Country reports
China is already here. Already when approaching the Belarusian capital city of Minsk, the visitors pass the new Belarusian-Chinese free trade zone “Great Stone”: an area of almost 10.000 hectares which was recently reclaimed from the woods, where Chinese and other foreign enterprises are to be located in the direct vicinity of the airport. Just near Minsk, in the town of Borisov, a factory for Chinese motor vehicles has been commissioned. Red banners with Chinese characters, dozens of meters long, decorate the new plant. Then, in the centre of Minsk: one of the most popular restaurants is the Chinese one near the Old Town Hall. Nearly all patrons are the Chinese. Moreover, you may find investment projects with the PRC participation almost anywhere in country, for example, a joint venture of the Chinese industrial manufacturer Zoomlion with MAZ — one of the flagship companies of the Belarusian automotive industry — in the town of Mogilev. The planned investment volume amounts to 45 million US dollars. In total, 27 major infrastructure and investment projects are being or have been implemented in the transport, energy and industry sector since 2007.
Belarus has been striving, to the best of its ability, for several years to position itself as one of the central partners for China on the border with the European Union through the attraction of investments. Practically every year there is an exchange in highest-ranking visitors between Beijing and Minsk — at this level the Belarusian party meets more often only with Russia.
The reason for the attractiveness of cooperation of China, with the population of almost 1,4 billion people, with Belarus, which has only 9,5 million people, lies in the fact that the important transport pathways of the new, currently developed Silk Route go through the country neighbouring the EU – it is known as the “Belt and Road Initiative” (BRI). Not only China includes Belarus in its plans related to future economic flows, but also an important transport corridor of the European Union leads in the direction of Minsk. Belarus aims to use the newly emerging Silk Route to its own advantage in the future: possibly not only as a transport route, but also as an economic hub.
The political system of the Republic of Belarus and also state economy prevailing in the country, as well as comparatively low economic performance make this EU neighbouring country definitely an attractive partner for China, because from the point of view of Beijing it seems predictable and reticent when it comes to foreign policy. Also in terms of security policy Minsk plays an increasing role for Beijing, along with Russia and Central Asia. Among other things, common defence projects have been promoted recently. For China Belarus became visible on the agenda only after the political and security crisis in the Ukraine, which had forced Beijing to relocate its planned routes to the North since 2014. Basically, in the full picture for China Belarus marks only one of many points of intersection on the new Silk Route. Therefore the relationship is still far from a real “strategic partnership”.
Trade with China
The state economy, which is predominant in Belarus, with tolerated areas of private entrepreneurship, manufactures products primarily in demand on the regional level. The key markets are currently Russia, the European Union and Ukraine with about 45, 26 and 3,6 percent of Belarusian exports respectively. Goods with a high added value are mainly sold to Russia and other countries of the Eurasian Economic Union (EEU) and the Commonwealth of Independent States (CIS). The EU and non-CIS countries are countries of destination for predominantly raw materials: petroleum products and potash, which represent more than one-fourth of the overall Belarusian volume of export at 18 and 8,8 percent respectively.
Such raw materials-intensive export also characterizes the current trade with China. Moreover, here a great imbalance in the volume and structure of trade flows is observed: in 2016 Belarus managed to sell to China only 0,435 billion US dollars worth of goods. This is even less than 1,8 percent of the Belarusian export of commodities — potash makes up 70 percent of sales. On the other hand, China sold Belarus 2,12 billion US dollars worth of commodities. With 7,9 percent in the overall Belarusian import of commodities, China ranks third country of origin of imports after Russia and the European Union. Here products with high added value prevail: electronics, energy systems, communication technologies, motor vehicles and aviation technologies. Since the establishment of diplomatic relations between Belarus and China in 1992, the volume of trade grew 100-fold from 34 million US dollars to the recent maximum of 3,3 billion US dollars in the year 2015 (with services soaring to 4,16 billion US dollars). From the standpoint of the foreign trade balance, there is a major bias to the benefit of China. In 2014 the balance of the bilateral trade in goods amounted to almost 1,8 billion US dollars in favour of Beijing.
