus approved a five-year meat production and mutual supplies balance, in which export and import volumes for both countries were clearly stated. The same program was agreed on supplies of milk-based products Belarusian food-processing companies are desperately in need of investment for reconstruction. Most of these are public companies and are open for participation of foreign capital Information Technology The Belarusian IT sector is competitive on the global market, with some 500 active IT companies. About 200 of these fall within the IT outsourcing industry. Their overall number of permanent employees varies around 7,000-10,000 individuals. In 2007, exports of software developed by Belarusian IT companies totalled some US$ 250 million. The roots of Belarus IT strength derive mainly from its mature technical infrastructure, which started to develop during the Soviet era, when Belarus used to manufacture over 50 % of the computers and computer components in the former USSR. Geographical and cultural proximity to the EU is also important. Among the key advantages of Belarus is the excellent education system inherited from Soviet times, when a strong focus was consistently made on natural sciences and applied research. Many programmers in Belarus participated in scientific R&D projects for the military, energy, and other industries of the former Soviet Union. Belarus is among the few countries in the world whose specialists have been involved in construction of space stations, global communication systems, and nuclear development projects Retail real estate development Key highlights: In 2007, the volume of retail turnover in Belarus reached US$ 17.8 billion, which is 14.8% higher in real terms compared to Over the past six years, retail turnover CAGR exceeds 14% (in real terms). Despite high growth rates, Belarus lags far behind CEE countries by per capita retail trade turnover. In 2007, this amounted to US$ 1.8 thousand in Belarus, compared with US$ 3.8 thousand per capita in Lithuania and US$ 3.1 thousand per capita in Russia. The relatively low per capita figure became a result of underdeveloped retail trade infrastructure. The share of non-organized trade (e.g. open bazaars, stands) in total retail turnover reached 33.1% in 2007 (in 2000 this share was 28.1%), which is rather high compared to CEE countries (2006: Russia %, the Ukraine - 19%, Poland - about 10%, Western Europe - 5-6%); The share of modern sales formats in retail trade turnover is insignificant: according to estimates, less than 5% in