October 8, 2024 –
Kacper Wańczyk
–
Analysis
National Bank of Belarus. Photo: Homoatrox / Wikimedia
Belarus – economic growth, transit to Asia
The Belarusian economy continued to grow, reaching 5.5 per cent in the first half of 2024. Experts expect it to be at four per cent by the end of the year. Still, state-supported internal household consumption was the main reason for GDP growth but spending on investments also played an important role. This last element is probably a result of the development of the production capabilities of Belarusian companies considering the growing competition from Russian and Chinese enterprises.
According to the independent research centre BEROC’s regular more than one quarter of Belarusians are expecting a fall in income. Most of the respondents attribute this to a rise in prices. Meanwhile, inflation remains under control. In the second quarter, it was kept at 6.1 per cent. The authorities continued to keep prices under control with administrative controls while maintaining a relaxed financial policy. The National Bank of Belarus left the basic interest rate unchanged. This was established in June last year at 9.5 per cent.
The situation in foreign trade, which is important for the Belarusian economy, remained complicated and unclear. The volume of exports continued to grow after the beginning of 2024. The dynamics of imports were also similar to the results from the first half of the year, showing a 0.3 per cent rise in GDP. However, the purchase of foreign currency by enterprises (the highest rate since 2010) shows that firms will continue to extend imports. This would not only be the result of a growth in consumption but also investments in new production schemes mentioned earlier. These sometimes require high-tech equipment not present in Belarus.
Minsk tries to seek additional foreign income. This can be seen in the attempt to join the North-South transit corridor project, which has been pushed by Russia. Moscow plans to construct a series of logistic centres along the railway from its border with Azerbaijan to the southern ports of Iran. The Russian government plans to invest three billion USD by 2030 in this project.
Analysis from official experts in Baku and Minsk have suggested that there is a synergy between the Nort-South corridor and the West-East route that passes through Belarus. Such analysis points out the fact that in the first quarter of 2024 the transit between Belarus and China increased by 68 per cent. As a result, Belarus could be a hub for land transport between Asia and the West, while Azerbaijan could have a similar role between Asia and the South. In August, Chinese Premier Li Qiang’s visit to Minsk saw Belarus and China sign documents on cooperation regarding transit (particularly rail transit). This might suggest possible progress in this area. However, bilateral economic cooperation has usually resulted in more words than practice given Minsk’s high dependency on Moscow.
Russia – inflation and property rights
Inflation pressure remained one of the most important problems for the Russian authorities. At the end of July, the Central Bank of Russia’s (CBR) Board of Directors decided to raise the base rate to 18 per cent. Elvira Nabiullina, the head of the bank, underlined that this was a reaction to the continued rise in inflation – it stood at 9.3 per cent in July. The CBR increased the inflation annual forecast for 2024 to between 6.5 and seven per cent (the official target is four per cent).
Nabiullina also pointed out several more problems that the Russian economy is facing. One would be the continuous growth in consumption that is not matched by production capabilities (one of the biggest problems being a shortage in the workforce). The second one is the growth in companies’ loan portfolios. This has been caused by state programmes that support such borrowing. Finally, western sanctions may lead to a further increase in demand for imported goods.
The Ukrainian incursion into the Kursk region may lead to the strengthening of some of these processes, at least at a regional level. Public investments in the building of new fortifications and the reconstruction of destroyed infrastructure, as well as support for internally displaced persons, could create more pressure when it comes to a rise in salaries. It could also further complicate the situation regarding the workforce.
These issues slowed the development of the Russian economy. However, GDP recorded a four per cent growth after the first half of the year. The budget deficit continues to be low. Initial estimates for the first half of 2024 show it at 0.5 per cent of GDP levels (a reduction by 2.5 times from the same period in 2023).
The Kremlin is using the war situation to revise relationships in the property rights area. Russian services began testing a legal formula that allows for the confiscation of resources once the person controlling them has been given “extremist” status.
This procedure was first applied to the TV journalist Alexander Nevzorov. In July his entire family was declared “extremist”, resulting in the confiscation of property – three parcels of land, a car, and several shares in companies.
Soon after that, the application of the formula was applied to a higher-level case. The Russian Prosecutor General’s Office started the procedure to place “extremist” status on the businessman Yuri Shefler and his companies. Shefler in the late 1990s took control of the company holding the rights to the “Stolichnaya” and “Moskovskaya” vodka brands. The Russian authorities have been trying to deprive him of the right to use these trade names abroad. He has now been accused of supporting Ukraine and criticizing the Russian authorities (he has been outside Russia since 2002), which may lead to the seizure of his assets by the Russian state.