Basic problems of the Belarusian economy
Trade deficit and an increasing role of the Asian country are not unusual for the trade partners of China. However, Belarus is additionally affected by two basic changes in its trade flows: on the one hand, prices for its traditional products have plummeted on the world market during the recent years – first of all, for petroleum products and potash. On the other hand, the economic crisis in Russia, with which Belarus is connected most closely within a Union State, has had an extraordinary negative effect on the economic situation of Minsk.
As the Russian economy shrank in 2015 and 2016 by 2,8 and 0,2 percent, Belarus lost 3,9 and 2,6 percent of own gross domestic product (GDP) respectively. Oil refineries were hit the most: on the one hand, they had to cope with decreasing world market prices and, on the other hand, with dropping supplies from the monopolies in Russia. The largest negative contribution to the GDP, beside oil processing, was made by the industry and the construction sector – in a poorly diversified state economy the loss of revenues and sales markets often has a stronger effect in the subsidised sectors of the state economy. With the revival of the Russian market – in 2017 the GDP growth of about two percent is expected here – and increasing oil prices the Belarusian economy has also demonstrated positive development since the first quarter of 2017. By September 2017 the Belarusian GDP managed to gain 1,7 percent. Thus, it is obvious that Belarus owes the positive economic dynamics first of all to improvements in the economic climate in its regional sales markets, and not to structural reforms within the country, which have been long requested by international sponsors. It is also obvious that this GDP growth at low single-digit increments is not sufficient for the repayment of debt already accumulated by Belarus.
Not without reason the government in Minsk has been trying for months to expand exports to the member states of the European Union. Thus, by 2020 they want to increase the export in the EU by 700 million US dollars and to diversify the flows of goods. Also due to the digitalization of economy, which is planned in Belarus, they promise at least one percent of yearly increase of the GDP. The business climate within the country is expected to dramatically improve thanks to the current legislative package. These reforms seem to be urgently necessary: the real unemployment according to current official reports is 5,8 percent for the year 2016 , the golden ages of exports of raw materials and thus secured state revenues seem to be over. The government sees itself as being more and more often forced to bridge the loss of revenues through new domestic and external debt. In July 2017 the total debt reached its historic maximum for independent Belarus: 40,4 percent of the GDP. In 2007 it was only 6,5 percent. The external debt thus peaked at 17,644 billion US dollars (doubled since 2010) , while ten years ago it had been still about 600 million US dollars.
Dependence on loans
The high external debt must not necessarily represent a problem for national economy. In the case of Belarus the problem is that the national economy does not generate sufficient growth to be able to repay debt by its own resources. So the Belarusian government must systematically refinance the existing liabilities by borrowing again. Only in 2017 700 million US dollars were borrowed in Russia to service the previous debt to the neighbouring country. Russia and the Eurasian Fund for Stabilization and Development accounting for more than 60 percent of the Belarusian external debt are the main sponsors for Minsk, there are also Russian loans at the amount of nine billion US dollars for the current construction of the first nuclear power plant in the Belarusian town of Astravets.
In order to overcome this strong one-sided dependence on credits, Belarus has been making efforts for diversification in the last couple of years: on the one hand, with already more than 18 percent of the Belarusian external debt, China is an important sponsor. On the other hand, Belarus seeks funds on the European and American debt market. In January 2011, shortly before the imposition of the EU sanctions, Belarus could place bonds for more than 800 million US dollars with an interest of 8,95 percent. In 2017, after the sanctions were lifted, Minsk placed new bonds in almost double amount. However, considering the comparatively high interest rates of more than seven per cent for the current bonds, this source of financing is not exactly favourable. Although cooperation with Western sponsors, such as World Bank Group, European Bank for Reconstruction and Development and as of recently with the European Investment Bank, expands, the cheaper long-term Western financing remains largely inaccessible, including IMF loan programmes. The root-causes are the principal differences in the economic policy concepts. Despite all the diversification efforts, Russia and China thereby remain the most influential sponsors in the long run.
In the light of this comparatively minor importance of Western credits for Belarus, the head of the state currently sees the approach in the field of economic and financial policy to be not in the implementation of substantial reforms as suggested by the Western side, but rather in gradual and stepwise adaptation of the existing system while maintaining relations with traditional partners. It becomes apparent that this approach includes, inter alia, concerns that the economic restructuring could not only fail and deteriorate this already difficult situation, but that it could also lead to the loss of grip on the economy, the related social benefits from the state and ultimately the power vertical during the process of economic reforms. While the European Union and other western sponsors push for changes in order to stabilize the economy in the long run, the People’s Republic of China in this situation seems to be the “knight in the shining armour” for the Belarusian government. President Alexander Lukashenko has widely praised and expressed his appreciation of the fact that China does not set any preconditions for the cooperation with Belarus. This may be true. However, the other side of the coin is that Beijing seeks stable sales markets for its products and less politically ambitious partners for the strengthening its export routes.
China as a role-model... unattainable
In his past speeches and interviews the Belarusian president has repeatedly pointed out that in his policy he orientated himself towards the Chinese state and economic model. According to his view, the old system will not be shall not be dismantled before the new one is built. However, the Chinese way proved difficult to copy immediately. In fact, Belarus was obviously struggling with the adoption of Chinese experience of reforms. Lukashenko, who according to him had closely studied the economic and social development in China, in his latest speech on September 30, 2016 at the University in Beijing admitted that transfer of Chinese experiences to the Belarusian economic reality would fail: Minsk must “ask China now for new technologies in many fields”, while 25 years ago “Belarus had been superior to the People’s Republic of China in many fields”, explained the Belarusian Head of the State. Specifically, there is still no technological revolution in market-oriented mass products for the global market, no IT-based modernization of the industry and no direct use of high technologies for the production of goods.
Credits instead of investments
While Belarus has always been interested to a certain degree in direct investments from China, the available data here are rather sobering: the direct Chinese investments as of the beginning of 2014, according to the figures provided by the then Belarusian prime minister Mikhail Myasnikovich, amounted to modest 200 million US dollars. Since then the investment cooperation has hardly improved. The direct net investments from China in Belarus in 2015 and 2016 amounted to about 36 million US dollars per year. Projects, in which Chinese investors take real business risk in Belarus, save for several flagship projects, can be counted on the fingers of one hand. Instead, the Chinese government and the leading Chinese banks already at the end of the year 2009 opened a credit line of 15 billion US dollars for Minsk. In 2015 further Chinese credit commitments for the total of seven billion US dollars were agreed on the government level, after the second to the last visit of Lukashenko to China in September 2016 – again eleven billion US dollars. These loans are partly used to modernize the transport and the energy infrastructure. These structural projects use up the agreed Chinese credit lines only to about one half. For the other half there are simply not many commercial projects yet, which would be profitable under current economic framework conditions, even in case of favourable lending terms. It should be added that the Chinese credits are, as a rule, tied with the supplies of Chinese equipment and services, which quality and competitive advantages are not always convincing in the long run. In contrast to this, the conditions for Chinese creditors in Belarus are almost free of risks: contracting parties for the credits are either directly Belarusian government agencies or Belarusian (state-owned) enterprises with government guarantees.
As surprising as it may also sound in view of the above-mentio ned framework conditions, the ambitious Chinese new Silk Route project (BRI), if implemented, still principally offers Belarus a chance to escape the trap of endless new borrowings from China and to better integrate its economy regionally and internationally. Especially as during the recent months the Belarusian foreign policy strives for the dismantling of barriers between the Eurasian Economic Union (EEU) and the European Union. Under certain conditions, the Silk Route project could, in the long run, become the forerunner for closer economic relations between the EEU and the EU. In this case Belarus could assume a role of the point of intersection. Also, Moscow seems to be supporting this, because it promises chances for the increased integration and convergence within the EEU, which is very heterogeneous from the economic point of view. Some Central and Eastern European EU Member States, as well as candidates for EU membership are interested to a certain degree in the Chinese giant project, which is not in the least proven by six already conducted Summits of government leaders of the Central and Eastern European countries and China. In the meantime, Minsk takes part as observer in the so-called 16+1 format, most recently in November 2017. The extent, to which it can participate in possible economic impulses for the Central and Eastern European region, to which Belarus naturally belongs geographically despite its integration in the EEU, is determined, on the one hand, by the future extent of the integration of the country in the Economic Belt of the new Silk Route and, on the other hand, by better relations with the EU. In Minsk this concept goes under the name “Integration of integrations”.