This procedure will allow one of the “privatization deals” of the 1990s to be reversed. It may be applied more widely to other owners and entities in the future.
Ukraine – more taxes and working women, less electricity.
At the beginning of June, the Ukrainian government submitted a proposal to parliament for tax regime changes. This move was dictated by the growing need for financing defence efforts. These changes will increase the tax burden on the economy by four to six per cent of GDP from September 1st.
The authors of the project have proposed an increase in the war tax to five per cent, which would lead to an increase of personal tax to 23 per cent (Ukraine has a flat tax system). This would create a larger burden for lower income groups within the society. The same increase would be applied to individuals and small companies within the simplified taxation system, except for the so-called “third group” (usually IT and other professional services), where the burden will grow by six per cent.
Larger companies would pay one per cent of their income which, according to some experts, would lower their competitiveness against imported goods. The Ukrainian government is not planning any changes influencing imports, with the exclusion of car imports. The purchase of a new car would be taxed at 15 per cent of its value. Moreover, the companies would be affected by an increase in excise tax on fuel. Other new taxes are to be levied on luxury goods: purchases of precious metals, jewellery, or the second in a year sale of a property.
Due to the intensification of the Russian missile attacks, Ukraine has lost around two thirds of its energy production capacities. Deficiencies in the system are being replaced by imports, mainly from Hungary (around 40 per cent), Slovakia and Romania (each around 20 per cent). This has had a significant impact on the functioning of the economy, which was reflected in a decline in the mood of entrepreneurs after May. In the regular opinion poll conducted by the National Bank of Ukraine (NBU) amongst businesses, problems with electricity are quoted as the most significant. Some changes in business attitudes were visible only in July, as entrepreneurs adapted to energy shortages. Most companies were also expecting a rise in their goods and services prices.
The workforce shortage remained an important problem. This issue is structural since it is an effect of both mobilization and migration and, therefore, will continue to hamper Ukrainian business activities in the future. This situation is leading to the feminization of the workforce. The data for 2023 shows that in construction 38 per cent of workers were female (20 per cent in 2021). In the mining industry, it was 49 per cent (27 per cent in 2021).
Despite these problems, Ukrainian GDP after six months of 2024 has reached 4.1 per cent. The NBU revised its prognosis and currently expects the economy to grow by 3.7 per cent in 2024.
The NBU continued to lower the basic interest rate. At the beginning of June, it was established at the level of 13 per cent. The management of the institution seems to be more cautious than external experts. IMF analysts already in March were calling for the lowering of the interest rate to the level it reached in June. In July inflation stood at 5.4 per cent, which is slightly above the inflation target of five per cent.
Where does this all lead?
Belarus obviously has the smallest room for manoeuvre. It is not the first time that Minsk has tried to actively help create a new international economic project that would give it some degree of independence from Moscow. The Kremlin has always been able to pull Alyaksandr Lukashenka back. However, the new position of Azerbaijan in the Caucasus and the growing position of China in the area, which Moscow perceives as its sphere of interest, may bring a different outcome this time.
The confiscation of property in Russia may bring some changes to the internal setup of power relationships between the different influence groups that make up the “Putin system”. The war overall has diminished to some extent and is effectively “a cake to be shared” among the three states. It has of course increased tensions but is still at a level that could be contained. But with the war still progressing, new conflicts may come to light.
Changes in Ukrainian taxation will probably help to increase budget income only to some extent. A lack of taxation that would significantly impact large companies or holdings will limit the expected inflow of resources. But even with a more significant tax overhaul, the Ukrainian budget would remain dependent on foreign support.
Kacper Wańczyk is an analyst focusing on Belarus, Russia and Ukraine and a PhD student at Koźmiński University in Warsaw. He is a former diplomat who has served in Belarus and Afghanistan, among other places.
“We suport the Belarusian Awakening’24” is a project co-financed by Solidarity Fund PL within the framework of Polish development cooperation of the Ministry of Foreign Affairs of the Republic of Poland in the amount of PLN 230,000.
This publication expresses the views of the author only and cannot be identified with the official position of the Ministry of Foreign Affairs of the Republic of Poland.
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belarus, Belarusian economy, Russia, Russian economy, Ukraine, Ukrainian economy
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Publish date : 2024-10-08 04:53:00
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