Flagship project of the free trade zone
Apart from current major fundamental impediments for the implementation of the concept of “Integration of integrations”, there is a number of current practical problems for Minsk in terms of finding its own economic place in the international arena. This is evidenced by the ambitious Chinese-Belarusian project of the Industrial Park “Great Stone”. It was initiated in 2010 for residency of high-tech enterprises from China. Originally, Belarusian government expected a wealth of Chinese high-tech companies. The assumption was that they will use the Park as a launchpad for the entry to the EU market, which would guarantee the volume of export at the amount of 50 billion US dollars yearly. Minsk hoped for stimulating effects of Chinese high technologies for the Belarusian industry. However, contrary to expectations, despite favourable tax preferences, Belarus still wasn't able not attract high-technology productions from China to the Park. Among the 13 residents of the Park registered as of June 2017, there still isn’t a single top high-technology company. The previous points made by the Belarusian side on the attractiveness of the Park are obviously not so valid. Thus, the Park can hardly play its role as a stepping stone on the Chinese companies’ way to the EU. Finally, even without taking residency in Belarus these companies can invest and produce already in the European Union some 200 km further away. WTO-compatible regulations and more stable legal conditions effective here are much more important than tax exemptions for the most enterprises. Not without reason the Chinese computer and smartphone manufacturer Lenovo placed its production not in the super favourable Belarusian-Chinese Industry Park but in the more expensive, but legally more stable Hungary. With the view to the East, on the other hand, Kazakhstan is obviously a more favourable destination than Belarus, both concerning the business climate and from the logistics point of view. It is evidenced, among other things, by the volume of Chinese direct investments in Kazakhstan: 21 billion US dollars or 82 percent of Chinese direct investments in the EEU are allotted exclusively to Kazakhstan. In the light of the above, in general it seems unclear what added value Belarus can currently offer China with its specific location and with its former approaches.
Also, the advantages of the Belarusian Park, which seem to be very favourable at first glance, are not unique in regional comparison and are outbidden by many competing parks in the neighbouring Russia, which is also the member of the EEU. The designation of the Belarusian Park
as a potential “Pearl in the Economic Belt of the new Silk Route” by the Chairman of the People’s Republic of China Xi Jinping during his visit to Belarus in May 2015 could not change anything in this respect: instead of high-tech companies, as of now there is only one state-owned Chinese logistics group settled here. Also, so far the only German company, which considers residency in the Park according to media reports, comes from the logistics sector and, according to reports, sees the Park primarily as a convenient transshipment point. As far as other twelve residents are concerned, their intent is yet to be clarified. Even the Belarusian-Chinese Fund for Venture Investments, which was founded in December 2016 and endowed with 20 million US dollars, still could not visibly contribute to the increase of share of high technology innovative enterprises in the Park.
Moreover, the mentioned favourable conditions are associated with the risk for the resident companies, that goods are produced in the Park, due to various existing or imminent anti-dumping measures, may face sales risks on the external markets. Besides, it is still impossible to speak about real free trade in the Eurasian Economic Union. It should be added that residents of the Park can additional mean tough competition for domestic Belarusian enterprises outside of the Park. Being tax-exempt and directly connected with China, they could in principle seriously hit Belarusian state-owned enterprises, which perform various social roles in the country.
Whether Belarus succeeds in positioning itself as a significant location on the new Silk Route in the future thus depends not as much on its infrastructure and flagship projects, as on reasonable investment climate with internationally attractive residency conditions, including, crucially, greater legal certainty for investments. However, despite everything, there are particular positive examples directly from Chinese enterprises: for example, a joint venture between the Belarusian Horizont industrial company and the Chinese Midea Group. Also the Belarusian-Chinese Joint Venture “BelGee”, a motor company, basked in praise by the Belarusian government, could definitely become a successful model. Moreover, a product of cooperation of defence industries of both countries is already successful today: the multiple launch rocket system “Polonez” has been in production since 2015.
Security policy
The military cooperation currently appears to be one of the most promising fields in the relations between Beijing and Minsk. Here it is both about direct supplies of military equipment, as well as about joint development, as in the case of the multiple launch rocket system “Polonez”. Speaking about the cooperation in the high-tech sector, one should also speak about joint projects of the State Committee for Defence Industry of Belarus and the China Aerospace Science and Technology Corporation (CASC). A corresponding cooperation agreement, which should strengthen the already existing cooperation, was signed during the visit of Lukashenko to China in September 2016. In September 2017 the Belarusian State Committee for Defence Industry discussed further joint projects in the defence sector with the Chinese Central Military Council.
Through the planned establishment of a joint working group for combating terrorism, the already existing cooperation in the field of defence and also in the sphere of combating international crime and cybercrimes is most likely to be enhanced. Already in 2015 paratrooper regiments from Belarus and China jointly fought terrorism. In July 2017 the first joint anti-terror maneuvers were conducted for the police of both states under the name “United Shield-2017”. In every assessment of these processes the international community should bear in mind, inter alia, that as a rule there are no clear definitions for the terms “terror”, “international crime” and “cybercrime” in these countries, and they can basically also refer to inner political processes.
Basic approaches for Germany and the European Union
The economic protrusion of the People’s Republic of China along the Silk Route in the direction of the EU and the undaunted will of Minsk to be given a greater role by China, request from Belarus better economic relations with the European Union, so that Belarus could exploit locational advantages. That said, the West still lacks the basic concept, which should determine how it should deal with China in future, as well as how to handle those countries, which are more and more influenced by China along the Silk Route. On the occasion of conversation with the Head of the State Xi Jinping in July 2017 the Federal Chancellor Dr. Angela Merkel pointed out that Germany supports the Chinese Silk Route project with a view to a better interconnectivity. With a view to Belarus, it is however clear that the Silk Route affects the bi- and multilateral relations of the European Union with the states along the Silk Route, and states like Belarus currently search for their role and their prospects. With the EU as a significant endpoint of the Silk Route, it would be less than strategic to leave it to Minsk to decide for itself without an in-depth dialogue how it wants to use its future function as a bridge between the EU and China. There is no high-ranking and structured exchange for this purpose anyway and the basic approaches of the EU currently concentrate primarily on the Eastern Partnership, in which Belarus is still the least participating state. There is still neither a legal bilateral basic agreement with the European Union, nor far-reaching results to be expected by analogy with Armenia or Kazakhstan, not to mention the existing rapprochement process with Georgia and the Ukraine on the basis of a contractual association agreement. Complaints about a possible stronger influence of China on the neighbouring countries of the EU – including Belarus – are by no means a substitute for constitutive strategic policy.
In the light of the above, it is about time that the European Union and its member states followed the Principled pragmatism approach developed within the framework of the EU-Global-Strategy in respect of Minsk more consistently, and also took into account the future role of the Republic of Belarus, which is expected to be greater than before. Several domestic political improvements in Belarus in the recent years – a national plan for human rights, recognition of party-like non-governmental organizations, a developing dialogue between the government and the opposition, delegates from opposition in the parliament and the declared goal of the government for further reforms – can serve grounds for thinking about even greater involvement of Belarus in a more prominent, substantial and systematic exchange with the West.
Within the framework of cooperation, with the view to the standards of neigh-bourhood and the importance of the country, the future role of the Republic of Belarus can be worked out at the point of intersection between the Eurasian, the Asian and the European market, and the necessary basic preconditions may be reiterated: namely that Belarus urgently needs to develop more marketable locational advantages to its own benefit, at least stepwise. According to the international standards, these locational advantages include also a liberal order inside the country. Within the framework of a strongly country-specific approach, the Eastern Partnership of the European Union can be more definitely utilized for this purpose as a tool for the dialogue and for the inner modernization of Belarus. Thereby, the most important thing is specific economic support, which is already being provided by the Eastern Partnership since recently.